The following discussion contains management's discussion and analysis of our financial condition and results of operations and should be read together with the historical consolidated financial statements and the notes thereto included in Part II, Item 8 "Financial Statements and Supplementary Data." This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the "Risk Factors" section of this Annual Report. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read "Special Note About Forward-Looking Statements" and Part I, Item 1A, "Risk Factors."
Overview and Recent Developments
We are a biopharmaceutical company dedicated to becoming a leader in the discovery, development, and commercialization of next-generation products for the treatment of cancer.
Our mission is to become a leader in bringing innovative cancer treatments to the market and to improve patient health outcomes. In pursuit of this mission,Athenex leverages years of experience in research and development, clinical trials, regulatory standards, and manufacturing. For more information about our mission, please see the section titled "Overview" in Part I, Item 1. "Business" of this Annual Report on Form 10-K. We are organized around two operating segments: (1) our Oncology Innovation Platform, dedicated to the research and development of our proprietary drugs; and (2) our Commercial Platform, focused on the sales and marketing of our specialty drugs and the market development of our proprietary drugs. Our current clinical pipeline in the Oncology Innovation Platform is derived mainly from the following technologies: (a)Cell Therapy , based on natural killer T ("NKT") cells, and (b) Orascovery, based on a P-glycoprotein pump inhibitor. For more information about recent developments in our Oncology Innovation Platform, please see the section titled "Our R&D Programs" in Part I, Item 1. "Business" of this Annual Report on Form 10-K. We previously had a third operating segment, the Global Supply Chain Platform, focused on the current Good Manufacturing Practices ("cGMP") manufacturing and supply of active pharmaceutical ingredients and 503B sterile compounded pharmaceutical products. The components within this operating segment were sold or otherwise discontinued during 2022.
Oncology Innovation Platform Developments
Cell Therapy Platform
Through our acquisition ofKuur Therapeutics, Inc. (formerly known asCell 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 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 CAR targeting disialoganglioside ("GD2"). GD2 is expressed on almost all neuroblastoma tumors and certain other malignancies. Neuroblastoma is a rare pediatric cancer and patients with relapsed or refractory ("R/R") high-risk neuroblastoma ("HRNB") have very poor outcomes. Therefore, we believe there is a significant unmet medical need for better treatment options. KUR-501 is currently being evaluated in a Phase 1 dose-escalation clinical trial ("GINAKIT2") treating children with R/R HRNB. Updated clinical data from this trial was presented at theAmerican Society of Gene & Cell Therapy Annual Meeting inMay 2022 . The data demonstrated expansion of CAR-NKT cells post-transfer in all patients and objective responses in patients with R/R HRNB, including patients previously treated with anti-GD2 monoclonal antibody. Overall Response Rate ("ORR") was 25%, or three responses out of 12 patients, and Disease Control Rate was 58% with four stable disease, two partial responses ("PR"), and one complete response ("CR"). Two of these responses occurred at the highest dose level tested so far of 100 million cells/m2, and the CR lasted for nearly 14 months. KUR-501 has been well-tolerated without dose limiting toxicity ("DLT"), as the majority of adverse events observed were cytopenias related to the preconditioning nonmyeloablative lymphodepletion chemotherapy regimen. There was no evidence of ICANS in any of the patients at the first four dose levels, and there was one case of Grade 2 CRS. The GINAKIT2 study is supported byAthenex and is being conducted byAthenex's collaborator, theBaylor College of Medicine ("BCM"). BCM temporarily suspended patient enrollment on this study after a young heavily pretreated male patient with R/R HRNB treated at the fifth dose level of 300 million cells/m2 died within three weeks of CAR-NKT cell therapy product administration. He was found to have human metapneumovirus infection, then Grade 1 CRS that was treated with immunosuppressants, and he later developed polyclonal hyperleukocytosis complicated by multiorgan dysfunction without evidence of sepsis. This was followed by a recent FDA-imposed clinical hold on the KUR-501 Investigational New Drug ("IND") while BCM completes their investigation of the etiology and pathogenesis of this event and devises a safety risk mitigation plan to reopen the clinical trial, one that could include excluding patients with concomitant viral infections. No patients are receiving or scheduled to receive additional treatment with KUR-501. While we intend to work with BCM to help address theFDA's questions 74 --------------------------------------------------------------------------------
and target to reopen the clinical trial during the year, BCM may not resume GINAKIT2 study patient enrollment unless and until the FDA lifts their clinical hold on the KUR-501 IND. There can be no assurance that BCM will be able to resume the Phase 1 clinical trial of KUR-501.
KUR-502 is an allogeneic ("off-the-shelf") product in which NKT cells isolated from healthy donors are engineered with a CAR targeting CD19, which is widely expressed on both normal and malignant B cells. In addition to the CAR, KUR-502 is genetically engineered to downregulate surface expression of HLA class I and class II proteins, resulting in reduced recognition and elimination by the host immune system following infusion. KUR-502 is currently being evaluated in a single-center, BCM-sponsored, Phase 1 clinical trial (ANCHOR) treating adults with R/R CD19-positive malignancies, including B cell non-Hodgkin lymphoma ("NHL"), acute lymphoblastic leukemia ("ALL"), and chronic lymphocytic leukemia. An interim data update on seven evaluable patients was presented at the Tandem Meetings of theAmerican Society of Transplantation and Cellular Therapy and theCenter for International Blood & Marrow Transplant Research in April 2022 . Five patients were enrolled and treated at the first two dose levels in the NHL cohort, and there were two CRs and one PR for an ORR of 60%, including responses in two patients who were previously treated with CD19-directed CAR-T cell therapy. Both CRs were durable and persisted for more than six months. Two patients were enrolled at the first dose level of the ALL cohort, and there was one CR and one progressive disease ("PD") for an ORR of 50%. KUR-502 has been well tolerated without DLT, as the majority of adverse events observed were cytopenias related to the preconditioning nonmyeloablative lymphodepletion chemotherapy regimen. There have been three cases of Grade 1 CRS, all observed in the ALL cohort, but there have not been any cases of ICANS or GvHD attributable to CAR-NKT cells. InMarch 2022 , the Company's IND application to expand the ANCHOR study to a multicenter,Athenex -sponsored Phase 1 study (ANCHOR2) was allowed to proceed by the FDA, which began enrolling patients in Q4 2022. 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 but not on normal liver or other non-neoplastic tissue. KUR-503 is currently in preclinical development, and we are planning to submit an IND application to the FDA in 2024. The cell therapy program also includes TCR-NKT cell therapy products, including ones targeting p53 and KRAS, which are the most commonly altered genes in epithelial cancers. These HLA class I- or class II-restricted cell therapy products are presently undergoing preclinical screening to identify those candidates with the best TCR-NKT cell isolation efficiency, transduction efficiency, and functional activity. We plan to engineer the TCRs into the NKT cell therapy platform to develop an allogeneic "off-the-shelf" approach for solid tumor treatment.
Orascovery Platform
We are also continuing certain studies of oral paclitaxel and encequidar ("Oral Paclitaxel"), the currently active product candidate using our Orascovery technology, based on a P-glycoprotein ("P-gp") pump inhibitor.
OnFebruary 26, 2021 , we received a Complete Response Letter ("CRL") from the FDA regarding our New Drug Application ("NDA") for 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 theU.S. InOctober 2021 , after careful consideration of the FDA feedback, we determined to redeploy our resources to focus on ourCell Therapy platform and other ongoing studies of Oral Paclitaxel. OnNovember 29, 2021 , we announced theU.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. OnJanuary 3, 2023 , we announced that the Oral Paclitaxel formulation did not receive regulatory approval from the MHRA for mBC based on CMC issues. The MHRA application was not rejected based on any clinical efficacy or safety concerns expressed by the MHRA. MHRA regulations allow an applicant to request a re-examination of an opinion by an independent board which the Company plans to pursue. The Company views the identified Chemistry, Manufacturing, and Controls ("CMC") issues as addressable. The MHRA application was supplemented with safety data from the I-SPY 2 TRIAL and no major clinical efficacy or safety concerns were expressed. Oral Paclitaxel is being evaluated in combination with dostarlimab (a checkpoint inhibitor) +/- carboplatin in the neoadjuvant treatment of breast cancer, as part of the I-SPY 2 TRIAL (Investigation of Serial studies to Predict Your Therapeutic Response with Imaging And moLecular analysis 2). OnDecember 20, 2022 , we announced that collaborators at theQuantum Leap Healthcare Collaborative ("QLHC") reported that Oral Paclitaxel in combination with a PD-1 inhibitor and carboplatin graduated in the triple-negative subgroup of high-risk early-stage breast cancer. Oral Paclitaxel, relative to IV paclitaxel, was associated with less neuropathy and was not associated with an increase in febrile neutropenia. The study has been completed and QLHC anticipates presenting these results at upcoming national meetings in the second quarter of 2023. We plan to discuss the I-SPY 2 TRIAL data with the FDA with respect to our metastatic breast cancer New Drug Application ("NDA").
In
75 -------------------------------------------------------------------------------- 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 theU.S. We believe the data from the I-SPY 2 TRIAL may address some of the deficiencies raised by the FDA in the CRL, but no assurance can be given that we will be successful in pursuing this path forward with the NDA. InMay 2022 , we announced a clinical trial collaboration and supply agreement with Merck (known as MSD outside theU.S. andCanada ). 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. Recruitment for the expansion phase of this clinical trial is currently ongoing. Non-core Asset Developments During 2022, we made significant progress on our strategy to dispose of non-core assets intended to extend our cash runway in 2023 as we pivoted to focusing on our cell therapy platform. InJune 2022 , the Company andATNX SPV, LLC , its newly-formed subsidiary (the "SPV" or "Subsidiary"), entered into a Revenue Interest Purchase Agreement (the "RIPA") with affiliates ofSagard Healthcare Partners ("Sagard") and funds managed byOaktree Capital Management, L.P. ("Oaktree" and together with Sagard, the "Purchasers"), for the sale of revenues fromU.S. and European royalty and milestone interests in Klisyri® (tirbanibulin) for an aggregate purchase price of$85.0 million ("Purchase Price"). OnJune 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 toDecember 31, 2025 ,$5.0 million was used to pay for transaction expenses,$56.6 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"). The Purchasers released the$7.5 million of Segregated Funds to the Company inAugust 2022 , and$1.5 million of the amount placed in escrow was released to the Company upon completion of an escrow release trigger milestone inSeptember 2022 . The remaining proceeds were available for the Company's operations. Refer to Part II, Item 8, Note 1 - Company and Nature of Business and Note 12 - 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. ("Almirall") relating to Klisyri (the "Almirall 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 sold its right to the cash received in respect of certain royalties and certain milestone interests under the Almirall License Agreement to the Purchasers. The Subsidiary retained the right to receive 50% of certain of the milestone interests under the Almirall License Agreement, equal to$155.0 million in the aggregate if those milestones are achieved, and 50% of the royalties paid under the Almirall License Agreement for sales of Klisyri once net sales of Klisyri exceed a certain dollar amount. InFebruary 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 inDunkirk, 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. InNovember 2022 , we completed the sale of our equity interests in ourChina subsidiaries, includingChongqing Taihao Pharmaceutical Co. Ltd. ("Taihao") andAthenex Pharmaceuticals (Chongqing) Limited (together, the "Chongqing Companies") toChongqing Comfort Pharmaceutical Inc. as assignee ofTiHe Capital (Beijing) Co. Ltd. (the "API Buyer") inNovember 2022 . The Chongqing Companies had operated a cGMP high potency oncology API plant based inChongqing, China , and completed construction of a new facility inChongqing (the "China API Operations"). The aggregate purchase price of this sale wasRMB129.4 million , or approximately$18 million . At closing, we received approximately$11 million , representing 70% of the sale proceeds in cash, net of PRC withholding tax and stamp duty. The remaining proceeds are expected to be received in the first half of 2023. At closing, we entered into a supply agreement ("Supply Agreement") with affiliates of the API Buyer (the "Supplier"). Under the Supply Agreement, we and the Supplier agreed to pricing and other supply terms for certain API ("API Products"), including those used in Klisyri® (tirbanibulin) and Oral Paclitaxel, to be manufactured at certain manufacturing sites by the Supplier. InDecember 2022 , we began the wind-down of our 503B sterile compounding business operated out of our facility inClarence, NY and ceased production of our 503B products in the first quarter of 2023. We have committed to a plan to sell our related assets in our efforts to monetize non-core assets, and consequently, such business is presented as discontinued in the Company's consolidated financial statements. 76 --------------------------------------------------------------------------------
Other Corporate Developments OnMarch 16, 2023 , we received notice fromThe Nasdaq Stock Market LLC indicating that we had regained compliance with the minimum bid price requirement under Nasdaq Rule 5550(a)(2). OnFebruary 15, 2023 , we effected a 20:1 reverse stock split of our common stock in order to regain compliance with this standard. All share and per share amounts, and exercise prices of stock options, warrants, and pre-funded warrants, if applicable, in this Annual Report on Form 10-K have been retroactively adjusted for all periods presented to give effect to this reverse stock split. InAugust 2022 , the Company completed an underwritten public offering in which it sold 1,766,667 shares of common stock, common warrants to purchase up to 2,000,000 shares of common stock at a price of$20.00 per share, and pre-funded warrants to purchase up to 233,334 shares of common stock at a price of$0.02 per share. The shares of common stock, together with the common warrants, were sold at$15.00 per share and accompanying common warrant, and the pre-funded warrants, together with the common warrants, were sold at$14.98 per pre-funded warrant and accompanying common warrant. The common and pre-funded warrants were exercisable immediately and will expire five years from the date of issuance. The Company received net proceeds of$28.1 million , after deducting discounts, commissions, and offering expenses. The Company intends to use the net proceeds from the proposed offering to fund ongoing clinical development for its product candidates and for working capital and other general corporate purposes. InAugust 20, 2021 , the Company entered into a sales agreement (the "Sales Agreement") withSVB Leerink LLC , in connection with the offer and sale of up to$100,000,000 of shares of the Company's 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 onAugust 12, 2021 . During the year endedDecember 31, 2022 , we raised net proceeds of$9.4 million by selling 1,263,251 shares of our common stock for an average price of$7.40 per share under the Sales Agreement. During the year endedDecember 31, 2021 , we raised net proceeds of$1.1 million by selling 38,142 shares of our common stock for an average price of$29.80 per share under the Sales Agreement. Going Concern Considerations We have two operating segments: our Oncology Innovation 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 andCell 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 ofDecember 31, 2022 and 2021, we had an accumulated deficit of$1,016.8 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. In addition to the alleged events of default described below in Liquidity and Capital Resources, we project that we will be in violation of financial covenants 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 II, Item 8, 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 ofDecember 31, 2022 , we had cash and cash equivalents of$30.4 million , restricted cash of$5.2 million , and short-term investments of$1.1 million . Results of Operations Since inception, we have devoted a substantial amount of our resources to research and development of our lead product candidates under our R&D programs, to sales and general administrative costs associated with our operations, and to the development of our specialty drug operations in our Commercial Platform. We have incurred significant net losses since inception. Our net losses were$104.4 million , and$202.0 million for the years endedDecember 31, 2022 and 2021 respectively. As ofDecember 31, 2022 and 2021, we had an accumulated deficit of approximately$1,016.8 million and$913.4 million , respectively. 77 -------------------------------------------------------------------------------- We have funded our operations to date primarily from the issuance and sale of our common stock through public offerings, private placements, debt and convertible bonds, and to a lesser extent, through revenue generated from our Commercial Platform. Our operating activities from continuing operations used$64.3 million and$129.8 million of cash during the years endedDecember 31, 2022 , and 2021, respectively. As ofDecember 31, 2022 , we had cash and cash equivalents of$30.4 million , restricted cash of$5.2 million , and short-term investments of$1.1 million .
Key Components of Results of Operations
Revenue
We derive our consolidated revenue primarily from (i) the sales of generic injectable products by our Commercial Platform; and (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.
The following table sets forth the components of our consolidated revenue and the amount as a percentage of total revenue for the periods indicated.
Year ended December 31, 2022 2021 (in thousands) % (in thousands) % Product sales, net $ 90,884 88%$ 68,505 72% License and other revenue 11,937 12% 26,864 28%$ 102,821 $ 95,369 Cost of Sales Along with sourcing from third-party manufacturers, we manufacture clinical and proprietary commercial products in ourU.S. cGMP facility inNew 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 sublicense fees related to in-license agreements.
Research and Development Expenses
R&D expenses primarily consist of the costs associated with conducting clinical trials, in-licensing of product candidates, milestone payments, conducting preclinical studies, activities related to regulatory filings and other R&D activities. The following table sets forth the components of our R&D expenses and the amount as a percentage of total R&D expenses for the periods indicated. Year Ended December 31, 2022 2021 (in thousands) % (in thousands) % Wages, benefits, and related costs$ 17,327 33%$ 21,779 28% Clinical trial costs for Orascovery program 14,044 27% 22,745 29% Clinical trial costs for cell therapy program 11,841 23% 7,937 10% Drug licensing costs 5,265 10% 8,559 11% Preclinical research costs 1,224 2% 2,393 3% Other research and development costs 2,057 4% 14,255 18% Total research and development costs$ 51,758 $ 77,668
Our current R&D activities mainly relate to the clinical development of our Oncology Innovation Platform.
78 -------------------------------------------------------------------------------- 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. For 2021, other research and development costs include the cost of manufacturing Oral Paclitaxel in advance of the potential product launch in 2021, which did not continue in 2022. Other research and development costs in 2022 included process optimization for Tirbanibulin. 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 decrease overall, as the development of most non-Cell Therapy technologies has been suspended. R&D expenses related to ourCell Therapy platform are expected to continue to increase as we prepare for additional clinical and preclinical studies for ourCell 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, 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 associated with the commercialization of the Orascovery platform will decrease in future periods. 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.
Impairments
Impairments are recognized when the carrying value of goodwill, intangible assets, and other long-lived assets are in excess of their fair value. Long-lived assets are tested for impairment annually, or more frequently if a triggering event occurs.
Interest Expense and Interest Income
Interest expense consists of stated interest payments and amortization of debt discount on our Senior Credit Agreement with Oaktree and interest expense recognized from amortizing our Royalty Financing Liability. We expect interest expense related to our Senior Credit Agreement with Oaktree to decrease as additional principal payments are made. Interest income consists primarily of interest generated from our cash and short-term investments inU.S. Treasury securities,U.S. agency securities, high rated commercial papers and corporate bonds.
Loss on Extinguishment of Debt
The loss on extinguishment of debt is the result of the amendments to and prepayments on the Senior Credit Agreement with Oaktree. The amendments to the Senior Credit Agreement resulted in exit and prepayment fees and the recognition of the unamortized debt discount as a loss on extinguishment of debt in the consolidated statements of operations and comprehensive loss. 79 --------------------------------------------------------------------------------
Results of Operations
Year Ended
The following table sets forth a summary of our consolidated results of operations for the years endedDecember 31, 2022 and 2021, together with the changes in those items in dollars and as a percentage. This information should be read together with our consolidated financial statements and related notes included elsewhere in this report. Our operating results in any period are not necessarily indicative of the results that may be expected for any future period. Year ended December 31, 2022 2021 Change (in thousands) (in thousands) (in thousands) % Revenue Product sales, net $ 90,884 $ 68,505 $ 22,379 33% License and other revenue 11,937 26,864 (14,927 ) -56% Total revenue$ 102,821 $ 95,369 7,452 Cost of sales (76,118 ) (62,892 ) (13,226 ) 21% Gross profit 26,703 32,477 (5,774 ) Research and development expenses (51,758 ) (77,668 ) 25,910 -33% Selling, general, and administrative -30% expenses (44,880 ) (64,230 ) 19,350 Impairments (79 ) (41,011 ) 40,932 100% Interest income 363 128 235 184% Interest expense (25,843 ) (20,654 ) (5,189 ) 25% Loss on extinguishment of debt (3,134 ) - (3,134 ) -100% Income tax benefit (expense) (347 ) 10,604 (10,951 ) NM Net loss from continuing operations (98,975 ) (160,354 ) 61,379 Loss from discontinued operations (5,448 ) (41,682 ) 36,234 -87% Net loss (104,423 ) (202,036 ) 97,613 Less: net loss attributable to 56% non-controlling interests (996 ) (2,268 ) 1,272
Net loss attributable to
*NM used to indicate a percentage change that is not meaningful
Revenue
Product sales for the year endedDecember 31, 2022 was$90.9 million , an increase of$22.4 million , or 33%, as compared to$68.5 million for the year endedDecember 31, 2021 . This increase was primarily attributable to the launch of two additional APD products, contributing$11.6 million in net product sales, and increased demand for three products on the FDA shortage list, contributing$12.0 million in net product sales. License fees and other revenue decreased to$11.9 million for the year endedDecember 31, 2022 , from$26.9 million for the year endedDecember 31, 2021 , a decrease of$14.9 million , or 56%. During the year endedDecember 31, 2022 , we recorded$2.5 million and$5.0 million of license revenue pursuant to our license agreement with Almirall upon the completion of a line extension milestone and upon the launch of Klisyri in three major European countries, respectively, and$1.6 million related to the approval of Tirbanibulin inTaiwan under the 2011 PharmaEssentia Agreement. During the year endedDecember 31, 2021 , we recorded$20.0 million and$5.0 million of license revenue pursuant to our license agreement with Almirall upon the launch of Klisyri in theU.S. inFebruary 2021 and inEurope inSeptember 2021 , respectively, and$0.5 million related to the upfront fee pursuant to the Second Amendment to the PharmaEssentia Agreement, for the license of Tirbanibulin inJapan andSouth Korea . Further, we received royalties from the sales of Klisyri of$2.3 million during the year endedDecember 31, 2022 , an increase of$1.3 million from the$1.0 million in royalties received in 2021.
Cost of Sales
Cost of sales totaled$76.1 million for the year endedDecember 31, 2022 , an increase of$13.2 million , or 21%, as compared to$62.9 million for the year endedDecember 31, 2021 . Gross profit as a percentage of product sales was 16.2% for the year endedDecember 31, 2022 , and 8.2% for the year endedDecember 31, 2021 . The increase in gross profit as a percentage of product sales was due primarily to the increased contribution from the sales of three FDA shortage products during 2022. 80 --------------------------------------------------------------------------------
Research and Development Expenses
R&D expenses totaled$51.8 million for the year endedDecember 31, 2022 , a decrease of$25.9 million , or 33%, as compared to$77.7 million for the year endedDecember 31, 2021 . This was primarily due to a decrease in costs related to Oral Paclitaxel, costs for clinical operations for the Orascovery platform, compensation, and drug licensing costs, and included the following:
•
•
•
•
•
The decrease in these R&D expenses was partially offset by a
Selling, General and Administrative Expenses
Selling, general, and administrative expenses totaled$44.9 million for the year endedDecember 31, 2022 , a decrease of$19.4 million , or 30%, as compared to$64.2 million for the year endedDecember 31, 2021 . This was primarily due to a$11.5 million decrease in pre-launch costs for Oral Paclitaxel that significantly slowed upon receipt of the Complete Response Letter in 2021. In addition, we recorded a$4.2 million gain on the change in fair value of contingent consideration during 2022 related to the probability of milestones associated with one of the cell therapy pipeline programs, as opposed to a$4.2 million loss on the change in fair value of contingent consideration during 2021. Operating costs, including insurance costs, IT costs, and other professional fees decreased in 2022 by$2.4 million . These decreases were partially offset by an increase in compensation related costs of$2.9 million in 2022. Impairments During the year endedDecember 31, 2021 , we recognized goodwill impairment expense of$41.0 million . This impairment was related to the Oncology Innovation Platform reporting unit, representing a full impairment of the goodwill allocated to that reporting unit.Goodwill impairment is the excess of a reporting unit's carrying amount over its fair value. The decrease in our estimation of the reporting unit's fair value was related to the Company's decision to no longer pursue regulatory approval for Oral Paclitaxel monotherapy for the treatment of mBC in theU.S. Impairment in the year endedDecember 31, 2022 was the result of the discontinuation of a project withinComprehensive Drug Enterprises' ("CDE") in-process research and development ("IPR&D").
Interest Income and Interest Expense
Interest income consisted of interest earned on our short-term investments and increased by$0.2 million , or 184%, from 2021 to 2022 due to increases in market rates for commercial paper, corporate bonds, andU.S. Treasury securities. Interest expense for the year endedDecember 31, 2022 totaled$25.8 million , an increase of$5.2 million , or 25%, as compared to$20.7 million for the year endedDecember 31, 2021 . This increase was primarily due to$11.2 million of interest recognized on our Royalty Financing Liability during 2022. This was partially offset by a$6.0 million decrease in interest expense recorded on borrowings under the Senior Credit Agreement with Oaktree as the result of principal payments made during the year.
Loss on Extinguishment of Debt
We recognized a$3.1 million loss on the extinguishment of debt related to the prepayments we made to Oaktree during 2022 under the amendment to the Senior Credit Agreement related to the sale of our leasehold interest in theDunkirk Facility, the RIPA, and the sale of our equity interests in the China API Operations. We did not incur a loss on the extinguishment of debt during the year endedDecember 31, 2021 .
Income Tax (Expense) Benefit
Income tax expense for the year endedDecember 31, 2022 was primarily the result of foreign tax withholdings on license revenue. For the year endedDecember 31, 2021 , income tax benefit amounted to$10.6 million , which is the result of 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. 81 --------------------------------------------------------------------------------
Loss from discontinued operations
Loss from discontinued operations is comprised of operating results of the activities related to the Dunkirk Facility, China API Operations, and 503B Operations. The operations related to the Dunkirk Facility recorded a gain of$12.5 million in 2022 and a loss of$7.8 million in 2021. This 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 of$8.3 million during the year endedDecember 31, 2022 . The China API Operations recorded a loss of$12.3 million in 2022 and a loss of$28.9 million in 2021. This was primarily due to impairment of goodwill and other long-lived assets of$23.8 million during the year endedDecember 31, 2021 , and the reserve of excess inventory of$7.1 million and sale of pilot products of$3.1 million during the year endedDecember 31, 2022 . Lastly, the 503B operations recorded a loss of$5.7 million in 2022 and a loss of$5.0 million in 2021. In 2022, the 503B operations experienced a decrease in gross margin due to increases in material, labor, and overhead costs and recorded impairment of long-lived assets of$1.5 million related to the operations being classified as held-for-sale. In 2021, the primary cause of the loss was the goodwill impairment of$4.6 million recorded during the year endedDecember 31, 2021 .
Liquidity and Capital Resources
Capital Resources
Since our inception, we have incurred net losses and negative cash flows from our operations. Our cash requirement was primarily cash used for our R&D programs, SG&A costs associated with our operations, 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$104.4 million and$202.0 million for the years endedDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 , we had an accumulated deficit of$1,016.8 million . Our operating activities from continuing operations used$64.3 million and$129.8 million of cash during the years endedDecember 31, 2022 and 2021, respectively. We intend to continue to advance 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 ourCell Therapy platform are expected to increase as we prepare for additional clinical and preclinical studies for ourCell Therapy programs. We can provide no assurance that the funding requirements to diversify the product portfolio for specialty drug products in the Commercial Platform will decline in the future. Our principal sources of liquidity as ofDecember 31, 2022 were cash and cash equivalents totaling$30.4 million , restricted cash of$5.2 million , held in a controlled bank account in connection with the Senior Credit Agreement with Oaktree, and short-term investments totaling$1.1 million , which are generally high-quality investment grade corporate debt securities.
ATM Financing
OnAugust 20, 2021 , we entered into a sales agreement withSVB Leerink 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 (the "ATM Offering"). During the year endedDecember 31, 2022 , we raised net proceeds of$9.4 million by selling 1,263,251 shares of our common stock for an average price of$7.40 per share under the Sales Agreement. During the year endedDecember 31, 2021 , we raised net proceeds of$1.1 million by selling 38,142 shares of our common stock for an average price of$29.80 per share under the Sales Agreement. While we intend to continue selling shares of common stock in the ATM Offering, there can be no assurance that the ATM Offering will be available to us, that we will be able to sell shares of common stock at a price that is acceptable to our Board of Directors, or that we will be successful in raising significant capital in the offering.
Public Offering of Stock
InAugust 2022 , we completed an underwritten public offering in which we sold 1,766,667 shares of common stock, common warrants to purchase up to 2,000,000 shares of common stock at a price of$20.00 per share, and pre-funded warrants to purchase up to 233,334 shares of common stock at a price of$0.02 per share. The shares of common stock, together with the common warrants, were sold at$15.00 per share and accompanying common warrant, and the pre-funded warrants, together with the common warrants, were sold at$14.98 per pre-funded warrant and accompanying common warrant. The common and pre-funded warrants were exercisable immediately and will expire five years from the date of issuance. We received net proceeds of$28.1 million , after deducting discounts, commissions, and offering expenses. We are using the net proceeds from this offering to fund ongoing clinical development for our product candidates and for working capital and other general corporate purposes.
Indebtedness
We had$129.1 million and$148.7 million of debt as ofDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 , this consisted of the$86.7 million royalty financing liability under the RIPA, the Senior Credit Agreement with Oaktree of$37.0 million , and finance and operating lease obligations of$5.4 million . As ofDecember 31, 2021 , this consisted of the Senior Credit Agreement with Oaktree of$141.3 million and finance and operating lease obligations of$7.3 million . 82 -------------------------------------------------------------------------------- The sale of the interest inU.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 year endedDecember 31, 2022 , the Company received Klisyri royalties of$0.9 million , which were remitted to the Purchasers.
Oaktree Senior Credit Agreement
OnJune 19, 2020 (the "Closing Date"), we entered into the Senior Credit Agreement to borrow up to$225.0 million in five tranches with a maturity date ofJune 19, 2026 , bearing interest at a fixed annual rate of 11.0%, payable quarterly. We are required to make quarterly interest-only payments untilJune 19, 2022 , after which we are required to make quarterly amortizing payments, with the remaining balance of the principal plus accrued and unpaid interest due at maturity. BetweenSeptember 2020 andFebruary 2022 , we were required to pay a commitment fee on any undrawn commitments equal to 0.6% per annum, payable on each subsequent funding date and the commitment termination date. We are also required to pay an exit fee at maturity equal to 2.0% of the aggregate principal amount of the loans funded under the Senior Credit Agreement. Three tranches in the aggregate amount of$150.0 million were drawn prior toDecember 31, 2020 . Our ability to draw the remaining tranches of the Senior Credit Agreement was associated with the marketing approval and future sales of Oral Paclitaxel. These tranches were reduced to zero in connection with the Third Amendment described below and are not available for future borrowing. We are required to make mandatory prepayments of the senior secured loans with net cash proceeds from certain asset sales or insurance proceeds or condemnation awards, in each case, subject to certain exceptions and reinvestment rights. In connection with the sale of the Dunkirk Facility inFebruary 2022 , we entered into an amendment to the Senior Credit Agreement (the "Third Amendment") whereby we were required to repay$25.0 million , or 62.5% of the proceeds from the sale, of the outstanding principal of the loan. In addition, on the date of closing the Dunkirk Transaction, we were required to pay (i) accrued and unpaid interest and (ii) a 7.0% fee, allocated as a 2.0% Exit Fee and a 5.0% Prepayment Fee (each as defined in the Senior Credit Agreement), on the principal amount being repaid. We were required to pay Oaktree an amendment fee of$0.3 million and certain related expenses. Further, the Third Amendment required us to make an additional prepayment of$12.5 million in principal plus the costs and fees described above onJune 14, 2022 . InJune 2022 , the Company entered into two additional amendments to the Senior Credit Agreement with Oaktree (the "Fourth Amendment" and the "Fifth Amendment"). In connection with the Fourth Amendment and the Fifth Amendment to the Senior Credit Agreement, effective in connection with the execution of the RIPA, we were required to repay$52.5 million of the loan, along with (i) accrued and unpaid interest and (ii) a 5.0% fee, allocated as a 2.0% Exit Fee and a 3.0% Prepayment Fee on the principal amount being repaid. Under the Sixth Amendment to the Senior Agreement, entered into in connection with the sale of the China API Operations inAugust 2022 (the "Sixth Amendment"), we were required to repay$6.8 million of the loan, along with (i) accrued and unpaid interest and (ii) a 5.0% fee, allocated as a 2.0% Exit Fee and a 3.0% Prepayment Fee on the principal amount being repaid. We made payments, inclusive of principal, interest, and fees, to Oaktree in the aggregate amount of$121.3 million during the year endedDecember 31, 2022 . These payments include our scheduled repayments under the Credit Agreement and prepayments under the Third Amendment, Fourth Amendment, Fifth Amendment, and Sixth Amendment. We may voluntarily prepay the Senior Credit Agreement at any time subject to a prepayment premium which equals 3.0% of the principal amount of the senior secured loans being repaid and is reduced over time untilJune 19, 2024 , after which no prepayment premium is required. 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. AtDecember 31, 2022 , we were in compliance with all applicable covenants. OnMarch 7 andMarch 13, 2023 , we received notices of certain alleged defaults and reservations of rights from Oaktree. The alleged defaults relate to (i) the Company exceeding the$10.0 million threshold for incurring additional indebtedness by having accounts payable owed to counterparties overdue by more than 90 days, (ii) the Company's obligation to provide notice to Oaktree related to the foregoing, and (iii) the Company's obligation to provide notice to Oaktree regarding the recent reverse stock split. Upon the occurrence of an Event of Default, Oaktree has the right to accelerate all amounts outstanding under the Senior Credit Agreement, in addition to other remedies available to it as a secured creditor of ours. If Oaktree accelerates the maturity of the indebtedness under the Senior Credit Agreement, we do not have sufficient capital available to pay the amounts due on a timely basis, if at all, and there is 83 -------------------------------------------------------------------------------- no guarantee that we would be able to repay, refinance or restructure the payments due under the Senior Credit Agreement. The Company responded to Oaktree, which included grounds upon which the Company disputes each of the alleged defaults. The Company has not reached a mutual agreement with Oaktree on this matter, and given the Company is in receipt of the notices of default and reservation of rights, which could result in payment to Oaktree on demand, the amounts due and outstanding to Oaktree are presented as a current obligation of the Company. The Senior Credit Agreement contains events of default which are customary for financings of this type, in certain circumstances subject to customary cure periods. Oaktree has the right upon notice to accelerate all amounts outstanding under the Senior Credit Agreement, in addition to other remedies available to it as a secured creditor of the Company. In connection with our entry into the Senior Credit Agreement, we granted warrants to Oaktree to purchase up to an aggregate of 45,420 shares of our common stock at a purchase price of$252.60 per share. Under the Third Amendment, the exercise price for 50% of the shares underlying the warrants was amended to be$22.00 per share. Under the Fourth Amendment, the exercise price for all of the shares underlying the warrants was amended to be$10.00 per share.
Outlook
We expect to explore and review a broad range of strategic alternatives with a goal of improving our balance sheet and supporting our development efforts and operations during 2023. We may also seek to access the capital markets to fund our 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 ofDecember 31, 2022 , we had cash and cash equivalents of$30.4 million , restricted cash of$5.2 million , and short-term investments of$1.1 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 2023. If we are unable to monetize assets or raise additional capital, we believe that the existing cash and cash equivalents, restricted cash, and short-term investments will fund operations into the second quarter of 2023 and will not be sufficient to fund our operations through the next twelve months beyond the date of the issuance of our consolidated financial statements. We have concluded that this, the notice of alleged defaults referenced above, and a forecasted violation of covenants on the Company's Senior Credit Agreement, raise substantial doubt about our ability to continue as a going concern. See Part II, Item 8. 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
•
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
•
Maintain, expand and protect our intellectual property ("IP") portfolio.
While we made significant progress on our strategy to dispose of non-core assets, as discussed above in "-Non-core Asset Developments," our expenses could increase as we continue to fund clinical and preclinical development of our research programs by advancing ourCell 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, including:
84 --------------------------------------------------------------------------------
•
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?
•
The initiation, progress, timing, costs and results of nonclinical studies and clinical trials for our other programs and potential drug candidates?
•
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.
Cash Flows The following table provides information regarding our cash flows from continuing and discontinued operations for the years endedDecember 31, 2022 , and 2021: Year ended December 31, 2022 2021 (in thousands) Net cash used in operating activities from continuing operations$ (64,348 ) $ (129,796 ) Net cash provided by investing activities from continuing operations 7,536
127,851
Net cash provided by financing activities from continuing operations 2,371
2,737
Net cash provided by (used in) discontinued operations 38,893 (35,725 ) Net effect of foreign exchange rate changes (534 )
548
Net decrease in cash, cash equivalents, and restricted cash$ (16,082 ) $
(34,385 )
The use of cash in all periods presented resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. The primary use of our cash in all periods presented was to fund our R&D, regulatory and other clinical trial costs, drug licensing costs, inventory purchases, pre-launch commercialization activities, build-out of our manufacturing facilities, and other expenditures related to sales, marketing and administration. 85 -------------------------------------------------------------------------------- During the year endedDecember 31, 2022 , operating activities from continuing operations used$64.3 million of cash, which resulted principally from our net loss from continuing operations of$99.0 million , adjusted for non-cash charges of$22.8 million , and cash provided by our operating assets and liabilities of$11.8 million . Our prepaid expenses and other current assets, accounts payable and accrued expense balances in all periods presented were affected by the timing of vendor invoicing and payments. Our net non-cash charges during the year endedDecember 31, 2022 consisted of$14.6 million of amortization of debt discount and royalty financing liability,$6.3 million of stock-based compensation expense,$3.1 million of loss on extinguishment of debt,$2.3 million depreciation and amortization expense, partially offset by a$4.2 million change in fair value of contingent consideration. Our operating assets increased$5.2 million for accounts receivable mainly related to the timing of revenues, and increased$19.6 million for inventory of specialty drug products to service the demand for our shortage products and products launched during the year. Our operating liabilities increased by$35.9 million mainly due to an increase in accounts payable, accrued clinical expenses related toCell Therapy , accrued wages and benefits, and accrued selling fees and rebates associated with increased sales of specialty drug products. Net cash used in operating activities from discontinued operations in 2022 was$10.7 million , primarily related to the operating expenses incurred by the activities at theDunkirk Facility and China API Operations. During the year endedDecember 31, 2021 , operating activities from continuing operations used$129.8 million of cash, which resulted principally from our net loss from continuing operations of$160.4 million , adjusted for non-cash charges of$60.4 million , non-cash income tax benefit of$10.8 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 cash used by our operating assets and liabilities of$19.0 million . Our net non-cash charges during the year endedDecember 31, 2021 consisted of$41.0 million of impairment of goodwill and intangible assets,$9.2 million of stock-based compensation expense,$3.1 million depreciation and amortization expense,$4.2 million change in fair value of contingent consideration,$2.9 million amortization of debt discount, and$0.6 million write-off of deferred debt issuance costs related to the revenue interest financing with Sagard in 2020. Net cash used in operating activities from discontinued operations in 2021 was$12.6 million , related to operations of the Dunkirk Facility, China API Operations, and 503B operations.
Net Cash Provided by Investing Activities
In 2022, cash provided by investing activities of continuing operations of$7.5 million was primarily attributable to$9.6 million in the sale and maturity of short-term investments, net of purchases. This was partially offset by$1.6 million in payments for licenses and$0.4 million in purchases of property and equipment. Net cash provided by investing activities of discontinued operations in 2022 was$50.4 million , primarily due to the proceeds of$40.0 million and$12.5 million from the sales of the Dunkirk Facility and China API Operations, respectively, partially offset by purchases of property and equipment at the discontinued operations of$2.2 million . In 2021, cash provided by investing activities of continuing operations of$127.8 million was primarily attributable to$128.9 million in the sale and maturity of short-term investments, net of purchases, and$1.4 million cash received from the acquisition of Kuur, partially offset by$2.1 million in payments for licenses and$0.5 million purchases of property and equipment. Net cash used in investing activities of discontinued operations in 2021 was$22.8 million , related to purchasing property and equipment at the Dunkirk Facility and China API Operations.
Net Cash Provided by Financing Activities
In 2022, cash provided by financing activities of continuing operations was$2.4 million and was primarily comprised of$76.5 million in net proceeds from the issuance of the royalty financing liability,$27.7 million in net proceeds from the sale of common stock under the ATM Offering, public stock offering, and 2017 Employee Stock Purchase Plan, and$10.4 million from the issuance of pre-funded and common warrants, partially offset by the$105.4 million repayment of long-term debt and$6.5 million in costs related to the repayment of such debt. Net cash used by financing activities of discontinued operations in 2022 was$0.8 million which was related to the repayment of the Chongqing Maliu debt at our China API Operations. In 2021, cash provided by financing activities of continuing operations was$2.7 million , which primarily consisted of the proceeds from the exercise of stock options of$1.6 million , proceeds from the sale of shares in the ATM Offering of$1.3 million in December, partially offset by the repayment of finance lease obligations of$0.1 million . Net cash used in financing activities of discontinued operations in 2021 was$0.3 million , related to the repayment of finance lease obligations. Capital Expenditures
Our liquidity position and capital requirements are subject to a number of factors. For example, our cash inflow and outflow may be impacted by the following:
•
Our ability to generate revenue;
•
Our ability to improve margins on our commercial products;
•
Fluctuations in working capital; and
86 --------------------------------------------------------------------------------
•
Our ability to raise additional funds.
Our primary short-term capital needs, which are subject to change, include expenditures related to:
• Repayment of indebtedness;
•
Continuous support of the development and research of our proprietary drug products;
•
New research and product development efforts; and
•
Support of our commercialization efforts related to our current and future products.
Although we believe the foregoing items reflect our most likely uses of cash in the short term, we cannot predict with certainty all of our short-term cash uses or the timing or amounts of cash used. If cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or debt securities or obtain credit financing. This capital may not be available on satisfactory terms, if at all. Furthermore, any additional equity financing may be dilutive to our stockholders, and debt financing, if available, may include restrictive covenants. Contractual Obligations A summary of our contractual obligations as ofDecember 31, 2022 is as follows: Payments Due by Period Total Less than 1 More than Amounts year 1 to 3 years 3 to 5 years 5 years Committed (in thousands) Operating leases$ 2,238 $ 3,506 $ 479 $ -$ 6,223 Long-term debt 56,027 - - - 56,027 Finance lease obligations 147 110 - 257 License fees 1,167 - - - 1,167$ 59,579 $ 3,616 $ 479 $ -$ 63,674 Our operating and finance leases are principally for facilities and equipment. We currently lease office space in theU.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 theConventus Center for Collaborative Medicine inBuffalo, NY ; (2) the rental of the Commercial Platform headquarters inChicago, IL ; (3) the rental of our clinical research headquarters inCranford, NJ ; (4) the rental of our contract research organization throughoutLatin America ; (5) the rental of our office inHouston, TX ; and (6) the rental of other facilities and equipment located mainly inBuffalo, NY . These locations represent$3.3 million ,$1.4 million ,$0.1 million , less than$0.1 million ,$0.1 million , and$1.3 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 indebtedness under the Senior Credit Agreement with Oaktree. The finance lease obligations represent leases of equipment in our office inBuffalo, 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 retained 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. In addition, we have certain obligations under licensing arrangements with third parties contingent upon achieving various development, regulatory, and commercial milestones. Pursuant to our purchase agreement of Kuur Therapeutics, we may be required to make payments worth up to$115.0 million , payable in cash of shares of our common stock, upon the occurrence of certain development and regulatory milestones related to our NKT cell therapy. Pursuant to our license agreement withBaylor College of Medicine , we may be required to pay up to$128.5 million upon the occurrence of certain development and sales milestones. Pursuant to the license agreement with XLifeSc, our 55% owned joint ventureAxis Therapeutics Limited , we may be required to make cash payments worth up to$108.0 million upon the occurrence of certain regulatory milestones related to XLifeSc's proprietary TCR-T technology, and make royalty payments representing a percentage of aggregate net income generated by sales of licensed products. Pursuant to our license agreements with Hanmi, we may be required to make equity payments of$24.0 million upon regulatory approval of a product within the Orascovery platform and make tiered royalty payments based on net sales of any product using the licensed intellectual property. These amounts are not included in the table above. 87 --------------------------------------------------------------------------------
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 withU.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. Revenue Recognition 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 ASC 606, Revenue from Contracts with Customers ("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 related to the Company's approved and late-stage drug candidates 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. The Company recognized$9.2 million and$0.5 million in license revenue from out-license arrangements for the years endedDecember 31, 2022 and 2021, respectively. During the year endedDecember 31, 2021 , the Company received$2.0 million in upfront fees for a license of TCR-T technology, which was deemed not to be distinct, as the IP is in an early stage and is dependent on development activities to be performed by the Company, and$0.7 million for licenses of Klisyri in territories in which it is not yet approved and further development activities are required to be performed by the Company. Therefore these licenses of IP and the development services were considered a bundled performance obligation. As ofDecember 31, 2022 , this bundle of performance obligations was not satisfied and the corresponding$2.7 million was recorded as deferred revenue on the Company's consolidated balance sheet. 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. 88 -------------------------------------------------------------------------------- To date, no amounts have been constrained in the initial or subsequent assessments of the transaction price. The Company did not recognize revenue from other performance obligations included in the Company's out-licensing agreements during the years endedDecember 31, 2022 or 2021. 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 recognized$2.5 million and$25.0 million in commercial milestones during the years endedDecember 31, 2022 and 2021, respectively. The Company recorded$2.3 million and$0.7 million of royalty revenue related to sales of Tirbanibulin during the years endedDecember 31, 2022 and 2021, respectively. 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 years endedDecember 31, 2022 and 2021.
2.
Commercial Platform
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 ofDecember 31, 2022 and 2021, the Company's total provision for chargebacks and other deductions included as a reduction of accounts receivable totaled$29.5 million and$22.9 million , respectively. The Company's total provision for chargebacks and other revenue deductions was$179.9 million and$129.0 million for the years endedDecember 31, 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. 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 89 -------------------------------------------------------------------------------- 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, excluding goodwill, 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. The Company determined that impairment indicators occurred during the first and fourth quarters of 2021 and concluded that there was impairment of intangible assets other than goodwill amounting to$1.7 million for the year endedDecember 31, 2021 . See Part II, Item 8, Note 8 -Goodwill and Intangible Assets, net for additional details.
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 II, Item 8. Note 12 - 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 interest 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
In the normal course of business, we evaluate all new accounting pronouncements issued by theFinancial Accounting Standards Board ,SEC , or other authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. Refer to Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations. 90
--------------------------------------------------------------------------------
© Edgar Online, source