10-Q 1 pbyi20230930_10q.htm FORM 10-Q pbyi20230930_10q.htm
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Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to            

 

Commission File Number: 001-35703


PUMA BIOTECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)


 

Delaware

77-0683487

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

10880 Wilshire Boulevard, Suite 2150, Los Angeles, CA 90024

(Address of principal executive offices) (Zip code)

 

(424) 248-6500

(Registrants telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

 

Common Stock, par value $0.0001 per share

PBYI

The NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer

Accelerated filer

    

Non-accelerated filer

Smaller reporting company

    

Emerging growth company

  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒.


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 47,571,332 shares of Common Stock, par value $0.0001 per share, were outstanding as of October 30, 2023

 



 

 

 

PUMA BIOTECHNOLOGY, INC.

 

- INDEX -

 

 

Page

PART I  FINANCIAL INFORMATION:

1

Item 1.

Financial Statements (Unaudited):

1

 

Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022

1

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022

2

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and 2022

3

 

Condensed Consolidated Statements of Stockholders Equity for the Three and Nine Months Ended September 30, 2023 and 2022

4

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022

6

 

Notes to the Unaudited Condensed Consolidated Financial Statements

7

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4.

Controls and Procedures

36

PART II  OTHER INFORMATION:

37

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

39

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 3.

Defaults Upon Senior Securities

39

Item 4.

Mine Safety Disclosures

39

Item 5.

Other Information

39

Item 6.

Exhibits

40

Signatures

41

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, (this “Quarterly Report”), contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Any statements about our expectations, beliefs, plans, objectives, assumptions, future events or performance are not historical facts and may be forward looking. These forward-looking statements include, but are not limited to, statements about:

 

 

the commercialization of NERLYNX® (neratinib) tablets (“NERLYNX”);

 

the development of our other drug candidates, including alisertib, and when we expect to undertake, initiate and complete clinical trials of our product candidates;

 

the anticipated timing of regulatory filings;

 

the regulatory approval of our drug candidates;

 

our use of clinical research organizations and other contractors;

 

our ability to find collaborative partners for research, development and commercialization of potential products;

 

efforts of our sub-licensees to obtain regulatory approval and commercialize NERLYNX in areas outside the United States;

 

our ability to market any of our products;

 

our expectations regarding our costs and expenses;

 

our anticipated capital requirements and estimates regarding our needs for additional financing;

 

our ability to compete against other companies and research institutions;

 

our ability to secure adequate protection for our intellectual property;

 

our intention and ability to vigorously defend against any litigation to which we are or may become party;

 

our ability to in-license additional drugs;

 

our ability to attract and retain key personnel; and

 

our ability to obtain adequate financing.

 

These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend” and similar words or phrases. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Discussions containing these forward-looking statements may be found throughout this Quarterly Report, including, in Part I, the section entitled “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements involve risks and uncertainties, including the risks discussed in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, and this Quarterly Report on Form 10-Q, that could cause our actual results to differ materially from those in the forward-looking statements. Such risks should be considered in evaluating our prospects and future financial performance. We undertake no obligation to update the forward-looking statements or to reflect events or circumstances after the date of this document.

 

 

Part I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

 

PUMA BIOTECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

  

September 30, 2023

  

December 31, 2022

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $81,800  $76,201 

Marketable securities

  3,229   4,873 

Accounts receivable, net of allowance for credit loss of $514 and $0

  28,974   40,350 

Inventory, net

  5,679   4,526 

Prepaid expenses, current

  3,684   5,902 

Other assets, current

  1,988   2,429 

Total current assets

  125,354   134,281 

Lease right-of-use assets, net

  8,540   11,362 

Property and equipment, net

  907   1,146 

Intangible assets, net

  63,305   70,610 

Restricted cash, long-term

  2,591   2,591 

Prepaid expenses and other, long-term

  2,908   2,069 

Total assets

 $203,605  $222,059 

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities:

        

Accounts payable

 $5,061  $6,440 

Accrued expenses, current

  33,773   53,034 

Accrued in-licensed rights, current

     12,500 

Post-marketing commitment liability, current

  1,236   1,370 

Lease liabilities, current

  4,628   4,140 

Current portion of long-term debt

  22,664    

Total current liabilities

  67,362   77,484 

Accrued expenses, long-term

  7,739   7,391 

Lease liabilities, long-term

  8,296   11,834 

Post-marketing commitment liability, long-term

  4,832   5,435 

Long-term debt, net

  76,634   98,307 

Total liabilities

  164,863   200,451 

Commitments and contingencies (Note 12)

          

Stockholders' equity:

        

Common stock - $.0001 par value per share; 100,000,000 shares authorized; 47,542,790 shares issued and outstanding at September 30, 2023 and 46,345,660 issued and outstanding at December 31, 2022

  5   5 

Additional paid-in capital

  1,396,173   1,388,358 

Accumulated other comprehensive loss

  (4)   

Accumulated deficit

  (1,357,432)  (1,366,755)

Total stockholders' equity

  38,742   21,608 

Total liabilities and stockholders' equity

 $203,605  $222,059 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 

 

 

PUMA BIOTECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

 

   

For the Three Months Ended September 30,

   

For the Nine Months Ended September 30,

 
   

2023

   

2022

   

2023

   

2022

 

Revenues:

                               

Product revenue, net

  $ 51,592     $ 54,287     $ 149,937     $ 146,319  

Royalty revenue

    4,524       2,815       13,522       16,037  

Total revenue

    56,116       57,102       163,459       162,356  

Operating costs and expenses:

                               

Cost of sales

    13,284       12,495       38,359       38,257  

Selling, general and administrative

    22,801       23,961       69,749       64,939  

Research and development

    11,446       11,253       37,509       38,456  

Acquired in-process research and development

          7,000             7,000  

Total operating costs and expenses

    47,531       54,709       145,617       148,652  

Income from operations

    8,585       2,393       17,842       13,704  

Other income (expenses):

                               

Interest income

    689       216       1,886       294  

Interest expense

    (3,339 )     (2,947 )     (9,976 )     (8,313 )

Legal verdict expense

          (19 )           (92 )

Other income

    74       64       118       176  

Total other expenses, net

    (2,576 )     (2,686 )     (7,972 )     (7,935 )

Net income (loss) before income taxes

  $ 6,009     $ (293 )   $ 9,870     $ 5,769  

Income tax expense

    (213 )     (67 )     (547 )     (161 )

Net income (loss)

  $ 5,796     $ (360 )   $ 9,323     $ 5,608  

Net income (loss) per share of common stock—basic

  $ 0.12     $ (0.01 )   $ 0.20     $ 0.13  

Net income (loss) per share of common stock—diluted

  $ 0.12     $ (0.01 )   $ 0.20     $ 0.13  

Weighted-average shares of common stock outstanding—basic

    47,520,338       45,567,739       46,977,127       44,290,432  

Weighted-average shares of common stock outstanding—diluted

    47,819,234       45,567,739       47,397,209       44,464,682  

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 

 

PUMA BIOTECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

   

For the Three Months Ended September 30,

   

For the Nine Months Ended September 30,

 
   

2023

   

2022

   

2023

   

2022

 

Net income (loss)

  $ 5,796     $ (360 )   $ 9,323     $ 5,608  

Other comprehensive income (loss):

                               

Unrealized gain (loss) on available-for-sale securities, net of tax of $0

    2     $       (4 )     2  

Comprehensive income (loss)

  $ 5,798     $ (360 )   $ 9,319     $ 5,610  

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 

 

PUMA BIOTECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

(in thousands, except share data)

(unaudited)

 

For the Three Months Ended September 30, 2023

                         
                           

Accumulated

                 
                   

Additional

   

Other

                 
   

Common Stock

   

Paid-in

   

Comprehensive

   

Accumulated

         
   

Shares

   

Amount

   

Capital

   

Loss

   

Deficit

   

Total

 

Balance at June 30, 2023

    46,947,153     $ 5     $ 1,393,628     $ (6 )   $ (1,363,228 )   $ 30,399  

Stock-based compensation

                2,545                   2,545  

Shares issued or restricted stock units vested under employee stock plans

    595,637                                

Unrealized gain on available-for-sale securities

                      2             2  

Net income

                            5,796       5,796  

Balance at September 30, 2023

    47,542,790     $ 5     $ 1,396,173     $ (4 )   $ (1,357,432 )   $ 38,742  

 

For the Three Months Ended September 30, 2022

                        
              

Accumulated

         
          

Additional

  

Other

         
  

Common Stock

  

Paid-in

  

Comprehensive

  

Accumulated

     
  

Shares

  

Amount

  

Capital

  

Loss

  

Deficit

  

Total

 

Balance at June 30, 2022

  45,274,635  $5  $1,380,522  $  $(1,360,789) $19,738 

Stock-based compensation

        2,830         2,830 

Shares issued or restricted stock units vested under employee stock plans

  334,179                

Issuance costs of approximately $0.1M for private investments in public equity

        (53)        (53)

Net loss

              (360)  (360)

Balance at September 30, 2022

  45,608,814  $5  $1,383,299  $  $(1,361,149) $22,155 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 

 

PUMA BIOTECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

(in thousands, except share data)

(unaudited)

 

For the Nine Months Ended September 30, 2023

                                         
                           

Accumulated

                 
                   

Additional

   

Other

                 
   

Common Stock

   

Paid-in

   

Comprehensive

   

Accumulated

         
   

Shares

   

Amount

   

Capital

   

Loss

   

Deficit

   

Total

 

Balance at December 31, 2022

    46,345,660     $ 5     $ 1,388,358     $     $ (1,366,755 )   $ 21,608  

Stock-based compensation

                7,815                   7,815  

Shares issued or restricted stock units vested under employee stock plans

    1,197,130                                

Unrealized loss on available-for-sale securities

                      (4 )           (4 )

Net income

                            9,323       9,323  

Balance at September 30, 2023

    47,542,790     $ 5     $ 1,396,173     $ (4 )   $ (1,357,432 )   $ 38,742  

 

For the Nine Months Ended September 30, 2022

                        
              

Accumulated

         
          

Additional

  

Other

         
  

Common Stock

  

Paid-in

  

Comprehensive

  

Accumulated

     
  

Shares

  

Amount

  

Capital

  

Loss

  

Deficit

  

Total

 

Balance at December 31, 2021

  41,175,507  $4  $1,364,309  $(2) $(1,366,757) $(2,446)

Stock-based compensation

        9,198         9,198 

Shares issued or restricted stock units vested under employee stock plans

  849,079                

Shares issued under private investments in public equity, net of issuance costs of approximately $0.2M

  3,584,228   1   9,792         9,793 

Unrealized gain on available-for-sale securities

           2      2 

Net income

              5,608   5,608 

Balance at September 30, 2022

  45,608,814  $5  $1,383,299  $  $(1,361,149) $22,155 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 

 

 

PUMA BIOTECHNOLOGY, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

   

For the Nine Months Ended September 30,

 
   

2023

   

2022

 

Operating activities:

               

Net income

  $ 9,323     $ 5,608  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    8,630       7,387  

Stock-based compensation

    7,815       9,198  

Provision for credit loss

    514        

Disposal of property and equipment

          1  

Loss on impairment of asset

    625        

Changes in operating assets and liabilities:

               

Accounts receivable

    10,862       4,496  

Inventory, net

    (1,153 )     1,657  

Prepaid expenses and other

    1,379       3,160  

Other current assets

    441       (3,663 )

Accounts payable

    (1,379 )     3,753  

Operating lease assets and liabilities, net

    (853 )     (674 )

Accrued expenses and other

    (18,913 )     (53,762 )

Post-marketing commitment liability

    (737 )     (671 )

Net cash provided by (used in) operating activities

    16,554       (23,510 )

Investing activities:

               

Purchase of property and equipment

    (95 )      

Purchase of available-for-sale securities

    (12,511 )      

Maturity of available-for-sale securities

    14,151       18,977  

Purchase of intangible assets

    (12,500 )      

Net cash (used in) provided by investing activities

    (10,955 )     18,977  

Financing activities:

               

Gross proceeds from private investments in public equity

          10,000  

Issuance costs associated with private investments in public equity

          (208 )

Net cash provided by financing activities

          9,792  

Net increase in cash, cash equivalents and restricted cash

    5,599       5,259  

Cash, cash equivalents and restricted cash, beginning of period

    78,792       75,292  

Cash, cash equivalents and restricted cash, end of period

    84,391       80,551  
                 

Supplemental disclosures of non-cash investing and financing activities:

               

Amounts in accounts payable for acquired in-process research and development

  $     $ 7,000  

Supplemental disclosure of cash flow information:

               

Interest paid

  $ 8,721     $ 7,412  

Income taxes paid

  $ 491     $ 141  

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

 

 

PUMA BIOTECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1Business and Basis of Presentation:

 

Business:

 

Puma Biotechnology, Inc., (the “Company”) is a biopharmaceutical company based in Los Angeles, California that develops and commercializes innovative products to enhance cancer care and improve treatment outcomes for patients. The Company is currently commercializing NERLYNX®, an oral version of neratinib (“NERLYNX”), for the treatment of HER2-positive breast cancer. Additionally, the Company recently in-licensed, and is responsible for global development and commercialization of, alisertib. Alisertib is a selective, small molecule inhibitor of aurora kinase A that is designed to disrupt mitosis leading to apoptosis of rapidly proliferating tumor cells dependent on aurora kinase. The Company believes alisertib has potential application in the treatment of a range of different cancer types, including hormone receptor positive breast cancer, triple-negative breast cancer and small cell lung cancer.

 

The Company has one subsidiary, Puma Biotechnology, B.V., a Netherlands company. In March 2022, the Company dissolved its United Kingdom company, Puma Biotechnology Ltd. These two subsidiaries were originally established for the purpose of legal representation in the European Union ("EU") and the United Kingdom, respectively. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

The Company has incurred significant operating losses since its inception. While the Company recently reported net income, we cannot assure that we will continue to do so and will need to continue to generate significant revenue to sustain operations and successfully commercialize neratinib. In 2017, the Company received U.S. Food and Drug Administration (“FDA”) approval for its first product, NERLYNX® (neratinib), formerly known as PB272 (neratinib, oral), for the extended adjuvant treatment of adult patients with early stage HER2-overexpressed/amplified breast cancer following adjuvant trastuzumab-based therapy. Following FDA approval in  July 2017, NERLYNX became available by prescription in the United States, and the Company commenced commercialization.

 

In February 2020, NERLYNX was also approved by the FDA in combination with capecitabine for the treatment of adult patients with advanced or metastatic HER2-positive breast cancer who have received two or more prior anti-HER2-based regimens in the metastatic setting.

 

In 2018, the European Commission (“EC”) granted marketing authorization for NERLYNX in the EU for the extended adjuvant treatment of adult patients with early stage hormone receptor positive HER2-overexpressed/amplified breast cancer and who are less than one year from the completion of prior adjuvant trastuzumab-based therapy.

 

The Company is required to make substantial payments to Pfizer upon the achievement of certain milestones and has contractual obligations for clinical trial contracts.

 

The Company has entered into other exclusive sub-license agreements with various parties to pursue regulatory approval, if necessary, and commercialize NERLYNX, if approved, in many regions outside the United States, including Europe (excluding Russia and Ukraine), Australia, Canada, China, Southeast Asia, Israel, South Korea, and various countries and territories in Central and South America. The Company plans to continue to pursue commercialization of NERLYNX in other countries outside the United States, if approved.

 

In September 2022, the Company entered into an exclusive license agreement with a subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”) to license the worldwide research and development and commercial rights to alisertib, a selective, small-molecule, orally administered inhibitor of aurora kinase A. 

 

The Company has reported net income of approximately $5.8 million and $9.3 million for the three and nine months ended September 30, 2023, respectively, and cash flows provided by operations of approximately $16.6 million for the nine months ended September 30, 2023. The Company’s commercialization, research and development or marketing efforts  may require funding in addition to the cash and cash equivalents and marketable securities totaling approximately $85.0 million at  September 30, 2023.

 

7

 

The Company believes that its existing cash and cash equivalents and marketable securities as of  September 30, 2023 and proceeds that will become available to the Company through product sales and sub-license payments are sufficient to satisfy its operating cash needs, including amounts due under the Company's Note Purchase Agreement with Athyrium, for at least one year after the filing of the Quarterly Report on Form 10-Q in which these financial statements are included. The Company continues to remain dependent on its ability to obtain sufficient funding to sustain operations and continue to successfully commercialize neratinib in the United States. While the Company has been successful in raising capital in the past, there can be no assurance that it will be able to do so in the future. The Company’s ability to obtain funding  may be adversely impacted by uncertain market and economic conditions, including the Company’s success in commercializing neratinib and unfavorable decisions of regulatory authorities or adverse clinical trial results. The outcome of these matters cannot be predicted at this time. Additionally, the terms of the Company’s Note Purchase Agreement place restrictions on the Company’s ability to operate the business and on the Company’s financial flexibility, and the Company  may be unable to achieve the revenue necessary to satisfy the minimum revenue and cash balance covenants as specified in the agreement.

 

Since its inception through September 30, 2023 the Company’s financing has primarily consisted of proceeds from product, royalty and license revenue, public offerings of its common stock, private equity placements, and various debt instruments.

 

In the opinion of management, the included disclosures are adequate, and the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair statement of our consolidated financial position as of  September 30, 2023. Such adjustments are of a normal and recurring nature and certain reclassifications of previously reported amounts have been made to conform to the current year presentation. The condensed consolidated balance sheet as of December 31, 2022 was derived from audited annual financial statements but does not contain all of the footnote disclosures from the audited annual financial statements. The condensed consolidated results of operations for the quarter ended September 30, 2023 are not necessarily indicative of the consolidated results of operations that may be expected for the fiscal year ending  December 31, 2023.

 

Note 2Significant Accounting Policies:

 

The significant accounting policies followed in the preparation of these unaudited consolidated financial statements are as follows:

 

Principles of Consolidation:

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Segment Reporting:

 

Management has determined that the Company operates in one business segment, which is the development and commercialization of innovative products to enhance cancer care.

 

Use of Estimates:

 

The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) in the United States, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the balance sheet, and reported amounts of revenues and expenses for the period presented. Accordingly, actual results could differ from those estimates.

 

Significant estimates include estimates for variable consideration for which reserves were established. These estimates are included in the calculation of net revenues and include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, payor rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between the Company and its customers, payors, and other indirect customers relating to the Company’s sale of its products.

 

Reclassification:

 

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment to the presentation of operating lease assets and liabilities, net has been made to the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022.

 

8

 

Net Income per Share of Common Stock:

 

Basic net income per share of common stock is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the periods presented, as required by Accounting Standards Codification (“ASC”), ASC 260, Earnings per Share. For purposes of calculating diluted net income per share of common stock, the denominator includes both the weighted-average number of shares of common stock outstanding and the number of dilutive common stock equivalents, such as stock options, restricted stock units (“RSUs”) and warrants. A common stock equivalent is not included in the denominator when calculating diluted earnings per common share if the effect of such common stock equivalent would be anti-dilutive and a net loss is reported.

 

Our potentially dilutive securities include potential common shares related to our stock options and RSUs granted in connection with the Puma Biotechnology, Inc. 2011 Incentive Award Plan and the Puma Biotechnology, Inc. 2017 Employment Inducement Incentive Award Plan. Diluted earnings per share (“Diluted EPS”) considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Diluted EPS excludes the impact of potential common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock for the period. The following potentially dilutive outstanding common stock equivalents for the respective periods were excluded from diluted net income per share because of their anti-dilutive effect:

 

  

For the Three Months Ended

  

For the Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Options outstanding

  4,211,389   4,458,414   4,211,389   4,458,414 

Warrant outstanding

  2,116,250   2,116,250   2,116,250   2,116,250 

Unvested restricted stock units

  1,087,224   1,350,925   1,111,286   2,113,930 

Totals

  7,414,863   7,925,589   7,438,925   8,688,594 

 

The 2,116,250 shares underlying the warrant will not have an impact on our diluted net income per share until the average market price of our common stock exceeds the exercise price of $16 per share (see Note 10—Stockholders' Equity).

 

A reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share of common stock computations is as follows (in thousands, except share and per share amounts):

 

  

For the Three Months Ended September 30,

  

For the Nine Months Ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Numerator:

                

Net income (loss)

 $5,796  $(360) $9,323  $5,608 

Denominator:

                

Weighted average common stock outstanding for basic net income (loss) per share

  47,520,338   45,567,739   46,977,127   44,290,432 

Net effect of dilutive common stock equivalents

  298,896      420,082   174,250 

Weighted average common stock outstanding for diluted net income (loss) per share

  47,819,234   45,567,739   47,397,209   44,464,682 

Net income (loss) per share of common stock

                

Basic

 $0.12  $(0.01) $0.20  $0.13 

Diluted

 $0.12  $(0.01) $0.20  $0.13 

 

Revenue Recognition:

 

Under ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when its customer obtains control of the promised goods or services, in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services. The Company had no contracts with customers until the FDA approved NERLYNX on July 17, 2017. Subsequent to receiving FDA approval, the Company entered into a limited number of arrangements with specialty pharmacies and specialty distributors in the United States to distribute NERLYNX. These arrangements are the Company’s initial contracts with customers. The Company has determined that these sales channels with customers are similar.

 

9

 

Product Revenue, Net:

 

The Company sells NERLYNX to a limited number of specialty pharmacies and specialty distributors in the United States. These customers subsequently resell the Company’s products to patients and certain medical centers or hospitals. In addition to distribution agreements with these customers, the Company enters into arrangements with health care providers and payors that provide for government mandated and/or privately negotiated rebates, chargebacks and discounts with respect to the purchase of the Company’s products.

 

The Company recognizes revenue on product sales when the specialty pharmacy or specialty distributor, as applicable, obtains control of the Company's product, which occurs at a point in time (upon delivery). Product revenue is recorded net of applicable reserves for variable consideration, including discounts and allowances. The Company’s payment terms range between 10 and 68 days.

 

Product revenue also consists of product sales under sub-license agreements to our sub-licensees, who then sell into their respective international territories.

 

Shipping and handling costs for product shipments occur prior to the customer obtaining control of the goods and are recorded in cost of sales.

 

If taxes should be collected from customers relating to product sales and remitted to governmental authorities, they will be excluded from revenue. The Company expenses incremental costs of obtaining a contract when incurred if the expected amortization period of the asset that the Company would have recognized is one year or less. However, no such costs were incurred during the nine months ended September 30, 2023 and 2022, respectively.

 

Reserves for Variable Consideration:

 

Revenue from product sales is recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, payor rebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between the Company and its customers, payors, and other indirect customers relating to the Company’s sale of its products. These reserves, as detailed below, are based on the related sales, and are classified as reductions of accounts receivable, net when the right of offset exists in accordance with Accounting Standards Update (“ASU”) ASU 2013-1, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, or as a current liability. These estimates take into consideration a range of possible outcomes that are probability-weighted in accordance with the expected value method in ASC 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.

 

The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. The Company’s analyses also contemplated application of the constraint in accordance with the guidance, under which it determined a significant reversal of revenue would not be probable to occur in a future period for the estimates detailed below as of September 30, 2023, and, therefore, the transaction price was not reduced further during the quarter ended September 30, 2023. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

 

Trade Discounts and Allowances:

 

The Company generally provides customers with discounts, which include incentive fees that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. The reserve for discounts is established in the same period that the related revenue is recognized, together with reductions to accounts receivable, net on the consolidated balance sheets. In addition, the Company compensates its customers for sales order management, data, and distribution services. The Company has determined such services received to date are not distinct from the Company’s sale of products to its customers and, therefore, these payments have been recorded as a reduction of revenue within the condensed consolidated statements of operations.

 

Product Returns:

 

Consistent with industry practice, the Company offers the specialty pharmacies and specialty distributors that are its customers limited product return rights for damaged and expiring product, provided it is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of product revenue, net in the period the related product revenue is recognized, as well as a reduction to accounts receivable, net on the consolidated balance sheets. The Company currently estimates product returns using its own sales information, including its visibility into the inventory remaining in the distribution channel. The Company has an insignificant amount of returns to date and believes that returns of its products will continue to be minimal.

 

Provider Chargebacks and Discounts:

 

Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to its customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. The reserve for chargebacks is established in the same period the related revenue is recognized, resulting in a reduction of product revenue, net and a reduction to accounts receivable, net on the consolidated balance sheets. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by customers, and the Company generally issues credits for such amounts within a few weeks of the customer’s notification to the Company of the resale. Chargebacks consist of credits the Company expects to issue for units that remain in the distribution channel at each reporting period-end that the Company expects will be sold to qualified healthcare providers and chargebacks that customers have claimed, but for which the Company has not yet issued a payment.

 

10

 

Government Rebates:

 

The Company is subject to discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue, net and the establishment of a current liability, which is included in accrued expenses on the consolidated balance sheets. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimates of future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel at the end of each reporting period.

 

Payor Rebates:

 

The Company contracts with certain private payor organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its products. The Company estimates these rebates and records such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue, net and the establishment of a current liability, which is included in accrued expenses on the consolidated balance sheets.

 

Other Incentives:

 

Other incentives the Company offers include voluntary patient assistance programs, such as the co-pay assistance program, which are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability, which is included as a component of accrued expenses on the consolidated balance sheets.

 

License Revenue:

 

The Company also recognizes license revenue under certain of the Company’s sub-license agreements that are within the scope of ASC 606. The terms of these agreements may contain multiple performance obligations, which may include licenses and research and development activities. The Company evaluates these agreements under ASC 606 to determine the distinct performance obligations. Non-refundable, upfront fees that are not contingent on any future performance and require no consequential continuing involvement by the Company, are recognized as revenue when the license term commences and the licensed data, technology or product is delivered. The Company defers recognition of non-refundable upfront license fees if the performance obligations are not satisfied.

 

Prior to recognizing revenue, the Company makes estimates of the transaction price, including variable consideration that is subject to a constraint. Amounts of variable consideration are 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 and when the uncertainty associated with the variable consideration is subsequently resolved.

 

If there are multiple distinct performance obligations, the Company allocates the transaction price to each distinct performance obligation based on its relative standalone selling price. The standalone selling price is generally determined based on the prices charged to customers or using expected cost-plus margin. Revenue is recognized by measuring the progress toward complete satisfaction of the performance obligations using an input measure.

 

Since 2018, the Company has entered into sub-license agreements with certain sub-licensees in territories outside of the United States. These sub-licensing agreements grant certain intellectual property rights and set forth various obligations with respect to actions such as development, pursuit and maintenance of regulatory approvals, commercialization and supply of NERLYNX in the sub-licensees’ respective territories.

 

License fees under the sub-license agreements include one-time upfront payments when each sub-license agreement was executed and potential additional one-time milestone payments due to the Company upon successful completion of certain performance obligations, such as achieving regulatory approvals or sales target thresholds, and potential double-digit royalties on sales of the licensed product, calculated as a percentage of net sales of the licensed product throughout each sub-licensee’s respective territory.

 

As of September 30, 2023 the total potential milestone payments that would be due to the Company upon achievement of all respective performance obligations under the sub-license agreements is approximately $579.8 million. At this time, the Company cannot estimate if or when these milestone-related performance obligations might be achieved.

 

11

 

Royalty Revenue:

 

For sub-license agreements that are within the scope of ASC 606, the Company recognizes revenue when the related sales occur in accordance with the sales-based royalty exception under ASC 606-10-55-65.

 

Royalty revenue consists of consideration earned related to international sales of NERLYNX made by the Company’s sub-licensees in their respective territories. The Company recognizes royalty revenue when the performance obligations have been satisfied. Royalty revenue was $4.5 million and $13.5 million for the three and nine months ended September 30, 2023, respectively, and $2.8 million and $16.0 million for the three and nine months ended September 30, 2022, respectively.

 

Royalty Expenses:

 

Royalties incurred in connection with the Company’s license agreement with Pfizer, as disclosed in Note 12—Commitments and Contingencies, are expensed to cost of sales as revenue from product sales is recognized.

 

Research and Development Expenses:

 

Research and development expenses (“R&D expenses”) are charged to operations as incurred. The major components of R&D expenses include clinical manufacturing costs, clinical trial expenses, consulting and other third-party costs, salaries and employee benefits, stock-based compensation expense, supplies and materials, and allocations of various overhead costs. Clinical trial expenses include, but are not limited to, investigator fees, site costs, comparator drug costs, and clinical research organization (“CRO”) costs. In the normal course of business, the Company contracts with third parties to perform various clinical trial activities in the ongoing development of potential products. The financial terms of these agreements are subject to negotiation and variations from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients and the completion of portions of the clinical trial or similar conditions. The Company’s accruals for clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with numerous clinical trial sites, cooperative groups and CROs. As actual costs become known, the Company adjusts its accruals in that period.

 

In instances where the Company enters into agreements with third parties for clinical trials and other consulting activities, upfront amounts are recorded to prepaid expenses and other in the accompanying consolidated balance sheets and expensed as services are performed or as the underlying goods are delivered. If the Company does not expect the services to be rendered or goods to be delivered, any remaining capitalized amounts for non-refundable upfront payments are charged to expense immediately. Amounts due under such arrangements may be either fixed fee or fee for service, and may include upfront payments, monthly payments and payments upon the completion of milestones or receipt of deliverables.

 

Costs related to the acquisition of technology rights and patents for which development work is still in process are charged to operations as incurred and considered a component of R&D expenses.

 

Acquired In-Process Research and Development Expense:

 

The Company has acquired, and may continue to acquire, the rights to develop new product candidates. Payments to acquire a new product candidate are immediately expensed as acquired in-process research and development provided that the product candidate has not achieved regulatory approval for marketing and, absent obtaining such approval, has no alternative future use.

 

Stock-Based Compensation:

 

Stock Option Awards:

 

ASC Topic 718, Compensation-Stock Compensation (“ASC 718”) requires the fair value of all share-based payments to employees and nonemployees, including grants of stock options, to be recognized in the statement of operations over the requisite service period. Under ASC 718, employee and nonemployee option grants are generally valued at the grant date and those valuations do not change once they have been established. The fair value of each option award is estimated on the grant date using the Black-Scholes Option Pricing Method. As allowed by ASC 718, the Company’s estimate of expected volatility is based on its average volatilities using its past eight years of publicly traded history. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant valuation. Option forfeitures are estimated when the option is granted to reduce the option expense to be recognized over the life of the award. The estimated forfeiture rate considers historical employee turnover rates stratified into employee pools, actual forfeiture experience and other factors. The option expense is adjusted upon the actual forfeiture of a stock option grant and the Company periodically revises the estimated forfeiture rate in subsequent periods if actual forfeitures differ from those estimates. Due to its limited history of stock option exercises, the Company uses the simplified method to determine the expected life of the option grants. Compensation expense related to modified stock options is measured based on the fair value for the awards as of the modification date. Any incremental compensation expense arising from the excess of the fair value of the awards on the modification date compared to the fair value of the awards immediately before the modification date is recognized at the modification date or ratably over the requisite service period, as appropriate.

 

Restricted Stock Units:

 

RSUs are valued on the grant date and the fair value of the RSUs is equal to the market price of the Company’s common stock on the grant date. The RSU expense is recognized over the requisite service period. When the requisite service period begins prior to the grant date (because the service inception date occurs prior to the grant date), the Company is required to begin recognizing compensation cost before there is a measurement date (i.e., the grant date). The service inception date is the beginning of the requisite service period. If the service inception date precedes the grant date, accrual of compensation cost for periods before the grant date shall be based on the fair value of the award at the reporting date. In the period in which the grant date occurs, cumulative compensation cost shall be adjusted to reflect the cumulative effect of measuring compensation cost based on fair value at the grant date rather than the fair value previously used at the service inception date (or any subsequent reporting date). RSU forfeitures are estimated when the RSU is granted to reduce the RSU expense to be recognized over the life of the award. The estimated forfeiture rate considers historical employee turnover rates stratified into employee pools, actual forfeiture experience and other factors. The RSU expense is adjusted upon the actual forfeiture of an RSU grant and the Company periodically revises the estimated forfeiture rate in subsequent periods if actual forfeitures differ from those estimates. Compensation expense related to modified restricted stock units is measured based on the fair value for the awards as of the modification date. Any incremental compensation expense arising from the excess of the fair value of the awards on the modification date compared to the fair value of the awards immediately before the modification date is recognized at the modification date or ratably over the requisite service period, as appropriate.

 

12

 

Warrants:

 

Warrants (see Note 10—Stockholders' Equity) granted to employees and nonemployees are valued at the fair value of the instrument on the grant date and are recognized in the condensed statement of operations over the requisite service period. When the requisite service period precedes the grant date and a market condition exists in the warrant, the Company values the warrant using the Monte Carlo Simulation Method. When the terms of the warrant become fixed, the Company values the warrant using the Black-Scholes Option Pricing Method. As allowed by ASC 718, the Company’s estimate of expected volatility is based on its average volatilities using its publicly traded history. The risk-free rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at the time of grant valuation. In determining the value of the warrant until the terms are fixed, the Company factors in the probability of the market condition occurring and several possible scenarios. When the requisite service period precedes the grant date and is deemed to be complete, the Company records the fair value of the warrant at the time of issuance as an equity stock-based compensation transaction. The grant date is determined when all pertinent information, such as exercise price and quantity are known. Compensation expense related to warrant modifications is measured based on the fair value of the warrant as of the modification date. Any incremental compensation expense arising from the excess of the fair value of the warrant on the modification date compared to the fair value of the warrant immediately before the modification date is recognized at the modification date or ratably over the requisite service period, as appropriate.

 

Income Taxes:

 

The Company follows ASC Topic 740, Income Taxes (“ASC 740”), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the consolidated financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

The standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of September 30, 2023 the Company’s uncertain tax position reserves include a reserve for its research and development credits.

 

Legal Contingencies and Expense:

 

For legal contingencies, the Company accrues a liability for an estimated loss if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated. Legal fees and expenses are expensed as incurred based on invoices or estimates provided by legal counsel. The Company periodically evaluates available information, both internal and external, relative to such contingencies and adjusts the accrual as necessary. The Company determines whether a contingency should be disclosed by assessing whether a material loss is deemed reasonably possible. In determining whether a loss should be accrued, the Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss (see Note 12—Commitments and Contingencies).

 

Financial Instruments:

 

The carrying value of financial instruments, such as cash equivalents, accounts receivable and accounts payable, approximate their fair value because of their short-term nature. The carrying value of long-term debt approximates its fair value as the principal amounts outstanding are subject to variable interest rates that are based on market rates, which are regularly reset.

 

Cash and Cash Equivalents:

 

The Company classifies all highly liquid instruments with an original maturity of three months or less as cash equivalents.

 

Restricted Cash:

 

Restricted cash represents cash held at financial institutions that is pledged as collateral for stand-by letters of credit for lease commitments. The lease-related letters of credit will lapse at the end of the respective lease terms through 2026. At each of periods ending  September 30, 2023 and December 31, 2022, the Company had restricted cash in the amount of approximately $2.6 million. 

 

13

 

Investment Securities:

 

The Company classifies all investment securities (short-term and long-term) as available-for-sale, as the sale of such securities may be required prior to maturity to implement management’s strategies. These securities are carried at fair value, with the unrealized gains and losses reported as a component of accumulated other comprehensive income in stockholders’ equity until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis. In accordance with ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, credit losses on available-for-sale securities are reported using an expected loss model and recorded to an allowance. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the straight-line method. Interest income is recognized when earned.

 

Assets Measured at Fair Value on a Recurring Basis:

 

ASC Topic 820, Fair Value Measurement (“ASC 820”) provides a single definition of fair value and a common framework for measuring fair value as well as disclosure requirements for fair value measurements used in financial statements. Under ASC 820, fair value is determined based upon the exit price that would be received by a company to sell an asset or paid by a company to transfer a liability in an orderly transaction between market participants, exclusive of any transaction costs. Fair value measurements are determined by either the principal market or the most advantageous market. The principal market is the market with the greatest level of activity and volume for the asset or liability. Absent a principal market to measure fair value, the Company uses the most advantageous market, which is the market from which the Company would receive the highest selling price for the asset or pay the lowest price to settle the liability, after considering transaction costs. However, when using the most advantageous market, transaction costs are only considered to determine which market is the most advantageous and these costs are then excluded when applying a fair value measurement. ASC 820 creates a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive fair values. The basis for fair value measurements for each level within the hierarchy is described below, with Level 1 having the highest priority and Level 3 having the lowest.

 

 

Level 1:

Quoted prices in active markets for identical assets or liabilities.

 

 

Level 2:

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

 

 

Level 3:

Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

 

Following are the major categories of assets measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022, using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3) (in thousands):

 

September 30, 2023

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Cash equivalents

 $35,304  $9,734  $  $45,038 

U.S. government

  999         999 

Commercial paper

     2,231      2,231 

Totals

 $36,303  $11,965  $  $48,268 

 

December 31, 2022

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Cash equivalents

 $41,673  $  $  $41,673 

Commercial paper

     4,873      4,873 

Totals

 $41,673  $4,873  $  $46,546 

 

The Company’s investments in commercial paper, corporate bonds and U.S. government securities are exposed to price fluctuations. The fair value measurements for commercial paper, corporate bonds and U.S. government securities are based upon the quoted prices of similar items in active markets multiplied by the number of securities owned.

 

The following tables summarize the Company’s cash equivalents and short-term investments (in thousands):

 

 

Maturity

 

Amortized

  

Unrealized

  

Estimated

 

September 30, 2023

(in years)

 

cost

  

Gains

  

Losses

  

fair value

 

Cash equivalents

 $45,041  $  $(3) $45,038 

U.S. government

Less than 1

  999         999 

Commercial paper

Less than 1

  2,232      (1)  2,231 

Totals

 $48,272  $  $(4) $48,268 

 

 

Maturity

 

Amortized

  

Unrealized

  

Estimated

 

December 31, 2022

(in years)

 

cost

  

Gains

  

Losses

  

fair value

 

Cash equivalents

 $41,673  $  $  $41,673 

Commercial paper

Less than 1

  4,873         4,873 

Totals

 $46,546  $  $  $46,546 

 

Concentration of Risk:

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, principally consist of cash and cash equivalents, marketable securities, and accounts receivable, net. The Company’s cash and cash equivalents and restricted cash in excess of the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insured limits at September 30, 2023 were approximately $83.2 million. The Company does not believe it is exposed to any significant credit risk due to the quality nature of the financial instruments in which the money is held. Pursuant to the Company’s internal investment policy, investments must be rated A-1/P-1 or better by Standard and Poor’s Rating Service and Moody’s Investors Service at the time of purchase.

 

14

 

The Company sells its products in the United States primarily through specialty pharmacies and specialty distributors. Therefore, wholesale distributors and large pharmacy chains account for a large portion of its accounts receivables, net and product revenues, net. The creditworthiness of its customers is continuously monitored, and the Company has internal policies regarding customer credit limits. The Company estimates an allowance for doubtful accounts primarily based on the creditworthiness of its customers, historical payment patterns, aging of receivable balances and general economic conditions. 

 

The Company’s success depends on its ability to successfully commercialize NERLYNX. The Company currently has a single product and limited commercial sales experience, which makes it difficult to evaluate its current business, predict its future prospects and forecast financial performance and growth. The Company has invested a significant portion of its efforts and financial resources in the development and commercialization of the lead product, NERLYNX, and expects NERLYNX to constitute the vast majority of product revenue for the foreseeable future.

 

The Company relies exclusively on third parties to formulate and manufacture NERLYNX and its drug candidates. The commercialization of NERLYNX and any other drug candidates, if approved, could be stopped, delayed or made less profitable if those third parties fail to provide sufficient quantities of product or fail to do so at acceptable quality levels or prices. The Company has no experience in drug formulation or manufacturing and does not intend to establish its own manufacturing facilities. While the drug candidates were being developed by Pfizer, both the drug substance and drug product are manufactured by third-party contractors. The Company is using the same third-party contractors to manufacture, supply, store and distribute drug supplies for clinical trials and the commercialization of NERLYNX and intends to use third party contractors to manufacture, supply, store and distribute drug supplies for its clinical trials of alisertib. If the Company is unable to continue its relationships with one or more of these third-party contractors, it could experience delays in the development or commercialization efforts as it locates and qualifies new manufacturers.

 

Inventory:

 

The Company values its inventories at the lower of cost and estimated net realizable value. The Company determines the cost of its inventories, which includes amounts related to materials and manufacturing overhead, on a first-in, first-out basis. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and it writes down any excess and obsolete inventories to their estimated realizable value in the period in which the impairment is first identified. Such impairment charges, should they occur, are recorded within cost of sales in the condensed consolidated statements of operations. The determination of whether inventory costs will be realizable requires estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required.

 

The Company capitalizes inventory costs associated with the Company’s products after regulatory approval, if any, when, based on management’s judgment, future commercialization is considered probable, and the future economic benefit is expected to be realized. Inventory that can be used in either the production of clinical or commercial product is recorded as R&D expenses when selected for use in a clinical trial. Starter kits, provided to patients prior to insurance approval, are expensed by the Company to selling, general and administrative expense as incurred.

 

As of September 30, 2023 and December 31, 2022, the Company’s inventory balance consisted primarily of raw materials and work-in-process purchased subsequent to FDA approval of NERLYNX.

 

  

September 30, 2023

  

December 31, 2022

 

Raw materials

 $1,269  $1,679 

Work-in-process (materials, labor and overhead)

  3,432   2,661 

Finished goods (materials, labor and overhead)

  978   186 

Total inventories

 $5,679  $4,526 

 

Property and Equipment, Net:

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is generally three years for computer hardware and software, three years for phone equipment, and seven years for furniture and fixtures. Leasehold improvements are amortized using the straight-line method over the lesser of the useful life or the lease term. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is credited or charged to operations. Repair and maintenance costs are expensed as incurred.

 

The Company reviews its long-lived assets used in operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, as required by ASC Topic 360, Property, Plant, and Equipment (“ASC 360”). The Company performs a recoverability test by comparing the sum of the estimated undiscounted cash flows over the life of the asset to its carrying value on the consolidated balance sheet. If the undiscounted cash flows used in the recoverability test are less than the carrying value, the Company would then determine the fair value of the long-lived asset and recognize an impairment loss for the amount in excess of the carrying value.

 

Leases:

 

Right-of-use assets (“ROU assets”) represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of fixed lease payments over the lease term. ROU assets are evaluated for impairment using the long-lived assets impairment guidance, as required by ASC 360. A significant indication of impairment of an ROU asset would include a change in the extent or manner in which the asset is being used. The Company must make assumptions which underlie the most significant and subjective estimates in determining whether any impairment exists. Those estimates, and the underlying assumptions, include estimates of future cash flow utilizing market lease rates and determination of fair value. If an ROU asset related to an operating lease is impaired, the carrying value of the ROU asset post-impairment should be amortized on a straight-line basis through the earlier of the end of the useful life of the ROU asset or the end of the lease term. Post impairment, a lessee must calculate the amortization of the ROU asset and interest expense on the lease liability separately, although the sum of the two continues to be presented as a single lease cost. If a lease is planned to be abandoned with no intention of subleasing, the ROU asset should be assessed for impairment.

 

15

 

Leases will be classified as financing or operating, which will drive the expense recognition pattern. The Company elects to exclude short-term leases if and when the Company has them. For additional information, see Note 5—Leases.

 

The Company leases office space and copy machines, all of which are operating leases. Most leases include the option to renew, and the exercise of the renewal options is at the Company’s sole discretion. Options to extend or terminate a lease are considered in the lease term to the extent that the option is reasonably certain of exercise. The leases do not include options to purchase the leased property. The depreciable life of assets and leasehold improvements is limited by the expected lease term. Covenants imposed by the leases include letters of credit required to be obtained by the lessee.

 

The incremental borrowing rate (“IBR”) represents the rate of interest the Company would expect to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. When determinable, the Company uses the rate implicit in the lease to determine the present value of lease payments. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company’s average IBR for existing leases as of September 30, 2023 is 10.9%.

 

License Fees and Intangible Assets:

 

The Company expenses amounts paid to acquire licenses associated with products under development when the ultimate recoverability of the amounts paid is uncertain and the technology has no alternative future use when acquired. Acquisitions of technology licenses are charged to expense or capitalized based upon the asset achieving technological feasibility in accordance with management’s assessment regarding the ultimate recoverability of the amounts paid and the potential for alternative future use. The Company has determined that technological feasibility for its product candidates is reached when the requisite regulatory approvals are obtained to make the product available for sale. The Company capitalizes technology licenses upon reaching technological feasibility.

 

The Company maintains definite-lived intangible assets related to the license agreement with Pfizer. These assets are amortized over their remaining useful lives, which are estimated based on the shorter of the remaining patent life or the estimated useful life of the underlying product. Intangible assets are amortized using the economic consumption method if anticipated future revenues can be reasonably estimated. The straight-line method is used when future revenues cannot be reasonably estimated. Amortization costs are recorded as part of cost of sales.

 

In September 2022, the Company entered an exclusive license agreement with Takeda to license the worldwide research and development and commercial rights to alisertib, a selective, small-molecule, orally administered inhibitor of aurora kinase A. The up-front payment of $7.0 million was expensed as acquired in-process research and development as the product candidate has not achieved regulatory approval for marketing and has no alternative future use.

 

The Company assesses its intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist. Events that could result in an impairment, or trigger an interim impairment assessment, include the receipt of additional clinical or nonclinical data regarding one of the Company’s drug candidates or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug. If impairment indicators are present or changes in circumstance suggest that impairment may exist, the Company performs a recoverability test by comparing the sum of the estimated undiscounted cash flows of each intangible asset to its carrying value on the consolidated balance sheet. If the undiscounted cash flows used in the recoverability test are less than the carrying value, the Company would determine the fair value of the intangible asset and recognize an impairment loss if the carrying value of the intangible asset exceeds its fair value. In connection with the FDA approval of NERLYNX in July 2017, the Company triggered a one-time milestone payment pursuant to its license agreement with Pfizer. In June 2020, the Company entered into a letter agreement with Pfizer relating to the method of payment associated with a milestone payment under the Company’s license agreement with Pfizer (see Note 12—Commitments and Contingencies). In addition, the Company reached a commercial milestone by achieving aggregate worldwide net sales of $250.0 million in calendar year 2022, resulting in a payment to Pfizer of $12.5 million during the three months ended March 31, 2023. The Company capitalized the milestones as intangible assets and is amortizing the assets to cost of sales on a straight-line basis over the estimated useful life of the licensed patent through 2030. The Company recorded amortization expense related to its intangible assets of approximately $2.4 million and $7.3 million and $2.0 million and $6.0 million for the three and nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023 estimated future amortization expense related to the Company’s intangible assets is approximately $2.4 million for the remainder of 2023 and $9.7 million for each year starting 2024 through 2029, and $2.4 million for 2030.

 

Recently Issued Accounting Standards:

 

In November 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021-10, Government Assistance (Topic 832) (“ASU-2021-10”), which enhances disclosure of transactions with governments that are accounted for by applying a grant or contribution model. ASU 2021-10 requires entities to provide information about the nature of the transactions, the related accounting policies used to account for the transactions, the effect of the transactions on an entity's financial statements, and significant terms and conditions associated with the transactions. ASU 2021-10 must be adopted for fiscal years beginning after December 15, 2021. Early adoption is permitted. We adopted this guidance during 2022 and recognized approximately $3.8 million in payroll tax credits under the Coronavirus Aid Relief Economic Security Act (the “CARES Act”). The entire amount of $3.8 million had been received by the Company as of March 31, 2023.

 

16

 
 

Note 3Accounts Receivable, Net:

 

Accounts receivable, net consisted of the following (in thousands):

 

   

September 30, 2023

   

December 31, 2022

 

Trade accounts receivable

  $ 23,813     $ 27,600  

Royalty revenue receivable

    5,675       12,750  

Total accounts receivable

  $ 29,488     $ 40,350  
                 

Allowance for credit losses

    (514 )      

Total accounts receivable, net

  $ 28,974     $ 40,350  

 

Trade accounts receivable consist entirely of amounts owed from the Company’s customers related to product sales. Royalty revenue receivable represents amounts owed related to royalty revenue recognized based on the Company’s sub-licensees’ sales in their respective territories in the periods ended September 30, 2023 and December 31, 2022.

 

For all accounts receivable, the Company recognizes credit losses based on lifetime expected losses to selling, general and administrative expense in the condensed consolidated statements of operations. In determining estimated credit losses, the Company evaluates its historical loss rates, current economic conditions and reasonable and supportable forecasts of future economic conditions. 

 

 

Note 4Prepaid Expenses and Other:

 

Prepaid expenses and other consisted of the following (in thousands):

 

   

September 30, 2023

   

December 31, 2022

 

Current:

               

CRO services

  $ 6     $ 431  

Other clinical development

    826       1,408  

Insurance

    408       2,318  

Professional fees

    1,026       300  

Other

    1,418       1,445  
      3,684       5,902  

Long-term:

               

Other clinical development

    168        

Other

    2,740       2,069  
      2,908       2,069  

Totals

  $ 6,592     $ 7,971  

 

Other current prepaid amounts consist primarily of deposits, subscriptions/software, and sponsorships. Other long-term prepaid amounts consist primarily of deposits, capitalized sublease commission fees paid, and a sublease tenant improvement allowance, net of amortization.

 

Note 5Leases:

 

In December 2011, the Company entered into a non-cancelable operating lease for office space in Los Angeles, California, which was subsequently amended in November 2012, December 2013, March 2014, July 2015, and December 2017. The initial term of the lease was for seven years and commenced on December 10, 2011. As amended, the Company rents approximately 65,656 square feet. The term of the lease runs until March 2026 and rent amounts payable by the Company increase approximately 3% per year. Concurrent with the execution of the lease, the Company provided the landlord an automatically renewable stand-by letter of credit in the amount of $1.5 million. The stand-by letter of credit is collateralized by a high-yield savings account, which is classified as restricted cash, long-term on the accompanying consolidated balance sheets.

 

In June 2012, the Company entered into a long-term lease agreement for office space in South San Francisco, California, which was subsequently amended in May 2014 and July 2015. As amended, the Company rents approximately 29,470 square feet. The term of this lease runs until March 2026, with the option to extend for an additional five-year term, and rents payable by the Company increase approximately 3% per year. The Company provided the landlord an automatically renewable stand-by letter of credit in the amount of $1.1 million. The stand-by letter of credit is collateralized by a high-yield savings account, which is classified as restricted cash, long-term on the accompanying consolidated balance sheets.

 

17

 

Total rent expense for the three and nine months ended September 30, 2023 was approximately $1.2 million and $3.7 million, respectively. Total rent expense for the three and nine months ended September 30, 2022 was approximately $1.2 million and $3.7 million, respectively. For purposes of determining straight-line rent expense, the lease term is calculated from the date the Company first takes possession of the facility, including any periods of free rent and any renewal option periods that the Company is reasonably certain of exercising. The Company’s office leases generally have contractually specified minimum rent and annual rent increases that are included in the measurement of the ROU asset and related lease liability. Additionally, under these lease arrangements, the Company may be required to pay directly, or reimburse the lessors, for real estate taxes, insurance, utilities, maintenance and other operating costs. Such amounts are generally variable and therefore not included in the measurement of the ROU asset and related lease liability but are instead recognized as variable lease expense in selling, general and administrative costs in the condensed consolidated statements of operations when they are incurred. 

 

Supplemental cash flow information related to leases for the nine months ended September 30, 2023:

    

Operating cash flows used for operating leases (in thousands)

 $4,546 

Right-of-use assets obtained in exchange for new operating lease liabilities

   

Weighted average remaining lease term (in years)

  2.5 

Weighted average discount rate

  10.9%

 

Future minimum lease payments as of September 30, 2023 were as follows (in thousands):

 

  

Amount

 

2023 (remaining)

 $1,419 

2024

  5,805 

2025

  5,983 

2026

  1,509 

Total minimum lease payments

 $14,716 

Less: imputed interest

  (1,792)

Total lease liabilities

 $12,924 

 

In February 2019, the Company entered into a long-term sublease agreement for 12,429 square feet of the office space in Los Angeles, California. The term of the lease runs until March 2026 and rent amounts payable to the Company increase approximately 3% per year. The Company recorded operating sublease income of $0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively, in other income (expenses) in the condensed consolidated statements of operations.

 

In September 2023, the Company entered into a long-term sublease agreement for 13,916 square feet of the office space in Los Angeles, California, which commences in November 2023. The term of the lease runs until March 2026 and the rent amounts payable to the Company increase approximately 3% per year. The Company will begin to record sublease income in other income (expenses) in the condensed consolidated statements of operations beginning November 2023. As a result of the long-term sublease, the Company recorded an impairment expense on the right-of-use asset of approximately $0.6 million.

 

The future minimum lease payments to be received as of September 30, 2023, were as follows (in thousands):

 

  

Amount

 

2023 (remaining)

 $209 

2024

  1,013 

2025

  1,044 

2026

  266 

Total

 $2,533 

 

 

Note 6Property and Equipment, Net:

 

Property and equipment, net consisted of the following (in thousands):

 

  

September 30, 2023

  

December 31, 2022

 

Leasehold improvements

 $3,779  $3,779 

Computer equipment

  2,228   2,132 

Telephone equipment

  302   302 

Furniture and fixtures

  2,359   2,359 

Total property and equipment

  8,668   8,572 

Less: accumulated depreciation

  (7,761)  (7,426)

Property and equipment, net

 $907  $1,146 

 

For the three and nine months ended September 30, 2023, the Company incurred depreciation expense of $0.1 million and $0.3 million, respectively. For the three and nine months ended September 30, 2022, the Company incurred depreciation expense of $0.2 million and $0.5 million, respectively.

 

18

 

Note 7Intangible Assets, Net:

 

Intangible assets, net consisted of the following (in thousands):

 

  

September 30, 2023

  

December 31, 2022

 

Acquired and in-licensed rights

 $102,500  $102,500 

Less: accumulated amortization

  (39,195)  (31,890)

Total intangible assets, net

 $63,305  $70,610 

 

For the three and nine months ended September 30, 2023, the Company incurred amortization expense of $2.4 million and $7.3 million, respectively. The estimated remaining useful life of the intangible assets as of September 30, 2023 is 6.5 years.

 

Note 8Accrued Expenses:

 

Accrued expenses consisted of the following (in thousands):

 

  

September 30, 2023

  

December 31, 2022

 

Current:

        

Accrued legal verdict expense

 $  $8,000 

Accrued royalties

  9,575   13,585 

Accrued CRO services

  893   1,796 

Accrued variable consideration

  9,034   12,304 

Accrued bonus

  5,161   7,667 

Accrued compensation

  4,227   4,301 

Accrued other clinical development

  1,247   1,233 

Accrued professional fees

  860   1,649 

Accrued legal fees

  1,848   1,731 

Accrued manufacturing costs

  664   553 

Other

  264   215 
   33,773   53,034 

Long-term:

        

Accrued legal verdict expense

  7,618   7,354 

Accrued other

  121   37 
   7,739   7,391 

Totals

 $41,512  $60,425 

 

Included in accrued long-term legal verdict expense is approximately $7.6 million ($8.0 million net of imputed interest) as of September 30, 2023 that is related to Eshelman v. Puma Biotechnology, Inc., et al. The Company announced on November 10, 2022, that the parties entered into a settlement agreement. Pursuant to the settlement agreement, Dr. Eshelman filed a Stipulation of Voluntary Dismissal with Prejudice on November 7, 2022, and the Company agreed to pay Dr. Eshelman $16.0 million. The settlement amount will be paid in two separate payments, the first payment of $8.0 million was paid in January 2023, and the final payment of $8.0 million will be paid on or before November 1, 2024.

 

Accrued variable consideration represents estimates of adjustments to product revenue, net for which reserves are established. Accrued royalties represent royalties incurred in connection with the Company’s license agreement with Pfizer. Accrued CRO services, accrued other clinical development expenses, and accrued legal fees represent the Company’s estimates of such costs and are recognized as incurred. Accrued compensation includes commissions, vacation and restructuring costs.

 

Other current accrued expenses consist primarily of marketing expenses, business license fees, and recruiting placement fees. 

 

Note 9Debt:

 

Long term debt consisted of the following (in thousands):

 

  

September 30, 2023

 

Maturity Date

Total debt, inclusive of $2.0 million exit payment

 $102,000 

July 23, 2026

Less: debt issuance costs and discounts

  (2,702) 

Less: current portion

  (22,664) 

Total long-term debt, net

 $76,634  

 

19

 

Athyrium Note Purchase Agreement:

 

The Company issued senior notes for an aggregate principal amount of $100.0 million pursuant to a note purchase agreement dated July 23, 2021, by the Company, and its subsidiaries, and Athyrium Opportunities IV Co-Invest 1 LP (“Athyrium”), as Administrative Agent, and certain other investor parties (the “Note Purchase Agreement”), with an initial maturity date of July 23, 2026 (the “Athyrium Notes”). The Athyrium Notes were issued for face amount of $100.0 million net of an original issue discount of $1.5 million. The Athyrium Notes also require a 2.0% exit payment to be made on each payment of principal. The borrowings under the Athyrium Notes, together with cash on hand, were used to repay the Company’s outstanding indebtedness, including the applicable exit and prepayment fees owed to lenders under its Oxford Credit Facility. The Company can borrow up to an additional $25.0 million under the Note Purchase Agreement for general corporate purposes and to further support commercial initiatives. The Athyrium Notes are secured by substantially all of the Company’s assets. The Company incurred $1.9 million of deferred financing costs with the borrowing.

 

Prior to October 1, 2022, the Athyrium Notes bore interest at an annual rate equal to the sum of (i) 8.0% and (ii) three-month London Interbank Offering Rate (“LIBOR”) rate where the three-month LIBOR rate could not be less than 1.5% or greater than 3.5%. (or a comparable or successor rate that gives due consideration to the then prevailing rate used by commercial banks in the United States, which rate is reasonably determined by Athyrium). Interest was payable quarterly on the last business day of March, June, September and December each year. Beginning June 30, 2024, principal payments are required to be made quarterly at 11.11% of the original face amount with the remaining balance paid at maturity. Each principal payment also included a 2.0% exit payment. 

 

On September 16, 2022, the Company entered into a third amendment to the Note Purchase Agreement in which the Secured Overnight Financing Rate (“SOFR”) is to be used in place of the LIBOR rate in calculating interest on the Athyrium Notes, beginning on October 1, 2022. The Athyrium Notes bear interest at an annual rate equal to the sum of (a) eight percent (8.00%) plus (b) adjusted three-month term SOFR for such interest period. The adjusted three-month term SOFR means, with respect to any interest period, the lesser of (a) the sum of (i) three-month term SOFR and (ii) 0.26161% (26.161 basis points) and (b) three and one-half of one percent (3.50%) per annum. The interest rate applicable to the Athyrium Notes during the period from September 16, 2022, until the expiration of the interest period ending on September 30, 2022, was equal to the sum of (a) eight percent (8.00%) plus (b) adjusted three-month LIBOR. The modification of the Note Purchase Agreement did not meet the requirements of a debt extinguishment under ASC 470-50Debt Modifications and Exchanges and no gain or loss was recognized. The Company performed a quantitative analysis and determined that the terms of the new debt and original debt instrument were not substantially different. Accordingly, the September 16, 2022 amendment was accounted for as a debt modification.

 

Following the effectiveness of the Third Amendment, the Athyrium Notes bear interest at an annual rate equal to the sum of (a) eight percent (8.00%) plus (b) the lesser of (i) the sum of (x) three-month term SOFR for an interest period of three months plus (y) 0.26161% (26.161 basis points) and (ii) three and one-half of one percent (3.50%) per annum. Interest is payable quarterly on the last business day of March, June, September and December each year. Beginning June 30, 2024, principal payments are required to be made quarterly at 11.11% of the original face amount with the remaining balance paid at maturity. Each principal payment will also include a 2.0% exit payment. As of September 30, 2023, the effective interest rate for the loan was 12.99%.

 

At the Company’s option, the Company may prepay the outstanding principal balance of the notes in whole or in part, subject to a prepayment fee of 2.0% of the amount prepaid if the prepayment occurs on or prior to the second anniversary of the issuance date of such notes, plus the present value of remaining interest that would have accrued through and including the second anniversary date, and 2.0% of the amount prepaid if the prepayment occurs after the second anniversary but on or prior to the third anniversary of the issuance date of such notes.

 

The Athyrium Notes include affirmative and negative covenants applicable to the Company. The affirmative covenants include, among others, covenants requiring the Company to maintain its legal existence and governmental approvals, deliver certain financial reports, maintain insurance coverage, and satisfy certain requirements regarding deposit accounts. The negative covenants include, among others, restrictions on the Company’s transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets and suffering a change in control, in each case subject to certain exceptions. The Company is also required to maintain minimum cash balances and achieve certain minimum product revenue targets, measured as of the last day of each fiscal quarter on a trailing year-to-date basis.

 

As of  September 30, 2023, the principal balance outstanding under the Athyrium Notes was $100.0 million and exit fees of $2.0 million represent the balance of the Company’s long-term debt.

 

The future minimum principal and exit payments under the Athyrium Notes as of September 30, 2023 are as follows (in thousands):

 

  

Amount

 

2023 (remaining)

 $ 

2024

  33,997 

2025

  45,329 

2026

  22,674 

Total

 $102,000 

 

Debt Issuance Costs and Discounts:

 

Debt issuance costs and discounts consist of the following (in thousands):

 

  

September 30, 2023

  

December 31, 2022

 

Debt issuance costs and discounts (Athyrium Notes)

 $5,410  $5,410 

Less: accumulated amortization

  (2,708)  (1,717)

Included in long-term debt

 $2,702  $3,693 

 

Debt issuance costs and discounts are financing costs related to the Company’s outstanding debt. Amortization of debt issuance costs is expensed using the effective interest method and is included in interest expense in the condensed consolidated statement of operations. For both the three and nine months ended September 30, 2023 and 2022, the Company recorded approximately $0.2 million and $0.6 million of interest expense, respectively, related to the amortization of debt issuance costs in the condensed consolidated statements of operations.

 

20

 
 

Note 10Stockholders Equity:

 

Common Stock:

 

The Company issued no shares of common stock upon exercise of stock options during the nine months ended September 30, 2023 and 2022, respectively. The Company issued 1,197,130 and 849,079 shares of common stock upon vesting of RSUs during the nine months ended September 30, 2023 and 2022, respectively.

 

On March 8, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Alan H. Auerbach, our President, Chief Executive Officer and Chairman of the Board, and Athyrium Opportunities IV Co-Invest 2 LP, an affiliate of the administrative agent and a purchaser under the Company’s existing note purchase agreement (together with Mr. Auerbach, the “Purchasers”). Pursuant to the Purchase Agreement, the Company agreed to sell an aggregate of 3,584,228 shares of our common stock, par value $0.0001 per share, to the Purchasers for aggregate gross proceeds of approximately $10.0 million before deducting any offering expenses (the “Private Placement”). The purchase price for each share was $2.79, which was equal to the closing price of the Company’s common stock on NASDAQ on the date of the Purchase Agreement. Each Purchaser agreed to purchase approximately $5.0 million of the shares, which resulted in Mr. Auerbach purchasing 1,792,114 shares of common stock. The Private Placement closed on March 10, 2022. In addition, Mr. Auerbach purchased an additional 568,181 shares of the Company's common stock on December 9, 2022 at a purchase price of $4.40 per share. The purchase price was equal to the closing price of the Company’s common stock on NASDAQ on the date of each purchase.

 

Authorized Shares:

 

The Company has 100,000,000 shares of stock authorized for issuance, all of which are common stock, par value $0.0001 per share.

 

Warrants:

 

In October 2011, the Company issued an anti-dilutive warrant to Alan H. Auerbach, the Company’s founder and Chief Executive Officer. The warrant was issued to provide Mr. Auerbach with the right to maintain ownership of at least 20% of the Company’s common stock in the event that the Company raised capital through the sale of its securities in the future.

 

In connection with the closing of a public offering in October 2012, the exercise price and number of shares underlying the warrant issued to Mr. Auerbach were established and, accordingly, the final value of the warrant became fixed. Pursuant to the terms of the warrant, as amended in June 2021, Mr. Auerbach may exercise the warrant to acquire 2,116,250 shares of the Company’s common stock at $16 per share until October 4, 2026.

 

Stock Options and Restricted Stock Units:

 

The Company’s 2011 Plan, as amended, was adopted by the Company’s Board of Directors on September 15, 2011. Pursuant to the 2011 Plan, the Company may grant incentive stock options and nonqualified stock options, as well as other forms of equity-based compensation. Incentive stock options may be granted only to employees, while consultants, employees, officers, and directors are eligible for the grant of nonqualified options under the 2011 Plan. The maximum term of stock options granted under the 2011 Plan is 10 years and the awards generally vest over a three-year period. The exercise price of incentive stock options granted under the 2011 Plan must be at least equal to the fair value of such shares on the date of grant. As of September 30, 2023 a total of 14,545,860 shares of the Company’s common stock have been reserved for issuance under the 2011 Plan.

 

All of the options awarded by the Company have been “plain vanilla options” as determined by the SEC Staff Accounting Bulletin 107 - Share Based Payment. As of September 30, 20235,587,936 shares of the Company’s common stock are issuable upon the exercise of outstanding stock options and vesting of RSUs granted under the 2011 Plan and 1,787,903 shares of the Company’s common stock are available for future issuance under the 2011 Plan. The fair value of options granted to employees and nonemployees was estimated using the Black-Scholes Option Pricing Method (see Note 2—Significant Accounting Policies) with the following weighted-average assumptions used during the nine months ended  September 30:

 

  

2023

  

2022

 

Dividend yield

  0.0%  0.0%

Expected volatility

  85.5%  86.3%

Risk-free interest rate

  3.9%  1.9%

Expected life in years

  5.63   5.60 

 

The Company’s 2017 Plan, as amended, was adopted by the Company’s Board of Directors on April 27, 2017. Pursuant to the 2017 Plan, the Company may grant stock options and RSUs, as well as other forms of equity-based compensation, to employees as an inducement to join the Company. The maximum term of stock options granted under the 2017 Plan is 10 years and the awards generally vest over a three-year period. The exercise price of stock options granted under the 2017 Plan must be at least equal to the fair market value of such shares on the date of grant. On July 15, 2021, the Board of Directors adopted an amendment to the 2017 Plan to increase the number of shares of the Company's common stock reserved for issuance thereunder by 1,000,000 shares. As of September 30, 2023 a total of 3,000,000 shares of the Company’s common stock have been reserved for issuance under the 2017 Plan. As of September 30, 2023, a total of 871,793 shares of the Company’s common stock are issuable upon the exercise of outstanding stock options and vesting of RSUs granted under the 2017 Plan and 1,146,332 shares of the Company’s common stock are available for future issuance under the 2017 Plan.

 

21

 

Stock-based compensation expense was as follows (in thousands):

 

  

For the Three Months Ended

  

For the Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2023

  

2022

  

2023

  

2022

 
                 

Stock-based compensation:

                

Options:

                

Selling, general, and administrative

 $566  $753  $1,947  $2,233 

Research and development

  153   139   457   414 

Restricted stock units:

                

Selling, general, and administrative

  1,228   1,185   3,477   4,015 

Research and development

  598   753   1,934   2,536 

Total stock-based compensation expense

 $2,545  $2,830  $7,815  $9,198 

 

Activity with respect to options granted under the 2011 Plan and 2017 Plan is summarized as follows:

 

Stock Option Roll Forward:

 

  

Shares

  

Weighted Average Exercise Price

  

Weighted Average Remaining Contractual Term (years)

  

Aggregate Intrinsic Value (in thousands)

 

Outstanding at December 31, 2022

  4,212,481  $59.59   5.1  $1,046 

Granted

  581,614  $4.39   9.4