Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in six sections. •Forward-Looking Statements •Company Overview •Results of Operations •Liquidity and Capital Resources •Critical Accounting Policies and Use of Estimates •Off-Balance Sheet Arrangements Our MD&A, the purpose of which is to provide investors and others with information that we believe to be necessary for understanding our financial condition, changes in financial condition and results of operations, should be read in conjunction with the condensed consolidated financial statements and related condensed footnotes included in Item 1 of Part I of this Quarterly Report on Form 10-Q. The terms "Antares," "we," "our," "us" or the "Company" in this Quarterly Report on Form 10-Q, unless the context otherwise requires, refer toAntares Pharma, Inc. and its wholly owned subsidiaries.
Forward-Looking Statements
This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are subject to risks and uncertainties. Undue reliance should not be placed on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as "anticipate," "will," "estimate," "expect," "project," "intend," "should," "plan," "believe," "hope," "may," "continue" or other words and terms of similar meaning in connection with any discussion of, among other things, future operating or financial performance, strategic initiatives and business strategies, regulatory or competitive environments, our intellectual property, our commercial operations and product development. In particular, these forward-looking statements include, among others, statements about: •our expectations about the ongoing COVID-19 pandemic (the "Pandemic") and any potential disruption or impact to our operations, financial position or cash flows;
•our expectations regarding the continued commercialization of XYOSTED® (testosterone enanthate) injection and the continued growth in prescriptions and revenues related thereto;
•our expectations regarding the commercialization of NOCDURNA® (desmopressin acetate) in theU.S. under a licensing agreement withFerring International Center S.A. and its affiliates, ("Ferring") and future sales and revenue from the same; •our expectations regarding the manufacturing and commercialization of TLANDO® in theU.S. under a licensing agreement with Lipocine Inc. ("Lipocine"), and future sales and revenue from the same; •our expectations regarding whether we will exercise the option for LPCN 1111 ("TLANDO XR") and, if exercised, the future timing and success of the clinical development program for TLANDO XR and future FDA approval, market acceptance and revenue from the same; •our expectations regarding future sales of OTREXUP® (methotrexate) injection toOtter Pharmaceuticals, LLC (a wholly owned subsidiary of Assertio Holdings, Inc., together with Assertio Holdings, Inc., as guarantor, individually and collectively referred to as "Otter"), as well as the ability of Otter to pay remaining installment payments of the purchase price; •our expectations regarding the ability of our partner, Teva Pharmaceutical Industries, Ltd. ("Teva"), to continue to commercialize Epinephrine Injection USP, the generic equivalent version of EpiPen® ("generic epinephrine injection"), and any future revenue related thereto; 20
--------------------------------------------------------------------------------
Table of Contents
•our expectations regarding the ability of Covis Group S.a.r.l. ("CG"),who acquiredAMAG Pharmaceuticals, Inc. ("AMAG") (collectively CG and AMAG are herein after referred to as "Covis") inNovember 2020 , to continue to commercialize Makena® (hydroxyprogesterone caproate injection) and our continued future sales to Covis and royalty revenue from the same, in light of theU.S. Food and Drug Administration's ("FDA") proposal to withdraw approval of Makena®, and the timing and outcome of any hearings and future regulatory actions by the FDA; •our expectations regarding continued sales of Sumatriptan Injection USP to our partner, Teva, and Teva's ability to distribute and sell Sumatriptan Injection USP; •our expectations regarding continued product development with Teva of the teriparatide disposable pen injector, Teva's ability to obtain FDA approval and AB-rating for the product, and if approved, Teva's ability to successfully commercialize the teriparatide disposable pen injector product outside theU.S. ; •our expectations about the development of a rescue pen for an undisclosed drug with our partner Pfizer Inc. ("Pfizer") and potential future regulatory approval and future revenue from the same; •our expectations about our development activities withIdorsia Pharmaceuticals Ltd ("Idorsia") and the timing and results of the Phase 3 clinical trial of the drug device combination product for selatogrel, a new chemical entity being developed for the treatment of a suspected acute myocardial infarction ("AMI") in adult patients with a history of AMI, and the potential future FDA and global regulatory approval of the same;
•our expectations about the development of ATRS-1902 for adrenal crisis rescue, including the timing and results of clinical trials and our anticipated 505(b)(2) NDA filing with the FDA;
•our expectations about our other internal and external research and development projects, including but not limited to ATRS-1901 and ATRS-1903, the timing and results of clinical trials, and our anticipated continued reliance on third parties in conducting studies, trials and other research and development activities;
•our expectations about the timing and outcome of pending or potential claims and litigation, including without limitation, the pending securities class action and derivative actions;
•our anticipated continued reliance on contract manufacturers to manufacture, assemble and package our products;
•our anticipated continued reliance on third parties to provide certain services for our products including logistics, warehousing, distribution, invoicing, contract administration and chargeback processing;
•our sales and marketing plans;
•our expectations about our future revenues, our cash flows and our ability to support our operations and maintain profitability;
•our estimates and expectations regarding the sufficiency of our cash resources, anticipated capital requirements and our ability to obtain additional financing, if needed; •uncertainties as to the timing of the completion of the cash tender offer (the "Offer") byAtlas Merger Sub, Inc. , aDelaware corporation ("Atlas"), a wholly owned subsidiary of Halozyme Therapeutics, Inc., aDelaware corporation ("Halozyme"), and the subsequent merger of Atlas with and into the Company, with the Company surviving as a wholly owned subsidiary ofHalozyme ; •risks related to the satisfaction or waiver of the conditions to closing the proposed acquisition of the Company byHalozyme (including the failure to obtain necessary regulatory clearance) in the anticipated timeframe or at all; •uncertainties as to how many of the Company's stockholders will tender their shares of the Company's common stock in the Offer and the possibility that the acquisition does not close;
•the possibility that competing offers may be made;
•risks related to the timing (including possible delays) and receipt of
clearance or expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), as
amended, in connection with the transaction with
•disruption from the transaction with
21
--------------------------------------------------------------------------------
Table of Contents
•significant transaction costs;
•the potential impact of new accounting pronouncements and tax legislation; and
•other statements regarding matters that are not historical facts or statements of current condition.
These forward-looking statements are based on assumptions that we have made considering our industry experience as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this quarterly report, you should understand that these statements are not guarantees of performance results. Forward-looking statements involve known and unknown risks, uncertainties and assumptions, and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this quarterly report, we caution you that these statements are based on a combination of facts and factors currently known by us and projections of the future about which we cannot be certain. Many factors may affect our ability to achieve our objectives, including:
•potential business interruptions and/or any financial or operational impact as a result of the Pandemic;
•delays in product introduction or unsuccessful marketing and commercialization efforts by us or our partners;
•interruptions in supply or an inability to adequately manage third party contract manufacturers to meet customer supply requirements;
•our inability to obtain or maintain adequate third-party payer coverage of marketed products;
•the timing and results of our or our partners' research projects or clinical trials of product candidates in development;
•actions by the FDA or other regulatory agencies with respect to our products or product candidates of our partners;
•our inability to generate or sustain continued growth in product sales and royalties;
•the lack of market acceptance of our and our partners' products and future revenues from these products;
•a decrease in business from our major customers and partners;
•our inability to compete successfully against new and existing competitors or to leverage our research and development capabilities or our marketing capabilities;
•our inability to establish and maintain commercial capabilities, our inability to effectively market our services or obtain and maintain arrangements with our customers, partners and manufacturers;
•our inability to attract and retain key personnel;
•changes or delays in the regulatory review and approval process;
•our inability to effectively protect our intellectual property;
•costs associated with future litigation and the outcome of such litigation; and
•adverse economic and political conditions.
The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses or to the general economy. Forward-looking statements speak only as of the date on which such statements are made. Actual results could differ materially from those currently anticipated as a result of a number of risk factors, including, but not limited to, the risks and uncertainties discussed in Item 1A of Part II of our Annual Report on Form 10-K for the year endedDecember 31, 2021 and Item 1A of Part II of this Quarterly Report on Form 10-Q. New risks and uncertainties emerge from time to time, and it is impossible for us to predict these events or how they may affect us. Forward-looking statements are qualified by some or all of these risk factors; therefore, you should consider these forward-looking statements with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. We undertake no obligation to update or revise any forward-looking statements included in this quarterly report to reflect events or circumstances after the date on which such statement is made, except as required by law. In light of these risks and significant uncertainties, you should not regard the forward-looking statements in this annual report as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, if at all. You should carefully review the disclosures and the risk factors described in Item 1A of Part II of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , Item 1A of Part II of this Quarterly Report on Form 10-Q and in other documents we file from time to time with theSecurities and Exchange Commission ("SEC"), including Current Reports on Form 8-K. 22
--------------------------------------------------------------------------------
Table of Contents
Company Overview
Antares Pharma, Inc. is a specialty pharmaceutical company focused primarily on the development and commercialization of pharmaceutical products and technologies that address patient needs in targeted therapeutic areas. We develop, manufacture and commercialize, for ourselves or with partners, novel therapeutic products using our advanced drug delivery systems that are designed to provide commercial or functional advantages, such as improved safety and efficacy, convenience, improved tolerability, and enhanced patient comfort and adherence. We also seek product opportunities that complement and leverage our commercial platform. We have a portfolio of proprietary and partnered commercial products and ongoing product development programs in various stages of development. We have formed partnership arrangements with several different industry leading pharmaceutical companies. We market and sell in theU.S. our proprietary product XYOSTED® (testosterone enanthate) injection indicated for testosterone replacement therapy in adult males for conditions associated with a deficiency or absence of endogenous testosterone. XYOSTED® is the only FDA approved subcutaneous testosterone enanthate product for once-weekly, at-home self-administration. We market and sell NOCDURNA® (desmopressin acetate) indicated for the treatment of nocturia due to nocturnal polyuria ("NP") in adultswho awaken at least two times per night to urinate in theU.S. under an exclusive license agreement entered into inOctober 2020 with Ferring. We began detailing NOCDURNA® with a soft launch in the fourth quarter of 2020 and executed a reintroduction of the product in 2021 through a comprehensive re-launch strategy to increase awareness and demand. InOctober 2021 , we entered into an exclusive license agreement (the "TLANDO® License Agreement") with Lipocine for the product TLANDO® (testosterone undecanoate) in theU.S. , a twice-daily oral formulation of testosterone for testosterone replacement therapy indicated for conditions associated with a deficiency or absence of endogenous testosterone, or hypogonadism in adult males. TLANDO® was granted FDA approval onMarch 28, 2022 with commercialization anticipated in the second quarter of 2022. Under the terms of the TLANDO® License Agreement, we paid Lipocine an upfront payment of$11.0 million . Lipocine is eligible for additional milestone payments up to$10.0 million and tiered royalty and commercial milestones based on net sales of TLANDO® in theU.S. We are responsible for the manufacturing and commercialization of TLANDO®. The TLANDO® License Agreement also granted us the option to license and develop LPCN 1111 (TLANDO XR) in theU.S. , a potential once daily oral testosterone product containing testosterone tridecanoate in development for the treatment of hypogonadism in adult males. If elected, upon exercise of the option, we will be required to pay an additional$4.0 million in license fees in two installments and will be responsible for additional development and commercial milestone payments as well as tiered royalties on net sales of TLANDO XR in theU.S. In addition, we will be responsible for completing the development program including the conduct of a Phase 3 clinical trial and applying for regulatory approval in theU.S. InApril 2022 , the TLANDO® License Agreement was amended (the "TLANDO® First Amendment") and$0.5 million of the$4.0 million was paid to Lipocine to extend the deadline in which we have to exercise the option to license and develop TLANDO XR. InDecember 2021 , we sold certain assets used in the operation of the OTREXUP® product under an asset purchase agreement with Otter for$44.0 million , subject to finalization of changes in closing inventory to be transferred, with$18.0 million received at closing and an additional$26.0 million to be paid in installments over a one-year period. Prior to the asset sale, we marketed and sold OTREXUP® (methotrexate) injection, a subcutaneous methotrexate injection for once weekly self-administration with an easy-to-use, single dose, disposable auto injector, indicated for adults with severe active rheumatoid arthritis, children with active polyarticular juvenile idiopathic arthritis and adults with severe recalcitrant psoriasis, as a proprietary product in theU.S. In conjunction with the asset sale, we entered into a supply agreement with Otter to manufacture the VIBEX® auto-injection system device at cost plus mark-up. Otter is responsible for manufacturing, formulation and testing of methotrexate and the corresponding prefilled syringe for assembly with the device manufactured by us, along with the commercialization and distribution of OTREXUP®. In collaboration with Teva, we developed a version of our VIBEX® auto injector for use in a generic epinephrine auto injector product that was approved by the FDA. Teva's Epinephrine Injection USP is indicated for emergency treatment of severe allergic reactions including those that are life threatening (anaphylaxis) in adults and certain pediatric patients and was approved as a generic drug product with an AB rating, meaning that it is therapeutically equivalent to the branded products EpiPen® and EpiPen Jr® and therefore, subject to state law, substitutable at the pharmacy. We are the exclusive supplier of the device and Teva is responsible for commercialization and distribution of the finished product, for which we also receive royalties on Teva's net sales. Through our commercialization partner Teva, we sell Sumatriptan Injection USP indicated in theU.S. for the acute treatment of migraine and cluster headache in adults. 23
--------------------------------------------------------------------------------
Table of Contents
We are the exclusive supplier of the device, a variation of our VIBEX® QuickShot® subcutaneous auto injector developed by us, for the progestin hormone drug Makena® (hydroxyprogesterone caproate injection), indicated to help reduce the risk of preterm birth in women pregnant with one baby andwho spontaneously delivered one preterm baby in the past. As the exclusive supplier, we perform final assembly and packaging of the commercial product and receive royalties on Covis' net sales of the product. InOctober 2020 , following an FDA advisory committee meeting, Covis received notice that the FDA is proposing to withdraw approval of Makena® (hydroxyprogesterone caproate injection). Covis formally requested a public hearing in response to theFDA's proposal to withdraw its approval. InApril 2022 , the FDA granted Covis a virtual public hearing to be scheduled in September orOctober 2022 . Covis has stated that it remains committed to working with the FDA to maintain patient access to Makena® as a treatment option to reduce pre-term birth. We are also developing with Teva a multi-dose pen for a generic form of Forteo® (teriparatide rDNA origin injection) for the treatment of osteoporosis, and were developing another multi-dose pen for a generic form of BYETTA® (exenatide injection) for the treatment of type 2 diabetes. OnFebruary 25, 2022 , Teva notified us that it was terminating the exenatide program and related agreement due to a lack of commercial viability. The termination is effectiveAugust 23, 2022 . Teva continues to work through theU.S. regulatory process with the FDA for teriparatide using the ANDA pathway. In 2020, Teva launched Teriparatide Injection ("teriparatide"), the generic version of Eli Lilly's branded product Forsteo® featuring the Antares multi-dose pen used platform in several countries outside theU.S. We are responsible for the manufacturing and supply of the multi-dose pen utilized in Teva's generic teriparatide product under an exclusive development, license and supply agreement with Teva, the scope of which is worldwide. InAugust 2018 , we entered into a development agreement with Pfizer to develop a combination drug device rescue pen. This rescue pen will utilize the Antares QuickShot® auto injector and an undisclosed Pfizer drug. In 2021, we continued to work on this development program, and we expect to continue development of this product candidate. InNovember 2019 , we entered into a global agreement with Idorsia to develop a novel, drug-device product containing selatogrel. The new chemical entity selatogrel is being developed for the treatment of a suspected AMI in adult patients with a history of AMI. Idorsia will pay for the development of the combination product and will be responsible for applying for and obtaining global regulatory approvals for the product. The parties intend to enter into a separate commercial license and supply agreement pursuant to which we will provide fully assembled and labelled product to Idorsia at cost plus mark-up. Idorsia will then be responsible for global commercialization of the product, pending FDA or foreign approval. We will be entitled to receive royalties on net sales of the commercial product. InJune 2021 , Idorsia announced it initiated its Phase 3 registration study to evaluate the efficacy and safety of self-administered subcutaneous selatogrel. The study will enroll approximately 14,000 patientswho are at high risk of recurrent AMI, at approximately 250 sites in approximately 30 countries. We are also committed to advancing our internal research and development programs and continue to invest in the development of our proprietary product pipeline. Our research and development efforts are focused primarily on leveraging our existing product and technology platforms by broadening their applications for use in other drug device combination products, as well as exploring new pharmaceutical products, technologies and drug delivery methods. We have initiated development of a proprietary drug device combination product for the urology oncology market, identified as ATRS-1901, and have conducted formulation development work and non-clinical studies to help advance this program. In 2020, we received a response from the FDA regarding our pre-IND (Investigational New Drug) submission. We have identified a program to develop a proprietary drug device combination product for the endocrinology market, an adrenal crisis pen, identified as ATRS-1902. The development program supports a proposed indication for the treatment of acute adrenal insufficiency, known as adrenal crisis, in adults and adolescents, using a novel proprietary auto-injector platform to deliver a liquid stable formulation of hydrocortisone. We conducted initial formulation work and developed a working prototype of a new device to support this program. We received a response from the FDA regarding our pre-IND submission and believe we have determined the regulatory and clinical path forward. InJuly 2021 , the FDA accepted our IND for ATRS-1902 enabling us to initiate our Phase 1 clinical study. InJanuary 2022 , we announced the positive results from the Phase 1 clinical study and were granted Fast Track designation by the FDA. The positive results support the advancement of our ATRS-1902 development program to a pivotal clinical study using our Vai™ novel proprietary rescue pen platform to deliver a liquid stable formulation of hydrocortisone. We anticipate starting this pivotal clinical study in the second quarter of 2022 and expect to submit a 505(b)(2) NDA with the FDA by the end of 2022 pending the success of the pivotal clinical study. 24
--------------------------------------------------------------------------------
Table of Contents
We have initiated development of a proprietary drug device combination product utilizing our rescue pen technology for a rare immunology disorder, identified as ATRS-1903. Formulation development work has been conducted and we anticipate progressing this towards initial clinical testing to evaluate PK and tolerability in human subjects.
Merger Agreement
OnApril 12, 2022 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") under whichHalozyme and Atlas will acquire all of the outstanding common stock ofAntares Pharma, Inc. for$5.60 per share in cash (the "Offer Price"), without interest and subject to any withholding of taxes required by applicable legal requirements. Under the terms of the Merger Agreement,Halozyme commenced an Offer to acquire all of the outstanding shares of Antares onApril 26, 2022 . The closing of the Offer will be subject to certain conditions, including the tender of shares representing at least a majority of the total number of Antares outstanding shares of common stock, the expiration or termination of the HSR waiting period, and other customary closing conditions. Following the successful completion of the Offer,Halozyme will acquire all remaining shares not tendered in the tender offer through a second-step merger at the same price. The acquisition is expected to close in the first half of 2022. COVID-19 InDecember 2019 , a novel strain of coronavirus ("COVID-19") emerged inChina , and has since spread worldwide, including every state in theU.S. OnMarch 11, 2020 , theWorld Health Organization declared the outbreak a Pandemic and onMarch 13, 2020 , theU.S. declared a national emergency with respect to the outbreak. The Pandemic has impacted global economic activity and led to disruptions in supply chain, labor shortages, business closures, travel restrictions and other health, safety and social distancing requirements. We have taken several measures to actively manage and help minimize the impact of the ongoing Pandemic on our business. We have implemented safety measures and protocols to protect the health and safety of our employees and comply with governmental and public health guidelines while working to ensure the sustainability of our business operations and continuity of product supply. We continue to monitor the situation, including COVID-19 variants, and potential effects on our business, suppliers, partners and workforce. We have implemented a hybrid work environment with the ability to shift remote as necessary to limit the number of individuals in our facilities to those necessary for essential functions such as research, development, manufacturing and supply. While our field-based team has resumed in-person interaction with fewer restrictions, we believe we are also well-positioned with our virtual capabilities to continue to engage healthcare professionals and patients through the ongoing Pandemic and beyond. Although, we have not experienced significant delays or disruption in our development programs or significant demand reductions for our partnered products due to the Pandemic, we continue to monitor the situation, including COVID-19 variants, for potential effects on our or our partners' clinical trials or delays or disruptions in activities with the FDA. Although, we have taken measures to help minimize the potential impact of the Pandemic on our business, given the fluidity of the Pandemic and other macroeconomic factors, we are unable to estimate the impact the Pandemic has had on our operations or cash flows as of the date of this filing. We also believe there continues to be uncertainty around the timing and duration of any potential future disruptions due to the COVID-19 variants and the magnitude of any potential impact. As a result, we are unable to estimate the potential impact on future operations or cash flows as of the date of this filing. For more information on these risks see Item 1A of Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2021 as filed with theSecurities and Exchange Commission . Results of Operations The following is an analysis and discussion of our operations for the three months endedMarch 31, 2022 as compared to the same period in 2021. Operating results for the three months endedMarch 31, 2022 are not necessarily indicative of the results that may be expected for the full year endingDecember 31, 2022 . 25
--------------------------------------------------------------------------------
Table of Contents
Revenue, Net
We generate revenue from proprietary and partnered product sales, license and development activities and royalty arrangements. The following table provides details about the components and drivers of our overall revenue growth: Three Months Ended March 31, Increased / (Decreased) (in thousands) 2022 2021 $ %
Proprietary product sales, net
$ (1,456) (7.8) % Partnered product sales 14,827 10,403 4,424 42.5 % Total product revenue, net 32,103 29,135 2,968 10.2 % Licensing and development revenue 4,191 4,984 (793) (15.9) % Royalties 5,263 7,964 (2,701) (33.9) % Total revenue, net$ 41,557 $ 42,083 $ (526) (1.2) % Product Revenue, Net Net revenue from product sales for the three months endedMarch 31, 2022 increased 10.2% over the same period in the prior year primarily driven by higher shipments of sumatriptan, epinephrine and teriparatide auto injectors to Teva and an increase in XYOSTED® proprietary product sales. The overall increase was partially offset by a reduction in OTREXUP® proprietary sales due to the sale of the OTREXUP® product line to Otter inDecember 2021 . Sales of our proprietary products XYOSTED® and NOCDURNA® (and OTREXUP® during the three months endedMarch 31, 2021 ) are presented net of estimated product returns and sales allowances. FDA approval was granted onMarch 28, 2022 to commercialize TLANDO® with no sales transacted in the three months endedMarch 31, 2022 prior to timing of the approval. The decreases in proprietary product sales of 7.8% for the three months endedMarch 31, 2022 was primarily attributable to a reduction in OTREXUP® proprietary sales due to the sale of the OTREXUP® product line to Otter inDecember 2021 which is now commercialized by Otter, partially offset by continued growth in prescriptions and sales of XYOSTED® and NOCDURNA®.
We also manufacture and sell devices, components and fully assembled and
packaged product to our partners. Partnered product sales increased 42.5% for
the three months ended
Licensing and Development Revenue
Licensing and development revenues include license fees received from partners for the right to use our intellectual property and amounts earned in joint development arrangements with partners under which we perform joint development activities or develop new products on their behalf. Licensing and development revenue decreased 15.9% for the three months endedMarch 31, 2022 primarily as a result of fluctuations in timing of the various stages and phases of development activities, along with a decline in development activities with Pfizer.
Royalties
Royalty revenue decreased 33.9% for the three months endedMarch 31, 2022 , principally driven by a reduction in royalties from Teva on its net sales of generic EpiPens®, partially offset by higher royalties from Covis on its net sales of Makena®. 26
--------------------------------------------------------------------------------
Table of Contents
Cost of Revenue
The following table summarizes our cost of product sales and development revenue: Three Months Ended March 31, Increased / (Decreased) (in thousands) 2022 2021 $ % Cost of product sales$ 15,648 $ 12,498 $ 3,150 25.2 % Cost of development revenue 3,119 3,947 (828) (21.0) % Total cost of revenue$ 18,767 $ 16,445 $ 2,322 14.1 % Fluctuations in cost of product sales is generally a function of the product revenue mix. Proprietary products generally have a lower cost of sales as a percentage of revenue than partnered product sales. Accordingly, as partner sales increased and proprietary sales decreased in the comparative period, the relative total cost of product sales for the three months endedMarch 31, 2022 increased. Cost of development revenue decreased 21.0% for the three months endedMarch 31, 2022 primarily due to, and consistent with, the quarter over quarter decline in development revenue from partnered development activities as shown in the revenue table above.
Research and Development Expenses
Research and development ("R&D") expenses consist of external costs for clinical studies and analysis activities, formulation development, engineering design work and prototype development, FDA application fees, personnel costs and other general operating expenses associated with our R&D activities. Three Months Ended March 31, Increased / (Decreased) (in thousands) 2022 2021 $ % Research and development$ 5,008 $ 2,640 $ 2,368 89.7 % R&D expenses increased 89.7% for the three months endedMarch 31, 2022 primarily due to higher employee compensation expense, increased clinical development activities for our ongoing internal development programs including, but not limited to, ATRS-1901 and ATRS-1902, and higher fees for professional services. Overall, R&D expense fluctuates based on phases of development and timing of clinical studies, including internal and external development costs incurred.
Selling, General and Administrative Expenses
Three Months Ended March 31, Increased / (Decreased) (in thousands) 2022 2021 $ %
Selling, general and administrative
$ 2,995 17.0 % Selling, general and administrative expenses increased 17.0% for the three months endedMarch 31, 2022 primarily driven by increased sales and marketing activities for XYOSTED® and NOCDURNA® and higher employee compensation expense due to the hiring of additional sales force and pre-launch costs in preparation for the launch of TLANDO® in the second quarter of 2022, partially offset by the elimination of sales and marketing costs related to the OTREXUP® product line which was sold to Otter inDecember 2021 . General and administrative expenses also increased primarily due to higher employee compensation expense and legal fees. 27
--------------------------------------------------------------------------------
Table of Contents Income Tax Expense (Benefit) Three Months Ended March 31, Increased / (Decreased) (in thousands) 2022 2021 $ % Income tax expense (benefit)$ (817) $ 590 $ (1,407) (238.5) % Effective tax rate 26.0 % 13.5 % An income tax benefit was recorded in the three months endedMarch 31, 2022 due to the recognition of a$3.1 million loss before income taxes. The effective tax rate for the three months endedMarch 31, 2022 is primarily driven by the federal and state tax rates, along with discrete income tax items for compensation expense in connection with stock option exercises and vesting of performance stock units during the first quarter of 2022, which favorably impacted the effective tax rate by 1.1%. Income tax expense recorded for the three months endedMarch 31, 2021 was driven by the generation of income before income taxes of$4.4 million . The effective income tax rate for the three months endedMarch 31, 2021 reflects a net discrete income tax benefit related to share-based compensation expense in connection with stock option exercises and vesting of performance stock units during the first quarter of 2021, which favorably impacted the effective tax rate by 12.5%.
Net Income (Loss) and Earnings (Loss) Per Common Share
Three Months Ended (in thousands, except per share March 31, Increased / (Decreased) amounts) 2022 2021 $ % Net income (loss)$ (2,321) $ 3,793 $ (6,114) (161.2) % Earnings (loss) per common share Basic$ (0.01) $ 0.02 $ (0.03) (150.0) % Dilutive$ (0.01) $ 0.02 $ (0.03) (150.0) %
Liquidity and Capital Resources
As ofMarch 31, 2022 , we had cash and cash equivalents of$61.7 million . Our principal liquidity needs are to fund our product manufacturing costs, research and development activities, sales and marketing and other general operating expenses, as well as capital expenditures and debt service. We believe that the combination of our current cash and cash equivalents, projected product sales, development revenue and royalties will provide us with sufficient funds to meet our obligations, including debt maturities, and support operations through at least the next twelve months from the date of this report. We had an accumulated deficit as ofMarch 31, 2022 of$178.7 million . If additional capital is needed to support our operations in the future, we may need to raise additional funds through financing, such as drawing on our current credit facility or issuance of additional debt. However, we may be unable to obtain such financing, or obtain it on favorable terms, in which case we may be required to curtail development of new products, limit expansion of operations or accept financing terms that are not as attractive as we may desire.
Long-term Debt Financing
OnNovember 1, 2021 , we entered into a Credit Agreement (the "Credit Agreement") withWells Fargo Bank, National Association , as administrative agent for the lenders, ("Administrative Agent") for credit facilities in an aggregate principal amount of up to$40.0 million with a maturity date ofNovember 1, 2024 . The Credit Agreement consists of a$20.0 million term loan facility (the "Term Loan Facility") and a$20.0 million revolving credit facility,$5.0 million of which is available for the issuance of letters of credit and$1.0 million of which is available for swingline loans (the "Revolving Credit Facility"), (collectively the "Credit Facilities"), which are secured by substantially all of our assets. The Term Loan Facility was funded upon execution of the Credit Agreement with the proceeds used to repay our$20.0 million Term Loan with Hercules Capital, Inc. and to pay fees and expenses incurred in connection with the early repayment. 28
--------------------------------------------------------------------------------
Table of Contents
The Revolving Credit Facility remains available for future use and is expected to be used for ongoing working capital requirements and other general corporate purposes as needed. Payments under the Term Loan Facility are due in consecutive quarterly installments on the last business day of each of March, June, September and December, commencing onMarch 31, 2022 . Interest accrues at either the base rate or LIBOR plus the applicable margin, which varies based on our consolidated total leverage ratio and will initially be 1.50% for base rate loans and 2.50% for LIBOR loans. The transaction is expected to provide approximately$1.2 million in annual interest expense savings based on an interest rate of 2.59% (one-month LIBOR rate plus the applicable margin of 2.50%) as ofNovember 1, 2021 . As ofMarch 31, 2022 andDecember 31, 2021 , we had$19.6 million and$20.0 million outstanding under our Term Loan Facility with a$0.4 million principal payment made onMarch 31, 2022 , and the Revolving Credit Facility remains available for future use. The weighted average interest rate on the Term Loan Facility outstanding balance during the three months endedMarch 31, 2022 was approximately 2.65%. Cash Flow Comparison
The following table summarizes our cash flows from total operations:
Three Months Ended March 31, (in thousands) 2022 2021 Total cash provided by (used in): Operating activities$ (4,881) $ 1,978 Investing activities 666
(1,184)
Financing activities 17 1,722 Effect of exchange rate changes on cash -
(1)
Increase (decrease) in cash and cash equivalents (4,198) 2,515 Cash and cash equivalents, beginning of period 65,913 53,137 Cash and cash equivalents, end of period
$ 61,715 $ 55,652
Operating Activities
Operating cash inflows are generated primarily from net product sales, license and development fees and royalties. Operating cash outflows consist principally of expenditures for manufacturing costs, personnel costs, general and administrative expenses, research and development activities, and sales and marketing costs. Fluctuations in cash from operating activities are primarily a result of the timing of cash receipts and disbursements. The change in the net cash from operating activities was primarily a result of the decrease in our net income to a net loss, excluding non-cash activity, and changes in operating assets and liabilities due to timing of cash receipts and cash disbursements, principally driven by a reduction in accrued liabilities, partially offset by an increase in accounts payable, slight decline in deferred revenue and a reduction in contract assets.
Investing Activities
Net cash provided by investing activities for the three months endedMarch 31, 2022 consisted of proceeds from maturities of investment securities of$1.0 million , partially offset by purchases of investment securities of$0.2 million and capital expenditures of$0.1 million . Net cash used in investing activities for the three months endedMarch 31, 2021 was primarily for capital expenditures related to our manufacturing facility.
Financing Activities
Net cash used in financing activities for the three months endedMarch 31, 2022 consisted of$0.5 million paid to taxing authorities in connection with net-share settled share-based awards for which we withheld shares equivalent to the value of the employee's tax obligation for the applicable income and other employment taxes and$0.4 million in principal payments on our Term Loan, offset by$0.9 million in proceeds received from exercises of stock options. Net cash provided by financing activities for the three months endedMarch 31, 2021 included$3.3 million in proceeds from the exercise of stock options, partially offset by$1.6 million paid to taxing authorities in connection with net-share settled stock-based awards. 29
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Estimates
The preceding discussion and analysis of our results of operations and financial condition is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and various other factors that we believe are reasonable under the circumstances. Actual results could differ from these estimates, and significant variances could materially impact our financial condition and results of operations.
There have been no material changes to the critical accounting estimates we
believe to be most critical to understanding our results of operations and
financial condition which are fully described in our Annual Report on Form 10-K
for the year ended
© Edgar Online, source