Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2021 included in our Annual Report on Form 10-K for the year ended December 31, 2021. Unless the context indicates otherwise, as used in this Quarterly Report, the terms “Athenex,” the “Company,” “we,” “us,” and “our” refer to Athenex, Inc., a Delaware corporation, and its subsidiaries taken as a whole, unless otherwise noted. This discussion and other parts of this Quarterly Report contain forward-looking statements that involve risks and uncertainties, such as our plans, objectives, expectations, intentions and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2021 and in Part II—Item 1A—Risk Factors below.
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and section 27A of the Securities Act of 1933, as amended (the “Securities Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of this Quarterly Report. These forward-looking statements may include, but are not limited to, statements regarding our future results of operations and financial position, ability to continue as a going concern, business strategy, the timing and results of clinical trials, our ability to maintain the listing of our common stock on Nasdaq, the impact of macroeconomic factors, such as the Russian invasion of Ukraine and the COVID-19 pandemic on our business, and potential regulatory approval of product candidates. In some cases, forward-looking statements may be identified by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “might,” “mission,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “strategy,” “will,” “would,” and similar expressions and variations thereof. These words are intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section included in our Annual Report on Form 10-K for the year ended December 31, 2021 and the additional risk factors described herein. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business. In light of these risks, uncertainties and assumptions, actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date hereof to conform these statements to actual results or to changes in our expectations, except as required by law.
Overview and Recent Developments
We are a biopharmaceutical company dedicated to becoming a leader in the discovery, development, and commercialization of next generation drugs for the treatment of cancer. Our mission is to improve the lives of cancer patients by creating more effective, safer, and accessible treatments. We have assembled a strong and experienced leadership team and have established operations across the pharmaceutical value chain to execute our goal of becoming a global leader in bringing innovative cancer treatments to the market and improving health outcomes.
We are organized around three operating segments: (1) our Oncology Innovation Platform, dedicated to the research and development of our proprietary drugs; (2) our Commercial Platform, focused on the sales and marketing of our specialty drugs and the market development of our proprietary drugs; and (3) our Global Supply Chain Platform, providing sterile injectable drugs to hospital pharmacies across the U.S. Our current clinical pipeline in the Oncology Innovation Platform is derived mainly from the following core technologies: (1) Cell Therapy, based on natural killer T ("NKT") cells, and (2) Orascovery, based on a P-glycoprotein (“P-gp”) pump inhibitor.
Oncology Innovation Platform Developments
Through our acquisition of Kuur Therapeutics, Inc. (formerly known as Cell Medica, “Kuur”) in 2021, we acquired rights to intellectual property to further the development of autologous and allogeneic, or “off-the-shelf”, NKT cell immunotherapies for the
32
treatment of solid and hematological malignancies. We are advancing the following product candidates: KUR-501, KUR-502, and KUR-503.
KUR-501 is an autologous product in which NKT cells are engineered with a chimeric antigen receptor (“CAR”) targeting GD2 (“GINAKIT” cells). GD2 is expressed on almost all neuroblastoma tumors and certain other malignancies. KUR-501 is currently being evaluated in a phase 1 clinical trial (GINAKIT2) treating children with relapsed-refractory (“R/R”) high risk neuroblastoma. The Company presented updated clinical data from this trial at the American Society of Gene & Cell Therapy (ASGCT) 2022 Annual Meeting in May 2022. The data demonstrated expansion of CAR-NKT cells post-transfer in all patients and objective responses in patients with relapsed/refractory neuroblastoma. Overall Response Rate (“ORR”) was 25%, or three out of twelve responses, and Disease Control Rate (“DCR”) was 58% with four stable disease (“SD”), two partial responses (“PR”) and one complete response (“CR”). There were two out of three responses at a dose of 100 million cells/m2. We also observed one durable complete response persisting 12 months. During this evaluation, KUR-501 was well-tolerated with no dose limiting toxicity (“DLT”). There was no evidence of immune effector cell-associated neurotoxicity syndrome (“ICANS”) in any of the patients at the first four dose levels and one case of grade 2 cytokine release syndrome (“CRS”). GINATKIT2 will continue enrolling patients at higher dose level cohorts with a goal to identify an optimal dose that we may take into a pivotal study.
KUR-502 is an allogeneic (“off-the-shelf”) product in which NKT cells are engineered with a CAR targeting CD19. KUR-502 is currently being evaluated in a phase 1 clinical trial (ANCHOR) treating adults with R/R CD19 positive malignancies, including B cell lymphoma, acute lymphoblastic leukemia (“ALL”), and chronic lymphocytic leukemia (“CLL”). The Company presented an interim data update on seven evaluable patients at the Tandem Meetings of the American Society of Transplantation and Cellular Therapy (ASTCT), and the Center for International Blood & Marrow Transplant Research (CIBMTR) in April 2022. In the lymphoma cohort, there were five patients and the data showed 2 CR and 1 PR for an ORR of 60%. Both complete responses were durable and persisted for more than 6 months, with one still ongoing at 34 weeks. The leukemia cohort consisted of two patients, and 1 CR and 1 PD for a 50% ORR was observed. Responses at the lowest doses in these heavily pre-treated patients were observed, and two responses (1 CR and 1 PR) were observed in patients who failed previous autologous CAR-T therapy. Allogeneic CD19 CAR-NKT cells were well tolerated with three cases of grade 1 CRS, all observed in the ALL patients. There were also no ICANS and no graft versus host disease (GvHD) attributable to CAR-NKT cells. In March 2022, the Company’s Investigational New Drug (“IND”) application to expand the ANCHOR study to a multi-center study was allowed to proceed by the FDA.
KUR-503 is an allogeneic (“off-the-shelf”) product in which NKT cells are engineered with a CAR targeting glypican-3 (“GPC3”). GPC3 is a molecule that is highly expressed on most hepatocellular carcinomas (“HCC”) but not normal liver or other non-neoplastic tissue. KUR-503 is currently in preclinical development, and we are planning to submit an IND application in 2023.
With respect to TCRT-ESO-A2, an autologous T cell receptor (“TCR”)-T cell therapy targeting solid tumors that are NY-ESO-1 positive in HLA-A*02:01 positive patients, we have made the strategic decision to de-prioritize the development and plan to close the U.S. Phase 1 clinical trial.
On February 26, 2021, we received a Complete Response Letter ("CRL") from the U.S. Food and Drug Administration (“FDA”) regarding our New Drug Application (“NDA”) for oral paclitaxel and encequidar (“Oral Paclitaxel”) for the treatment of metastatic breast cancer (“mBC”). Following the CRL, we held two Type A meetings with the FDA to discuss the deficiencies raised in the CRL, review a proposed design for a new clinical trial intended to address the deficiencies raised in the CRL, and discuss the potential regulatory path forward for Oral Paclitaxel in mBC in the U.S. In October 2021, after careful consideration of the FDA feedback, we determined to redeploy our resources to focus on our Cell Therapy platform and other ongoing studies of Oral Paclitaxel. On November 29, 2021, we announced the U.K. Medicines and Healthcare products Regulatory Agency (“MHRA”) validation of the Marketing Authorization Application (“MAA”) for Oral Paclitaxel, for review. The Phase 3 study of Oral Paclitaxel in mBC (KX-ORAX-001) served as the basis of the MAA.
We are continuing to evaluate Oral Paclitaxel in combination with check point inhibitors. In May 2022, we announced a clinical trial collaboration and supply agreement with Merck (known as MSD outside the US and Canada). The agreement applies to the expansion phase of the Phase 1 clinical trial evaluating Oral Paclitaxel in combination with Merck’s anti-PD-1 therapy KEYTRUDA® (pembrolizumab) for certain non-small cell lung cancer (“NSCLC”) patients. Oral Paclitaxel is also being evaluated in combination with dostarlimab +/- carboplatin in neoadjuvant breast cancer, as part of the I-SPY2 TRIAL (Investigation of Serial studies to Predict Your Therapeutic Response with Imaging And moLecular analysis 2).
On June 21, 2022, the Company and ATNX SPV, LLC, its newly-formed subsidiary (the "SPV"), entered into a Revenue Interest Purchase Agreement (the “RIPA”) with affiliates of Sagard Healthcare Partners (“Sagard”) and funds managed by Oaktree Capital Management, L.P. (“Oaktree” and together with Sagard, the “Purchasers”), for the sale of revenues from U.S. and European royalty and milestone interests in Klisyri® (tirbanibulin) for an aggregate purchase price of $85.0 million (“Purchase Price”). On June 29, 2022, the Purchasers paid the Company the Purchase Price. Of the total Purchase Price, $5.0 million was placed into escrow to be paid to the Company upon the satisfaction of certain manufacture and supply milestones for Klisyri prior to December 31, 2025, $5.0 million was used to pay for transaction expenses, $42.5 million was used to pay down the Company's senior secured loan agreement and related security agreements (the "Senior Credit Agreement") with Oaktree, and $7.5 million was deposited and held in a segregated account of the Company (the “Segregated Funds”). Subject to the satisfaction of certain conditions, the Segregated Funds
33
will either be distributed to the Company as a cash payment or distributed to the Lenders to pay down the Company’s existing indebtedness under the Credit Agreement. The remaining proceeds were available for the Company's operations. Refer to Part I, Item 1. Note 1 - Company and Nature of Business and Note 11 - Debt and Lease Obligations for additional information.
In connection with this transaction, the Company formed the Subsidiary and contributed its interest in the License and Development Agreement with Almirall S.A. relating to Klisyri (the “License Agreement”) and certain related assets to the Subsidiary. Oaktree and Sagard each own a 10% equity interest in the Subsidiary. Pursuant to the RIPA, the Subsidiary will sell its right to the cash received in respect of certain royalties and certain milestone interests under the License Agreement to the Purchasers. The Subsidiary will retain the right to receive 50% of certain of the milestone interests under the License Agreement, equal to $155.0 million in the aggregate if those milestones are achieved, and 50% of the royalties paid under the License Agreement for sales of Klisyri once net sales of Klisyri exceed a certain dollar amount. Under its operating agreement, the Subsidiary will be governed by a five-member board of directors to which the Company will appoint three directors, Oaktree will appoint one director, and Sagard will appoint one director.
Global Supply Chain Platform Developments
We suspended production activities at our Taihao API facility in Chongqing, China, in May 2019, based on concerns raised by the Department of Emergency Management of Chongqing (“DEMC”) related to the location of our plant. We subsequently resumed producing API at the Taihao API facility primarily for our ongoing clinical studies and commercial launches of proprietary drugs in accordance with local regulatory guidance, while we started building out Sintaho, a new API facility in Chongqing. In July 2021, we received verbal notice from the DEMC that we will be required to terminate the production activities at its Taihao API facility. We are continuing to engage in dialogue with the DEMC. While we are able to continue producing certain API at the Taihao API facility in limited quantities and a certain extent of our operations are now being conducted at Sintaho, we are in the process of moving the remainder of the operations and production activities to Sintaho and exploring other sources of API, in the event we are unable to reach an agreement with the DEMC for the continued production activities of the Taihao API facility. The Sintaho facility continues to conduct and complete product qualification activities. On July 7, 2022, we entered into an agreement to sell all of our equity interests in our China subsidiaries, which are primarily engaged in API manufacturing operations (the "China API Operations"), to TiHe Capital (Beijing) Co. Ltd. ("China API Buyer") for RMB 124.4 million, or approximately $19.0 million in cash. The transactions is subject to customary closing conditions, including obtaining certain regulatory approvals in China. Athenex and the China API Buyer also plan to enter into a long-term supply agreement for the manufacture and supply of certain API products at or before the closing of the transaction. See Part I, Item 1. Note 19 - Subsequent Events for additional information.
On February 14, 2022, we completed the sale of our leasehold interest in the 409,000 square feet, newly constructed cGMP ISO Class 5 high potency pharmaceutical manufacturing facility located in Dunkirk, NY (the "Dunkirk Transaction"). We sold our interest in the Dunkirk facility and certain other assets to ImmunityBio, Inc. for approximately $40.0 million. Of these proceeds, we used approximately $27.4 million to make a mandatory prepayment of $25.0 million in principal, accrued and unpaid interest, and associated fees to the lenders under our Senior Credit Agreement with Oaktree. See “Liquidity and Capital Resources” below for more information about the Senior Credit Agreement.
The sale of the Dunkirk facility and the planned sale of our China API Operations are part of our strategy to dispose of non-core assets intended to extend our cash runway in 2022 as we pivot to focusing on our Cell Therapy platform.
COVID-19 related measures
Since early 2020, after monitoring developments related to the spread of COVID-19, we have undertaken a number of measures in response to the COVID-19 pandemic, with a goal to prioritize the health and safety of our employees and ensure continuity in our business. We adhere to all state, federal and local requirements as the same may be in force from time to time.
With respect to our clinical development program, we have experienced and may continue to experience slowed enrollment for our clinical trials as well as suspensions in our clinical trials as healthcare resources are diverted to address the COVID-19 pandemic. We remain committed to advancing our pipeline in line with our Mission as described below while ensuring the safety of all participants as well as the integrity of the data. We will continue to monitor developments with respect to the COVID-19 pandemic as well as industry and regulatory best practices for continuing clinical development programs during the pandemic, including, if and where appropriate, the use of virtual communications, interviews, and visits as well as self-administration and remote monitoring techniques to address health and safety concerns while minimizing disruptions and delays to our clinical development timelines.
There is still uncertainty regarding the pandemic's overall duration and the severity of any future outbreaks, including any potential impact on our operations in China. The scope and impact of any such measures is not yet known and will depend on a number of factors, including but not limited to the ultimate spread and severity of the outbreaks and the scope, duration and impact of
34
containment measures on individuals and businesses. If our partners experience significant or extended disruptions to their business due to COVID-19, it could result in supply shortages and harm our specialty drug business, as well as our overall financial condition. We are actively monitoring our operations and supply chain across the globe and are making adjustments to respond to challenges that arise due to the pandemic where appropriate.
Going Concern Considerations
We have three operating segments: our Oncology Innovation Platform, Global Supply Chain Platform, and Commercial Platform. Since inception, we have devoted a substantial amount of our resources to research and development of our lead product candidates under our Orascovery and Cell Therapy platforms, while building up our commercial infrastructure. We have incurred significant net losses since inception.
We have incurred operating losses since inception and, as a result, as of June 30, 2022 and December 31, 2021, we had an accumulated deficit of $963.0 million and $913.4 million, respectively. We expect to incur significant expenses and operating losses for the foreseeable future. We project insufficient liquidity to fund our operations through the next twelve months beyond the date of this report and project that we will be in violation of a financial covenant included within the Senior Credit Agreement during the twelve-month period subsequent to the date of this filing. This projection does not reflect management's plans that are outside of the Company's control, pursuant to ASC 205. These conditions raise substantial doubt about our ability to continue as a going concern. See Part I, Item 1. Note 1—Company and Nature of Business for further information regarding our ability to continue as a going concern.
We have funded our operations to date primarily from the issuance and sale of our common stock through public offerings, senior secured loans, private placements, and to a lesser extent, from convertible bond financing, revenue, and grant funding. As of June 30, 2022, we had cash and cash equivalents of $22.1 million, restricted cash of $13.8 million, and short-term investments of $1.2 million.
On August 20, 2021, we entered into a sales agreement (the “Sales Agreement”) with SVB Securities LLC, in connection with the offer and sale of up to $100,000,000 of shares of our common stock, par value $0.001 per share (“ATM Shares”). The ATM Shares to be offered and sold under the Sales Agreement will be issued and sold pursuant to a registration statement on Form S-3 (File No. 333-258185) that became effective on August 12, 2021. During the year ended December 31, 2021, we sold 762,825 shares of our common stock for an average price of $1.49 per share under the Sales Agreement. During the six months ended June 30, 2022, we sold 7,147,892 shares of our common stock for an average price of $0.63 per share under the Sales Agreement.
Nasdaq Deficiency Notice
On March 18, 2022, we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC indicating that, based upon the closing bid price of our common stock, we no longer meet the Nasdaq listing standard requiring listed companies to maintain a minimum bid price of at least $1.00 per share. Nasdaq Listing Rule 5810(c)(3)(A) provides a compliance period of 180 calendar days, or until September 14, 2022, in which to regain compliance with the minimum bid price requirement. If our common stock maintains a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days during the 180-day compliance period, we will automatically regain compliance. In the event we do not regain compliance with the $1.00 bid price requirement by September 14, 2022, we may be eligible for consideration of a second 180-day compliance period. To qualify for this additional compliance period, we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq’s Global Select Market, other than the minimum bid price requirement. In addition, we would also be required to notify Nasdaq of our intent to cure the minimum bid price deficiency. We are diligently working to evidence compliance with the minimum bid price requirement for continued listing on Nasdaq. If we fail to regain compliance with the Nasdaq continued listing standards, Nasdaq will provide notice that our common stock will be subject to delisting. We would then be entitled to appeal that determination to a Nasdaq hearings panel.
The notification has no immediate effect on the listing of our common stock on Nasdaq’s Global Select Market. We intend to monitor the closing bid price of our common stock and consider our available options in the event the closing bid price of our common stock remains below $1.00 per share.
Outlook
Our Company’s mission is to become a leader in bringing innovative cancer treatments to the market and to improve patient health outcomes. We are focused on our innovative cell therapy platform, which is based on NKT cells. NKT cells have unique biology that has potential advantages over current T cell and NK cell-based technologies. We believe these advantages include the following:
35
(1)There is still a major unmet need in hematological and solid tumors in that even in those indications where autologous CAR-T cells have been previously approved, up to 60% of patients receiving CAR-T therapy do not achieve long term durable responses.
(2)Cellular therapies have generally not been effective in the treatment of solid tumors. NKT cells are an ideal platform for treatment of solid tumors because NKT cells home to tumors, and we have data demonstrating that CAR-NKT cells are superior in tumor homing compared to CAR-T cells.
(3)Our allogeneic (“off-the-shelf”) CAR-NKT cell therapy products may be produced at larger scale than autologous products, potentially at lower cost.
(4)Our allogeneic CAR-NKT cells are manufactured starting with the lymphocytes of healthy donors. Use of healthy donors, rather than patients (who are the source of autologous cell therapy starting materials), results in a more robust and consistent product, because patient lymphocytes are usually dysfunctional due to previous cancer therapy.
NKT cells demonstrate anti-tumor activity, even without a CAR. This is because NKT cells can kill immune suppressive cells in the local tumor microenvironment. Thus, when we add a CAR to NKT cells they are now equipped with two different anti-tumor mechanisms, which may lead to more potent anti-tumor activity and reduce the potential for relapse.
Advancing KUR-501 CAR-NKT Targeting GD2 – KUR-501 is an autologous product in which NKT cells are engineered with a CAR targeting GD2 and is currently being evaluated in a phase 1 clinical trial (GINAKIT2) treating children with R/R high risk neuroblastoma. Neuroblastoma is a rare pediatric cancer and patients with R/R high risk neuroblastoma have very poor outcomes. Therefore, we believe there is a significant unmet need for better treatment options. Interim data to be presented at the ASGCT 2022 Annual Meeting showed 25% overall response rate and 58% disease control rate, two out of three responses at dose level 4 (100 million cells/m2), and one durable complete response persisting 12 months. Previous data updates also demonstrated long-term persistence of CAR-NKT cells and CAR-NKT cell localization at the tumor site. The safety profile of KUR-501 was shown to be well-tolerated and the product is being administered in the outpatient setting. GINATKIT2 will continue enrolling patients at higher dose level cohorts with a goal to identify an optimal dose that we may take into a pivotal study.
Advancing KUR-502 CAR-NKT Targeting CD19 – Interim data, as presented at the ASTCT and CIBMTR Tandem Meetings in April of 2022, indicated that, of the first seven evaluable patients, there was a promising overall response rate of 57% and disease control rate of 71%, with two responses (1 CR and 1 PR) observed in patients who failed previous autologous CAR-T therapy. KUR-502 is an allogeneic, “off-the-shelf” product in which NKT cells are engineered with a CAR targeting CD19. Today, autologous CAR-T cell treatments are available to patients, but the patient-to-patient variability and long manufacturing lead times limit patient care options. As an allogeneic “off-the-shelf” product, KUR-502 leverages economies of scale and has the potential to significantly increase patient access to innovative CAR-NKT treatments. Our aim is to expand the phase 1 (ANCHOR) clinical trial treating adults with R/R CD19 positive malignancies currently being conducted at BCM to a phase 1 multicenter clinical trial (ANCHOR2). Our IND application to expand the ANCHOR study to a multi-center study was allowed to proceed by the FDA in March 2022.
Focusing on Specific Programs of Oral Paclitaxel – For Oral Paclitaxel, while our MAA submission is currently under review by the U.K. MHRA, we have focused our efforts on our ongoing combination clinical trials with checkpoint inhibitors where we believe there is an opportunity. Oral Paclitaxel is currently being evaluated in combination with pembrolizumab in NSCLC; and dostarlimab +/- carboplatin in neoadjuvant breast cancer, as part of I-SPY 2 TRIAL.
Licensing and Partnership Opportunities – We continue to increase the global reach of tirbanibulin 1% ointment by maintaining strong global partnerships with existing partners such as Almirall, Seqirus, and AVIR and by evaluating other strategic territories to launch the product. We recently monetized our royalty stream from the sale of Klisyri in the U.S. and Europe by entering into the RIPA. See Oncology Innovation Platform Developments above. Our team will continue to work closely with our partners to explore additional treatment regimens and indications for tirbanibulin 1% ointment. We will pursue strategic licensing and partnership opportunities that will create potential value for stockholders and support our business strategy and mission.
As we pursue these strategic priorities, we expect to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase as we seek to:
•Advance the preclinical and clinical research program and development activities of our Cell Therapy technology platform;
•Continue our preclinical and clinical research program and development activities related to our Mission;
•Seek to identify additional research programs and product candidates within existing Cell Therapy platform; and
•Maintain, expand, and protect our IP portfolio.
Key Components of Results of Operations
36
Revenue
We derive our consolidated revenue primarily from (i) the sales of generic injectable products by our Commercial Platform; (ii) licensing and collaboration projects conducted by our Oncology Innovation Platform, which generates revenue in the form of upfront payments, milestone payments, and payments received for providing research and development services for our collaboration projects and for other third parties; (iii) the sales of 503B and API products by our Global Supply Chain Platform; and (iv) grant awards from government agencies and universities for our continuing research and development efforts.
We do not anticipate revenue being generated from sales of our product candidates under development in our Oncology Innovation Platform until we have obtained regulatory approval. We cannot assure you that we will succeed in achieving regulatory approval for our drug candidates as planned, or at all.
Cost of Sales
Along with sourcing from third-party manufacturers, we manufacture clinical products in our cGMP facility in New York. Cost of sales primarily includes the cost of finished products, raw materials, labor costs, manufacturing overhead expenses and reserves for expected scrap, as well as transportation costs. Cost of sales also includes depreciation expense for production equipment, changes to our excess and obsolete inventory reserves, certain direct costs such as shipping costs, net of costs charged to customers, and royalty costs related to in-license agreements.
Research and Development Expenses
Research and development (“R&D”) expenses consist of the costs associated with in-licensing of product candidates, milestone payments, conducting preclinical studies and clinical trials, activities related to regulatory filings and correspondences, and other R&D activities. Our current R&D activities mainly relate to the regulatory and clinical development activities of our Oncology Innovation Platform.
We expense R&D costs as incurred. We record costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment or clinical site activations. We do not allocate employee-related costs, depreciation, rental and other indirect costs to specific R&D programs because these costs are deployed across multiple product programs under R&D.
We cannot determine with certainty the duration, costs and timing of the current or future preclinical or clinical studies of our drug candidates. The duration, costs, and timing of clinical studies and development of our drug candidates will depend on a variety of factors, including:
•The scope, rate of progress, and costs of our ongoing, as well as any additional, clinical studies and other R&D activities;
•Future clinical study results;
•Uncertainties in clinical study enrollment rates;
•Significant and changing government regulation; 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 drug candidate, could mean a significant change in the costs and timing associated with the development of that drug candidate.
R&D activities are central to our business model. We expect our R&D expenses to remain at a decreased level from prior periods, as the development of most non-Cell Therapy technologies has been suspended. R&D expenses related to our Cell Therapy platform are expected to increase as we prepare for additional clinical and preclinical studies for our Cell Therapy programs. There are numerous factors associated with the successful commercialization of any of our drug candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial, regulatory, and public health factors beyond our control will likely impact our clinical development programs and plans.
Selling, General and Administrative Expenses
Selling, general and administrative, (“SG&A”), expenses primarily consist of compensation, including salary, employee benefits and stock-based compensation expenses for sales and marketing personnel, and for administrative personnel that support our general operations such as executive management, legal counsel, financial accounting, information technology, and human resources personnel. SG&A expenses also include professional fees for legal, patent, consulting, auditing and tax services, as well as other direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies used in the selling, marketing, general and administrative activities. SG&A expenses also include costs associated with our commercialization efforts for our proprietary drugs,
37
such as market research, brand strategy and development work on market access, scientific publication, product distribution, and patient support.
We anticipate that our SG&A costs will decrease in future periods, without the commercialization of the Orascovery platform, the development of the facility in Dunkirk, NY, and the management of the China API Operations, if the sale of the China API Operations is completed. We expect that certain costs, including share compensation costs, insurance costs, and other administrative costs, will decrease as a result of the sale of our interest in the pharmaceutical manufacturing facility located in Dunkirk, NY and anticipated sale of the China API Operations. Meanwhile, we anticipate that cost related to legal, compliance, accounting and investor and public relations expenses associated with being a public company will remain consistent.
Results of Operations
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
The following table sets forth a summary of our condensed consolidated results of operations for the three months ended June 30, 2022 and 2021, together with the changes in those items in dollars and as a percentage. This information should be read together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Our operating results in any period are not necessarily indicative of the results that may be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
|
(in thousands) |
|
|
% |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales, net |
|
$ |
25,786 |
|
|
$ |
20,394 |
|
|
$ |
5,392 |
|
|
|
26 |
% |
License fees and other revenue |
|
|
5,730 |
|
|
|
304 |
|
|
|
5,426 |
|
|
NM |
|
Total revenue |
|
|
31,516 |
|
|
|
20,698 |
|
|
|
10,818 |
|
|
|
|
Cost of sales |
|
|
(23,092 |
) |
|
|
(19,117 |
) |
|
|
(3,975 |
) |
|
|
21 |
% |
Gross profit |
|
|
8,424 |
|
|
|
1,581 |
|
|
|
6,843 |
|
|
|
|
Research and development expenses |
|
|
(13,094 |
) |
|
|
(20,646 |
) |
|
|
7,552 |
|
|
|
-37 |
% |
Selling, general, and administrative expenses |
|
|
(17,172 |
) |
|
|
(17,641 |
) |
|
|
469 |
|
|
|
-3 |
% |
Interest income |
|
|
46 |
|
|
|
32 |
|
|
|
14 |
|
|
|
44 |
% |
Interest expense |
|
|
(4,307 |
) |
|
|
(5,608 |
) |
|
|
1,301 |
|
|
|
-23 |
% |
Gain on extinguishment of debt |
|
|
2,051 |
|
|
|
— |
|
|
|
2,051 |
|
|
NM |
|
Income tax benefit |
|
|
19 |
|
|
|
11,035 |
|
|
|
(11,016 |
) |
|
|
-100 |
% |
Net loss from continuing operations |
|
|
(24,033 |
) |
|
|
(31,247 |
) |
|
|
7,214 |
|
|
|
-23 |
% |
Loss from discontinued operations |
|
|
(8,341 |
) |
|
|
(3,368 |
) |
|
|
(4,973 |
) |
|
|
148 |
% |
Net loss |
|
|
(32,374 |
) |
|
|
(34,615 |
) |
|
|
2,241 |
|
|
|
|
Less: net loss attributable to non-controlling interests |
|
|
(217 |
) |
|
|
(341 |
) |
|
|
124 |
|
|
|
-36 |
% |
Net loss attributable to Athenex, Inc. |
|
$ |
(32,157 |
) |
|
$ |
(34,274 |
) |
|
$ |
2,117 |
|
|
|
|
*NM used to indicate a percentage change that is not meaningful
Revenue
Revenue from product sales increased to $25.8 million for the three months ended June 30, 2022, from $20.4 million for the three months ended June 30, 2021, an increase of $5.4 million or 26%. This increase was primarily attributable to an increase in APD specialty product sales, which increased by $4.2 million as the result of increases in shortage product sales and product launches during 2022. 503B product sales increased by $1.2 million from additional product launches. Fluctuations in the demand for shortage products and market demand may continue to significantly affect our product sales in the future.
License fees and other revenue increased by $5.4 million, to $5.7 million for the three months ended June 30, 2022. This increase was primarily due to the recognition of $5.0 million of license revenue pursuant to the 2017 Almirall License Agreement upon the commencement of a line extension trial for Klisyri in the U.S. Substantially all of the revenue earned under the Almirall License Agreement in the near future will be remitted to the Purchasers under the RIPA.
Cost of Sales
Cost of sales for the three months ended June 30, 2022 totaled $23.1 million, an increase of $4.0 million, or 21%, as compared to $19.1 million for the three months ended June 30, 2021. The increase was primarily due to an increase of $1.3 million in cost of APD product sales related to the increase in sales volume and an increase of $2.7 million in cost of 503B product sales related to the increase in sales volume, product costs, and overhead.
38
Research and Development Expenses
R&D expenses for the three months ended June 30, 2022 totaled $13.1 million, a decrease of $7.6 million, or 37%, as compared to $20.6 million for the three months ended June 30, 2021. This was primarily due to a decrease in Oral Paclitaxel product development and medical affairs costs, costs of clinical and regulatory operations, compensation costs, and costs of preclinical operations and included the following:
•$3.3 million decrease in Oral Paclitaxel product development and medical affairs costs incurred in connection with the potential product launch costs of clinical operations after the completion of the Phase 3 studies for Oral Paclitaxel;
•$2.4 million decrease in costs of clinical operations and regulatory affairs after the completion of the Phase 3 study for Oral Paclitaxel;
•$2.0 million decrease in drug licensing costs related to a license milestone payment associated with Arginine deprivation therapy in 2021;
•$1.7 million decrease in R&D related compensation expenses; and
•$1.0 million decrease in preclinical operations, primarily related to the Orascovery platform;
The decrease in these R&D expenses was partially offset by a $2.4 million increase in cell therapy development costs and a $0.5 million increase in drug licensing costs related to licenses for specialty drug products.
Selling, General, and Administrative Expenses
SG&A expenses for the three months ended June 30, 2022 totaled $17.2 million, a decrease of $0.5 million, or 3%, as compared to $17.6 million for the three months ended June 30, 2021. This was primarily due to a $2.5 million decrease in costs for preparing to commercialize Oral Paclitaxel as the significant pre-launch activities slowed upon receipt of the Complete Response Letter in February 2021. Compensation related costs decreased by $0.2 million. These decreases were partially offset by a $2.2 million increase in operating costs, including professional fees and IT costs.
Interest Income and Interest Expense
Interest income consisted of interest earned on our short-term investments and totaled less than $0.1 million for both of the three months ended June 30, 2022 and 2021. Interest expense totaled $4.3 million and $5.6 million for the three months ended June 30, 2022 and 2021, respectively. Interest expense in both periods was incurred from the Senior Credit Agreement with Oaktree. The decrease in interest expense during the three months ended June 30, 2022 was due to principal repayments made to the Senior Credit Agreement.
Gain on extinguishment of debt
We recognized a $2.1 million gain on the extinguishment of debt during the three months ended June 30, 2022. This was due to the partial repayment we made to Oaktree upon the closing of the RIPA with Sagard and Oaktree.
Income Tax Expense
For the three months ended June 30, 2022, income tax benefit amounted to less than $0.1 million, compared to income tax benefit of $11.0 million for the three months ended June 30, 2021. We did not record a provision for U.S. federal income taxes for the three months ended June 30, 2022 or 2021 because we expect to generate a loss for the years ended December 31, 2022 and 2021. The income tax benefit in the prior period is primarily the result of a taxable temporary difference due to the deferred tax liability recognized for the indefinite lived intangible assets acquired in connection with the acquisition of Kuur’s IPR&D. This taxable temporary difference is considered a source of taxable income to support the realization of deferred tax assets from the acquirer which resulted in a reversal of our valuation allowance.
Loss from discontinued operations
Loss from discontinued operations for the three months ended June 30, 2022 totaled $8.3 million, as compared to $3.4 million for the three months ended June 30, 2021. This change was primarily due to the reserve of excess inventory held at our discontinued China API operations of $7.1 million, partially offset by general and administrative expenses related to the discontinued Dunkirk operation of $2.4 million, which was incurred in the three months ended June 30, 2021. Further, research and development costs at our discontinued China API operations decreased by $0.3 million and other income increased by $0.3 million due to the sale of pilot products in 2022.
39
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
The following table sets forth a summary of our condensed consolidated results of operations for the six months ended June 30, 2022 and 2021, together with the changes in those items in dollars and as a percentage. This information should be read together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Our operating results in any period are not necessarily indicative of the results that may be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
|
(in thousands) |
|
|
% |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales, net |
|
$ |
54,154 |
|
|
$ |
38,881 |
|
|
$ |
15,273 |
|
|
|
39 |
% |
License fees and other revenue |
|
|
6,504 |
|
|
|
20,969 |
|
|
|
(14,465 |
) |
|
|
-69 |
% |
Total revenue |
|
|
60,658 |
|
|
|
59,850 |
|
|
|
808 |
|
|
|
|
Cost of sales |
|
|
(45,613 |
) |
|
|
(34,158 |
) |
|
|
(11,455 |
) |
|
|
34 |
% |
Gross profit |
|
|
15,045 |
|
|
|
25,692 |
|
|
|
(10,647 |
) |
|
|
|
Research and development expenses |
|
|
(27,179 |
) |
|
|
(42,390 |
) |
|
|
15,211 |
|
|
|
-36 |
% |
Selling, general, and administrative expenses |
|
|
(30,979 |
) |
|
|
(36,840 |
) |
|
|
5,861 |
|
|
|
-16 |
% |
Interest income |
|
|
122 |
|
|
|
61 |
|
|
|
61 |
|
|
|
100 |
% |
Interest expense |
|
|
(8,820 |
) |
|
|
(10,538 |
) |
|
|
1,718 |
|
|
|
-16 |
% |
Loss on extinguishment of debt |
|
|
(1,450 |
) |
|
|
— |
|
|
|
(1,450 |
) |
|
|
100 |
% |
Income tax (expense) benefit |
|
|
(8 |
) |
|
|
10,881 |
|
|
|
(10,889 |
) |
|
|
-100 |
% |
Net loss from continuing operations |
|
|
(53,269 |
) |
|
|
(53,134 |
) |
|
|
(135 |
) |
|
|
0 |
% |
Gain (loss) from discontinued operations |
|
|
2,963 |
|
|
|
(7,084 |
) |
|
|
10,047 |
|
|
|
-142 |
% |
Net loss |
|
|
(50,306 |
) |
|
|
(60,218 |
) |
|
|
9,912 |
|
|
|
|
Less: net loss attributable to non-controlling interests |
|
|
(729 |
) |
|
|
(894 |
) |
|
|
165 |
|
|
|
-18 |
% |
Net loss attributable to Athenex, Inc. |
|
$ |
(49,577 |
) |
|
$ |
(59,324 |
) |
|
$ |
9,747 |
|
|
|
|
Revenue
Revenue from product sales increased to $54.2 million for the six months ended June 30, 2022, from $38.9 million for the six months ended June 30, 2021, an increase of $15.3 million or 39%. This increase was primarily attributable to an increase in APD specialty product sales, which increased by $13.6 million as the result of increases in shortage product sales and product launches during 2022. 503B product sales increased by $1.6 million from additional product launches. Fluctuations in the demand for shortage products and market demand may continue to significantly affect our product sales in the future.
License fees and other revenue decreased by $14.5 million, to $6.5 million for the six months ended June 30, 2022. This decrease was primarily due to the recognition of $20.0 million of license revenue in 2021 pursuant to the 2017 Almirall License Agreement upon the launch of Klisyri in the U.S., partially offset by the recognition of $5.0 million of license revenue upon the commencement of a line extension trial for Klisyri in the U.S. during the six months ended June 30, 2022. Substantially all of the revenue earned under the Almirall License Agreement in the near future will be remitted to the Purchasers under the RIPA.
Cost of Sales
Cost of sales for the six months ended June 30, 2022 totaled $45.6 million, an increase of $11.5 million, or 34%, as compared to $34.2 million for the six months ended June 30, 2021. The increase was primarily due to an increase of $7.0 million in cost of APD product sales related to the increase in sales volume and an increase of $4.5 million in cost of 503B product sales related to the increase in sales volume, product costs, and overhead.
Research and Development Expenses
R&D expenses for the six months ended June 30, 2022 totaled $27.2 million, a decrease of $15.2 million, or 36%, as compared to $42.4 million for the six months ended June 30, 2021. This was primarily due to a decrease in Oral Paclitaxel product development and medical affairs costs, costs of clinical and regulatory operations, and costs of preclinical operations and included the following:
•$9.6 million decrease in Oral Paclitaxel product development and medical affairs costs incurred in connection with the potential product launch costs of clinical operations after the completion of the Phase 3 studies for Oral Paclitaxel;
•$3.6 million decrease in costs of clinical operations and regulatory affairs after the completion of the Phase 3 study for Oral Paclitaxel;
•$2.5 million decrease in R&D related compensation expenses;
40
•$2.0 million decrease in drug licensing costs related to a license milestone payment associated with Arginine deprivation therapy in 2021; and
•$1.2 million decrease in costs of preclinical operations, primarily related to the Orascovery platform.
The decrease in these R&D expenses was partially offset by a $3.6 million increase in cell therapy development costs and a $0.1 million increase in costs of other product development.
Selling, General, and Administrative Expenses
SG&A expenses for the six months ended June 30, 2022 totaled $31.0 million, a decrease of $5.9 million, or 16%, as compared to $36.8 million for the six months ended June 30, 2021. This was primarily due to a $9.2 million decrease in costs for preparing to commercialize Oral Paclitaxel as the significant pre-launch activities slowed upon receipt of the Complete Response Letter in February 2021. Compensation related costs decreased by $0.3 million. These decreases were partially offset by a $3.6 million increase in operating costs, including professional fees, IT costs, and the change in fair value of contingent consideration.
Interest Income and Interest Expense
Interest income consisted of interest earned on our short-term investments and totaled $0.1 million for both of the six months ended June 30, 2022 and 2021. Interest expense totaled $8.8 million and $10.5 million for the six months ended June 30, 2022 and 2021, respectively. Interest expense in both periods was incurred from the Senior Credit Agreement with Oaktree. The decrease in interest expense during the six months ended June 30, 2022 was due to principal repayments made to the Senior Credit Agreement.
Loss on extinguishment of debt
During the six months ended June 30, 2022, we recognized a $1.5 million net loss on the extinguishment of debt. This was comprised of a loss of $3.5 million related to the prepayment we made to Oaktree upon the closing of the sale of our leasehold interest in the manufacturing facility in Dunkirk, New York. This was partially offset by a $2.1 million gain on the extinguishment of debt due to the partial repayment we made to Oaktree upon the closing of the RIPA with Sagard and Oaktree.
Income Tax Expense
For the six months ended June 30, 2022, income tax expense amounted to less than $0.1 million, compared to income tax benefit of $10.9 million for the six months ended June 30, 2021. We did not record a provision for U.S. federal income taxes for the six months ended June 30, 2022 or 2021 because we expect to generate a loss for the years ended December 31, 2022 and 2021. The income tax benefit in the prior period is primarily the result of a taxable temporary difference due to the deferred tax liability recognized for the indefinite lived intangible assets acquired in connection with the acquisition of Kuur’s IPR&D. This taxable temporary difference is considered a source of taxable income to support the realization of deferred tax assets from the acquirer which resulted in a reversal of our valuation allowance.
Gain (loss) from discontinued operations
Gain from discontinued operations for the six months ended June 30, 2022 totaled $3.0 million, as compared to a loss of $7.1 million for the six months ended June 30, 2021. This change was primarily due to the gain on the sale of the Dunkirk facility of $14.5 million, and a decrease in general and administrative expenses related to the discontinued Dunkirk operations of $1.9 million during the six months ended June 30, 2022. These were partially offset by a decrease in API product sales at the discontinued China API operations and the reserve of excess inventory held at our discontinued China API operations of $7.1 million. Further, research and development costs at our discontinued China API operations decreased by $1.2 million and other income increased by $0.8 million due to the sale of pilot products in 2022.
41
Liquidity and Capital Resources
Capital Resources
Since our inception, we have incurred net losses and negative cash flows from our operations. Substantially all of our losses have resulted from funding our R&D programs, SG&A costs associated with our operations, and the development of our specialty drug operations in our Commercial Platform and 503B operations and the investment we made in our pre-launch activities in anticipation of commercializing our proprietary drugs. We incurred net losses of $50.3 million and $60.2 million for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, we had an accumulated deficit of $963.0 million. Our operating activities from continuing operations used $36.8 million and $63.7 million of cash during the six months ended June 30, 2022 and 2021, respectively. We intend to continue to advance certain of our various clinical and pre-clinical programs which could lead to increased cash outflow of R&D costs. While we expect our R&D expenses to remain at a decreased level from prior periods, as the development of most non-Cell Therapy technologies has been suspended, R&D expenses related to our Cell Therapy platform are expected to increase as we prepare for additional clinical and preclinical studies for our Cell Therapy programs. We intend to continue to diversify the product portfolio for specialty drug products in the Commercial Platform and 503B operations, which may require relatively more funding than we have previously dedicated to this portfolio. Our principal sources of liquidity as of June 30, 2022 were cash and cash equivalents totaling $22.1 million, restricted cash of $13.8 million, held in a controlled bank account in connection with the Senior Credit Agreement with Oaktree and the RIPA with Sagard, and short-term investments totaling $1.2 million, which are generally high-quality investment grade corporate debt securities.
Indebtedness
We had $126.9 million and $148.5 million of debt as of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022 and 2021, this primarily consisted of the royalty financing liability under the RIPA (as described in Part I, Item 1. Note 11 - Debt and Lease Obligations), Senior Credit Agreement with Oaktree, a credit agreement with Chongqing Maliu Riverside Development and Investment Co., LTD, and finance and operating lease obligations.
The sale of the interest in U.S. and European royalties and milestones to Sagard and Oaktree in connection with the Revenue Interest Purchase Agreement was recorded as a royalty financing liability due to our significant continued involvement in the cash flows due to the Purchasers. The RIPA contains various representations and warranties, information rights, non-financial covenants, and indemnification obligations, however, this liability is not guaranteed by the Company. During the six months ended June 30, 2022, the Company received Klisyri royalties of $0.5 million, which were remitted to the Purchasers.
During the six months ended June 30, 2022, we made payments, inclusive of principal, interest, and fees, to Oaktree in the aggregate amount of $97.6 million pursuant to the Third Amendment, Fourth Amendment, and Fifth Amendment. See Part I, Item 1. Note 11—Debt and Lease Obligations for additional information regarding our Senior Credit Agreement with Oaktree.
As of June 30, 2022, we owe $57.5 million under the Senior Credit Agreement. We do not have access to additional tranches of funding available under the Senior Credit Agreement. Our obligations under the Senior Credit Agreement are guaranteed by us and certain of our existing domestic subsidiaries and subsequently acquired or organized subsidiaries subject to certain exceptions. Our obligations under the Senior Credit Agreement and the related guarantees thereunder are secured, subject to customary permitted liens and other agreed upon exceptions, by (i) a pledge of all of the equity interests of our direct subsidiaries, and (ii) a perfected security interest in all of our tangible and intangible assets.
The Senior Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions, subject to certain exceptions, including specific exceptions with respect to product commercialization and development activities. In addition, the Senior Credit Agreement contains certain financial covenants, including, among other things, maintenance of minimum liquidity and a minimum revenue test, measured quarterly until the last day of the second consecutive fiscal quarter where the consolidated leverage ratio does not exceed 4.5 to 1, provided that thereafter we cannot allow our consolidated leverage ratio to exceed 4.5 to 1, measured quarterly. Failure of the Company to comply with the financial covenants will result in an event of default, subject to certain cure rights of the Company. At June 30, 2022, we were in compliance with all applicable covenants.
As of June 30, 2022, we owe $7.5 million under the line of credit with Chongqing Maliu Riverside Development and Investment Co., LTD (“CQ”), which is expected to be assumed by the China API Buyer if the sale of the China API Operations closes, and is included within non-current portion of liabilities of discontinued operations on our condensed consolidated balance sheet.
ATM Offering
42
On August 20, 2021, we entered into a sales agreement with SVB Securities LLC, in connection with the offer and sale of up to $100,000,000 of shares of our common stock, par value $0.001 per share, in an at-the-market offering (“ATM Offering”). During the six months ended June 30, 2022, we sold 7,147,892 shares of our common stock for an average price of $0.63 per share under the sales agreement, raising approximately $4.5 million in net proceeds. Since the inception of the ATM, we sold 7,910,717 shares of our common stock for an average price of $0.71 per share under the sales agreement, raising approximately $5.6 million in net proceeds. While we intend to continue selling shares of common stock in the ATM Offering, there can be no assurance that we will be able to sell shares of common stock at a price that is acceptable to our Board of Directors or that will be successful in raising significant capital in the offering.
Outlook
We expect to continue to opportunistically seek access to the equity capital markets to support our development efforts and operations. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. To the extent that we raise additional funds through collaboration or partnering arrangements or by monetizing non-core assets, we may be required to relinquish some of our rights to our technologies or rights to market and sell our products in certain geographies, grant licenses on terms that are not favorable to us, or issue equity that may be substantially dilutive to our stockholders. In addition, we have borrowed and, in the future, may borrow additional capital from institutional and commercial banking sources to fund future growth. We may borrow additional funds on terms that may include restrictive covenants, including covenants that further restrict the operation of our business, liens on assets, high effective interest rates, financial performance covenants and repayment provisions that reduce cash resources and limit future access to capital markets.
As of June 30, 2022, we had cash and cash equivalents of $22.1 million, restricted cash of $13.8 million, and short-term investments of $1.2 million. We are implementing cost savings programs and plan to monetize non-core assets and raise capital in order to extend our cash runway in 2022. If we are unable to raise additional capital or monetize assets, we believe that the existing cash and cash equivalents, restricted cash, and short-term investments will not be sufficient to fund our operations through the next twelve months beyond the date of the issuance of our unaudited condensed consolidated financial statements. We have concluded that this raises substantial doubt about our ability to continue as a going concern. See Part I, Item 1. Note 1—Company and Nature of Business for further information regarding our ability to continue as a going concern. We have based these estimates on assumptions that may prove to be wrong, and we could spend the available financial resources much faster than expected and need to raise additional funds sooner than anticipated. Although we plan to raise additional funds though the sale of non-core assets and selling equity securities, these plans are subject to market conditions which are outside of our control, and therefore cannot be deemed to be probable. There can be no assurance that additional financing, if available, can be obtained on terms acceptable to us. If we are unable to obtain such additional financing, we would need to reevaluate our future operating plans.
We anticipate that our expenses will cover the following activities as we:
•Advance the preclinical and clinical research program and development activities of our Cell Therapy technology platform;
•Continue our preclinical and clinical research program and development activities related to our Mission;
•Seek to identify additional research programs and product candidates within existing Cell Therapy platform; and
•Maintain, expand and protect our intellectual property (“IP”) portfolio.
We have made certain changes to our budgeted expenses in light of the CRL for Oral Paclitaxel we received in February 2021 and the Type A meetings with the FDA, including curtailing commercialization expenses and investing in additional products for our specialty drug product business. However, our expenses could increase as we continue to fund clinical and preclinical development of our research programs by advancing our Cell Therapy programs, certain candidates in our pipeline, our specialty drug products, working capital and other general corporate purposes. We have based our estimates on assumptions that might prove to be wrong and we might use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our drug candidates, we are unable to accurately estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development and commercialization of our drug candidates.
Our future capital requirements will depend on many factors, some or all of which may be impacted by the COVID-19 pandemic, including:
•Our ability to generate revenue and profits from our Commercial Platform or otherwise;
•The costs, timing and outcome of regulatory reviews and approvals;
•Progress of our drug candidates to progress through clinical development successfully;
43
•The initiation, progress, timing, costs and results of nonclinical studies and clinical trials for our other programs and potential drug candidates;
•The costs of construction and fit-out of planned drug manufacture at our API manufacturing facility;
•The number and characteristics of the drug candidates we pursue;
•The costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our IP rights and defending IP related claims;
•The extent to which we acquire or in-license other products and technologies; and
•Our ability to maintain and establish collaboration arrangements on favorable terms, if at all.
We expect to finance our cash needs through a combination of equity offerings, debt financings, sales of non-core assets, collaborations, strategic alliances, licensing arrangements, and government grants. We believe that the existing cash and cash equivalents, restricted cash, and short-term investments will not be sufficient to fund our operations through the next twelve months beyond the date of the issuance of our consolidated financial statements. Our estimates are based on relevant conditions that are known and reasonably knowable at the date of these consolidated financial statements being available for issuance and are subject to change due to changes in business, industry or macroeconomic conditions. We have based these estimates on assumptions that may prove to be wrong, and we could spend the available financial resources much faster than expected and need to raise additional funds sooner than anticipated. To the extent that we raise additional capital by issuing equity securities or convertible debt securities, our stockholders may experience substantial dilution, and the terms of these securities may include liquidation or other preferences that adversely affect rights of holders of common stock. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and might require the issuance of warrants, which could potentially dilute the ownership interest of holders of common stock. If we are able to sell non-core assets, we may not realize in full the anticipated benefits, savings, and improvements in our strategic pivot efforts, we may not realize the cost savings we anticipate, the cost of disposing of the assets may exceed the cost savings generated, and the process of disposing of the assets may be disruptive to our daily operating activities and our execution of short- and long-term strategies. To the extent that we raise additional funds through collaboration or partnering arrangements, we may be required to relinquish some of our rights to our technologies or rights to market and sell our products in certain geographies and grant licenses on terms that are not favorable to us. If we are unable to raise additional funds when needed, we might be required to delay, limit, reduce, or terminate our product development efforts, reevaluate our future operating plans or cease operations.
Cash Flows
The following table provides information regarding our cash flows for the six months ended June 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Net cash used in operating activities from continuing operations |
|
$ |
(36,811 |
) |
|
$ |
(63,764 |
) |
Net cash provided by investing activities from continuing operations |
|
|
8,460 |
|
|
|
84,696 |
|
Net cash (used in) provided by financing activities from continuing operations |
|
|
(18,528 |
) |
|
|
1,534 |
|
Net cash provided by (used in) discontinued operations |
|
|
29,420 |
|
|
|
(15,379 |
) |
Net effect of foreign exchange rate changes |
|
|
1,721 |
|
|
|
267 |
|
Net (decrease) increase in cash, cash equivalents, and restricted cash |
|
$ |
(15,738 |
) |
|
$ |
7,354 |
|
Net Cash Used in Operating Activities from Continuing Operations
The use of cash in our operating activities resulted primarily from our net loss adjusted for non-cash charges and changes in components of working capital. The primary use of our cash in the periods presented was to fund our R&D, regulatory and other clinical trial costs, drug licensing costs, inventory purchases, pre-launch commercialization activities, and other expenditures related to sales, marketing and administration.
Net cash used in operating activities from continuing operations was $36.8 million for the six months ended June 30, 2022. This resulted primarily from our net loss from continuing operations of $53.3 million, adjusted for non-cash charges of $7.6 million and by cash provided by our operating assets and liabilities of $8.9 million. Our operating assets increased $7.5 million for accounts receivable mainly related to the increase in APD sales, decreased $1.4 million in prepaid expenses and other assets, and increased $10.8 million for inventory of all drug products. Our operating liabilities increased by $25.8 million mainly due to an increase in
44
accrued selling fees and rebates, accrued wages and benefits, accrued clinical expenses, and accrued inventory purchases. Our net non-cash charges during the six months ended June 30, 2022 primarily consisted of $3.5 million of stock-based compensation expense, $1.5 million loss on extinguishment of debt, $1.5 million depreciation and amortization expense, and $1.0 million amortization of debt discount.
Net cash used in operating activities from continuing operations was $63.7 million for the six months ended June 30, 2021. This resulted primarily from our net loss from continuing operations of $53.1 million, adjusted for non-cash charges of $9.3 million, non-cash income benefit of $10.9 million related to the reversal of our valuation allowance on our deferred tax assets to offset the deferred tax liability assumed in connection with the acquisition of Kuur’s IPR&D, and by cash used by our operating assets and liabilities of $8.9 million. Our operating assets decreased $0.5 million for accounts receivable mainly related to the decreased sales of specialty products, increased $0.3 million in prepaid expenses and other assets, and increased $0.6 million for inventory of all drug products. Our operating liabilities decreased by $8.6 million mainly due to a decrease in accrued selling fees and royalties on our specialty drugs and a decrease in accrued costs for product launch, partially offset by an increase in accrued license fees and accrued interest. Our net non-cash charges during the six months ended June 30, 2021 consisted of $4.7 million of stock-based compensation expense, $2.0 million depreciation and amortization expense, $1.5 million amortization of debt discount, $0.6 million write-off of deferred debt issuance costs related to the revenue interest financing, and $0.4 million change in fair value of contingent consideration.
Net Cash Provided by Investing Activities from Continuing Operations
Net cash provided by investing activities from continuing operations was $8.5 million for the six months ended June 30, 2022, compared to $84.7 million provided in the six months ended June 30, 2021. The difference was primarily due to less cash being provided by the net sales and maturities of short-term investments, partially offset by a decrease in cash paid for in-licenses fees related to our specialty drugs during the six months ended June 30, 2022 and cash acquired from the acquisition of Kuur in 2021.
Net Cash (Used in) Provided by Financing Activities from Continuing Operations
Net cash used in financing activities from continuing operations was $18.5 million for the six months ended June 30, 2022, which consisted of $92.6 million repayment of long-term debt, $5.6 million in costs related to the repayment of debt, and $5.0 million in costs related to the issuance of the royalty financing liability, partially offset by $80.0 million proceeds from the issuance of the royalty financing liability and $4.7 million in proceeds for the sale of common stock under the ATM Offering and the 2017 Employee Stock Purchase Plan.
Net cash provided by financing activities from continuing operations was $1.5 million for the six months ended June 30, 2021, which consisted of $1.7 million from the exercise of stock options and sale of common stock, partially offset by $0.1 million repayment finance lease obligations.
Net Cash Provided by (Used in) Discontinued Operations
Net cash provided by discontinued operations was $29.4 million for the six months ended June 30, 2022 and was primarily comprised of proceeds of the Dunkirk Transaction of $40.0 million, partially offset by purchases of property and equipment of $2.3 million and cash used in operating activities of discontinued operations of $7.5 million.
Net cash used in discontinued operations was $15.4 million for the six months ended June 30, 2021 and was primarily attributable to purchases of property and equipment of $10.0 million and cash used in operating activities of discontinued operations of $5.4 million.
Contractual Obligations
A summary of our contractual obligations as of June 30, 2022 is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Payments Due by Period |
|
|
|
|
|
|
Within
1 Year |
|
|
1 to 3
years |
|
|
3 to 5
years |
|
|
More than
5 years |
|
|
Total Amounts
Committed |
|
|
|
(in thousands) |
|
Operating leases |
|
$ |
2,253 |
|
|
|
4,131 |
|
|
$ |
948 |
|
|
$ |
— |
|
|
$ |
7,332 |
|
Long-term debt |
|
|
17,712 |
|
|
|
38,461 |
|
|
|
26,001 |
|
|
|
— |
|
|
|
82,174 |
|
Finance lease obligations |
|
|
147 |
|
|
|
184 |
|
|
|
— |
|
|
|
— |
|
|
|
331 |
|
Licensing fees |
|
|
716 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
716 |
|
|
|
$ |
20,828 |
|
|
$ |
42,776 |
|
|
$ |
26,949 |
|
|
$ |
— |
|
|
$ |
90,553 |
|
45
Our operating and finance leases are principally for facilities and equipment. We currently lease office space in the U.S. and foreign countries to support our operations as a global organization. The operating leases in the above table include our several locations with the amounts committed by each location: (1) the rental of our global headquarters in the Conventus Center for Collaborative Medicine in Buffalo, NY; (2) the rental of our research and development facility in the IC Development Centre in Hong Kong; (3) the rental of the Commercial Platform headquarters in Chicago, IL; (4) the rental of our clinical research headquarters in Cranford, NJ; (5) the rental of our contract research organization throughout Latin America; (6) the rental of our Global Supply Chain distribution office in Houston, TX; (7) the rental of our Global Supply Chain API manufacturing facility in Chongqing, China; and (8) the rental of other facilities and equipment located mainly in Buffalo, NY. These locations represent $4.0 million, less than $0.1 million, $1.5 million, $0.2 million, less than $0.1 million, $0.1 million, $0.1 million, and $1.5 million, respectively, of the total amounts committed. In addition to the minimum rental commitments on our operating leases we may also be required to pay amounts for taxes, insurance, maintenance and other operating expenses.
The long-term debt includes our senior secured loan and the credit agreement with CQ. The finance lease obligations represent three leases of equipment in our 503B manufacturing facility outside of Buffalo, NY. The license fees in the above table represent the amount committed and accrued under in-license agreements for specialty drug products by the Commercial platform.
The Company is obligated to remit funds collected from certain Klisyri royalties and milestones under the License Agreement with Almirall to the Purchasers under the RIPA. The Company will retain the right to receive 50% of certain of the milestone interests under the License Agreement, equal to $155.0 million in the aggregate if those milestones are achieved, and 50% of the royalties paid under the License Agreement for sales of Klisyri once net sales of Klisyri exceed a certain dollar amount. The estimates of these cash flows are excluded from the above table.
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the periods. We evaluate our estimates and judgments on an ongoing basis, including but not limited to, estimating the useful lives of long-lived assets, assessing the impairment of long-lived assets, stock-based compensation expenses, and the realizability of deferred income tax assets. We base our estimates on historical experience, known trends and events, contractual milestones and other various factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Changes in the accounting estimates are likely to occur from period to period. Actual results could be significantly different from these estimates. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgment and estimates.
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Revenue Recognition
The Company records revenue in accordance with ASC, Topic 606 “Revenue from Contracts with Customers.” Under Topic 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of Topic 606, the entity performs the following five steps: (i) identifies the contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Below is a description of principal activities – separated by reportable segments – from which the Company generates its revenue.
1.Oncology Innovation Platform
The Company out-licenses certain of its IP to other pharmaceutical companies in specific territories that allow the customer to use, develop, commercialize, or otherwise exploit the licensed IP. In accordance with Topic 606, the Company analyzes the contracts to identify its performance obligations within the contract. Most of the Company’s out-license arrangements contain multiple performance obligations and variable pricing. After the performance obligations are identified, the Company determines the transaction price, which generally includes upfront fees, milestone payments related to the achievement of developmental, regulatory, or commercial goals, and royalty payments on net sales of licensed products. The Company considers whether the transaction price is fixed or variable, and whether such consideration is subject to return. Variable consideration is only included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. If any portion of the transaction price is constrained, it is excluded from the transaction price until the constraint no longer exists. The Company then allocates the transaction price to the performance obligation to which the consideration is related. Where a portion of the transaction price is received and allocated to continuing performance obligations under the terms of the arrangement, it is recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied.
The Company’s contracts may contain one or multiple promises, including the license of IP and development services. The licensed IP is capable of being distinct from the other performance obligations identified in the contract and is distinct within the context of the contract, as upon transfer of the IP, the customer is able to use and benefit from it, and the customer could obtain the development services from other parties. The Company also considers the economic and regulatory characteristics of the licensed IP and other promises in the contract to determine if it is a distinct performance obligation. The Company considers if the IP is modified or enhanced by other performance obligations through the life of the agreement and whether the customer is contractually or practically required to use updated IP. The IP licensed by the Company has been determined to be functional IP. The IP is not modified during the license period and therefore, the Company recognizes revenues from any portion of the transaction price allocated to the licensed IP when the license is transferred to the customer and they can benefit from the right to use the IP. For the six month period ended June 30, 2021, the Company recognized license revenue of $21.0 million, of which $20.0 million was recognized upon the achievement of the first commercial milestone pursuant to the 2017 Almirall out-license arrangement upon the launch of Klisyri in the U.S., and $0.5 million was recognized for an upfront fee upon transferring IP to the customer upon execution of the second amendment to the 2011 PharmaEssentia license agreement. No such revenue was recorded for the six months ended June 30, 2022. Under the collaboration agreement between Axis Therapeutics and PharmaEssentia, the Company received $2.0 million of upfront fees allocated to its performance obligation to deliver functional IP to the Customer. As of June 30, 2022, the Company had not satisfied this performance obligation by delivering the license with the data necessary for the customer to benefit from the right to use the IP and, therefore, the amount was recorded as deferred revenue.
Other performance obligations included in most of the Company’s out-licensing agreements include performing development services to reach clinical and regulatory milestone events. The Company satisfies these performance obligations at a point-in-time, because the customer does not simultaneously receive and consume the benefits as the development occurs, the development does not create or enhance an asset controlled by the customer, and the development does not create an asset with no alternative use. The Company considers milestone payments to be variable consideration measured using the most likely amount method, as the entitlement to the consideration is contingent on the occurrence or nonoccurrence of future events. The Company allocates each variable milestone payment to the associated milestone performance obligation, as the variable payment relates directly to the Company’s efforts to satisfy the performance obligation and such allocation depicts the amount of consideration to which the Company expects to be entitled for satisfying the corresponding performance obligation. The Company re-evaluates the probability of achievement of such performance obligations and any related constraint and adjusts its estimate of the transaction price as appropriate. To date, no amounts have been constrained in the initial or subsequent assessments of the transaction price. During the three and six months ended June 30, 2022, the Company recognized license revenue of $5.0 million related to a line extension milestone in connection with its license agreement with Almirall. The Company did not recognize revenue from other performance obligations included in the Company’s out-licensing agreements during the three and six months ended June 30, 2021.
47
Certain out-license agreements include performance obligations to manufacture and provide drug product in the future for commercial sale when the licensed product is approved. For the commercial, sales-based royalties, the consideration is predominantly related to the licensed IP and is contingent on the customer’s subsequent sales to another commercial customer. Consequently, the sales- or usage-based royalty exception would apply. Revenue will be recognized for the commercial, sales-based milestones as the underlying sales occur. The Company recorded $0.6 million and $1.2 million of royalty revenue related to sales of Tirbanibulin during the three and six months ended June 30, 2022, respectively. During the three and six months ended June 30, 2021, the Company recorded $0.2 million of royalty revenue related to sales of Tirbanibulin.
The Company exercises significant judgment when identifying distinct performance obligations within its out-license arrangements, determining the transaction price, which often includes both fixed and variable considerations, and allocating the transaction price to the proper performance obligation. The Company did not use any other significant judgments related to out-licensing revenue during the six months ended June 30, 2022 and 2021.
2.Global Supply Chain Platform
The Company’s Global Supply Chain Platform generates revenue by providing small to mid-scale cGMP manufacturing of clinical and commercial products for pharmaceutical and biotech companies and selling pharmaceutical products under 503B regulations set forth by the U.S. FDA.
Revenue earned by the Global Supply Platform is recognized when the Company has satisfied its performance obligation, which is the shipment or the delivery of drug products. The underlying contracts for these sales are generally purchase orders and the Company recognizes revenue at a point-in-time. Any remaining performance obligations related to product sales are the result of customer deposits and are reflected in the deferred revenue contract liability balance.
The Company’s Commercial Platform generates revenue by distributing specialty products through independent pharmaceutical wholesalers. The wholesalers then sell to an end-user, normally a hospital, alternative healthcare facility, or an independent pharmacy, at a lower price previously established by the end-user and the Company. Upon the sale by the wholesaler to the end-user, the wholesaler will chargeback the difference, if any, between the original list price and price at which the product was sold to the end-user. The Company also offers cash discounts, which approximate 2.3% of the gross sales price, as an incentive for prompt customer payment, and, consistent with industry practice, the Company’s return policy permits customers to return products within a window of time before and after the expiration of product dating. Further, the Company offers contractual allowances, generally in the form of rebates or administrative fees, to certain wholesale customers, group purchasing organizations (“GPOs”), and end-user customers, consistent with pharmaceutical industry practices. Revenues are recorded net of provisions for variable consideration, including discounts, rebates, GPO allowances, price adjustments, returns, chargebacks, promotional programs and other sales allowances. Accruals for these provisions are presented in the consolidated financial statements as reductions in determining net sales and as a contra asset in accounts receivable, net (if settled via credit) and other current liabilities (if paid in cash). As of June 30, 2022, and December 31, 2021, the Company’s total provision for chargebacks and other deductions included as a reduction of accounts receivable totaled $26.7 million and $22.9 million, respectively. The Company’s total provision for chargebacks and other revenue deductions was $43.2 million, and $26.9 million for the three months ended June 30, 2022, and 2021, respectively and was $80.9 million and $52.5 million for the six months ended June 30, 2022 and 2021, respectively.
The Company exercises significant judgment in its estimates of the variable transaction price at the time of the sale and recognizes revenue when the performance obligation is satisfied. Factors that determine the final net transaction price include chargebacks, fees for service, cash discounts, rebates, returns, warranties, and other factors. The Company estimates all of these variables based on historical data obtained from previous sales finalized with the end-user customer on a product-by-product basis. At the time of sale, revenue is recorded net of each of these deductions. Through the normal course of business, the wholesaler will sell the product to the end-user, determining the actual chargeback, return products, and take advantage of cash discounts, charge fees for services, and claim warranties on products. The final transaction price per product is compared to the initial estimated net sale price and reviewed for accuracy. The final prices and other factors are immediately included in the Company’s historical data from which it will estimate the transaction price for future sales. The underlying contracts for these sales are generally purchase orders including a single performance obligation, generally the shipment or delivery of products and the Company recognizes this revenue at a point-in-time.
Research and Development Expenses
Research and development expenses represent costs associated with developing our proprietary drug candidates, our collaboration agreements for such drugs, and our ongoing clinical studies.
48
Clinical trial costs are a significant component of our research and development expenses. We have a history of contracting with third parties that perform various clinical trial activities on our behalf in the ongoing development of our drug candidates. Expenses related to clinical trials are accrued based on our estimates of the actual services performed by the third parties for the respective period. If the contracted amounts are revised or the scope of a contract is revised, we will modify the accruals accordingly on a prospective basis and will do so in the period in which the facts that give rise to the revision become reasonably certain.
Intangible Assets, net
Intangible assets arising from a business acquisition are recognized at fair value as of the acquisition date. The Company amortizes intangible assets using the straight-line method. When the straight-line method of amortization is utilized, the estimated useful life of the intangible asset is shortened to assure the recognition of amortization expense corresponds with the expected cash flows. Other purchased intangibles, including certain licenses, are capitalized at cost and amortized on a straight-line basis over the license life, when a future economic benefit is probable and measurable. If a future economic benefit is not probable or measurable, the license costs are expensed as incurred within research and development expenses. In-process research and development ("IPR&D") intangible assets are not amortized, but rather are reviewed for impairment on an annual basis or more frequently if indicators of impairment are present, until the project is completed, abandoned, or transferred to a third party.
Impairment of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the assets from the expected future cash flows (undiscounted and without interest expense) of the related operations. If these cash flows are less than the carrying value of such assets, an impairment loss for the difference between the estimated fair value and carrying value is recorded.
Business Acquisitions
The Company accounts for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Identifiable amortizing intangible assets are recorded on the consolidated balance sheet at fair value and amortized over their estimated useful lives. Acquisition-related costs are expensed as incurred. Any excess of the consideration transferred over the estimated fair values of the net assets acquired is recorded as goodwill.
Contingent Consideration
Contingent consideration arising from a business acquisition is included as part of the purchase price and is recorded at fair value as of the acquisition date. Subsequent to the acquisition date, the Company remeasures contingent consideration arrangements at fair value at each reporting period until the contingency is resolved. The changes in fair value are recognized within selling, general, and administrative expenses in the Company’s consolidated statement of operations and comprehensive loss. Changes in fair values reflect new information about the likelihood of the payment of the contingent consideration and the passage of time.
Liability related to the sale of future royalties
The Company treats the liability related to the sale of future royalties, as discussed further in Part I, Item 1. Note 11 - Debt and Lease Obligations, as a debt instrument, amortized under the effective interest rate method over the estimated life of the revenue streams. The Company recognizes interest expense thereon using the effective rate, which is based on its current estimates of future revenues over the life of the arrangement. The Company periodically assesses its expected revenues using internal projections, imputes interest on the carrying value of the deferred royalty obligation, and records interest expense using the imputed effective interest rate. To the extent its estimates of future revenues are greater or less than previous estimates or the estimated timing of such payments is materially different than previous estimates, the Company will account for any such changes by adjusting the effective interest rate on a prospective basis, with a corresponding impact to the reclassification of the deferred royalty obligation. The assumptions used in determining the expected repayment term of the royalty financing liability and amortization period of the issuance costs require that the Company makes significant estimates that could impact the short-term and long-term classification of the royalty financing liability, interest recorded on such liability, as well as the period over which such costs will be amortized.
Recent Accounting Pronouncements
49
In the normal course of business, we evaluate all new accounting pronouncements issued by the FASB, the SEC, or other authoritative accounting bodies to determine the potential impact they may have on our condensed consolidated financial statements.