You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this Annual Report. Some of the information contained in this discussion and analysis is set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Annual Report, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
Overview
We are aSan Diego -based commercial-stage biopharmaceutical company committed to developing and commercializing innovative products to address unmet needs in women's sexual and reproductive health, including hormone-free, woman-controlled contraception and protection from certain sexually transmitted infections (STIs). Our first commercial product, Phexxi, was approved by the FDA onMay 22, 2020 and is the first and only FDA-approved, hormone-free, woman-controlled, on-demand prescription contraceptive gel for women. We commercially launched Phexxi inSeptember 2020 inthe United States . We intend to commercialize Phexxi in other global markets through partnerships or licensing agreements.
Phexxi as a contraceptive; Business strategies
InSeptember 2020 , we commercially launched Phexxi. Our sales force promotes Phexxi directly to obstetrician/gynecologists and their affiliated health professionals, who collectively write the majority of prescriptions for contraceptive products. Our sales force comprises approximately 57 regional sales representatives and eight business managers, supported by a self-guided virtual health care provider (HCP) learning platform. Additionally, we offer women direct access to Phexxi via our telehealth platform. Using the platform, women can directly meet with an HCP to determine their eligibility for a Phexxi prescription and, if eligible, have the prescription written by the HCP, filled, and mailed directly to them by a third party pharmacy. Our comprehensive commercial strategy for Phexxi includes marketing and product awareness campaigns targeting women of reproductive potential in theU.S. , including the approximately 23 million women who are not using hormonal contraception and the approximately 18.8 million women who are using a prescription contraceptive, some of whom, particularly pill users, may be ready to move to an FDA-approved, non-invasive hormone-free contraceptive, as well as certain identified target HCP segments. In addition to marketing and product awareness campaigns, our commercial strategy includes payer outreach and execution of our consumer digital and media strategy. According to our post-commercial launch market research, HCPs indicated they would recommend Phexxi to approximately 60% of patients who are currently using natural contraceptive methods, approximately 58% of patients who are currently using over-the-counter contraceptive products and approximately 26% of patients who are currently using prescription contraception or methods requiring an HCP to perform a procedure. Additional research into the demographics of more than 1,300 women who are using Phexxi revealed that 60% of Phexxi users are between the ages of 18 to 34 years of age. Among the subset of Phexxi users for whom prior contraceptive data is available (n=413), 39% of women who had recently started Phexxi switched over from either an oral contraceptive, hormone patch/ring, or long-acting reversible contraception. OnFebruary 14, 2021 , we launched a direct-to-consumer advertising campaign, known as "Get Phexxi," designed to increase awareness and educate women on the benefits of Phexxi. The campaign highlights some of the struggles women face when choosing among the many available methods of contraception, including the lack of control with condoms, daily use of the pill, and abstinence required for cycle tracking. OnSeptember 9, 2021 , we launched a national brand ambassador House Rules campaign featuring Emmy Award-winning celebrityAnnie Murphy , designed to broaden awareness and drive uptake of Phexxi. The House Rules campaign has significantly raised our target audience awareness of Phexxi, while also driving women to their HCP to request a trial. More importantly, it has also helped drive significant increases in new HCPs recommending and prescribing Phexxi. ThroughDecember 31, 2021 , the House Rules DTC campaign has impacted key metrics. Total ex-factory units sent to distributors in 2021 was 89,163. Over the course of 2021, ex-factory units grew quarter over quarter with the largest growth in the fourth quarter of 73% in Phexxi units shipped. This growth in the fourth quarter was propelled by over 22,600 new patients starting Phexxi, a 56% increase as compared to the prior quarter. Ex-factory growth was further driven by a significant growth in refills (over 9,700 refill prescriptions, a 111% increase). 78 -------------------------------------------------------------------------------- We continue working to increase the number of lives covered and to gain a preferred formulary position for Phexxi. As ofDecember 2021 , approximately 80% of Phexxi prescriptions are being approved either by payers or through Evofem's patient support programs. We have coverage for approximately 55% ofU.S. commercial lives, including approximately 9 million lives covered at no out-of-pocket cost and approximately 13.7 million lives covered under ourDecember 2020 contract award from theU.S. Department of Veterans Affairs . OnJanuary 1, 2021 , theU.S. Medicaid population gained access to Phexxi through our participation in the Medicaid National Drug Rebate Program. Medicaid provides health coverage to approximately 68 million members, including approximately 16.8 million women 19-49 years of age. OnJanuary 1, 2021 , as a result of our participation in the Medicaid National Drug Rebate Program, theU.S. Medicaid population gained access to Phexxi. Medicaid provides health coverage to approximately 68 million members, including approximately 16.8 million women between 19 to 49 years of age. Phexxi is classified in the databases and pricing compendia of Medi-Span andFirst Databank , two major drug information databases that payers can consult for pricing and product information, as the first and only "Vaginal pH Modulator." We continue to work with theFDA's Office of Women's Health to update its Birth Control Guide to include a new category for vaginal pH modulators, as the current guide does not have a place for Phexxi due to its unique mechanism of action. While theHRSA and Department of Labor guidance are clear that plans are required to cover FDA- approved contraception at$0 cost share, whether or not it is specifically identified in the FDA Birth Control Guide, we believe there is still merit to the Guide being current and accurate. The Guide is used as an educational tool by obstetrician/gynecologists and we therefore believe it should include all FDA-approved methods of birth control. To support this initiative, we have launched a grassroots coalition that shows the public's support of the need for updating the chart.
Phexxi for the prevention of chlamydia and gonorrhea
Our lead clinical program is evaluating Phexxi for the prevention of urogenital infection in women with both chlamydia and gonorrhea - two of the most pervasive sexually transmitted infections (STIs) inthe United States . Currently, there are no FDAapproved prescription products for the prevention of either of these common STIs. According to theCenters for Disease Control and Prevention (CDC ), any sexually active person can be infected with chlamydia or gonorrhea. Despite theCDC recommendation for condom use to prevent STIs,U.S. rates of infection with chlamydia and gonorrhea climbed in 2019 for the sixth consecutive year. TheCDC reported 1.8 million new cases of chlamydia in 2021, the most ever reported, and over 600,000 new cases of gonorrhea, also the highest reported. Based on these reports, an estimated 78 million women 18-65 years of age who are sexually active inthe United States could be at risk to contract these STIs. Although common, many cases are not reported because most people with chlamydia and many women with gonorrhea are asymptomatic and do not seek testing. We believe this represents a significant unmet medical need, as well as a commercial opportunity. InOctober 2020 , based on positive and statistically significant top-line results of our Phase 2B/3 AMPREVENCE trial, we initiated our Phase 3 EVOGUARD clinical trial. This randomized, placebo-controlled confirmatory trial is designed to enroll 1,730 women with a prior chlamydia or gonorrhea infection and who are at risk for future infection. Participants are enrolled for a 16-week interventional phase followed by a one-month follow-up period. We completed enrollment inMarch 2022 and expect to report top-line EVOGUARD results in the second half of 2022. Assuming positive results from the trial, we expect to submit a marketing application for Phexxi in the first half of 2023 with an anticipated FDA action date under the Prescription Drug User Fee Act in the second half of 2023. This acceleration is due to the expedited review afforded by the Fast Track designations that were granted for the prevention of chlamydia and gonorrhea in women. Additionally, the FDA has designated EVO100 (Phexxi) as a Qualified Infectious Disease Product for the prevention of gonorrhea in women, which provides several important potential advantages, including, but not limited to, longer market exclusivity.
Versatile prevention technology Vaginal gel for HIV prevention
InDecember 2021 , we launched a collaboration with Orion to evaluate the compatibility and stability of Orion's novel CCR5 antagonist, OB-002, in Phexxi with the goal of developing a Multipurpose Prevention Technology (MPT) product candidate for indications including the prevention of HIV in women. This collaboration will focus on determining compatibility and stability of OB-002 in Phexxi and is expected to yield results in the third quarter of 2022. Assuming positive results, Evofem and Orion will seek government and philanthropic funding for subsequent clinical trials of the MPT vaginal gel product candidate. 79 --------------------------------------------------------------------------------
Financial Operations Overview Net Product Sales Our revenue recognition is based on unit shipments from our third-party logistics warehouse to our customers, which consist of wholesale distributors, retail pharmacies, and a mail-order specialty pharmacy. We have recognized net product sales inthe United States since the commercial launch of Phexxi inSeptember 2020 with the quarter endedDecember 31, 2021 being our fifth full quarter of commercialization and first full fiscal year of product sales. For the quarter endedDecember 31, 2021 , there was an approximate 73% increase in shipments to wholesale distributors and pharmacies compared to the quarter endedSeptember 30, 2021 , driving an increase in net product sales of approximately 109%. Phexxi outperformed the newer branded contraceptive market and the launch of our House Rules campaign onSeptember 9, 2021 has increased Phexxi awareness, consideration, and prescriptions. Gross revenues, as discussed in Note 3- Revenue , were adjusted for variable consideration, including our patient support programs. We intend to out-license commercialization rights for Phexxi to one or more pharmaceutical companies or other qualified potential partners for countries or regions outside ofthe United States . We are currently in discussion with potential partners for various geographies. We cannot forecast when or if these arrangements will be secured, the structure or potential amount of revenues from these arrangements, whether upfront, milestone-related or related to future Phexxi sales (assuming approval of Phexxi for commercial sale outside ofthe United States ) or to what degree these arrangements would affect our development plans, future revenues and overall capital requirements. InOctober 2021 , we submitted the registration for our hormone-free contraceptive vaginal gel to the Mexican Regulatory Agency Comisión Federal para la Protección contra Riesgos Sanitarios (COFEPRIS). This is the first of several strategic regulatory submissions planned under Evofem's 2020 Global Health Agreement withAdjuvant Capital .
Cost of Goods Sold
The Company began to capitalize the inventory costs associated with Phexxi inApril 2020 when it was determined that the inventory had a probable future economic benefit. These inventory costs include all purchased materials, direct labor and manufacturing overhead. Prior toApril 2020 , costs incurred for the manufacture of Phexxi were recorded as research and development expenses. In addition, we are obligated to pay quarterly royalty payments pursuant to our license agreement withRush University , in amounts equal to a single-digit percentage of the gross amounts we receive on a quarterly basis, less certain deductions incurred in the quarter based on a sliding scale. We are also obligated to pay a minimum annual royalty amount of$100,000 to the extent these earned royalties do not equal or exceed$100,000 in a given year. A minimum annual royalty amount of$100,000 was first required for the annual period commencing onJanuary 1, 2021 . Such royalty costs were$0.2 million and an immaterial amount for the years endedDecember 31, 2021 and 2020, respectively, and was included in the costs of goods sold in the consolidated financial statements.
Functionnary costs
Research and development costs
Our research and development expenses primarily consist of costs associated with
the clinical development of Phexxi for the prevention of chlamydia and gonorrhea
and costs associated with the continuous improvements related to Phexxi
commercialization efforts. These expenses include:
•external development expenses incurred under arrangements with third parties,
such as fees paid to clinical research organizations (CROs) relating to our
clinical trials, costs of acquiring and evaluating clinical trial data such as
investigator grants, patient screening fees, laboratory work and statistical
compilation and analysis, and fees paid to consultants;
•costs to acquire, develop and manufacture clinical trial materials, including
fees paid to contract manufacturers;
•costs related to compliance with drug development regulatory requirements;
•continuous improvements of manufacturing and analytical efficiency;
•on-going product characterization and process optimization;
•back-up contract manufacturing organization's evaluation to support future
commercial forecast and reduce cost of goods sold;
•alternative raw material evaluation to secure an uninterrupted supply chain and
reduce cost of goods sold;
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•employee-related expenses, including salaries, benefits, travel and noncash
stock-based compensation expense; and
•facilities, depreciation and other allocated expenses, which include direct and
allocated expenses for rent and maintenance of facilities, depreciation of
leasehold improvements and equipment, and research and other supplies.
We expense internal and external research and development costs as incurred. The following table summarizes research and development expenditure by product candidate (in thousands):
Years Ended December 31,
2021 2020
Allocated third-party development expenses:
Phexxi for prevention of chlamydia/gonorrhea- Phase 3 (EVOGUARD) $ 23,779 $ 4,757
Phexxi for prevention of chlamydia/gonorrhea- Phase 2B/3 (AMPREVENCE) - (27)
Phexxi for the prevention of pregnancy (AMPOWER) - (16)
Total allocated third-party development expenses 23,779 4,714
Unallocated internal research and development expenses: Non-cash stock compensation expenses
1,357 1,922 Payroll and related expenses 4,967 5,005 Outside services costs 1,696 4,062 Other 1,330 1,347 Total unallocated internal research and development expenses 9,350 12,336 Total research and development expenses
Completion dates and costs for our clinical development programs are very difficult to predict and may vary significantly for Phexxi for the prevention of chlamydia and gonorrhea and any future product candidate we may seek to develop. We anticipate that we will determine which programs and product candidates to pursue, as well as the most appropriate funding allocations for each program and product candidate on an ongoing basis in response to the results of ongoing and future clinical trials, regulatory developments, and our ongoing assessments of the commercial potential of each current or future product candidate. We expect research and development expenses to decrease slightly primarily due to EVOGUARD, which we expect to report top-line results for in the second half of 2022. We will need to raise significant additional capital in the future to complete clinical development of Phexxi for the prevention of chlamydia and gonorrhea and any future product candidates.
Clinical trial costs can vary significantly over the life of a program for the following reasons:
•per patient trial costs; •the number of sites included in the trials; •the length of time and level of marketing required to enroll eligible patients; •the number of patients participating in the trials; •the number of doses patients receive; •potential additional safety monitoring or other trials requested by regulatory agencies; •the phase of development of the product candidate; and •the efficacy and safety profile of the product candidate.
Sales and marketing expenses
Our selling and marketing expenses consist primarily of Phexxi commercialization costs, including direct-to-consumer (DTC) and HCP advertising, the Phexxi telehealth platform, our sample program, training, salaries, benefits, travel, noncash stock-based compensation expense, and other related costs for our employees and consultants.
We expect our sales and marketing expenses to decrease significantly due to reduced media and marketing activities related to ongoing Phexxi promotional strategies.
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General and administrative expenses
Our general and administrative expenses consist primarily of salaries, benefits, travel, business development expenses, investor and public relations expenses, noncash stock-based compensation, and other related costs for our employees and consultants performing executive, administrative, finance, legal and human resource functions. Other general and administrative expenses include facility-related costs not otherwise included in research and development or selling and marketing, and professional fees for accounting, auditing, tax and legal fees, and other costs associated with obtaining and maintaining our patent portfolio.
We expect our general and administrative expenses to increase slightly primarily due to increases in corporate insurance and general legal costs.
Other income (expenses)
Other income (expense) consists primarily of interest expense and the change in fair value of financial instruments issued in various capital raise transactions. The change in fair value of financial instruments was recognized as a result of mark-to-market adjustments for those financial instruments.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) inthe United States . The preparation of consolidated financial statements requires us to make use of estimates, assumptions and judgments that affect the reported amounts of assets, expenses, and liabilities, as well as the disclosure of contingent liabilities on the date of the consolidated financial statements. Management bases its estimates, assumptions, and judgments on historical experience and on various other factors it believes to be reasonable under the circumstances. Different estimates, assumptions and judgments may change the estimate used in the preparation of our consolidated financial statements, which, in turn, could materially change our results from those reported. Management evaluates its use of estimates, assumptions, and judgments on an ongoing basis. However, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may have a material adverse effect on our consolidated statements of operations, liquidity, and financial condition. We believe the following critical accounting policies involve significant areas where management applies estimates, assumptions, and judgments in the preparation of our consolidated financial statements. See Note 2- Summary of Significant Accounting Policies .
Revenue recognition and accounts receivable
The Company recognizes revenue from the sale of its product Phexxi in accordance with ASC 606, Revenue from Contracts with Customers (ASC 606). The provisions of ASC 606 require the following steps to determine revenue recognition: (1) Identify the contract(s) with a customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to the performance obligations in the contract; (5) Recognize revenue when (or as) the entity satisfies a performance obligation. In accordance with ASC 606, the Company recognizes revenue when its performance obligation is satisfied by transferring control of the product to a customer. Per the Company's contracts with customers, control of the product is transferred upon the conveyance of title, which occurs when the product is sold to and received by a customer. The Company's customers consist of wholesale distributors, retail pharmacies, and a mail-order specialty pharmacy. Payment terms vary by customer, but typically range from 31 to 66 days and include prompt pay discounts. Trade accounts receivable due to the Company from contracts with its customers are stated separately in the balance sheet, net of various allowances as described in the Trade Accounts Receivable policy in
Note 2- Summary of main accounting policies .
The amount of revenue recognized by the Company is equal to the amount of consideration which is expected to be received from the sale of product to its customers. Revenue is only recognized when it is probable that a significant reversal will not occur in future periods. To determine the amount of revenue to recognize, the Company assesses both the likelihood and magnitude of any such potential reversal of revenue.
Phexxi is sold to customers at the wholesale purchase price. However, the Company recognizes revenue from the products, net of estimates of the applicable variable consideration.
Revenue recognition is subject to uncertainty due to the variable consideration
estimates that are required to be made by management. These estimates include
chargebacks, rebates and patient support programs. Management must estimate and
accrue for these amounts primarily by estimating the portion of product in the
distribution supply channel at the reporting date
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that will be sold through to an entity or end user that will result in a
variable consideration expense. To accomplish this, management relies on
historical sales data showing the amount of various end-user consumer types,
inventory reports from the wholesale distributors and mail-order specialty
pharmacy, and other relevant data reports. The recorded variable consideration
is directly sensitive to the estimated inputs made by management that are used
in the calculation. The total balance for variable considerations was
$2.3 million and $1.0 million , as of December 31, 2021 and 2020, respectively.
Accumulation of clinical trials
As part of the process of preparing our financial statements, we are required to estimate expenses resulting from our obligations under contracts with vendors, CROs and consultants and under clinical site agreements relating to conducting our clinical trials. The financial terms of these contracts vary and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. Our objective is to reflect the appropriate clinical trial expenses in our consolidated financial statements by recording those expenses in the period in which services are performed and efforts are expended. We account for these expenses according to the progress of the clinical trial as measured by patient progression and the timing of various aspects of the trial. We determine accrual estimates through financial models and discussions with applicable personnel and outside service providers as to the progress of clinical trials. During a clinical trial, we adjust the clinical expense recognition if actual results differ from estimates. We make estimates of accrued expenses as of each balance sheet date based on the facts and circumstances known at that time. Our clinical trial accruals are partially dependent upon accurate reporting by CROs and other third-party vendors. Although we do not expect estimates to differ materially from actual amounts, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low for any reporting period. For the years endedDecember 31, 2021 and 2020 there were no material adjustments to our prior period estimates of accrued expenses for clinical trials.
Fair Value of Baker Notes
We elected the fair value option under ASC 825, Financial Instruments, for the Baker Notes issued pursuant to that certainBaker Bros . Purchase Agreement with the Baker Purchasers, andBaker Bros .Advisors LP , as designated agent, datedApril 23, 2020 , as they are qualified financial instruments and are, in whole, classified as liabilities. Under the fair value option, we recognized the hybrid debt instrument at fair value inclusive of embedded features. The fair value of the Baker Notes issued, and the change in fair value of the Baker Notes at the reporting date, were determined using a Monte Carlo simulation-based model. The Monte Carlo simulation was used to take into account several embedded features and factors, including the future value of our common stock, a potential change of control event, the probability of meeting certain debt covenants, the maturity term of the Baker Notes, the probability of an event of voluntary conversion of the Baker Notes, the probability of the failure to meet the affirmative covenant to achieve$100.0 million in cumulative net sales of Phexxi byJune 30, 2023 , and the probability of exercise of the put right and the probability of exercise of our call right. The fair value of the Baker Notes are subject to uncertainty due to the assumptions that are used in the Monte Carlo simulation-based model. These factors include but are not limited to the future value of the Company's common stock, the probability and timing of a potential change of control event, the probability of meeting certain debt covenants, the probability of an event of voluntary conversion of the Baker Notes, exercise of the put right, and exercise of the Company's call right. The fair value of the Baker Notes is sensitive to these estimated inputs made by management that are used in the calculation. The fair value of the Baker Notes was$81.7 million and$50.8 million , as ofDecember 31, 2021 and 2020, respectively.
Fair value of stock options and warrants
The fair value of stock options and warrants issued in various financing transactions, the change in fair value of options and warrants as a result of any modification to these instruments, and mark-to-market adjustments for liability classified warrants were determined using the Black-Scholes Merton option-pricing model based on the applicable assumptions, which include the exercise price of these options and warrants, time to expiration, expected volatility of our peer group of companies, risk-free interest rate and expected dividends. Fair Value of Purchase Rights
The fair value of the rights granted to the Baker Acquirers to possibly purchase from the Company up to
Note 5- Convertible Notes , at the Baker Purchasers' discretion at any time prior to the Company receiving at least$100.0 million in aggregate gross proceeds from one or more sales of equity securities issued in connection with the Baker Bros. Purchase Agreement, as described in Note 5- Convertible Notes , and the change in fair value 83 -------------------------------------------------------------------------------- of the Baker Purchasers' option to purchase from the Company up to$10.0 million of Baker Notes upon exercise of such rights, was determined as the maximum of (i) the fair value of rights to purchase the additional$10.0 million Baker Notes and (ii) the fair value of the shares of on as-if converted basis, which was determined by the lattice model. The fair value of rights to purchase the accompanying 2,049,180 warrants was valued using a Geske option-pricing model. The Geske model was based on the applicable assumptions, including the underlying stock price, warrant exercise price, the exercise price of the rights to purchase the warrants, the term of the warrants, the term of the rights to purchase the warrants, expected volatility of the Company's peer group, risk-free interest rate and expected dividends.
Inventories
Inventories, consisting of purchased materials, direct labor and manufacturing overheads, are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. At each balance sheet date, we evaluate ending inventories for excess quantities, obsolescence, or shelf-life expiration. The evaluation includes an analysis of our current and future strategic plans, anticipated future sales, the price projections of future demand, and the remaining shelf life of goods on hand. To the extent that we determine there are excess or obsolete inventory or quantities with a shelf life that is too near its expiration for us to reasonably expect that it can sell those products prior to their expiration, we adjust the carrying value to estimated net realizable value in accordance with the first-in, first-out inventory costing method.
Operating results
Year EndedDecember 31, 2021 Compared to Year EndedDecember 31, 2020 (in thousands): Net Product Sales Year Ended December 31, 2021 vs. 2020 2021 2020 $ Change % Change Product sales, net$ 8,244 $ 446 $ 7,798 1,748 % Phexxi was commercially launched inSeptember 2020 . The increase in product sales, net was primarily due to a full year of sales in 2021 versus four months of sales in 2020, continued growth in ex-factory unit sales since commercial launch, and an increase in both gross and net sales from the impact of Phexxi promotional strategies and gross-to-net initiatives implemented since the commercial launch. Cost of Goods Sold Year Ended December 31, 2021 vs. 2020 2021 2020 $ Change % Change Cost of goods sold$ 4,055 $ 468 $ 3,587 766 %
The increase in cost of goods sold is mainly due to a full year of Phexxi sales in 2021 versus four months of sales in 2020.
Research and development costs
Year Ended December 31 ,
2021 vs. 2020
2021 2020 $
Change % Change
Research and development$ 33,129 $ 17,050 $ 16,079 94 % The increase in research and development expenses was primarily due to an$18.8 million increase in clinical trial costs associated with EVOGUARD. This increase was partially offset by a$2.1 million decrease in outside services associated with manufacturing and regulatory related activities and a$0.6 million decrease in noncash stock-based compensation. 84 --------------------------------------------------------------------------------
Sales and marketing expenses
Year Ended December 31, 2021 vs. 2020
2021 2020 $ Change % Change
Selling and marketing $ 113,152 $ 56,467 $ 56,685 100 %
The increase in selling and marketing expenses was primarily due to a $46.4
million increase in media and marketing costs related to ongoing promotional
strategies, especially those focused on DTC campaigns that commenced in 2021, a
$9.1 million increase in payroll and related expenses due to increased headcount
and sales activities, $2.2 million in the Phexxi sample program, and a $1.7
million increase in facilities costs. These aggregated increases were partially
offset by a $2.6 million decrease in costs for outside services associated with
marketing, market access and medical affairs activities, and a $0.5 million
decrease in noncash stock-based compensation.
General and administrative expenses
Year EndedDecember 31 ,
2021 vs. 2020
2021 2020 $ Change % Change General and administrative$ 24,709 $ 30,085 $
(5,376) (18)%
The decrease in general and administrative expenses was primarily due to a$2.7 million decrease in noncash stock-based compensation, a$2.1 million decrease in financing and recruiting related outside services, a$1.2 million decrease in financing advisory fees and legal fees, and a$0.9 million decrease in payroll and related expenses due to lower headcount. These aggregated decreases were partially offset by a$1.4 million increase in facilities costs.
Total other expenses, net
Year Ended December 31 ,
2021 vs. 2020
2021 2020 $
Change % Change Total other expenses, net
(1) % Total other expense, net, for the year endedDecember 31, 2021 , primarily included$4.7 million in interest expense related to the Baker Notes and the Adjuvant Notes as described in Note 5- Convertible Notes and a$33.7 million recorded loss as a result of mark-to-market adjustments including the recorded loss from the change in fair value of the Baker Notes and the recorded gain from the change in fair value of the derivative liability. Total other expense, net, for the year endedDecember 31, 2020 primarily included a$64.0 million recorded loss on issuance of convertible notes, warrants and purchase rights issued in connection with the Baker Bros. Purchase Agreement as described in Note 5- Convertible Notes and$2.1 million in interest expense related to convertible notes. This loss was offset by a$27.3 million recorded gain from the change in fair value of these financial instruments as a result of mark-to-market adjustments.
Cash and capital resources
Overview
As ofDecember 31, 2021 , we had a working capital deficit of$107.5 million and an accumulated deficit of$860.7 million . We have financed our operations to date primarily through the issuance of preferred stock, common stock and warrants, cash received from private placement transactions, the issuance of convertible notes and, to a lesser extent, product sales. As ofDecember 31, 2021 , we had approximately$7.7 million in cash and cash equivalents, and$4.7 million in restricted cash available for use from the Adjuvant Notes (as defined in Note 5- Convertible Notes ). Our cash and cash equivalents include amounts held in checking accounts, money market funds, and investments in fixed income debt securities with original maturities of less than three months. We invest cash in excess of immediate requirements in accordance with our investment policy, which limits the amounts we may invest in any one type of investment and requires all investments held by us to maintain minimum ratings from nationally recognized statistical rating organizations so as to primarily achieve liquidity and capital preservation. We have incurred losses and negative cash flows from operating activities since inception. During the year endedDecember 31, 2021 , we received net proceeds of approximately$81.5 million upon the sale and issuance of common stock and warrants to purchase common stock from two underwritten public offerings that occurred in March and May of 2021. In 85 --------------------------------------------------------------------------------
We anticipate that we will continue to incur net losses for the foreseeable future. We expect research and development expenses to decrease slightly primarily due to EVOGUARD, which we expect to report top-line results for in the second half of 2022. We expect selling and marketing expenses to decrease significantly due to reductions in media and marketing activities related to ongoing Phexxi promotional strategies. Lastly, we expect general and administrative expenses to increase slightly due to increased general legal expenses. We currently expect our liquidity resources as ofDecember 31, 2021 , together with the net proceeds from the registered direct offerings completed inJanuary 2022 andMarch 2022 , to be sufficient to fund our planned operations into the second quarter of 2022. As ofDecember 31, 2021 , our significant commitments for capital expenditures include the Baker Notes, as described in Note 5- C onvertib l e No tes , our office lease, fleet lease, and supply and manufacturing agreement with our Phexxi manufacturer, as described in N ote 8 - Commitments and Contingencies , and our agreement with our clinical research organization that manages EVOGUARD. The purpose of these commitments is to further the commercialization of Phexxi and other future products. We expect to fund these commitments through debt and equity issuances and, to a lesser extent, product sales. The uncertainties associated with our ability to obtain additional equity financing on terms that are favorable to us or at all, enter into collaborative agreements with strategic partners, and succeed in our future operations raise substantial doubt about our ability to continue as a going concern. In addition, the COVID-19 pandemic caused us to delay the commercial launch of Phexxi untilSeptember 2020 . Also, due in part to the impact of the COVID-19 pandemic, we completed enrollment in the Phase 3 EVOGUARD study inMarch 2022 and we expect to report top-line EVOGUARD results in the second half of 2022. Our ability to raise additional funds, and the terms on which those funds may be raised, will be dependent, in part, on how successful the commercialization of Phexxi is, whether we are able to gain revenue traction prior to raising such additional funds, and the success of our research and development efforts, including our ability to develop Phexxi for the prevention of chlamydia and gonorrhea. If the COVID-19 pandemic continues to disrupt and negatively impact the commercialization of Phexxi or our research and development efforts, our ability to raise additional funds may be negatively impacted, or we may not be able to obtain funding on terms favorable to us or at all. If we are not able to obtain required additional funding when and as needed, through equity financings or other means, or if we are unable to obtain funding on terms favorable to us, the shortfall in funds raised, or such unfavorable terms, will likely have a material adverse effect on our operations and strategic plan for future growth. If we cannot successfully raise the funding necessary to implement our current strategic plan, we may be forced to make reductions in spending, suspend or terminate development programs, extend payment terms with suppliers, liquidate assets where possible, suspend or curtail planned programs, and/or cease operations. Any of these developments would materially and adversely affect our financial condition and business prospects and could even cause us to be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and, in doing so, we may receive less than the value at which those assets are carried on our financial statements. Any of these developments would materially and adversely affect the price of our stock and the value of your investment. The opinion of our independent registered public accounting firm on our audited financial statements as of and for the years endedDecember 31, 2021 and 2020 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Future reports on our financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern. Our audited consolidated financial statements as of and for the years endedDecember 31, 2021 and 2020 included in this Annual Report do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should we be unable to continue our operations. 2021 Equity Financings As described in Note 10- Stockholders' Equity (Deficit) , we received proceeds of approximately$28.0 million , net of underwriting discounts, from a public offering inMarch 2021 , upon the issuance of 17,142,857 shares of our common stock, and approximately$4.2 million , net of underwriting discounts, from the issuance of 2,571,428 shares of common stock upon exercise of the underwriters' overallotment option inApril 2021 . 86 -------------------------------------------------------------------------------- As described in Note 10- Stockholders' Equity (Deficit) , we received proceeds of approximately$46.8 million , net of underwriting discounts and fees, from a public offering inMay 2021 , upon the issuance of 50,000,000 shares of common stock and common warrants to purchase 50,000,000 shares of common stock. We received approximately$2.4 million and$0.1 million , both net of underwriting discounts, from the issuance of 2,547,794 shares of common stock and 7,500,000 common warrants, respectively, upon exercise of the underwriter's overallotment option inMay 2021 .
As described in Note 10 – Equity (deficit), we received proceeds of approximately
2020 Debt and Equity Financing
As described in Note 5 – Convertible Notes, we received aggregate gross proceeds of
As described in Note 10- Stockholders' Equity (Deficit) , we received net aggregate proceeds of$103.7 million inJune 2020 upon the issuance and sale of 31,700,000 shares of our common stock from our 2020 Public Offering and net aggregate proceeds of$3.8 million during the first half of 2020 upon the issuance and sale of 676,656 shares of our common stock pursuant to the "at the market" (ATM) program. The ATM program was terminated inJune 2020 .
Summary statements of cash flows
The following table presents a summary of net cash activity for the years ended
Year Ended December 31, 2021 vs. 2020
2021 2020 $ Change % Change
Net cash, cash equivalents and restricted cash used in operating activities
$ (146,667) $ (104,829) $ (41,838) 40
%
Net cash, cash equivalents and restricted (used) cash from investing activities
(2,689) 6,229 (8,918) (143) %
Net cash, cash equivalents and restricted cash provided by financing activities
90,693 154,226 (63,533) (41) % Net (decrease) increase in cash, cash equivalents and restricted cash$ (58,663) $ 55,626 $ (114,289) (205) % Cash Flows from Operating Activities. During the years endedDecember 31, 2021 and 2020, the primary use of cash, cash equivalents and restricted cash was to fund commercialization of our lead product Phexxi, to fund the Phase 3 clinical trial to evaluate our Phexxi for the prevention of chlamydia and gonorrhea, and to support selling and marketing and general and administrative operations. Cash Flows from Investing Activities. During the year endedDecember 31, 2021 , the change in net cash, cash equivalents and restricted cash used in investing activities was primarily due to$2.9 million in purchases of property and equipment, offset by a$0.3 million cash inflow from the sale of Softcup line of business. During the year endedDecember 31, 2020 , the change in net cash, cash equivalents and restricted cash provided by investing activities was primarily due to an$8.2 million cash inflow from maturities of short-term investments offset by$2.3 million in purchases of property and equipment. Cash Flows from Financing Activities. During the year endedDecember 31, 2021 , the primary source of cash, cash equivalents and restricted cash was provided from the issuance of 72,262,079 shares of common stock and 7,500,000 shares of common warrants for proceeds of approximately$81.5 million , net of underwriting discounts, the issuance of 460,636 shares of our common stock under the 2019 Employee Stock Purchase Plan (ESPP) with proceeds of approximately$0.3 million , the issuance of 159,000 shares of common stock from the exercise of common warrants for proceeds of approximately$0.2 million , the issuance of 5,000 shares of Series B-1 Convertible Preferred Stock and 5,000 shares of Series B-2 Convertible Preferred Stock for proceeds of approximately$9.6 million , net of offering expenses, offset by$0.3 million in payments of tax withholdings related to vesting of restricted stock awards and$1.0 million in payments for financing issuance costs.
During the year ended
87 -------------------------------------------------------------------------------- million, net of underwriting commissions, gross proceeds of$50.0 million from issuance of convertible notes and warrants, the sale of 676,656 shares of common stock under the at-the-market program for net proceeds of approximately$3.8 million in cash and cash equivalents (including$0.3 million that was included in other receivables in the consolidated balance sheet atDecember 31, 2019 ), net of commissions, and the issuance of 150,353 shares of our common stock under the 2019 ESPP and exercise of stock options with aggregate proceeds of$0.4 million . These cash inflows were offset by$2.9 million in payments of tax withholdings related to vesting of restricted stock awards and$1.1 million payments for financing and debt issuance costs.
Operating and Capital Expenditure Requirements
Our specific future operating and capital expense requirements are difficult to forecast. However, we can anticipate the general types of expenses and areas in which they might occur in 2022 as follows: we expect research and development expenses to decrease slightly, selling and marketing expenses to decrease significantly, and general and administrative expenses to increase slightly due to the reasons stated under the Operating Expenses section above.
Contractual obligations and commitments
Operating leases
Operating lease ROU assets and lease liabilities were$5.4 and$6.8 million onDecember 31, 2021 , respectively, and were$6.9 and$8.3 million on December 31, 2020, respectively. See Note 8 - Commitments and Contingencies for more detailed discussions on leases and financial statements information under ASC 842, Leases.Fleet Lease .
Other contractual commitments
InNovember 2019 , the Company entered into a supply and manufacturing agreement with a third-party to manufacture Phexxi, with potential to manufacture other product candidates in accordance with all applicable current good manufacturing practice regulations, pursuant to which the Company has certain minimum purchase commitments based on the forecasted product sales.
Intellectual property rights
As described in Note 8 - Commitments and Contingencies , royalty costs owed toRush University pursuant to the Rush License Agreement were$0.2 million and immaterial for the years endedDecember 31, 2021 and 2020, respectively. 88
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