You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with (i) our unaudited interim
condensed financial statements and the related notes thereto included elsewhere
in this Quarterly Report on Form 10-Q and (ii) our audited financial statements
and notes thereto and management’s discussion and analysis of financial
condition and results of operations Included in our Annual Report on Form 10-K
for the year ended
Commission
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934 (the “Exchange Act”), including, without
limitation, statements regarding our expectations, beliefs, intentions or future
strategies that are signified by the words “expect,” “anticipate,” “intend,”
“believe,” “may,” “plan”, “seek” or similar language. All forward-looking
statements included in this document are based on information available to us on
the date hereof, and we assume no obligation to update any such forward-looking
statements. Our business and financial performance are subject to substantial
risks and uncertainties. Actual results could differ materially from those
projected in the forward-looking statements. In evaluating our business, you
should carefully consider other matters set forth in our
the Risk Factors set forth in Part I, Item 1A of our 2021 10-K.
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
For the three months ended
sales and royalties which generated a gross profit of
revenue of
reflected Azurity and Bausch milestone revenues for
and royalty revenues which generated a total gross profit of
period.
Research and Development Expenses
For the three months ended
development expenses (“R&D”) as compared to the
2021. The increase was primarily due to a
Crossject for Zeneo hydrocortisone autoinjector development and continued
development efforts for our other new product candidates.
General and Administrative Expenses
General and administrative (“G&A”) expenses consist primarily of employee
compensation expenses, legal and professional fees, product marketing expenses,
distribution expenses, business insurance, travel expenses and general office
expenses.
For the three-month periods ended
and
mainly due to increased compensation expenses to support our product sales
growth and increased legal expenses on our Paragraph IV patent challenge related
to L-Cysteine, partially offset by reduced product marketing expenses related to
Alkindi Sprinkle commercialization.
23
Liquidity and Capital Resources
As of
equivalents of
previously capitalized our operations from the
approximately
shares of our common stock concurrent with our IPO in
IPO which provided us with net proceeds of
entered into a Credit Agreement with SWK Holdings in
drew a
we received net proceeds of approximately
of our common stock at an offering price of
existing funding, revenues from our approved products and additional 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 three-month
periods ended
Three months ended Three months ended
March 31, 2022 March 31, 2021
Net cash provided by operating activities $ 1,223 $ 3,715
Cash used in investing activities (15 ) -
Cash flows (used in) provided by financing
activities (385 ) 103
Change in cash and cash equivalents $ 823 $ 3,818
The decrease in cash provided by operating activities was mainly a result of the
net income in the 2021 period partially offset by changes in working capital as
compared to the net loss in the 2022 period and favorable working capital
changes – in particular, the collection of the
related to the
activity was an initial payment on our loan principal (see Note 5) whereas the
2021 financing activity was the result of stock option exercises.
24 Critical Accounting Policies
Our condensed financial statements are prepared in accordance with accounting
principles generally accepted in
preparation of our condensed 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 condensed 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.
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.
25
We sell Biorphen in the
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 product 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 product, 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 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 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 inventory at our pharmacy distributor customer location and
sales are recorded when stock is pulled and shipped to fulfill specific patient
orders.
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.
Stock-Based Compensation
We account for stock-based compensation under the provisions of Accounting
Standards Codification (“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
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.
26
Prior to our initial public offering in
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.
27 JOBS Act Transition Period
In
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.
We are in the process of evaluating the benefits of relying on other exemptions
and reduced reporting requirements under the JOBS Act. 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 the
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)
31, 2023
the completion of our IPO, (b) in which we have total annual gross revenues of
at least
filer” under the rules of the
stock that is held by non-affiliates exceeds
30th
non-convertible debt during the prior three-year period.
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