Quarterly Report (10-q)

Date : 05/10/2019 @ 9:17PM
Source : Edgar (US Regulatory)
Stock : Stemline Therapeutics, Inc. (STML)
Quote : 14.99  0.82 (5.79%) @ 9:01PM

Quarterly Report (10-q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2019

 

OR

 

o          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 001-35619

 

STEMLINE THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

45-0522567

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer Identification No.)

 

750 Lexington Avenue

Eleventh Floor

New York, New York 10022

(Address including zip code of principal executive offices)

 

(646) 502-2311

(Registrant’s telephone number, including area code)

 

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 x No o

 

Indicate by check mark whether the registrant has submitted 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 x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

o

 

 

Accelerated filer

x

Non-accelerated filer

o

 

 

Smaller reporting company

x

 

 

 

 

Emerging growth company

o

 

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.  o

 

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

 

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

 

Title of each class:

 

Trading Symbol(s)

 

Name of each exchange on which registered:

Common Stock

 

STML

 

Nasdaq Capital Market

 

There were 43,684,777 shares of the registrant’s common stock, $0.0001 par value, outstanding as of May 9, 2019.

 

 

 


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This Quarterly Report on Form 10-Q contains trademarks and trade names of Stemline Therapeutics, Inc., including our name and logo. All other trademarks, service marks, or trade names referenced in this Quarterly Report on Form 10-Q are the property of their respective owners.

 

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q (“Form 10-Q”) includes statements that are, or may be deemed, “forward-looking statements.” In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately” or, in each case, their negative or other variations thereon or comparable terminology, although not all forward-looking statements contain these words. They appear in a number of places throughout this Form 10-Q and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our history of net operating losses and uncertainty regarding our ability to obtain capital and achieve profitability, our ability to develop and commercialize our product candidates, our ability to advance our development programs, enroll our trials, and achieve clinical endpoints, our ability to use or expand our technology to build a pipeline of product candidates, our ability to obtain and maintain regulatory approval of our product candidates and comply with ongoing regulatory requirements, our ability to successfully operate in a competitive industry and gain market acceptance by physician, provider, patient, and payor communities, our reliance on third parties, unstable economic or market conditions, and our ability to obtain and adequately protect intellectual property rights for our product candidates.

 

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, and healthcare, regulatory and scientific developments and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Form 10-Q. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, they may not be predictive of results or developments in future periods.

 

Some of the factors that we believe could cause actual results or outcomes to differ from those anticipated or predicted include:

 

·                                           the success of our launch and commercialization of ELZONRIS in the U.S., Europe, and other regions;

 

·                                           the success of our commercial infrastructure buildout in the U.S., Europe, and other regions;

 

·                                           the success and timing of our clinical trials and preclinical studies for our product candidates, including site initiation, institutional review board approval, scientific review committee approval, patient accrual, safety, tolerability and efficacy data observed;

 

·                                           the success and timing of our regulatory filings for ELZONRIS or any of our product candidates, including for approval in the U.S., Europe, and other regions;

 

·                                           the possibility that results of clinical trials are not predictive of safety and efficacy results of our products or product candidates in broader or additional patient populations;

 

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·                                           our ability to adhere to ongoing compliance requirements of all health authorities to which we are subject, in the U.S. and abroad;

 

·                                           our ability to obtain and maintain adequate reimbursement for our products;

 

·                                           product quality, efficacy or safety concerns resulting in product recalls or regulatory action;

 

·                                           the risk that estimates regarding the number of patients with the diseases that our products and product candidates are designed to treat are inaccurate, do not predict, or are not reflective of actual numbers;

 

·                                           our products not gaining acceptance among patients, providers and/or third party payors, including governmental agencies, for certain approved indications, due to cost or otherwise;

 

·                                           our ability to maintain or increase sales of ELZONRIS;

 

·                                           the adequacy of our pharmacovigilance and drug safety reporting processes in the U.S., Europe and other regions;

 

·                                           the loss of key scientific or management personnel;

 

·                                           changes in regulations in the U.S., Europe and other regions;

 

·                                           new products, new product candidates or new uses for existing products or technologies introduced or announced by our competitors and the timing of these introductions or announcements;

 

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·                                           our available cash and investments;

 

·                                           the accuracy of our estimates regarding expenses, future income or revenue, capital requirements and needs for additional financing;

 

·                                           our ability to obtain additional funding;

 

·                                           our ability to obtain and maintain intellectual property protection for our products and product candidates;

 

·                                           delays, interruptions, or failures in the manufacture, supply and distribution of our products and product candidates;

 

·                                           our ability to maintain the license agreements for our products and product candidates;

 

·                                           our ability to obtain and maintain authorization from regulatory authorities for use of our products and product candidates for the initiation and conduct of clinical trials;

 

·                                           the ability of our third-party manufacturers to manufacture and supply our products, and the performance of, and our reliance on, our third-party manufacturers and suppliers;

 

·                                           the performance of our third-party vendors, including clinical research organizations, clinical trial sponsors, and clinical trial investigators; and

 

·                                           our ability to gain access to products we plan to use in combination studies; and

 

·                                           our ability to form corporate partnerships, should that be an avenue we choose to pursue.

 

Any forward-looking statements that we make in this Form 10-Q speak only as of the date of such statement, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Form 10-Q. You should also read carefully the factors described in the “Risk Factors” section of this Form 10-Q to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements. As a result of these risks and uncertainties, our actual results may differ materially from those reflected in the forward-looking statements in this Form 10-Q.

 

This Form 10-Q includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third-parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data.

 

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

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PART I: FINANCIAL INFORMATION

 

Item 1.          Financial Statements.

 

STEMLINE THERAPEUTICS, INC.
Balance Sheets

 

 

 

March 31,
2019
(Unaudited)

 

December 31,
2018

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

24,014,510

 

$

9,443,667

 

Short-term investments

 

100,337,983

 

50,662,189

 

Accounts receivable

 

5,618,900

 

 

Inventories

 

848,493

 

 

Prepaid expenses and other current assets

 

3,120,926

 

2,952,996

 

Total current assets

 

133,940,812

 

63,058,852

 

Property and equipment, net

 

273,399

 

222,413

 

Right-of-use asset, net

 

1,738,680

 

 

Other assets

 

212,305

 

212,305

 

Total assets

 

$

136,165,196

 

$

63,493,570

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

25,413,021

 

$

21,153,062

 

Right-of-use liability - current portion

 

 

1,023,678

 

 

 

Other current liabilities

 

6,021

 

65,862

 

Total current liabilities

 

26,442,720

 

21,218,924

 

Right-of-use liability

 

818,303

 

 

Other liabilities

 

12,011

 

72,591

 

Total liabilities

 

27,273,034

 

21,291,515

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding at March 31, 2019 and December 31, 2018

 

 

 

Common stock $0.0001 par value, 53,750,000 shares authorized at March 31, 2019 and December 31, 2018. 43,576,081 shares issued and outstanding at March 31, 2019 and 31,943,186 shares issued and outstanding at December 31, 2018

 

4,358

 

3,194

 

Additional paid-in capital

 

425,410,295

 

331,343,484

 

Accumulated other comprehensive loss

 

(27,161

)

(56,559

)

Accumulated deficit

 

(316,495,330

)

(289,088,064

)

Total stockholders’ equity

 

108,892,162

 

42,202,055

 

Total liabilities and stockholders’ equity

 

$

136,165,196

 

$

63,493,570

 

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.
Statements of Operations
(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Revenue:

 

 

 

 

 

Product revenue, net

 

$

5,048,590

 

$

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Cost of goods sold

 

85,728

 

 

Research and development

 

16,953,822

 

12,708,058

 

Selling, general and administrative

 

15,953,968

 

5,938,600

 

 

 

 

 

 

 

Total operating expenses

 

32,993,518

 

18,646,658

 

 

 

 

 

 

 

Loss from operations

 

(27,944,928

)

(18,646,658

)

Other expense

 

(4,616

)

(3,897

)

Interest income

 

538,584

 

233,802

 

 

 

 

 

 

 

Net loss before income taxes

 

(27,410,960

)

(18,416,753

)

 

 

 

 

 

 

Income tax benefit

 

3,694

 

 

 

 

 

 

 

 

Net loss

 

$

(27,407,266

)

$

(18,416,753

)

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

$

(0.73

)

$

(0.69

)

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

37,550,931

 

26,845,983

 

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.
Statements of Comprehensive Loss
(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Net loss

 

$

(27,407,266

)

$

(18,416,753

)

 

 

 

 

 

 

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments, net of tax

 

25,074

 

(8,316

)

Reclassification adjustment for loss on investments included in net loss

 

4,324

 

3,897

 

 

 

 

 

 

 

Other comprehensive gain (loss)

 

29,398

 

(4,419

)

Comprehensive loss

 

$

(27,377,868

)

$

(18,421,172

)

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.
Statement of Stockholders’ Equity
(Unaudited)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Capital

 

Capital

 

Income (Loss)

 

Deficit

 

Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

31,943,186

 

$

3,194

 

$

331,343,484

 

$

(56,559

)

$

(289,088,064

)

$

42,202,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock award — in-licensing

 

43,822

 

4

 

500,005

 

 

 

500,009

 

Restricted stock grants

 

1,366,471

 

137

 

(137

)

 

 

 

Forfeiture of restricted stock grants

 

(13,125

)

(1

)

1

 

 

 

 

Stock-based compensation expense

 

 

 

7,206,092

 

 

 

7,206,092

 

Employee Stock Purchase Plan compensation expense

 

 

 

24,853

 

 

 

24,853

 

Issuance of common stock in connection with the ESPP

 

11,005

 

1

 

102,565

 

 

 

102,566

 

Issuance of common stock in connection with the exercise of stock options

 

2,500

 

 

15,825

 

 

 

15,825

 

Issuance of common stock in connection with secondary public offering, net

 

10,222,222

 

1,023

 

86,217,607

 

 

 

86,218,630

 

Net loss

 

 

 

 

 

(27,407,266

)

(27,407,266

)

Other comprehensive income

 

 

 

 

29,398

 

 

29,398

 

Balance, March 31, 2019

 

43,576,081

 

$

4,358

 

$

425,410,295

 

$

(27,161

)

$

(316,495,330

)

$

108,892,162

 

 

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Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Capital

 

Capital

 

Loss

 

Deficit

 

Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

25,313,595

 

$

2,531

 

$

251,489,546

 

$

(145,958

)

$

(204,275,690

)

$

47,070,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock grants

 

541,254

 

54

 

(54

)

 

 

 

Stock-based compensation expense

 

 

 

2,206,427

 

 

 

2,206,427

 

Employee Stock Purchase Plan compensation expense

 

 

 

18,876

 

 

 

18,876

 

Issuance of common stock in connection with the ESPP

 

6,650

 

1

 

49,741

 

 

 

49,742

 

Issuance of common stock in connection with the exercise of stock options

 

69,201

 

7

 

1,089,909

 

 

 

1,089,916

 

Issuance of common stock in connection with the exercise of warrants

 

30,830

 

3

 

352,527

 

 

 

352,530

 

Issuance of common stock in connection with secondary public offering, net

 

4,255,000

 

426

 

55,650,476

 

 

 

55,650,902

 

Net loss

 

 

 

 

 

(18,416,753

)

(18,416,753

)

Other comprehensive loss

 

 

 

 

(4,419

)

 

(4,419

)

Balance, March 31, 2018

 

30,216,530

 

$

3,022

 

$

310,857,448

 

$

(150,377

)

$

(222,692,443

)

$

88,017,650

 

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.
Statements of Cash Flows
(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(27,407,266

)

$

(18,416,753

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation

 

23,510

 

11,786

 

Stock-based compensation expense

 

7,206,092

 

2,206,427

 

Stock award — in-licensing

 

500,009

 

 

Employee Stock Purchase Plan compensation expense

 

24,853

 

18,876

 

Amortization of premium paid on marketable securities

 

(96,065

)

(3,100

)

Net loss on sale of marketable securities

 

4,324

 

3,897

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(5,618,900

)

 

Inventories

 

(848,493

)

 

Prepaid expenses and other current assets

 

(167,930

)

(628,575

)

Right-of-use asset, net

 

(1,738,680

)

 

Accounts payable and accrued expenses

 

4,259,959

 

(253,580

)

Right-of-use liability - current portion

 

1,023,678

 

 

Right-of-use liability

 

818,303

 

 

Other liabilities

 

(120,421

)

(24,205

)

Net cash used in operating activities

 

(22,137,027

)

(17,085,227

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchase of fixed assets

 

(74,495

)

 

Purchase of marketable securities

 

(81,499,610

)

(44,688,793

)

Sale and maturities of marketable securities

 

31,944,954

 

15,066,670

 

Net cash used in investing activities

 

(49,629,151

)

(29,622,123

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of common stock from follow-on public offering, net

 

86,218,630

 

55,650,902

 

Proceeds from issuance of common stock from ESPP

 

102,566

 

49,742

 

Proceeds from exercise of stock options

 

15,825

 

1,089,916

 

Proceeds from exercise of warrants

 

 

352,530

 

Net cash provided by financing activities

 

86,337,021

 

57,143,090

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

14,570,843

 

10,435,740

 

Cash and cash equivalents at beginning of period

 

9,443,667

 

4,795,098

 

Cash and cash equivalents at end of period

 

$

24,014,510

 

$

15,230,838

 

 

See accompanying unaudited notes.

 

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STEMLINE THERAPEUTICS, INC.
Notes to Unaudited Financial Statements
March 31, 2019

 

1.                                       Organization and Basis of Presentation

 

Organization

 

Stemline Therapeutics, Inc. (the “Company”) is a commercial-stage biopharmaceutical company focused on discovering, acquiring, developing and commercializing novel oncology therapeutics. The Company’s activities to date have primarily consisted of advancing ELZONRIS™ (tagraxofusp-erzs; SL-401) through the clinical and regulatory process, launching and commercializing ELZONRIS, preparing for this launch and commercialization efforts including building out a sales, marketing, and reimbursement infrastructure, developing and implementing its global regulatory and commercial strategies, developing its clinical and preclinical stage programs including ELZONRIS in additional indications and other product candidates, expanding and strengthening its intellectual property portfolio, identifying and acquiring additional product and technology rights, investor relations efforts, and raising capital. The Company was incorporated in Delaware on August 8, 2003 and has its principal office in New York, New York.

 

The Company has incurred losses from operations since inception of $328.2 million. Since its inception, most of its resources have been dedicated to the discovery, acquisition, preclinical and clinical development, regulatory strategy and implementation, and commercialization. In particular, it has expended and will continue to expend, substantial resources for the foreseeable future commercializing its approved product, developing its approved product for potential additional indications, developing its additional clinical stage product candidates, developing its preclinical stage product candidates, and continuing its asset acquisition efforts. These expenditures include costs associated with general and administrative, facilities, research and development, acquiring new technologies, manufacturing product and product candidates, conducting clinical trials and preclinical experiments, seeking regulatory input, including approvals, as well as commercializing any products approved for sale, including its approved product, ELZONRIS, in blastic plasmacytoid dendritic cell neoplasm (“BPDCN”). The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of its approved product and/or the potential approval of its currently approved product in additional territories and/or indications or its other product candidates currently in development. The Company expects its research and development expenses to increase moderately in connection with its ongoing and planned clinical trials and related manufacturing efforts, as well as for expenses related to the U.S. commercial launch of ELZONRIS and pursuit of potential regulatory approval and commercialization in additional ex-U.S. territories. The Company also anticipates that its selling, general and administrative expenses will be higher in future periods due to commercialization and ongoing optimization and build out of its commercial infrastructure and regulatory compliance systems to support the continued commercialization of ELZONRIS in the U.S. and potentially additional ex-U.S. territories.

 

As a result, the Company expects to continue to incur operating losses for the foreseeable future. If adequate funds are not available to the Company on a timely basis, or at all, the Company may be required to delay or terminate commercialization, clinical trials or other development activities for its product and product candidates, for one or more indications or territories, or delay or terminate its establishment of sales and marketing capabilities, or other activities, that may be necessary to commercialize its products and product candidates.

 

Basis of Presentation

 

The accompanying unaudited financial statements have been prepared in accordance with the United States generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments (including normal recurring adjustments) considered necessary for fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented. Operating results for the current interim period are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019, or any future periods. This Form 10-Q should be read in conjunction with the audited financial statements and accompanying notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The Company believes that its existing cash, cash equivalents, short-term investments, and long-term investments will be sufficient to cover its cash flow requirements for at least the next twelve months from the issuance date of these financial statements.

 

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Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. (U.S. GAAP) requires management to make estimates and assumptions that affect the reported financial position at the date of the financial statements and the reported results of operations during the reporting period. Such estimates and assumptions affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

2.                                       Summary of Significant Accounting Policies

 

The Company’s significant accounting policies are described in Note 2 of the Notes to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. During the three months ended March 31, 2019, the changes to the significant accounting policies mainly relate to the commercialization of ELZONRIS, which includes product net revenue, accounts receivable, and inventory.

 

Revenue Recognition

 

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements, and financial instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five step assessment: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines which goods and services are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. The Company determined that the delivery of its product to its customer constitutes a single performance obligation as there are no other promises to deliver goods or services. Shipping and handling are considered to be fulfillment activities and are not considered separate performance obligations. The Company has assessed the existence of a significant financing component in the agreement with its customer. The payment terms with its customer do not exceed one year and therefore no amount of consideration has been allocated as a financing component. Taxes collected related to product sales are remitted to governmental authorities and are excluded from revenue.

 

Product Revenue, Net: The Company has obtained marketing approval from the U.S. Food and Drug Administration, (“FDA”) to sell ELZONRIS in the United States market. The Company sells ELZONRIS to its customer through its title distribution channel. The customer subsequently resells ELZONRIS to a limited number of specialty distributors who in turn distribute ELZONRIS to specialty hospitals.

 

The Company recognizes revenue on sales of ELZONRIS when its customer obtains control of the product, which occurs at a point in time, typically upon delivery. Product revenues are recorded at the product’s wholesale acquisition costs, net of applicable reserves for variable consideration. Components of variable consideration include government contracts, product returns, commercial co-payment assistance program transactions, and distribution service fees. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as a current liability. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled with respect to product revenue that has been recognized.

 

The amount of variable consideration which 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 contracts will not occur in a future period. The Company’s analyses contemplate the application of the constraint in accordance with ASC 606. For the three months ended March 31, 2019, the Company determined a material reversal of revenue would not likely occur in a future period for the estimates detailed below and, therefore, the transaction price was not reduced further. 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.

 

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Government Contracts: The Company have entered into contracts (i) to participate in the Medicaid Drug Rebate Program and the Medicare Part D program, and (ii) to sell to the U.S. Department of Veterans Affairs, 340b entities and other government agencies (“Government Payors”) so that ELZONRIS will be eligible for purchase by, in partial or full reimbursement from, such Government Payors. These reserves are recorded in the same period the revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability, which is included in accrued expenses and other current liabilities. For Medicare Part D, the Company estimates the number of patients in the prescription drug coverage gap for whom it will owe an additional discount under the Medicare Part D program.

 

The Company estimate s the rebates that it will provide to Government Payors for those programs that require rebates. These rebate estimates are based upon (i) the government-mandated discounts applicable to government-funded programs, (ii) information obtained from its customers and (iii) information obtained from other third parties regarding the payor mix for ELZONRIS. The liability for these rebates consists of estimates of claims for the current year and estimated future claims that will be made for product shipments that have been recognized as revenue but remain in the distribution channel inventories at the end of each reporting period.

 

Product Returns: Consistent with industry practice, the Company offers a limited right of return for product that has been purchased. To estimate sales with a right of return, the Company will assess, on a quarterly basis, the number of vials that are held in inventory throughout the distribution channel. Amounts for estimated product returns are established in the same period that the related gross 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 and other current liabilities.

 

Commercial Co-payment Assistance Program: The Company offers a co-payment assistance program where permitted by law and which is intended to provide financial assistance to qualified commercially-insured patients who are required to pay prescription drug copayments based on the terms of their prescription drug insurance plans. The calculation of the accrual for co-payment 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 and other current liabilities.

 

Distribution Fees: Distribution fees include fees paid to the Company’s distributors for the distribution of ELZONRIS based on contractual rates. In addition, the Company compensates for data and other administrative activities. Therefore, estimates for these costs are recorded as a reduction of revenue, based on contractual terms.

 

Accounts Receivable, Net

 

Accounts receivable, net primarily relates to amounts due from the Company’s customer, net of applicable revenue reserves. The Company analyzes accounts that are past due for collectability and provides an allowance for receivables when collection becomes doubtful. Given the nature and limited history of collectability of the Company’s accounts receivable, an allowance for doubtful accounts is not deemed necessary at March 31, 2019.

 

Inventory

 

The Company capitalizes inventory costs associated with the manufacturing of ELZONRIS after regulatory approval or when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. Otherwise, such costs are expensed as research and development. The majority of manufacturing costs for ELZONRIS units recognized as revenue during the three months ended March 31, 2019 were expensed to research and development prior to FDA approval on December 21, 2018.

 

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The Company values its inventories at the lower of cost or 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 product revenues. 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 which would be recorded as a cost of product sales in the statement of operations and comprehensive loss.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”), issued a comprehensive new revenue recognition Accounting Standards Update (“ASU”), Revenue From Contracts With Customers (Topic 606) (ASU 2014-09). ASU 2014-09 provides guidance to clarify the principles for recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize income to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted for fiscal years and interim periods beginning after December 15, 2016. The Company adopted this guidance on January 1, 2018, using the full retrospective method. Any future contracts with customers will be accounted for under the new guidance effective January 1, 2018.

 

As noted below in Note 10 to the Company’s Financial Statements, the Company has received grant income from the Leukemia and Lymphoma Society (“LLS”) to fund the Company’s development program related to the Company’s preclinical and clinical product development activities. The Company has determined that LLS is not a customer as defined by Topic 606. The Company recognizes grant income when there is reasonable assurance of compliance with the conditions of the grant and reasonable assurance that the grant income will be received based on the Company’s best estimates of work performed and qualifying costs incurred.

 

In January 2016, the FASB issued a new ASU,  Recognition and Measurement of Financial Assets and Financial Liabilities ( ASU 2016-01). ASU 2016-01 amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted for certain changes. The Company adopted this guidance on January 1, 2018 and it had no impact on the financial position, results of operations or cash flows.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02) , which supersedes ASC 840, Leases. The amendments in this update will increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under ASU 2016-02, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. ASU 2016-02 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under prior GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

 

The guidance permits a practical expedient with regards to initial adoption, allowing adopters the option to apply the new leases standard prospectively at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this expedient, comparative periods presented in the

 

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financial statements in which the new lease standard is adopted will continue to be presented in accordance with prior GAAP.

 

The Company adopted this standard on January 1, 2019 using the prospective application method practical expedient. The adoption of this standard had an impact on our balance sheet, recognizing a right-of-use asset and lease liability of approximately 2 million. Refer to Note 8 for disclosure requirements related to the adoption of this standard.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15) . ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments on the Statement of Cash Flows and amends certain disclosure requirements of ASC 230. The guidance will generally be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the guidance in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the guidance in the same period. The Company adopted this guidance on January 1, 2018 and it had no impact on the Statement of Cash Flows.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (ASU 2018-19) . ASU 2018-19 will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope of this amendment that represent the contractual right to receive cash. ASU 2016-13 and ASU 2018-19 are effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. Adoption of ASU 2016-13 will not have a significant impact on the Company’s financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation — Stock Compensation (Topic 718), Scope of Modification Accounting (ASU No. 2017-09) . ASU 2017-09 provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. ASU 2017-09 is applied prospectively to awards modified on or after the effective date. The Company adopted ASU 2017-09 on January 1, 2018. The adoption of this standard did not have a material impact to the Company’s Balance Sheet, Statement of Operations, or Statement of Cash Flows.

 

On June 20, 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718):  Improvements to Nonemployee Share-Based Payment Accounting (ASU No. 2018-07) , which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Entities should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the period of time equity awards vest and the pattern of cost recognition over that period. ASU No. 2018-07 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted and the Company adopted ASU No. 2018-07 on April 1, 2018. The Company early adopted ASU No. 2018-07 on April 1, 2018 and the net impact relating to the adoption was a $0.2 million decrease to accumulated deficit for the impact prior to April 1, 2018. In addition, the Company has elected to account for forfeitures of nonemployee awards as they occur.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13) , which adds disclosure requirements to Topic 820 for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of ASU 2018-13 is not expected to have an impact on the Company’s financial statements.

 

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In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheets must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. As such, the Company adopted these SEC amendments on November 5, 2018 and will present the analysis of changes in stockholders’ equity in its interim financial statements in its March 31, 2019 Form 10-Q. The Company does not anticipate that the adoption of these SEC amendments will have a material effect on the Company’s financial statements.

 

In November 2018, ASU 2018-18 was issued to provide clarity on when transactions between entities in a collaborative arrangement should be accounted for under the new revenue standard, ASC 606. In determining whether transactions in collaborative arrangements should be accounted under the revenue standard, the update specifies that entities shall apply unit of account guidance to identify distinct goods or services and whether such goods and services are separately identifiable from other promises in the contract. ASU 2018-18 also precludes entities from presenting transactions with a collaborative partner which are not in scope of the new revenue standard together with revenue from contracts with customers. The accounting update is effective January 1, 2020 and early adoption is permitted. The adoption of ASU 2018-18 is not expected to have an impact on the Company’s financial statements.

 

In December 2018, the FASB issued  ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors (ASU 2018-20) , which addressed implementation questions arising from stakeholders in regard to ASU 2016-02, Leases. Specifically addressed in this update were issues related to 1) sales taxes and other similar taxes collected from lessees, 2) certain lessor costs, and 3) recognition of variable payments for contracts with lease and nonlease components. The amendments in this ASU are effective in the same time-frame as ASU 2016-02 as discussed above. The Company incorporated this ASU into its assessment and adoption of ASU 2016-02.

 

3.                                       Liquidity and Capital Resources

 

As of March 31, 2019, the Company has approximately $124.4 million in cash, cash equivalents, and short and long-term investment securities. The Company primarily invests in highly liquid cash equivalents, short-term investments and long-term investments in U.S. Treasury and Agency securities and related money market funds and FDIC-insured bank certificates of deposit, with the balance in commercial bank operating accounts.

 

4.                                       Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consist of the following at March 31, 2019 and December 31, 2018:

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

Prepaid third party vendor costs

 

$

1,376,116

 

$

1,851,553

 

Deposits

 

189,000

 

189,000

 

Prepaid insurance

 

657,669

 

69,021

 

Other receivable

 

898,141

 

843,422

 

Total

 

$

3,120,926

 

$

2,952,996

 

 

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5.                                       Property and Equipment, Net

 

Property and equipment, net, consist of the following at March 31, 2019 and December 31, 2018:

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

Office furniture and fixtures

 

$

519,675

 

$

519,675

 

Manufacturing equipment

 

181,753

 

107,258

 

Leasehold improvements

 

82,694

 

82,694

 

Capital lease equipment

 

29,529

 

29,529

 

Computer equipment

 

18,612

 

18,612

 

Property and equipment

 

832,263

 

757,768

 

Less accumulated depreciation

 

(558,864

)

(535,355

)

Property and equipment, net

 

$

273,399

 

$

222,413

 

 

Depreciation expense was $23,510 and $11,786 for the three-month periods ended March 31, 2019 and 2018, respectively.

 

6.                                       Fair Value Measurements

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2 — Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.

 

Level 3 — Inputs that are unobservable for the asset or liability.

 

The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liability measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:

 

 

 

March 31, 2019

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

Balance

 

 

 

Identical

 

Observable

 

Unobservable

 

at

 

 

 

Assets

 

Inputs

 

Inputs

 

March 31,

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

2019

 

Assets:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio

 

$

71,811,331

 

$

 

$

 

$

71,811,331

 

Certificate of Deposits

 

 

28,526,652

 

 

28,526,652

 

Cash and cash equivalents

 

24,014,510

 

 

 

24,014,510

 

Total assets at fair value

 

$

95,825,841

 

$

28,526,652

 

$

 

$

124,352,493

 

 

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December 31, 2018

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

Balance

 

 

 

Identical

 

Observable

 

Unobservable

 

at

 

 

 

Assets

 

Inputs

 

Inputs

 

December 31,

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

2018

 

Assets:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio

 

$

30,637,998

 

$

 

$

 

$

30,637,998

 

Certificate of Deposits

 

 

20,024,191

 

 

20,024,191

 

Cash and cash equivalents

 

9,443,667

 

 

 

9,443,667

 

Total assets at fair value

 

$

40,081,665

 

$

20,024,191

 

$

 

$

60,105,856

 

 

The following is a summary of cash equivalents and available-for-sale investments held by the Company at March 31, 2019 and December 31, 2018:

 

 

 

March 31, 2019

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains*

 

Losses*

 

Value

 

Cash:

 

 

 

 

 

 

 

 

 

Cash from operating accounts

 

$

3,151,188

 

$

 

$

 

$

3,151,188

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money market funds

 

20,863,322

 

 

 

20,863,322

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

24,014,510

 

$

 

$

 

$

24,014,510

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio:

 

 

 

 

 

 

 

 

 

Federal home loan bank

 

1,003,875

 

 

(2,220

)

1,001,655

 

Freddie Mac

 

999,981

 

 

(4,485

)

995,496

 

U.S. Treasury Securities

 

69,793,815

 

24,250

 

(3,886

)

69,814,179

 

 

 

 

 

 

 

 

 

 

 

Certificate of Deposits

 

28,534,366

 

805

 

(8,518

)

28,526,653

 

 

 

 

 

 

 

 

 

 

 

Total short-term investments

 

100,332,037

 

25,055

 

(19,109

)

100,337,983

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

124,346,547

 

$

25,055

 

$

(19,109

)

$

124,352,493

 

 

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December 31, 2018

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains*

 

Losses*

 

Value

 

Cash:

 

 

 

 

 

 

 

 

 

Cash from operating accounts

 

$

2,482,621

 

$

 

$

 

$

2,482,621

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money market funds

 

6,961,046

 

 

 

6,961,046

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

9,443,667

 

$

 

$

 

$

9,443,667

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Fixed-income treasury portfolio:

 

 

 

 

 

 

 

 

 

Fannie Mae

 

2,013,336

 

 

(1,146

)

2,012,190

 

Federal home loan bank

 

6,020,492

 

 

(10,646

)

6,009,846

 

Freddie Mac

 

2,512,252

 

 

(8,530

)

2,503,722

 

U.S. Treasury Securities

 

20,123,026

 

767

 

(11,553

)

20,112,240

 

 

 

 

 

 

 

 

 

 

 

Certificate of Deposits

 

20,024,346

 

 

(155

)

20,024,191

 

 

 

 

 

 

 

 

 

 

 

Total short-term investments

 

50,693,452

 

767

 

(32,030

)

50,662,189

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

60,137,119

 

$

767

 

$

(32,030

)

$

60,105,856

 

 


*The gross unrealized gains and losses captured in this footnote is before tax.

 

At March 31, 2019 and December 31, 2018, the remaining contractual maturities of available-for-sale investments classified as current on the balance sheet were less than 12 months, and the remaining contractual maturities of available-for-sale investments classified as long-term were less than two years.

 

There were no available-for-sale securities in a continuous unrealized loss position for greater than twelve months at March 31, 2019 and December 31, 2018. The Company has the ability to hold such securities with an unrealized loss until its forecasted recovery. The Company determined that there was no material change in the credit risk of the above investments. As a result, the Company determined it did not hold any investments with an other-than-temporary impairment as of March 31, 2019.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist principally of cash and cash equivalents, investments, other current assets, accounts payable and accrued expenses. Cash and cash equivalents, short-term investments and long-term investments are carried at fair value (see above). Financial instruments including other current assets, accounts payable and accrued expenses are carried at cost, which approximate fair value given their short-term nature.

 

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7.                                       Inventory

 

Inventory consists of the following:

 

 

 

March 31,

 

 

 

2019

 

Raw materials

 

$

 

Work-in-process

 

650,722

 

Finished goods

 

197,771

 

Total Inventory

 

$

848,493

 

 

Inventory is related to our approved product, ELZONRIS. There were no write downs for excess and obsolete inventory during the three months ended March 31, 2019.

 

8.                                       Leases

 

The Company has leases for office facilities as well as for certain equipment. The operating lease portfolio is related to two office spaces and the financing lease relate to office equipment that was acquired in prior year. As of March 31, 2019, the Company has not entered into any new lease arrangements classified as a finance lease. Operating leases are included in operating lease right-of-use assets, current operating lease liabilities and operating lease liabilities on the Company’s balance sheet. The Company has elected the package of practical expedients which applies to leases that commenced before the adoption date. By electing the package of practical expedients, the Company did not need to reassess the following; whether any existing contracts are or contain leases, the lease classification for any existing leases and initial direct costs for any existing leases.

 

Right-of-use asset and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. When the implicit rate of the lease is not provided or cannot be determined, the Company used the incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Operating lease right-of-use asset is presented within right-of-use asset, net. The current portion of operating lease liabilities are presented within right-of-use liability - current portion and the non-current portion of operating lease liabilities are presented within right-of-use liability on the Balance Sheet. Finance lease assets are included in Property, plant and equipment - net, and the finance lease obligations are included in Other current liabilities debt, and in Other liabilities on the Balance Sheet. Components of lease expense and other information as follows:

 

 

 

March 31,

 

 

 

2019

 

Lease Expense

 

 

 

Operating Lease Cost

 

$

264,693

 

Financing Lease Cost:

 

 

 

Amortization of right-of-use assets

 

2,460

 

Interest on lease liability

 

292

 

Total financing lease cost

 

2,752

 

Total Lease Cost

 

$

267,445

 

 

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March 31,

 

Balance sheet information related to leases was as follows:

 

2019

 

Operating Leases

 

 

 

Operating right-of-use asset, net

 

$

1,738,680

 

Operating right-of-use liability - current portion

 

1,023,678

 

Operating right-of-use liability

 

818,303

 

Total operating lease liabilities

 

$

1,841,981

 

Financing Leases

 

 

 

Property, plant and equipment

 

$

29,529

 

Accumulated depreciation

 

(8,202

)

Property, plant and equipment - net

 

$

21,327

 

Other current liabilities

 

9,754

 

Other liabilities

 

12,011

 

Total Financing lease liabilities

 

$

21,765

 

Weighted Average Remaining Lease Term — Operating Leases

 

1.75 years

 

Weighted Average Remaining Lease Term — Financing Leases

 

2.16 years

 

Weighted Average Discount Rate — Operating Leases

 

7.32

%

Weighted Average Discount Rate — Financing Leases

 

5

%

 

Future minimum lease payments under non-cancellable leases as of March 31, 2019 were as follows:

 

 

 

Operating
Leases

 

Financing
Leases

 

2019

 

$

838,350

 

$

7,965

 

2020

 

1,117,800

 

10,620

 

2021

 

 

4,425

 

Total future minimum lease payments

 

1,956,150

 

23,010

 

Less imputed interest

 

(114,169

)

(1,245

)

Total

 

$

1,841,981

 

$

21,765

 

 

Supplemental cash flow information related to leases was as follows:

 

 

 

March 31,

 

Cash paid for amounts included in the measurement of lease liabilities:

 

2019

 

 

 

 

 

Operating cash flows from operating leases

 

$

279,450

 

Operating cash flows from finance leases

 

292

 

Financing cash flows from finance leases

 

2,363

 

 

9.                                       Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consist of the following at March 31, 2019 and December 31, 2018:

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

Accrued research and development costs

 

$

13,350,177

 

$

8,790,920

 

Accrued compensation

 

2,643,983

 

5,515,002

 

Accrued legal

 

1,342,389

 

687,042

 

Accrued commercial costs

 

5,599,300

 

4,614,507

 

Accrued general and administrative costs

 

1,829,046

 

1,545,591

 

Accrued sales deduction and allowance

 

648,126

 

 

Total accounts payable and accrued expenses

 

$

25,413,021

 

$

21,153,062

 

 

10.                                Common Stock

 

On January 18, 2019, the Company completed a follow-on public offering, selling 8,888,889 shares at an offering price of $9 per share. Additionally, the underwriters exercised in full their over-allotment option to purchase an additional 1,333,333 shares at an offering price of $9 per share. Aggregate gross proceeds from the follow-on public offering, including the exercise of the over-allotment option, were $92 million, and net proceeds received after underwriting fees and offering expenses were approximately $86.2 million.

 

As of March 31, 2019 and December 31, 2018, the Company was authorized to issue 53,750,000 shares of common stock.

 

Dividends on common stock will be paid when, and if, declared by the board of directors. Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held. The Company will, at all times, reserve and keep available, out of its authorized but unissued shares of common stock, sufficient shares to affect the conversion of shares from the exercise of stock options.

 

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11.                                Accumulated Other Comprehensive Loss

 

The changes in accumulated balances for each component of other comprehensive loss are as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(56,559

)

$

(145,958

)

Other comprehensive income (loss) before reclassification

 

25,074

 

(8,316

)

Amounts reclassified from accumulated other comprehensive loss*

 

4,324

 

3,897

 

Total other comprehensive income (loss)

 

29,398

 

(4,419

)

 

 

 

 

 

 

Balance at end of period

 

$

(27,161

)

$

(150,377

)

 


*Amounts reclassified affect other income in the Statements of Operations.

 

12.                                Product revenue reserves and allowances

 

As of March 31, 2019, the Company’s sole source of product revenue has been from sales of ELZONRIS in the United States. The following table summarizes activity in each of the product revenue allowance and reserve categories for the three months ended March 31, 2019:

 

 

 

 

 

March 31, 2019

 

 

 

Government
Rebates

 

Product
Returns

 

Commercial
Co-payment
Assistance
Programs

 

Distribution
Fees

 

Total

 

Beginning balance at December 31, 2018

 

$

 

$

 

$

 

$

 

$

 

Provision related to sales in the current year

 

172,688

 

202,769

 

52,181

 

142,672

 

570,310

 

Adjustments related to prior period sale

 

 

 

 

 

 

Credits and payments made

 

 

 

 

 

 

Ending balance at March 31, 2019

 

$

172,688

 

$

202,769

 

$

52,181

 

$

142,672

 

$

570,310

 

 

Government rebates, product returns, commercial co-payment assistance programs, and distribution fees are recorded as a component of accrued expenses on the balance sheet.

 

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13.                                Net Loss Per Common Share

 

The Company accounts for and discloses net loss per share using the treasury stock method. Net loss per common share, or basic loss per share, is computed by dividing net loss by the weighted-average number of common shares outstanding. Since the Company is in a net loss for all periods presented, diluted net loss per share is not presented since the common stock equivalents would have an anti-dilutive effect on the per share calculation.

 

The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Basic and diluted net loss per common share calculation:

 

 

 

 

 

Net loss

 

$

(27,407,266

)

$

(18,416,753

)

Basic and diluted weighted-average common shares

 

37,550,931

 

26,845,983

 

Basic and diluted net loss per share

 

$

(0.73

)

$

(0.69

)

 

The difference between basic and diluted weighted-average common shares generally results from the assumption that dilutive stock options outstanding were exercised, dilutive restricted stock has vested, and outstanding warrants are issued. For the three-month periods ended March 31, 2019 and 2018, the Company reported a loss from operations and therefore, all potentially dilutive stock options and restricted stock as of such date were excluded from the computation of diluted net loss per share as their effect would have been anti-dilutive. The total shares of stock options and restricted stock that could potentially dilute earnings per share in the future, but which were not included in the calculation of diluted net loss per share because their affect would have been anti-dilutive were as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Restricted stock

 

$

3,582,612

 

$

1,840,125

 

Options outstanding

 

3,535,018

 

3,128,627

 

Total

 

$

7,117,630

 

$

4,968,752

 

 

14.                                Grant Income

 

In October 2013, the Company entered into a contract with the Leukemia and Lymphoma Society, or LLS. LLS is a national voluntary health organization that, among other activities, encourages and sponsors research relating to blood cancers to develop therapies to cure or mitigate these diseases. To further its mission, LLS provides research funding to entities that can demonstrate after LLS’s review process that their proposed research projects have scientific promise to advance LLS’s effort to find treatments and cures for blood cancers and their complications. LLS agreed to provide funding to the Company not to exceed $3.5 million to fund the Company’s development program related to the Company’s preclinical and clinical product development activities. Through March 31, 2019, the Company has received $3.5 million based on milestones achieved. The agreement terminates when there are no longer any payment obligations for either LLS or Stemline.

 

15.                                Income Taxes

 

The Company recorded $3,694 income tax benefit related to intraperiod tax allocations for the three-month period ended March 31, 2019 and no income tax provisions or benefits were recorded for the three-month period ended March 31, 2018, due to the fact that the Company cannot benefit from its net operating losses or other deferred tax assets. The Company does not currently have the ability to carry back losses to previous years to recover taxes paid and future utilization of these losses is uncertain.

 

The Company files income tax returns in the United States and in the State of New York. The Company’s 2015 tax year is currently being audited by the Internal Revenue Service and there are no ongoing audits in state taxing jurisdictions.

 

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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their basis for income tax purposes and the tax effects of net operating loss and tax credit carryforwards.

 

Valuation allowances reduce deferred tax assets to the amounts that are more likely than not to be realized. As of March 31, 2019, the Company has recorded additional deferred tax assets which are fully offset by a valuation allowance. Realization of the deferred tax assets is dependent on generating sufficient taxable income in the future. At present, the likelihood of the Company being able to fully utilize its deferred income tax benefits against future income is uncertain.

 

16.                                Stock-Based Compensation

 

The Company’s 2016 Stock Equity Incentive Plan (the “2016 Plan”) was adopted by the board of directors and approved by the stockholders in May 2016. The 2016 Plan authorizes the Company to grant up to 1,812,932 shares of common stock to eligible employees, directors, and non-employee consultants and advisors to the Company. Under the provisions of the 2016 Plan, no option will have a term in excess of 10 years. In 2017, the Company’s stockholders approved an increase of 1,200,000 shares authorized under the 2016 Plan and another increase of 2,900,000 shares authorized in 2018.

 

The Company’s 2012 Stock Equity Incentive Plan (the “2012 Plan”), which was adopted by the board of directors and approved by the stockholders in July 2012, became effective immediately prior to the closing of the Company’s initial public offering. In addition, the Company’s 2004 Stock Option and Grant Plan (the “2004 Plan”) was terminated effective immediately prior to the closing of the Company’s initial public offering. The 2012 Plan authorized the Company to grant up to 1,663,727 shares of common stock to eligible employees, directors, and non-employee consultants and advisors to the Company. Under the provisions of the 2012 Plan, no option will have a term in excess of 10 years. With the adoption of the 2016 Plan, all authorized but unissued shares, totaling 12,932, under the 2012 plan were converted to the 2016 Plan. All future awards will be granted out of the 2016 Plan.

 

As of March 31, 2019, there were 350,667 shares of common stock available for future grants under the 2016 Plan.

 

Total compensation cost that has been charged against operations related to the above plans was approximately $7.2 million and $2.2 million for the three-month periods ended March 31, 2019 and 2018, respectively. As a result of the valuation allowance against the Company’s deferred tax assets, there was no net adjustment to retained earnings for the change in accounting for unrecognized windfall tax benefits.

 

The following table summarizes stock-based compensation related to the above plans by expense category for the three-month periods ended March 31, 2019 and 2018, respectively:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Research and development

 

$

3,106,059

 

$

970,624

 

Selling, general and administrative

 

4,100,033

 

1,235,803

 

Total

 

$

7,206,092

 

$

2,206,427

 

 

The following table summarizes the stock-based compensation capitalized to inventory:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Stock-based compensation expense capitalized to inventory

 

$

55,557

 

$

 

 

Stock Options

 

The Company grants stock options to employees, directors and non-employee consultants, with exercise prices equal to the closing price of the underlying shares of the Company’s common stock on the date that the options are granted. Options granted have a term of 10 years from the grant date. Options granted to employees generally vest over a four-year period from date of grant or if vesting based on market condition, awards vest based on the derived service period which is the estimated period of time that would be required to satisfy the market condition. Options granted to directors’ vest in equal yearly installments over a three-year period from the date of grant. Options to directors are granted on an annual basis and represent compensation for services performed on the Board of Directors. Compensation cost for stock options granted to employees and directors is charged against operations

 

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using the straight-line attribution method between the grant date for the option and each vesting date. The Company estimates the fair value of stock options on the grant date by applying the Black-Scholes option pricing valuation model. The application of this valuation model involves assumptions that are highly subjective, judgmental and sensitive in the determination of compensation cost.

 

The weighted-average key assumptions used in determining the fair value of options granted for the three-month periods ended March 31, 2019 and 2018, respectively are as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Weighted-average volatility

 

66.47

%

77.96

%

Weighted-average risk-free interest rate

 

2.59

%

2.63

%

Weighted-average expected term in years

 

6.26

 

6.26

 

Dividend yield

 

 

 

 

The Company’s computation of stock-price volatility is based on the volatility rates of comparable publicly held companies over a period equal to the estimated useful life of the options granted by the Company. The Company’s computation of expected life was determined using the “simplified” method which is the midpoint between the vesting date and the end of the contractual term. The Company believes that it does not have sufficient reliable exercise data in order to justify the use of a method other than the “simplified” method of estimating the expected exercise term of employee stock option grants. The Company has paid no dividends to stockholders. The risk-free interest rate is based on the zero-coupon U.S. Treasury yield at the date of grant for a term equivalent to the expected term of the option.

 

For the three-month period ended March 31, 2019, the Company issued 2,500 shares of the Company’s common stock upon the exercise of outstanding stock options and received proceeds of approximately $15,825. As of March 31, 2019, there was approximately $6.7 million of unrecognized compensation cost related to unamortized stock option compensation which is expected to be recognized over a remaining weighted-average period of approximately 2.45 years.

 

The following table summarizes the activity related to the Company’s stock options for the three months ended March 31, 2019:

 

 

 

Options

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual
Life

 

Aggregate
Intrinsic
Value

 

Outstanding at December 31, 2018

 

3,514,018

 

$

9.59

 

6.08

 

$

10,087,201

 

Options granted

 

45,500

 

10.90

 

 

 

 

 

Options exercised

 

(2,500

)

6.33

 

 

 

 

 

Options forfeited

 

(22,000

)

15.65

 

 

 

 

 

Outstanding at March 31, 2019

 

3,535,018

 

$

9.57

 

5.87

 

$

17,220,252

 

Options exercisable at March 31, 2019

 

2,550,614

 

$

8.89

 

4.84

 

$

14,283,344

 

 

The aggregate intrinsic value in the previous table reflects the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the quarter ended March 31, 2019 and the exercise price of the options, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all option holders exercised their options on March 31, 2019. The intrinsic value of the Company’s stock options changes based on the closing price of the Company’s common stock.

 

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Restricted Stock

 

The Company grants restricted stock to its employees, directors, and non-employee consultants. Restricted stock is recorded as deferred compensation and charged against income on a straight-line basis over the vesting period, which ranges from immediate to four years in duration. If vesting of the award is based on a performance or market condition, awards vest based on the derived service period which is the estimated period of time that would be required to satisfy the performance or market condition. Restricted stock awards to directors vest in equal installments over a three-year period from the grant date. Compensation cost for restricted stock is based on the award’s grant date fair value, which is the closing market price of the Company’s common stock on the grant date, multiplied by the number of shares awarded.

 

The following table summarizes the activity related to the Company’s restricted stock for the three months ended March 31, 2019:

 

 

 

Number of Shares

 

Weighted-
Average Grant
Date Fair Value
Per Share

 

Outstanding at December 31, 2018

 

2,794,455

 

$

12.79

 

Shares granted

 

1,366,471

 

11.16

 

Shares vested

 

(565,189

)

10.59

 

Shares forfeited

 

(13,125

)

15.65

 

Outstanding at March 31, 2019

 

3,582,612

 

$

12.50

 

 

For the three-month period ended March 31, 2019, the Company granted 1,366,471 shares of restricted stock at a weighted-average grant date fair value of $11.16 per share amounting to approximately $15.3 million in total aggregate fair value. As of March 31, 2019, 3,582,612 shares remained unvested and there was approximately $36.6 million of unrecognized compensation cost related to restricted stock which is expected to be recognized over a remaining weighted-average period of approximately 2.05 years. The total fair value of restricted stock vested during the three-month periods ended March 31, 2019 and 2018 was approximately $6.0 million and $3.5 million, respectively.

 

Performance Share Awards

 

On August 2018, the FDA accepted the Company’s Biologics License Application, or BLA, for ELZONRIS for the treatment of BPDCN, in adults and in pediatric patients two years and older. As a result of the approval, the underlying performance condition associated with the performance share awards, or PSAs, were met. The Company recognized approximately $0.2 million and $21,739 of stock compensation expense related to the performance share awards, or PSAs, for three-month period ended March 31, 2019 and March 31, 2018, respectively.

 

In addition, ELZONRIS received FDA approval on December 21, 2018 for the treatment of patients with BPDCN. As a result of the approval, the underlying performance condition associated with the PSAs were met and the Company recognized approximately $2.5 million and $0 of stock compensation expense related to the PSAs for the three-month period ended March 31, 2019 and March 31, 2018, respectively.

 

For awards with performance conditions, such as obtaining regulatory approval on a developed product, capital raises, a change in control or a sale of the company, no expense is recognized, and no measurement date can occur, until the occurrence of the event is probable.

 

Awards Granted to Non-Employee Consultants

 

The Company grants stock options, restricted stock, and unrestricted stock to non-employee consultants. The Company measures the fair value of stock-based awards issued to non-employees and records expense over the requisite service period. Total compensation cost charged against operations related to stock-based awards granted to non-employee consultants was approximately $0.2 million and $ 0.2 million for the three-month periods ended March 31, 2019 and 2018, respectively.

 

Employee Stock Purchase Plan

 

In September 2015, the Company adopted its 2015 Employee Stock Purchase Plan (the “2015 ESPP”). The 2015 ESPP is qualified as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended (the “IRC”). Under the 2015 ESPP, the Company will grant rights to purchase shares of common stock under the 2015 ESPP (“Rights”) at prices not less than 85% of the lesser of (i) the fair value of the shares on the date of grant of such Rights or (ii) the fair value of the shares on the date such Rights are exercised. Therefore, the 2015 ESPP is considered compensatory under FASB ASC 718 since, along with other factors, it includes a purchase discount of greater than 5%. The Company recorded approximately $24,853 and $18,876 of compensation expense for the three months ended March 31, 2019 and 2018, respectively, related to participation in the 2015 ESPP.

 

17.                                Commitments and Contingencies

 

The Company has entered into research and development agreements with third-parties for the development of oncology product candidates and technologies. According to these agreements, the Company typically funds the development of such assets and potentially makes development-based milestone payments, and royalty and sales-based milestone

 

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payments based on net sales should the product candidates be approved for marketing. The timing and the amounts of milestone and royalty payments in the future are not certain.

 

The Company has also entered into license agreements, including ones with licenses to certain intellectual property rights, in the field of oncology and other indications. The Company is generally required to make upfront payments as well as other payments upon successful completion of preclinical, clinical, regulatory or sales milestones, should such milestones occur. In addition, these agreements generally would require the Company to pay royalties on sales of the products arising from these agreements, should a product candidate under the license agreement receive regulatory approval. These agreements generally permit the Company to terminate the agreement with no significant continuing obligation.

 

Under the Company’s research and development and/or license agreements, if the Company were to achieve certain milestones, primarily late stage clinical trial events, marketing approval, and sales, the Company could be required to pay up to a total of $375.6 million in future periods. As of March 31, 2019, the Company has paid or accrued $7.3 million in payments pursuant to such agreements. If a product candidate under such agreements were to receive marketing approval, royalty payments, largely single digit, are payable on commercial sales of certain products.

 

The Company has committed to make potential future milestone and royalty payments to third-parties as part of its research and development and licensing agreements. Payments generally become due and payable only upon the achievement of certain developmental, regulatory and/or commercial milestones. Because the achievement of these milestones is neither guaranteed nor reasonably estimable, the Company has not recorded a liability on its balance sheet for any such contingencies.

 

Contractual Agreements

 

The Company has entered into contracts with a pharmaceutical drug substance manufacturer over the past six years totaling $32.4 million, with services to be rendered on some of these agreements through 2019. From inception through March 31, 2019, the Company has received and paid for services relating to these agreements in the amount of $27.0 million. In addition, the Company has a commercial supply agreement with a vendor in which the Company is required to manufacture at least one batch during 2019.

 

The Company has agreements in place with contract research organizations, or CROs, in connection with its clinical programs. The Company’s total expenditures in the future would be approximately $3.1 million assuming the successful advancement of its programs.

 

Agreement with the Leukemia and Lymphoma Society

 

In October 2013, the Company entered into a contract with the Leukemia and Lymphoma Society, or LLS. LLS is a national voluntary health organization which, among other activities, encourages and sponsors research relating to blood cancers to develop therapies to cure or mitigate these diseases. To further its mission, LLS provides research funding to entities that can demonstrate, after LLS’s review process, that their proposed research projects have scientific promise to advance LLS’s effort to find treatments and cures for blood cancers and their complications. LLS agreed to provide funding to the Company not to exceed $3.5 million to fund the Company’s development program related to the Company’s preclinical and clinical product development activities. Through March 31, 2019, the Company has received $3.5 million based on milestones achieved.

 

For the three-month period ended March 31, 2019, the Company recorded expense of approximately $4.4 million relating to the achievement of a post-approval milestone.

 

Contingencies

 

On March 15, 2018, the United States District Court for the Southern District of New York granted a motion to dismiss in its entirety a consolidated shareholder action against the Company, its directors, certain of its officers, and

 

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the lead underwriter. This matter originated from lawsuits filed in February 2017. On March 12, 2019, Lead Plaintiffs filed a joint stipulation of settlement in support of their motion for preliminary approval of a settlement of the consolidated shareholder action with the United States District Court for the Southern District of New York, after the Plaintiffs voluntarily withdrew their appeal pursuant to Local Rule 42.1.

 

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Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Unless the context requires otherwise, references in this report to “Stemline,” “Company,” “we,” “us” and “our” refer to Stemline Therapeutics, Inc.

 

The following discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those factors discussed in “Item 1A. Risk Factors.” See also the “Special Cautionary Notice Regarding Forward-Looking Statements” set forth at the beginning of this report.

 

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in our audited financial statements and notes thereto for the year ended December 31, 2018, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018, to which the reader is directed for additional information.

 

Overview

 

We are a commercial-stage biopharmaceutical company focused on discovering, acquiring, developing and commercializing oncology therapeutics. In December 2018, the U.S. Food and Drug Administration, or FDA, approved our first product, ELZONRIS TM (tagraxofusp-erzs; SL-401), a targeted therapy directed to CD123, for the treatment of adult and pediatric patients, two years and older, with blastic plasmacytoid dendritic cell neoplasm, or BPDCN. ELZONRIS is the first treatment approved for BPDCN and the first approved CD123-directed therapy. ELZONRIS is commercially available for patients with BPDCN in the U.S.

 

BPDCN is an aggressive, orphan hematologic malignancy with historically poor outcomes. BPDCN may present with features similar to, and can be mistaken for, certain diseases including acute myeloid leukemia, or AML, non-Hodgkin’s lymphoma, or NHL, acute lymphocytic leukemia, or ALL, myelodysplastic syndrome, or MDS, chronic myelomonocytic leukemia, or CMML, other malignancies with skin manifestations as well as certain non-malignant cutaneous conditions. BPDCN typically presents in the bone marrow and/or skin, and may also involve lymph nodes and viscera. The diagnosis of BPDCN is based on the immunophenotypic diagnostic triad of CD123, CD4, and CD56, as well as other markers including TCL-1.

 

ELZONRIS is designed to specifically target CD123. CD123 is highly expressed on BPDCN and is a key marker, as a part of a triad of markers that enables proper diagnosis of BPDCN. Additionally, CD123 represents a potential target for therapeutic research in a variety of cancers beyond BPDCN, as well as certain autoimmune disorders. CD123 has been associated with poor outcomes in AML.

 

ELZONRIS was granted by the FDA, Breakthrough Therapy Designation, or BTD, for the treatment of BPDCN in August 2016, and Orphan Drug Designation, or ODD, for AML in February 2011 and ODD for BPDCN in June 2013. ELZONRIS was granted, by the European Medicines Agency, or EMA, ODD for AML in September 2015 and ODD for BPDCN in November 2015.

 

In addition to ELZONRIS, our pipeline of product candidates also includes: SL-801, SL-701, SL-901 and SL-1001.

 

FDA-approved product

 

ELZONRIS

 

ELZONRIS, a targeted therapy directed to CD123, was approved by the FDA on December 21, 2018 for the treatment of BPDCN in adult and pediatric patients two years and older. ELZONRIS became commercially available in the United States by prescription in January 2019, when we commenced sales and shipments to our customer who, in turn, ships product to oncology hospital sites via sales to specialty distributors.

 

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In January 2019, Stemline submitted a Marketing Authorization Application, or MAA, to the EMA, seeking potential approval of ELZONRIS for the treatment of adult patients with BPDCN. The MAA was validated, and is currently under review, by the EMA. The MAA was granted accelerated assessment by the EMA in November 2018.

 

In the U.S., ELZONRIS is approved for the treatment of BPDCN in adult and pediatric patients two years and older, in both treatment-naïve and previously-treated populations. The ELZONRIS label contains a boxed warning for capillary leak syndrome, or CLS, which may be life-threatening or fatal if not properly managed , and can occur in patients receiving ELZONRIS. Physicians are advised to monitor for signs and symptoms of CLS and take actions as recommended in the full prescribing information.

 

Stemline’s commercial group is focused on effectively launching ELZONRIS in the U.S., as well as preparing for a potential European launch. The commercial function is comprised of a wide range of functions including commercial operations, sales, marketing, market access and reimbursement. Additionally, the organization has established a medical affairs presence in the field which is predominantly staffed by medical science liaisons. We believe the aforementioned functions represent the necessary infrastructure to support a successful launch of ELZONRIS in BPDCN.

 

Over the past several years, the organization has been focused on preparing the market, the product, and the organization for the successful launch of ELZONRIS. In December 2017, we launched our BPDCN disease awareness campaign at the American Society of Hematology, or ASH, annual meeting. One of the campaign’s primary goals is to try to ensure that multidisciplinary healthcare professionals, including hematologist-oncologists, dermatologists, pathologists, and allied healthcare professionals are appropriately testing for CD123 to bring the diagnosis of BPDCN to the forefront and to limit misdiagnoses and underdiagnoses. The campaign highlights the importance of CD123 as a key diagnostic marker for correct patient diagnosis.

 

Access to ELZONRIS remains a top priority within our managed care group with key success criteria identified as removing hurdles to product access and reimbursement. We have set up a formal commercial co-payment assistance program known as the Stemline ARC program, and have donated to an independent 501(c)(3) foundation for patients with BPDCN that require assistance. Marketing, sales and medical affairs staffing efforts are scaled up to the “right size.” European staffing and infrastructure needs have been assessed and we are enacting a similar “right size” approach to meet the needs of a potential European Union launch. We are also seeking to broaden the commercial potential of ELZONRIS, globally, through ongoing clinical trials in additional indications including CMML, myelofibrosis, or MF, AML, as well as additional planned trials in other indications. Additional planned trials include maintenance therapy after stem cell transplant in patients with BPDCN and AML subsets enriched for CD123 expression and/or with BPDCN-like features.

 

Clinical pipeline product candidates

 

SL-801

 

SL-801 is a structurally novel, oral, small molecule, reversible inhibitor of Exportin-1, or XPO1, a nuclear transport protein implicated in a variety of malignancies. SL-801 has demonstrated preclinical in vitro and in vivo antitumor activity against a wide array of solid and hematologic cancers. SL-801’s potential ability to reversibly bind XPO1 may offer the possibility to mitigate side effects and help optimize the therapeutic index. We are currently enrolling patients with advanced solid tumors in a Phase 1 dose escalation trial of single agent SL-801. The dosing regimen for SL-801 was revised in light of the occurrence of non-dose limiting gastrointestinal effects. We have resumed dosing at 70 mg/day with a new schedule, days 1-2 every 7 days of a 28-day cycle, and we expect to provide further data updates later this year.

 

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SL-701

 

SL-701 is an immunotherapy designed to direct the immune system to attack targets present on brain cancer and other malignancies. SL-701 is comprised of several short synthetic peptides that correspond to epitopes of targets including IL-13Rα2, EphA2, and survivin; two of these synthetic peptides (IL-13Rα2 and survivin) are mutant and believed to enhance immune activity. We completed a Phase 2 trial of SL-701 in adult patients with second-line glioblastoma, or GBM. Phase 2 data preliminarily suggest SL-701 is generating target specific CD8+ T-cell responses in patients, which may be translating into improved clinical outcomes, including improved overall survival, or OS, in a subset of patients, which could form the basis of studies. SL-701 was awarded ODD from the FDA for the treatment of glioma in January 2015. We expect to provide further updates relating to this program later this year.

 

S L-901

 

SL-901 is an oral, small molecule kinase inhibitor. In December 2017, we in-licensed this drug candidate from UCB Biopharma SPRL. Prior to in-licensing, the agent had demonstrated preclinical activity in several tumor types, and was evaluated in an abbreviated Phase 1 clinical trial in Europe. A partial response, or PR, was reported in one patient with advanced lung cancer. Neither a dose-limiting toxicity nor a maximum tolerated dose was reached in the trial and we believe further dose escalation is possible and warranted. We also believe that SL-901 may have utility in certain non-oncologic orphan diseases and preclinical work in this area is ongoing. We are currently evaluating plans to enable a new regulatory filing, including an Investigational New Drug (IND) application and IND-enabling work, to continue clinical dose escalation and exploration.

 

SL-1001

 

SL-1001 is an oral, selective small molecule RET (rearranged during transfection) kinase inhibitor. Genetic alterations in the RET kinase have been found in a diverse range of cancers. We believe RET kinase represents a clinically validated target in multiple oncology indications. In March 2019, we in-licensed this preclinical drug candidate from the CRT Pioneer Fund. The candidate was rationally designed by scientists at Cancer Research UK Manchester Institute (United Kingdom), and has demonstrated potent, selective, preclinical anti-cancer activity, both in vitro and in vivo, in RET-driven tumor models. IND-enabling studies are planned, and we expect to begin clinical studies of SL-1001 in 2020.

 

SL-501

 

SL-501 is a novel CD123-targeted therapy in preclinical development that has shown potency, in vitro and in vivo, against several hematologic tumor types, including AML, CMML, Hodgkin’s lymphoma, and NHL.

 

Financings

 

We have devoted substantially all of our resources to the preclinical and clinical development of our products and product candidates, the design and implementation of our regulatory strategy for our Biologics License Application, or BLA, and MAA filings, preparation for the commercialization and launch of our approved product, manufacturing our product and product candidates, strengthening and building our intellectual property portfolio, conducting investor relations, raising capital, providing general and administrative support for these operations, and the execution of our business plan. We have funded our operations primarily through public sales of common stock to our investors. With the U.S. commercial launch of ELZONRIS currently underway, we have recently begun partially funding our operations through net product revenues. For the three months ended March 31, 2019, we have generated $5.0 million in net product revenue for ELZONRIS.

 

From inception through March 31, 2019, we have received net proceeds of $364.4 million from the sale of common stock through the initial public offering and five follow-on public offerings.

 

On January 18, 2019, we completed an underwritten follow-on public offering of 8,888,889 shares of our common stock, which included the underwriters’ exercise in full of the option to purchase 1,333,333 additional shares, at a price of $9.00 per share. Aggregate gross proceeds from the follow-on public offering, including the exercise of the

 

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over-allotment option, were $92 million, and net proceeds received after underwriting fees and offering expenses were approximately $86.2 million.

 

We have never been profitable and our net loss from operations for the three months ended March 31, 2019 and 2018 was $27.4 million and $18.4 million, respectively. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses to trend higher in connection with our ongoing activities, particularly as we commercialize our approved product in the U.S., seek approval and build out a commercial infrastructure in Europe, advance our approved product through clinical trials to seek regulatory approval in additional indications, advance our other product candidates through clinical trials to seek regulatory approval and, when and if approved, commercialize such product(s) and product candidates, as well as conducting manufacturing campaigns and various preclinical activities. Accordingly, we may need additional financing to support our continuing operations. We may seek to fund our operations through public or private equity or debt financings or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital if and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant income to achieve profitability, and we may never do so.

 

Litigation

 

From time to time, we are involved in legal proceedings in the ordinary course of our business. Refer to Footnote 17: Commitments and Contingencies for more information on legal proceedings.

 

Financial Operations Overview

 

Product Revenues

 

Total revenue consists of net sales of ELZONRIS, which was approved by the FDA on December 21, 2018 and launched in the U.S. in January 2019. Net sales represents the gross sales of ELZONRIS in the U.S. less provisions for product sales allowances and accruals. These provisions include trade allowances, rebates, chargebacks, discounts, and product returns. Although we expect net sales to increase over time, the provisions for product sales and allowances may fluctuate based on the mix of sales to different customer segments, rates of returns, and/or changes in our accrual estimates.

 

Research and Development Expenses

 

The following table shows our research and development expenses for the three-month periods ended March 31, 2019 and 2018, respectively:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

ELZONRIS

 

$

9,116,428

 

$

8,006,591

 

Other product candidates

 

 

1,722,290

 

 

1,055,074

 

Personnel expenses

 

5,550,846

 

3,136,482

 

Other expenses

 

564,258

 

509,911

 

Total

 

$

16,953,822

 

$

12,708,058

 

 

Research and development expenses consist of costs associated with the development of our product candidates and our platform technology, which include:

 

·                   clinical trial costs;

 

·                   chemistry, manufacturing and controls, or CMC, related costs, particularly as they relate to process characterization and validation expenses for ELZONRIS as required to support BLA or New Drug Application, or NDA, and equivalent foreign regulatory submission requirements;

 

·                   nonclinical costs;

 

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·                   regulatory costs, including BLA or NDA related expenses;

 

·                   employee-related expenses, including salaries, benefits, travel and stock-based compensation expense, and consultant costs;

 

·                   costs associated with work contracted and conducted by third-party contract research organizations, or CROs, contract manufacturing organizations, or CMOs, academic institutions and consultants; and

 

·                   license fees and milestone payments related to in-licensed products and technology.

 

We expense research and development costs to operations as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities expenses when the services have been performed or when the goods have been received, rather than when the payments are made.

 

We use our employee and infrastructure resources across multiple research and development projects. We do not allocate employee-related expenses or depreciation to any particular project. The components of our research and development costs are described in more detail in “Results of Operations.”

 

We anticipate that our future research and development expense levels will trend higher in future periods as we continue the preclinical and clinical development of our other product candidates, including ELZONRIS in additional indications and territories.

 

The successful development of ELZONRIS in additional indications, including but not limited to CMML, and our other product candidates is highly uncertain. As of this time, other than as discussed above, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete development of our product candidates or the period, if any, in which material net cash inflows from our product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

·                   the scope, enrollment, rate of progress and costs of our planned, as well as any additional, clinical trials and other research and development activities;

 

·                   timing and results of future clinical trials;

 

·                   the potential benefits of our product candidates over other therapies;

 

·                   the potential safety risks of our product candidates compared to other therapies;

 

·                   the costs, timing and outcome of regulatory interactions, submissions, and potential approvals;

 

·                   our ability to market and commercialize, either on our own or with strategic partners, and achieve market acceptance and reimbursement for any of our product candidates that we are developing or may develop in the future;

 

·                   our ability to manufacture, at a reasonable expense, adequate supplies or our product candidates for use in planned and future clinical trials and/or commercial distribution in the event of a successful regulatory approval; and

 

·                   the costs of preparing, filing, prosecuting, defending and enforcing patents and other intellectual property.

 

A change in the outcome of any of these or similar variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA, or other regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of a product candidate, we could be required to expend significant additional financial resources and time on the completion of clinical

 

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development. A similar result could occur if we experience significant delays in the progress of, including enrollment in, any clinical trials.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation expense. The primary functions included in our selling, general and administrative expenses are commercial, legal, finance, human resources, investor relations, and business development. Other general and administrative expenses include facility costs, insurance expense and professional fees for consulting and accounting services.

 

We anticipate that our selling, general and administrative expenses will be higher in future periods due to the build out of a commercial infrastructure and regulatory compliance systems to support a potential commercial launch of ELZONRIS in the European Union, if marketing approval is obtained from the EMA.

 

Interest Income

 

Interest income consists of interest earned on our cash, cash equivalents, short-term investments and long-term investments. Given the current interest rate environment and that our primary investment is in 100% U.S. Treasury and Agency securities and related money market funds coupled with FDIC-insured bank certificates of deposits, we expect interest income to be minimal in future quarters.

 

Critical Accounting Policies and Estimates

 

To understand our financial statements, it is important to understand our critical accounting policies and estimates. We prepare our financial statements in accordance with generally accepted accounting principles, or GAAP. The preparation of financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

 

For a discussion of our critical accounting estimates, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018. During the three months ended March 31, 2019, the changes to the significant accounting policies mainly relate to the commercialization of ELZONRIS, which includes product net revenue, accounts receivable, and inventory.

 

Revenue Recognition

 

Effective January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations; and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. We have determined that the delivery of our product to our customer constitutes a single performance obligation as there are no other promises to deliver goods or services. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation. We have assessed the existence of a significant financing component in the agreements with our customer. The trade payment terms with our customer do not exceed one year and therefore, no amount of consideration has been allocated as a financing component. Taxes collected related to product sales are remitted to governmental authorities and are excluded from revenue.

 

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Product Revenue, Net: We have obtained marketing approval from FDA to sell ELZONRIS in the United States market. We sell ELZONRIS to our customer through its title distribution channel. The Customer subsequently resells ELZONRIS to a limited number of specialty distributors who, in turn, distributes ELZONRIS to specialty hospitals.

 

We recognize revenue on sales of ELZONRIS when our customer obtains control of the product, which occurs at a point in time (typically upon delivery). Product revenues are recorded at the wholesale acquisition costs, net of applicable reserves for variable consideration. Components of variable consideration include government rebates, product returns, commercial co-payment assistance programs, and distribution service fees. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as a current liability. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled with respect to product revenue that has been recognized.

 

The amount of variable consideration which 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 contracts will not occur in a future period. Our analyses contemplate the application of the constraint in accordance with ASC 606. For the three months ended March 31, 2019, we determined a material reversal of revenue would not likely occur in a future period for the estimates detailed below and, therefore, the transaction price was not reduced further. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

 

Government Contracts: We entered into contracts (i) to participate in the Medicaid Drug Rebate Program and the Medicare Part D program, and (ii) to sell to the U.S. Department of Veterans Affairs, 340b entities, and other government agencies (“Government Payors”) so that ELZONRIS will be eligible for purchase by, in partial or full reimbursement from, such Government Payors. These reserves are recorded in the same period the revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability, which is included in accrued expenses and other current liabilities. For Medicare Part D, we estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program.

 

We estimate the rebates that will be provided to Government Payors for these programs. These rebate estimates are based upon (i) the government-mandated discounts applicable to government-funded programs, (ii) information obtained from its customer and (iii) information obtained from other third parties regarding the payor mix for ELZONRIS. The liability for these rebates consists of estimates of claims for the current year and estimated future claims that will be made for product shipments that have been recognized as revenue but remain in the distribution channel inventories at the end of each reporting period.

 

Product Returns: Consistent with industry practice, we offer a limited right of return for product that has been purchased. To estimate sales with a right of return, we will assess, on a quarterly basis, the number of vials that are held in inventory throughout the distribution channel. Amounts for estimated product returns are established in the same period that the related gross 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 and other current liabilities.

 

Commercial Co-Payment Assistance Program: We offer co-pay assistance programs which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug copayments required by payers. 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 and other current liabilities.

 

Distribution Fees: Distribution fees include fees paid to our distributors for the distribution of our product based on contractual rates. In addition, we compensate for data and other administrative activities. Therefore, estimates for these costs are recorded as a reduction of revenue, based on contractual terms.

 

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Accounts Receivable, Net

 

Accounts receivable, net primarily relates to amounts due from our customer, net of applicable revenue reserves. We analyze accounts that are past due for collectability and provides an allowance for receivables when collection becomes doubtful. Given the nature and limited history of collectability of our accounts receivable, an allowance for doubtful accounts is not deemed necessary at March 31, 2019.

 

Inventory

 

We capitalize inventory costs associated with the manufacturing of ELZONRIS after regulatory approval or when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. Otherwise, such costs are expensed as research and development. The majority of manufacturing costs for ELZONRIS units recognized as revenue during the three months ended March 31, 2019 were expensed to research and development prior to FDA approval on December 21, 2018.

 

We value our inventories at the lower of cost or estimated net realizable value. We determine the cost of our inventories, which includes amounts related to materials and manufacturing overhead, on a first-in, first-out basis. We perform an assessment of the recoverability of capitalized inventory during each reporting period, and we write 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 product revenues. 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 which would be recorded as a cost of product sales in the statement of operations and comprehensive loss.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued a comprehensive new revenue recognition ASU, Revenue From Contracts With Customers (Topic 606) (ASU 2014-09). ASU 2014-09 provides guidance to clarify the principles for recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize income to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted for fiscal years and interim periods beginning after December 15, 2016. We adopted this guidance on January 1, 2018 using the full retrospective method. Any future contracts with customers will be accounted for under the new guidance effective January 1, 2018.

 

As noted above in Note 10 to our Financial Statements, the Company has received grant income from the Leukemia and Lymphoma Society (“LLS”), to fund the Company’s development program related to the Company’s preclinical and clinical product development activities. The Company has determined that LLS is not a customer as defined by Topic 606. We recognize grant income when there is reasonable assurance of compliance with the conditions of the grant and reasonable assurance that the grant income will be received based on the Company’s best estimates of work performed and qualifying costs incurred.

 

In January 2016, the FASB issued a new ASU,  Recognition and Measurement of Financial Assets and Financial Liabilities ( ASU 2016-01). ASU 2016-01 amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted for certain changes. We adopted this guidance on January 1, 2018 and it had no impact on the Balance Sheet, Statement of Operations, or Statement of Cash Flows.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02) , which supersedes ASC 840, Leases. The amendments in this update will increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under ASU 2016-02, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. ASU 2016-02 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under prior GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

 

The guidance permits a practical expedient with regards to initial adoption, allowing adopters the option to apply the new leases standard prospectively at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this expedient, comparative periods presented in the financial statements in which the new lease standard is adopted will continue to be presented in accordance with prior GAAP.

 

We adopted this standard on January 1, 2019 using the prospective application method practical expedient. The adoption of this standard had an impact on our Balance Sheet, recognizing a right-of-use asset and lease liability of approximately 2 million. Refer to Note 8 of the financial statements for disclosure requirements related to the adoption of this standard.

 

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In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15) . ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments on the Statement of Cash Flows and amends certain disclosure requirements of ASC 230. The guidance will generally be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the guidance in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the guidance in the same period. We adopted this guidance on January 1, 2018 and it had no impact on the Statement of Cash Flows.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments(ASU 2016-13). ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments -Credit Losses (ASU No. 2018-19) . ASU 2018-19 will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope of this amendment that represent the contractual right to receive cash. ASU 2016-13 and ASU 2018-19 are effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. Adoption of ASU 2016-13 will not have a significant impact on our financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation — Stock Compensation (Topic 718), Scope of Modification Accounting (ASU No. 2017-09) . ASU 2017-09 provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. ASU 2017-09 is applied prospectively to awards modified on or after the effective date. We adopted ASU 2017-09 on January 1, 2018. The adoption of this standard did not have a material impact to our Balance Sheet, Statement of Operations, or Statement of Cash Flows.

 

On June 20, 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718):  Improvements to Nonemployee Share-Based Payment Accounting (ASU No. 2018-07) , which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Entities should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the period of time equity awards vest and the pattern of cost recognition over that period. ASU No. 2018-07 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted and we adopted ASU No. 2018-07 on April 1, 2018. We early adopted ASU No. 2018-07 on April 1, 2018 and the net impact relating to the adoption was a $0.2 million decrease to accumulated deficit for the impact prior to April 1, 2018. In addition, we have elected to account for forfeitures of nonemployee awards as they occur.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13) , which adds disclosure requirements to Topic 820 for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of ASU 2018-13 is not expected to have an impact on our financial statements.

 

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheets must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. As such, we adopted these SEC amendments on November 5, 2018 and will present the analysis of changes in stockholders’ equity in its interim financial statements in its March 31, 2019 Form 10Q. We do not anticipate that the adoption of these SEC amendments will have a material effect on our financial statements.

 

In November 2018, ASU 2018-18 was issued to provide clarity on when transactions between entities in a collaborative arrangement should be accounted for under the new revenue standard, ASC 606. In determining whether transactions in collaborative arrangements should be accounted under the revenue standard, the update specifies that entities shall apply unit of account guidance to identify distinct goods or services and whether such goods and services are separately identifiable from other promises in the contract. ASU 2018-18 also precludes entities from presenting transactions with a collaborative partner which are not in scope of the new revenue standard together with revenue from

 

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contracts with customers. The accounting update is effective January 1, 2020 and early adoption is permitted. The adoption of ASU 2018-18 is not expected to have an impact on our financial statements.

 

In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors (ASU 2018-20) , which addressed implementation questions arising from stakeholders in regard to ASU 2016-02, Leases. Specifically addressed in this update were issues related to 1) sales taxes and other similar taxes collected from lessees, 2) certain lessor costs, and 3) recognition of variable payments for contracts with lease and nonlease components. The amendments in this ASU are effective in the same time-frame as ASU 2016-02 as discussed above. We incorporated this ASU into its assessment and adoption of ASU 2016-02.

 

Results of Operations

 

Comparison of Three Months Ended March 31, 2019 and 2018

 

Product net revenue .  We began commercial sales of ELZONRIS within the U.S., in January 2019, following receipt of FDA marketing approval on December 21, 2018. For the quarter ended March 31, 2019, we recorded $5.0 million of product revenue. We had no product revenue during the first quarter of 2018.

 

Costs of goods sold .  Cost of goods sold for the first quarter of 2019 was $0.1 million and relates primarily to royalties owed to the licensor of ELZONRIS. The majority of manufacturing costs for ELZONRIS units recognized as revenue during the three months ended March 31, 2019 were expensed to research and development prior to FDA approval on December 21, 2018. We had no cost of goods sold during the first quarter of 2018.

 

Research and development expense .  Research and development expense was $17.0 million for the quarter ended March 31, 2019, compared with $12.7 million for the quarter ended March 31, 2018, representing an increase of $4.3 million. The higher costs were primarily due to the $4.4 million expense recorded during the quarter ended March 31, 2019 relating to a milestone payment payable to LLS following FDA approval of our BLA for ELZONRIS and first commercial sale.

 

Selling, general and administrative expense .  Selling, general and administrative expense was $16.0 million for the quarter ended March 31, 2019, compared with $5.9 million for the quarter ended March 31, 2018, representing an increase of $10.1 million. The increase in costs were primarily attributable to launch expenses in support of the commercialization of ELZONRIS and compensation costs related to increase in headcount to support the commercial launch.

 

Interest income .  Interest income was $0.5 million for the quarter ended March 31, 2019, compared with $0.2 million for the quarter ended March 31, 2018, representing an increase of $0.3 million. The increase was primarily due to higher average cash and investment balances during 2019 versus the prior year.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

As of March 31, 2019, our cash, cash equivalents and short-term investments totaled $124.4 million. We primarily invest our cash, cash equivalents, and short-term investments in U.S. Treasury and Agency securities and related money market funds and FDIC-insured bank certificates of deposit, with the balance

 

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in commercial bank operating accounts. We believe that our existing cash, cash equivalents, and short-term investments will be sufficient to fund our operations for at least the next two years.

 

We have financed our operations to date primarily through proceeds from public sales of common stock via our 2013 initial public offering, or IPO, and subsequent follow-on public offerings. Since inception through March 31, 2019, we received net proceeds of $364.4 million from these offerings. We expect our operations to be partially funded in the future by cash inflows from revenues from ELZONRIS. We generated $5.0 million of net product revenues from ELZONRIS for the three months ended March 31, 2019. We have incurred losses and generated negative cash flows from operations since inception. On January 18, 2019, the Company completed its follow-on public offering, selling 8,888,889 shares at an offering price of $9 per share. Additionally, the underwriters exercised in full their over-allotment option to purchase an additional 1,333,333 shares at an offering price of $9 per share. Aggregate gross proceeds from the follow-on public offering, including the exercise of the over-allotment option, were $92 million, and net proceeds received after underwriting fees and offering expenses were approximately $86.2 million.

 

Cash Flows

 

The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Net cash used in operating activities

 

$

(22,137,027

)

$

(17,085,227

)

Net cash used in investing activities

 

(49,629,151

)

(29,622,123

)

Net cash provided by financing activities

 

86,337,021

 

57,143,090

 

Net increase in cash and cash equivalents

 

$

14,570,843

 

$

10,435,740

 

 

Operating activities .  The use of cash in all periods resulted primarily from our net losses adjusted for stock-based compensation expense, non-cash depreciation expense and changes in the components of working capital. The net cash used in operating activities during the three months ended March 31, 2019 and 2018 resulted from research and development expenses as we continue our clinical trial activities relating to ELZONRIS, SL-801, and SL-701. Additional research and development costs also include CMC-related expenses for the manufacture of drug substance and drug product of our product candidates in development. Our cash from operating activities was also effected by the manufacturing of commercial drug product during the three-month period ended March 31, 2019. Additionally, our use of cash reflected significant commercial infrastructure expenses to support the U.S. commercial launch of ELZONRIS in December 2018.

 

Investing activities .  The net cash provided by and used in financing activities for the three months ended March 31, 2019 and 2018, respectively, reflects purchases and redemptions of short-term and long-term investments within our U.S. Treasury-related investment and bank certificate of deposit portfolios, net of maturities.

 

Financing activities .  The net cash provided by financing activities for the three months ended March 31, 2019 resulted primarily from our January 2019 issuance and sale of 10,222,222 common shares via our follow-on public offering. We sold 8,888,889 shares at an offering price of $9 per share. Additionally, the underwriters exercised in full their over-allotment option to purchase an additional 1,333,333 shares at an offering price of $9 per share. Aggregate gross proceeds from the follow-on public offering, including the exercise of the over-allotment option, were $92 million, and net proceeds received after underwriting fees and offering expenses were approximately $86.2 million. The net cash provided by financing activities for the three months ended March 31, 2018 resulted primarily from our January 2018 issuance and sale of 4,255,000 common shares via our follow-on public offering. We sold 3,700,000 shares at an offering price of $14 per share. Additionally, the underwriters exercised in full their over-allotment option to purchase an additional 555,000 shares at an offering price of $14 per share. Aggregate gross proceeds from the follow-on public offering, including the exercise of the over-allotment