ForwardLooking Statements
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and the other financial information included in this Annual Report. This discussion contains forwardlooking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forwardlooking statements because of various factors, including those set forth under "Risk Factors" or in other parts of this Annual Report.
Company Overview
We are a commercial-stage biopharmaceutical company engaged in the discovery,
development, marketing and sale of innovative treatments and therapies,
primarily for rare and orphan diseases. Our lead product, Endari®
(prescription-grade L-glutamine oral powder) is approved by the
Endari® is marketed and sold in the
As of
Critical Accounting Estimates
Management's discussion and analysis of financial condition and results of
operations is based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in
While our significant accounting policies are more fully described in Note 2 of the Notes to Financial Statements included in this Annual Report, we believe that the accounting policies discussed below under "Revenues, net" are the most critical to assist you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.
Financial Overview
Revenues, net
We realize net revenues primarily from sales of Endari® to our distributors and specialty pharmacy providers. Distributors resell our products to other pharmacy and specialty pharmacy providers, health care providers, hospitals, and
47
--------------------------------------------------------------------------------
clinics. In addition to agreements with these distributors, we have contractual arrangements with specialty pharmacy providers, in-office dispensing providers, physician group purchasing organizations, pharmacy benefits managers and government entities that provide for government-mandated or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. These various discounts, rebates, and chargebacks are referred to as "variable consideration." Revenue from product sales is recorded net of variable consideration.
Under the Accounting Standards Codification ("ASC") 606, we recognize revenue when our customers obtain control of our product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that we expect to receive in exchange for the product, or transaction price. To determine revenue recognition for contracts with customers within the scope of ASC 606, we perform the following: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to our performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the relevant performance obligations.
Management estimates variable consideration using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible transaction prices. Actual variable consideration may differ from our estimates. If actual results vary from the estimates, we adjust the variable consideration in the period such variances become known, which adjustments are reflected in net revenues in that period. The following are our significant categories of variable consideration:
Sales Discounts: We provide our customers prompt payment discounts and from time to time offer additional discounts to encourage bulk orders to generate needed working capital. Sales attributable to bulk discounts offered by us increased in 2021 and adversely affected sales in subsequent period.
Product Returns: We offer our distributors a right to return product principally based upon (i) overstocks, (ii) inactive product or non-moving product due to market conditions, and (iii) expired product. Product return allowances are estimated and recorded at the time of sale.
Government Rebates: We are subject to discount obligations under state Medicaid programs and the Medicare Part D prescription drug coverage gap program. We estimate Medicaid and Medicare Part D prescription drug coverage gap rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenues are recognized, resulting in a reduction of product revenues and the establishment of a current liability that is included as accounts payable and accrued expenses on our balance sheet. Our liability for these rebates consists primarily of estimates of claims expected to be received in future periods related to recognized revenues.
Chargebacks and Discounts: Chargebacks for fees and discounts represent the estimated obligations resulting from contractual commitments to sell products to certain specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities at prices lower than the list prices charged to distributors. The distributors charge us for the difference between what they pay for the products and our contracted selling price to these specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities. In addition, we have contractual agreements with pharmacy benefit managers who charge us for rebates and administrative fee in connection with the utilization of product. These reserves are established in the same period that the related revenues are recognized, resulting in a reduction of revenues. Chargeback amounts are generally determined at the time of resale of product by our distributors.
Cost of Goods Sold
Cost of goods sold consists primarily of expenses for raw materials, packaging, shipping and distribution of Endari®.
48
--------------------------------------------------------------------------------
Research and Development Expenses
Research and development expenses consist of expenditures for new products and technologies consisting primarily of fees paid to contract research organizations ("CRO") that conduct clinical trials of our product candidates, payroll-related expenses, study site payments, consultant fees and other related costs. The costs of later-stage clinical studies such as Phase 2 and 3 trials are generally higher than those of earlier studies. This is primarily due to the larger size, expanded scope, patient related healthcare and regulatory compliance costs, and generally longer duration of later-stage clinical studies.
Our contracts with CROs are generally based on time and materials expended, whereas study site agreements are generally based on costs per patient as well as other pass-through costs, including start-up costs and institutional review board fees. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.
Future research and development expenses will depend on any new product candidates or technologies that we may introduce into our research and development pipeline. In addition, we cannot predict which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree, if any, such arrangements would affect our development plans and capital requirements.
Due to the inherently unpredictable nature of the drug approval process and the
interpretation of the regulatory requirements, we are unable to estimate the
amount of costs of obtaining regulatory approvals of Endari® outside of the
General and Administrative Expense
General and administrative expense consists principally of salaries and related employee costs, including sharebased compensation for our directors, executive officers and employees. Other general and administrative expense includes facility costs, and professional fees and expenses for audit, legal, consulting, and tax services.
Selling Expenses
Selling expenses consist principally of salaries and related costs for personnel
involved in the promotion, sales, and marketing of Endari®. Other selling cost
include advertising, third party consulting costs, the cost of in-house sales
personnel and travel-related costs. We expect selling expenses to increase as we
acquire additional sales personnel to support the commercialization of Endari®
in the
COVID-19
In retrospect, we believe our business and net revenues were adversely affected in 2020 and 2021 by lockdowns, travel-related restrictions and other governmental responses to the pandemic related to the COVID 19 pandemic which inhibited the ability of our sales force to visit doctors' offices and clinics and may have adversely affected the willingness of SCD patients to seek the care of a physician or to comply with physician-prescribed care. Ongoing COVID-19 infections or future official responses could cause a temporary or prolonged decline in our revenues and have a material adverse effect on our results of operations and financial condition. COVID-19 or governmental responses also may adversely affect the timing and conduct of clinical studies or the ability of regulatory bodies to consider or grant approvals with respect to Endari® or our prescription grade L-glutamine, or PGLG, drug candidates or oversee the development of our drug candidates, may further divert the attention and efforts of the medical community to coping with COVID-19 or variants and disrupt the marketplace in which we operate. For example, we experienced a temporary disruption in 2020 in patient enrollment in our Pilot/Phase I study of PGLG oral powder in diverticulosis. Any outbreak of COVID-19 among our executives or key employees or their families and loved ones could disrupt our management and operations and adversely affect the effectiveness of our management, Endari® sales, and results of operations and financial condition. The foregoing factors could also have an adverse effect on economic and business conditions and the broad stock market, in general, or the market price of our common stock, in particular. We intend to consider changes to our business to adapt to the new post-pandemic environment, including an increased focus on our telehealth solution.
49
--------------------------------------------------------------------------------
Inflation
Inflation has not had a material impact on our expenses or results of operations over the past two years, but may result in increased manufacturing, research and development, general and administrative and selling expenses in the foreseeable future.
Environmental Expenses
The cost of compliance with environmental laws has not been material over the past two years and any such costs are included in general and administrative costs.
Inventories
Inventories consist of raw materials, finished goods and work-in-process and are
valued on a firstin, firstout basis and at the lower of cost or net realizable
value. Substantially all raw materials purchased during the years ended
Notes Payable, Convertible Notes Payable and Warrants
From time to time, we obtain financing from the sale and issuance of promissory notes or other debt instruments with detachable stock purchase warrants, some of which notes or debt instruments are convertible into shares of our common stock and some of which are issued to related parties. We analyze all of the terms of our notes payable and promissory notes issued with warrants to determine the appropriate accounting treatment, including determining whether embedded derivatives (conversion features, detachable stock purchase warrants and right to purchase common stock) are required to be bifurcated and treated as discount, and the applicable classification of the notes payable and embedded derivative as debt, derivative liabilities, equity or temporary equity (i.e., mezzanine capital).
Direct and incremental costs associated with the issuance of note payables such as legal fees and broker fees, among others, paid to parties are recorded as a reduction of note payable on the consolidated balance sheets. Issuance costs and discounts are amortized over the term of the respective financing agreement using the effective interest methods. Amortization of these amounts is included as a components of interest expenses in the consolidated statements of operation.
Notes payable to related parties, interest expense and accrued interest to related parties are separately identified in our consolidated financial statements. We also disclose significant terms of all transactions with related parties in the notes to our consolidated financial statements.
Sharebased Compensation
We recognize compensation expense for sharebased compensation awards during the
service term of the recipients of the awards. The fair value of sharebased
awards is calculated using the BlackScholesMerton pricing model. The
BlackScholesMerton model requires subjective assumptions regarding future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. The expected term of awards granted is calculated using the
simplified method allowed under the
Fair Value Measurements
We define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in accordance with ASC 820. We measure fair value under a framework that provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:
Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2: Inputs to the valuation methodology include:
•
Quoted prices for similar assets or liabilities in active markets;
50
--------------------------------------------------------------------------------
•
Quoted prices for identical or similar assets or liabilities in inactive markets;
•
Inputs other than quoted prices that are observable for the asset or liability; and
•
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3: Inputs to the valuation methodology that are unobservable and significant to the fair value measurement.
An asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs The fair value of our debt instruments is not materially different from their carrying values as presented. The fair value of our convertible debt instruments was determined based on Level 2 inputs. The carrying value of the debt was discounted based on allocating proceeds to other financial instruments within the arrangement as discussed in Note 7 to our consolidated financial statements.
Certain of our outstanding warrants contain price adjustment provisions and, consequently, are accounted for as liabilities that are remeasured at fair value on a recurring basis using Level 3 inputs. The Level 3 inputs in the valuation of warrants include expected term and expected volatility.
Related Party Transactions
For a discussion of related party transactions, refer to Note 12 of the Notes to Consolidated Financial Statement included elsewhere in this Annual Report, which information is incorporated herein by reference.
Equity method investment
The Company owns 40% of the capital shares of
51
--------------------------------------------------------------------------------
Financial Highlights
Years Ended December 31, 2022 2021 CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) REVENUES, NET$ 18,390 $ 20,610 COST OF GOODS SOLD 2,588 3,312 GROSS PROFIT 15,802 17,298 OPERATING EXPENSES Research and development 1,725 4,110 Selling 7,493 5,878 General and administrative 13,170 13,438 Total operating expenses 22,388 23,426 LOSS FROM OPERATIONS (6,586 ) (6,128 ) OTHER INCOME (EXPENSE) Loss on debt extinguishment (501 ) (365 ) Change in fair value of warrant derivative liabilities 1,304 (432 ) Change in fair value of conversion feature derivative, notes payable 4,259 (1,906 ) Loss on investment in convertible bond (133 ) - Net loss on equity method investment (1,913 ) (2,733 ) Foreign exchange loss (2,662 ) (2,017 ) Interest and other income 680 761 Interest expense (5,013 ) (3,101 ) Total other expense (3,979 ) (9,793 ) LOSS BEFORE INCOME TAXES (10,565 ) (15,921 ) Income tax provision 60 25 NET LOSS$ (10,625.00 ) $ (15,946.00 )
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.21 )
49,439,867 49,253,156
Years ended
Net Income (Loss). Net loss decreased by
Revenues, Net. Net revenues decrease by
Cost of Goods Sold. Cost of goods sold decreased by
Research and Development Expenses. Research and development expenses decreased
by
52
--------------------------------------------------------------------------------
Selling Expenses. Selling expenses increased by
General and Administrative Expenses. General and administrative expense
decreased by
Other Income (Expense). Other expense decreased by
Income Tax (Expense). Income tax expenses remained consistent to
Seasonality
There may be seasonal variations in our Endari® sales due to factors such as
year-end holidays, severe winter weather conditions in certain regions of the
Liquidity and Capital Resources
Based on our losses to date, anticipated future net revenues and operating
expenses, debt repayment obligations, funding commitment to
Our subsidiary,
Liquidity represents our ability to pay our liabilities when they become due,
fund our business operations, fund the operations and retrofitting of
53
--------------------------------------------------------------------------------
have no contractual commitment to provide funding to
As of
Our API supply agreement with Telcon provides for an annual API purchase target
of
Due to uncertainties regarding our ability to meet our current and future
operating and capital expenses, there is substantial doubt about our ability to
continue as a going concern for 12 months from the date of this filing, and the
report of our independent public accounting firm on our financial statements as
of and for the year ended
Cash Flows
Net cash used in operating activities
Net cash used in operating activities increased by$ 3.8 million, or 305%, to
Net cash used in investing activities
Net cash used in investing activities decreased by
Net cash from financing activities
Net cash from financing activities decreased by
OffBalanceSheet Arrangements
We had no off-balance sheet arrangements in the periods presented.
54
--------------------------------------------------------------------------------
© Edgar Online, source