You should read the following discussion and analysis together with our financial statements and the related notes thereto included in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. For a complete discussion of forward-looking statements, see the section above entitled "Forward Looking Statements." Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption "Item 1A. Risk Factors." Overview We are a unique pharmaceutical company focused on developing, acquiring, and commercializing innovative pharmaceutical products that fulfill an unmet patient need. Since the formation of our company in 2017, we have used our expertise in business development, regulatory, and product development to assemble a diversified portfolio of eleven products. Six of our products have been approved by the FDA and commercially launched. We plan to continue growing our business through the acquisition of additional late-stage, high-value product candidates. Results of Operations
To date, we have realized revenues from the sale of our neurology products portfolio to Azurity in 2021, a licensing arrangement on our EM-100 product that was sold to Bausch Health and also the launch of our Biorphen®, Alkindi Sprinkle®, and Carglumic Acid products inDecember 2019 ,December 2020 , andDecember 2021 , respectively. We anticipate successfully growing our sales for these products and commercializing additional product candidates in 2022 and beyond.
Year Ended
Net revenues of
including
the beginning of the year. Revenues were nominal in 2020 for Biorphen and
reflected the launch of Alkindi Sprinkle® late in mid-December.
Our 2021 gross profit of$19.2 million was up significantly as the prior year negative gross profit level was adversely impacted by Biorphen price discounts and a reserve charge to cost of sales for certain slow-moving Biorphen inventory that we do not believe we will be able to sell before its expiry date. For the years endedDecember 31, 2021 and 2020, we incurred$6.2 million and$14.1 million of research and development ("R&D") expenses, respectively, and$14.5 million and$12.8 million of general and administrative ("G&A") expenses, respectively. The$7.9 million decrease in R&D was driven by significant milestone payments on a number of our products in development that did not recur in 2021. The$1.7 million increase in G&A expenses was primarily due to personnel additions and increased professional/consulting spending to support our growing business. We incurred a net loss of$2.0 million and$28.0 million for the years endedDecember 31, 2021 and 2020, respectively.
General and Administrative Expenses
G&A expenses consist primarily of employee compensation expenses, selling and adverting/promotional expenses, legal and professional fees, business insurance and FDA fees. We anticipate that our G&A expenses will increase to support our business growth - particularly with respect to sales and marketing for additional personnel and promotional expenses.
Research and Development Expenses
We currently have seven employees that support our overall product development function. The majority of our spend in R&D is to third parties we contract with to develop and test our products in addition to development partner milestone payments. We closed our R&D facility inMay 2021 . 47
Year Ended
Net revenues for 2020 reflected limited benefit from Alkindi Sprinkle which launched in mid-December. In addition, revenue was negatively impacted by a price discount for Biorphen in 2020 related to the shelf stock at our wholesale customers. Our 2020 gross profit was also adversely impacted by a reserve charge to cost of sales for certain slow-moving Biorphen inventory that we do not believe we will be able to sell before its expiry date. Revenue and gross profit in 2019 reflected the initial launch for Biorphen and a$0.5 million milestone payment for our sale of EM-100 to Bausch Health. For the years endedDecember 31, 2020 and 2019, we incurred$14.1 million and$11.6 million of research and development ("R&D") expenses, respectively, and$12.8 million and$7.6 million of general and administrative ("G&A") expenses, respectively. The increase in R&D expense was primarily due to$4.8 million of licensing and development fees for Alkindi Sprinkle in 2020 offset by reduced spending for Topiramate and Lamotrigine. The$5.2 million increase in G&A expenses was primarily due to personnel additions and increased sales/marketing spending to support product launches. In addition, we incurred significant legal expenses associated with our patent challenge against Exela Pharma Sciences for the Cysteine product that we have in development. We incurred a net loss of$28.0 million and$18.3 million for the years endedDecember 31, 2020 and 2019, respectively.
General and Administrative Expenses
G&A expenses consisted primarily of employee compensation expenses, selling and adverting/promotional expenses, legal and professional fees, business insurance and travel expenses. Our G&A expenses increased to support our business growth - particularly with respect to sales and marketing for additional personnel and promotional expenses.
Research and Development Expenses
As ofDecember 31, 2020 , we had six employees that supported our overall product development and we had facility and operating costs for a laboratory to support product development which we subsequently closed inMay 2021 . 48
Liquidity and Capital Resources
As ofDecember 31, 2021 , we had total assets of$27.5 million , cash and cash equivalents of$14.4 million and working capital of$19.0 million . We had previously capitalized our operations from theJune 2017 private placement of approximately$20.1 million of Series A preferred stock which converted into shares of our common stock concurrent with our IPO inNovember 2018 and also the IPO which provided us with net proceeds of$22.0 million . In addition, we entered into a Credit Agreement with SWK Holdings inNovember 2019 whereby we drew a$5.0 million loan amount at closing and an additional$2.0 million inAugust 2020 . In March andApril 2020 , we received net proceeds of approximately$7.8 million from the sale of shares of our common stock, and inOctober 2020 , we received net proceeds of approximately$21.0 million from a public offering of our common stock at an offering price of$7.00 per share. We believe that our existing funding, revenues from our approved products and milestone payments expected to be paid in 2022 will be sufficient for at least the next twelve months of our operations. However, our projected estimates for our product development spending, administrative expenses and our working capital requirements could be inaccurate, or we may experience growth more quickly or on a larger scale than we expect, any of which could result in the depletion of capital resources more rapidly than anticipated and could require us to seek additional financing earlier than we expect to support our operations. Cash Flows
The following table sets forth a summary of our cash flows for the years ended
Year ended Year ended Year ended
December 31, 2021 December 31, 2020 December 31, 2019
Net cash used in operating
activities $ (4,721 ) $ (22,346 ) $ (18,026 )
Net cash used in investing
activities (2,559 ) (50 ) (1,846 )
Net cash flows provided by
financing activities 391 31,625 5,203
Net change in cash and cash
equivalents $ (6,889 ) $ 9,229 $ (14,669 )
The decrease in cash used in operating activities is primarily a result of lower operating losses, driven by higher revenue. Investing activities in 2021 consist primarily of licensing fees for Carglumic Acid, partially offset by the proceeds from the sale of equipment from our laboratory facility which we closed inMay 2021 . The financing activity primarily consists of theOctober 2020 follow-on common stock offering and theNovember 2019 Credit Agreement borrowing from
SWK Holdings.
Critical Accounting Policies
Our financial statements are prepared in accordance with GAAP. The preparation
of our financial statements and related disclosures requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
costs and expenses in our financial statements. We base our estimates on
historical experience, known trends and events and various other factors that we
believe are 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. We evaluate our estimates and
assumptions on an ongoing basis. Our actual results may differ from these
estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 3
to our financial statements included herein, we believe that the following
accounting policies are those most critical to the judgments and estimates used
in the preparation of our financial statements.
Revenue Recognition
We account for contracts with our customers in accordance with Accounting
Standards Codification ("ASC") 606 - Revenue from Contracts with Customers. ASC
606 applies to all contracts with customers, except for contracts that are
within the scope of other standards. Under ASC 606, an entity recognizes revenue
when its customer obtains control of promised goods or services, in an amount
that reflects the consideration which the entity expects to receive in exchange
for those goods or services. To determine revenue recognition for arrangements
that an entity determines are within the scope of ASC 606, the entity performs
the following five steps: (i) identify the contract(s) with a customer; (ii)
identify the performance obligations in the contract; (iii) determine the
transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) the entity
satisfies a performance obligation.
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At contract inception, once the contract is determined to be within the scope of
ASC 606, we assess the goods or services promised within each contract and
determines those that are performance obligations and assesses whether each
promised good or service is distinct. We then recognize as revenue the amount of
the transaction price that is allocated to the respective performance obligation
when (or as) the performance obligation is satisfied. Arrangements that include
rights to additional goods or services that are exercisable at a customer's
discretion are generally considered options. We assess whether these options
provide a material right to the customer and, if so, they are considered
performance obligations. The exercise of a material right is accounted for as a
contract modification for accounting purposes.
We recognize as revenue the amount of the transaction price that is allocated to
the respective performance obligation when (or as) each performance obligation
is satisfied at a point in time or over time, and if over time this is based on
the use of an output or input method. Any amounts received prior to revenue
recognition will be recorded as deferred revenue. Amounts expected to be
recognized as revenue within the twelve months following the balance sheet date
will be classified as current portion of deferred revenue in our balance sheets.
Amounts not expected to be recognized as revenue within the twelve months
following the balance sheet date are classified as long-term deferred revenue,
net of current portion.
Milestone Payments - If a commercial contract arrangement includes development
and regulatory milestone payments, we will evaluate whether the milestone
conditions have been achieved and if it is probable that a significant revenue
reversal would not occur before recognizing the associated revenue. Milestone
payments that are not within our control or the licensee's control, such as
regulatory approvals, are generally not considered probable of being achieved
until those approvals are received.
Royalties – For arrangements that include sales-based royalties, including
milestone payments based on a level of sales, which are the result of a
customer-vendor relationship and for which the license is deemed to be the
predominant item to which the royalties relate, we will recognize revenue at the
later of (i) when the related sales occur, or (ii) when the performance
obligation to which some or all of the royalty has been allocated has been
satisfied or partially satisfied.
Significant Financing Component - In determining the transaction price, we will adjust consideration for the effects of the time value of money if the expected period between payment by the licensees and the transfer of the promised goods or services to the licensees will be more than one year. We sell Biorphen in theU.S. to wholesale pharmaceutical distributors, who then sell the product to hospitals and other end-user customers. Sales to wholesalers are made pursuant to purchase orders subject to the terms of a master agreement, and delivery of individual shipments of Biorphen represent performance obligations under each purchase order. We use a third-party logistics ("3PL") vendor to process and fulfill orders and have concluded it is the principal in the sales to wholesalers because it controls access to the 3PL vendor services rendered and directs the 3PL vendor activities. We have no significant obligations to wholesalers to generate pull-through sales. In addition, we sell our Alkindi Sprinkle and Carglumic Acid products to one pharmacy distributor customer which provides order fulfillment and inventory storage/distribution services.
Selling prices initially billed to wholesalers are subject to discounts for
prompt payment and subsequent chargebacks when the wholesalers sell Biorphen at
negotiated discounted prices to members of certain group purchasing
organizations ("GPOs") and government programs. In addition, we pay fees to
wholesalers for their distribution services, inventory reporting and chargeback
processing. We pay GPOs fees for administrative services and for access to GPO
members and concluded the benefits received in exchange for these fees are not
distinct from our sales of Biorphen, and accordingly we apply these amounts to
reduce revenues. Wholesalers also have rights to return unsold product nearing
or past the expiration date. Because of the shelf life of Biorphen and our
lengthy return period, there may be a significant period of time between when
the product is shipped and when we issue credits on returned product. For our
Alkindi Sprinkle and Carglumic Acid products, we bill at the initial product
list prices which are subject to offsets for patient co-pay assistance and
potential state Medicaid reimbursements which are estimated and recorded as a
reduction of net revenues at the date of sale/shipment.
We estimate the transaction price when we receive each purchase order, taking
into account the expected reductions of the selling price initially billed to
the wholesaler arising from all of the above factors. We have developed
estimates for future returns and chargebacks of Biorphen and the impact of the
other discounts and fees we pay. Our sales of Alkindi Sprinkle and Carglumic
Acid to our distributor are not subject to returns. When estimating these
adjustments to the transaction price, we reduce it sufficiently to be able to
assert that it is probable that there will be no significant reversal of revenue
when the ultimate adjustment amounts are known.
We recognize revenue from Biorphen product sales and related cost of sales upon
product delivery to the wholesaler location. At that time, the wholesalers take
control of the product as they take title, bear the risk of loss of ownership,
and have an enforceable obligation to pay us. They also have the ability to
direct sales of product to their customers on terms and at prices they
negotiate. Although wholesalers have product return rights, we do not believe
they have a significant incentive to return the product to us. We store our
Alkindi Sprinkle and Carglumic Acid inventory at our pharmacy distributor
customer location and sales are recorded when stock is pulled and shipped to
fulfill specific patient orders.
50
Upon recognition of revenue from product sales, the estimated amounts of credit
for product returns, chargebacks, distribution fees, prompt payment discounts,
state Medicaid and GPO fees are included in sales reserves, accrued liabilities
and net of accounts receivable. We monitor actual product returns, chargebacks,
discounts and fees subsequent to the sale. If these amounts end up differing
from our estimates, we will make adjustments to these allowances, which are
applied to increase or reduce product sales revenue and earnings in the period
of adjustment.
In addition, we anticipate we will receive revenues from product licensing
agreements where we have contracted for milestone payments and royalties from
products we have developed or for which we have acquired the rights to a product
developed by a third party.
Stock-Based Compensation
We account for stock-based compensation under the provisions of ASC 718
Compensation - Stock Compensation. The guidance under ASC 718 requires companies
to estimate the fair value of the stock-based compensation awards on the date of
grant and record expense over the related service periods, which are generally
the vesting period of the equity awards. Compensation expense is recognized over
the period during which services are rendered by consultants and non-employees
until completed. At the end of each financial reporting period prior to
completion of the service, the fair value of these awards is remeasured using
the then-current fair value of our common stock and updated assumption inputs in
the Black-Scholes option-pricing model ("BSM").
We estimate the fair value of stock-based option awards to our using the BSM.
The BSM requires the input of subjective assumptions, including the expected
stock price volatility, the calculation of expected term, forfeitures and the
fair value of the underlying common stock on the date of grant, among other
inputs. The risk-free interest rate was determined from the implied yields for
zero-coupon U.S. government issues with a remaining term approximating the
expected life of the options or warrants. Dividends on common stock are assumed
to be zero for the BSM valuation of the stock options. The expected term of
stock options granted is based on vesting periods and the contractual life of
the options. Expected volatilities are based on comparable companies' historical
volatility along with a limited weighting included for our own volatility
subsequent to our IPO, which we believe represents the most accurate basis for
estimating expected future volatility under the current conditions. We account
for forfeitures as they occur.
Prior to our initial public offering in November 2018 , the fair value of the
shares of common stock underlying our stock-based awards was determined by our
board of directors, with input from management. Because there had been no public
market for our common stock prior to the IPO, our board of directors had
determined the fair value of the common stock on the grant-date of the
stock-based award by considering a number of objective and subjective factors,
including enterprise valuations of our common stock performed by an unrelated
third-party specialist, valuations of comparable companies, sales of our
convertible preferred stock to unrelated third parties, operating and financial
performance, the lack of liquidity of our capital stock, and general and
industry-specific economic outlook. Following our IPO, we use the closing stock
price on the date of grant for the fair value of the common stock.
Research and Development Expenses
R&D expenses include both internal R&D activities and external contracted services. Internal R&D activity expenses include salaries, benefits and stock-based compensation and other costs to support our R&D operations. External contracted services include product development efforts including certain product licensor milestone payments, clinical trial activities, manufacturing and control-related activities and regulatory costs. R&D expenses are charged to operations as incurred. We review and accrue R&D expenses based on services performed and rely upon estimates of those costs applicable to the stage of completion of each project. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from our estimates. Upfront payments and milestone payments made for the licensing of technology for products that are not yet approved by the FDA are expensed as R&D in the period in which they are incurred. Nonrefundable advance payments for goods or services to be received in the future for use in R&D activities are recorded as prepaid expenses and are expensed as the related goods are delivered or the services are performed.
Off Balance Sheet Transactions
We do not have any off-balance sheet transactions.
51 JOBS Act Transition Period InApril 2012 , the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), was enacted. Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions, including without limitation, (i) providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by thePublic Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier to occur of (1) the last day of the fiscal year (a)December 31, 2023 , which is the end of the fiscal year following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenues of at least$1.07 billion or (c) in which we are deemed to be a "large accelerated filer" under the rules of theSEC , which means the market value of our common stock that is held by non-affiliates exceeds$700 million as of the priorJune 30th , and (2) the date on which we have issued more than$1.0 billion in non-convertible debt during the prior three-year period.
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