Item 7.
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, 2019 as filed with the SEC on February 26, 2020 (“2019 Form
10-K”).
123
Table of Contents
Liquidity and Capital Resources
Overview
During the third quarter of 2019, we began generating revenues from product sales, as XPOVIO first became commercially available in the U.S. in July 2019. While we began to generate revenue from the sales of XPOVIO in July 2019, to date, we have financed our operations through a combination of product revenue sales and through private placements of our preferred stock, proceeds from our initial public offering and
follow-on
offerings of common stock, proceeds from the issuance of convertible debt, proceeds pursuant to the deferred royalty obligation, and cash generated from our business development activities.
As of December 31, 2020, our principal source of liquidity was $273.5 million of cash, cash equivalents and investments. We have had recurring losses and incurred a loss of $196.3 million for the year ended December 31, 2020. Net cash used in operations for the year ended December 31, 2020 was $160.2 million. We expect that cash, cash equivalents and investments at December 31, 2020 will be sufficient to fund our current operating plans and capital expenditure requirements for at least twelve months from the date of issuance of the financial statements contained in this Annual Report on Form
10-K.
Sources of Liquidity
On May 5, 2020, we entered into Amendment No. 1 to the Open Market Sale Agreement, dated August 17, 2018 (the “Open Market Sale Agreement”), with Jefferies LLC, as agent (“Jefferies”), pursuant to which we increased the maximum aggregate offering price of shares of our common stock that we may issue and sell from time to time through Jefferies, by $100.0 million from $75.0 million to up to $175.0 million. We did not sell any shares under the Open Market Sale Agreement during 2020. As of December 31, 2020, we have sold an aggregate of 3,712,359 shares under the Open Market Sale Agreement, for net proceeds of approximately $46.2 million, all of which were sold in 2019.
On March 6, 2020, we completed a
follow-on
offering under our shelf registration statement on
Form S-3
pursuant to which we issued an aggregate of 7,187,500 shares of common stock, which included the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $24.00 per share. We received aggregate net proceeds of approximately $161.8 million from the offering after deducting the underwriting discounts and commissions and other offering expenses.
On September 14, 2019, we entered into a deferred royalty obligation with HealthCare Royalty Partners III, L.P. and HealthCare Royalty Partners IV, L.P. (“HCR”). Pursuant to the deferred royalty obligation, HCR paid us $75.0 million, less certain transaction expenses, at the initial closing, which occurred on September 27, 2019, as disclosed in Note 15 “
Long-term Obligations”
to the Consolidated Financial Statements included under Part II, Item 8 of this Annual Report on Form
10-K.
On October 16, 2018, we completed an offering of $150.0 million aggregate principal amount of the Notes. In addition, on October 26, 2018, we issued an additional $22.5 million aggregate principal amount of the Notes pursuant to the full exercise of the option to purchase additional Notes granted to the initial purchasers in the offering. The Notes were sold in a private offering to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the sale of the Notes was $166.9 million, after deducting the initial purchasers’ discounts and commissions and actual offering expenses payable by us.
On May 7, 2018, we completed a
follow-on
offering under our shelf registration statement on
Form S-3
(File
No. 333-222726)
pursuant to which we issued an aggregate of 10,525,424 shares of common stock, which included the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $14.75 per share. We received aggregate net proceeds of approximately $145.7 million from the offering after deducting the underwriting discounts and commissions and other offering expenses.
124
Table of Contents
During the year ended December 31, 2020, we received $17.2 million in upfront payments under our license and distribution arrangements pursuant to which we are also entitled to receive milestone payments, if certain development goals and sales milestones are achieved, as well as royalties on future net sales of the licensed and sold products in the territories under such arrangements. We did not receive upfront payments under license and distribution arrangements during the year ended December 31, 2019.
Cash flows
The following table provides information regarding our cash flows:
Years Ended December 31,
Effect of exchange rate changes 268 19 (78 )
Net Cash Used in Operating Activities
Net cash used in operating activities was $160.2 million during the year ended December 31, 2020 compared to $190.8 million during the year ended December 31, 2019. Net cash used in operating activities in both periods resulted primarily from our net losses adjusted for
non-cash
charges and changes in the components of working capital. The decrease in cash used in operating activities during the year ended December 31, 2020 compared to the year ended December 31, 2019 was driven by a $3.3 million decrease in our net loss due to increased revenues year over year and an increase of $12.6 million in
non-cash
charges and a $14.7 million increase in the components of working capital.
Net Cash (Used in) Provided by Investing Activities
Net cash used in investing activities was $53.7 million during the year ended December 31, 2020, and changed by approximately $132.1 million compared to $78.5 million in net cash provided by investing activities during the year ended December 31, 2019. The change was primarily related to a $96.1 million increase in the purchases of investments, coupled with a $36.1 million decrease in proceeds from the maturities of investments.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $172.1 million during the year ended December 31, 2020 compared to $124.3 million during the year ended December 31, 2019. The $47.8 million increase was primarily related to the net cash proceeds of $161.8 million from the sale of shares of our common stock from the
follow-on
offering under our shelf registration statement on Form
S-3
during the first quarter of 2020, coupled with a $5.8 million increase in proceeds from the exercise of stock options and shares issued under our Employee Stock Purchase Plan in the year ended December 31, 2020 compared to the year ended December 31, 2019. This activity was partially offset by the $73.6 million in net proceeds received in the third quarter of 2019 from the execution of our deferred royalty obligation and the net proceeds of $46.2 million from the sale of shares of our common stock under the Open Market Sale Agreement during the year ended December 31, 2019.
A discussion of changes in our cash flow from the year ended December 31, 2018 to the year ended December 31, 2019 can be found in Part II, Item 7, “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” of the 2019 Form
10-K.
125
Table of Contents
Funding Requirements
We expect our expenses to increase in connection with our ongoing activities, particularly as we continue to commercialize XPOVIO and continue the clinical trials of, and as we seek marketing approval for, our product candidates. In addition, we expect to incur significant commercialization expenses related to sales, marketing, manufacturing and distribution of any of our product candidates for which we obtain marketing approval, to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of any collaborator that we may have at such time for any such product candidate. Furthermore, we expect to continue to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or commercialization efforts.
We anticipate that we will continue to incur substantial expenses as we continue to commercialize XPOVIO in the U.S. and potentially outside of the U.S. and engage in activities to prepare for the potential approval and commercialization of additional indications for selinexor as well as our other product candidates. For a description of these expenses, please refer the risk factor entitled “
We have incurred significant losses since inception, expect to continue to incur significant losses, and may never achieve or maintain profitability
.” under the heading “
Risk Factors
” in this Annual Report on Form 10-K.
We expect that cash, cash equivalents and short- and long-term investments at December 31, 2020 will be sufficient to fund our current operating plans and capital expenditure requirements for at least twelve months from the date of issuance of the financial statements contained in this Annual Report on
Form 10-K
while we continue to commercialize XPOVIO in the U.S. and continue the clinical trials of our product candidates. Our future capital requirements will depend on many factors, including:
• the amount and timing of revenue generated from commercial sales of XPOVIO;
• costs related to the sales and marketing of XPOVIO;
• the costs, timing and outcome of regulatory review of our product candidates;
• the success of any collaborations that we may enter into with third parties;
• the extent to which we acquire or in-license other products or technologies;
Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete. In addition, our product candidates for which we receive marketing approval may not achieve commercial success. Our ability to become and remain profitable depends on our ability to generate revenue. While we began to generate revenue from the sales of XPOVIO in July 2019, there can be no assurance as to the amount or timing of any such revenue, and we may
126
Table of Contents
not achieve profitability for several years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. We may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans.
Off-Balance
Sheet Arrangements
We did not have, during the periods presented, and we do not currently have, any
off-balance
sheet arrangements, as defined under applicable Securities and Exchange Commission rules.
Inflation
We do not believe that inflation has had a significant impact on our revenues or results of operations since inception.
Recently Issued Accounting Pronouncements
Recent accounting pronouncements which may be applicable to us are described in Note 2 “
Summary of Significant Accounting Policies”
to our Consolidated Financial Statements included under Part II, Item 8 of this Annual Report on Form
10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk related to changes in interest rates. We had cash, cash equivalents, and investments of $273.5 million as of December 31, 2020. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point shift in interest rates would have an impact of approximately $1.0 million on the fair market value of our investment portfolio.
We do not believe our cash, cash equivalents, restricted cash and investments have significant risk of default or illiquidity. While we believe our cash, cash equivalents and investments do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in securities at one or more financial institutions that are in excess of federally insured limits. Given the potential instability of financial institutions, we cannot provide assurance that we will not experience losses on these deposits and investments.
We are also exposed to market risk related to changes in foreign currency exchange rates. We contract with contract research organizations and contract manufacturing organizations that are located in Canada and Europe, which are denominated in foreign currencies. We also contract with a number of clinical trial sites outside of the U.S., and our budgets for those studies are frequently denominated in foreign currencies. We are subject to fluctuations in foreign currency rates in connection with these agreements. We do not currently hedge our foreign currency exchange rate risk.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, together with the report of our independent registered public accounting firm, appears on pages 132 through 139 of this Annual Report on
Form 10-K.
127
Table of Contents
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms prescribed by the Securities and Exchange Commission and is accumulated and communicated to management, including the principal executive officer (our Chief Executive Officer) and principal financial officer (our Senior Vice President, Chief Financial Officer and Treasurer), to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our Chief Executive Officer and Senior Vice President, Chief Financial Officer and Treasurer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by this Annual Report on
Form 10-K.
Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on such evaluation, our Chief Executive Officer and Senior Vice President, Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2020.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Rules13a-15(f)
and15d-15(f)
of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
Under the supervision and with the participation of management, including our principal executive officer and principal financial officer we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under that framework, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
Our independent registered public accounting firm that audited the financial statements included in this Annual Report on Form
10-K
has issued an attestation report on our internal control over financial reporting, which is included below.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by
Rule 13a-15(d)
and
15d-15(d)
of the Exchange Act that occurred during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
128
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Karyopharm Therapeutics Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Karyopharm Therapeutics Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Karyopharm Therapeutics Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2020 consolidated financial statements of the Company and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 24, 2021
129
Table of Contents
Item 9B. Other Information
None.
130
Table of Contents
PART III
Certain information required by Part III is omitted from this Annual Report on
Form 10-K
and is incorporated by reference from our definitive proxy statement relating to our 2021 annual meeting of stockholders, pursuant to Regulation 14A of the Exchange Act, which we refer to as our 2021 Proxy Statement. We expect to file our 2021 Proxy Statement with the SEC within 120 days of December 31, 2020.
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding our directors, including the audit committee and audit committee financial experts, and compliance with Section 16(a) of the Exchange Act, if applicable, will be included in our 2021 Proxy Statement and is incorporated herein by reference. Information regarding our executive officers is set forth in “
Business—Information about Our Executive Officers
” in Part I, Item 1 of this Annual Report on Form
10-K.
We have adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees as required by Nasdaq governance rules and as defined by applicable SEC rules. Stockholders may locate a copy of our Code of Business Conduct and Ethics on our website at www.karyopharm.com or request a copy without charge from:
Karyopharm Therapeutics Inc.
Attention: Investor Relations
85 Wells Avenue, 2
nd
Floor
Newton, MA 02459
We will post to our website any amendments to the Code of Business Conduct and Ethics and any waivers that are required to be disclosed by the rules of either the SEC or Nasdaq.
Item 11. Executive Compensation
The information required by this Item 11 of
Form 10-K
regarding executive compensation will be included in our 2021 Proxy Statement and is incorporated herein by reference.
The information required by this Item 12 of
Form 10-K
regarding security ownership of certain beneficial owners and management and securities authorized for issuance under equity compensation plans will be included in our 2021 Proxy Statement and is incorporated herein by reference.
The information required by this Item 13 of
Form 10-K
regarding certain relationships and related transactions and director independence will be included in our 2021 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 of
Form 10-K
regarding principal accountant fees and services will be included in our 2021 Proxy Statement and is incorporated herein by reference.
131
Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The financial statements listed below are filed as a part of this Annual Report on
Form 10-K.
Pagenumber
Report of Independent Registered Public Accounting Firm 133
Notes to Consolidated Financial Statements 140
(a)(2) Financial Statement Schedules
All financial schedules have been omitted because the required information is either presented in the consolidated financial statements or the notes thereto or is not applicable or required.
(a)(3) Exhibits
The exhibits required by Item 601 of
Regulation S-K
and Item 15(b) of this Annual Report on
Form 10-K
are listed in the Exhibit Index immediately preceding the signature page of this Annual Report on Form
10-K
and are incorporated herein.
Item 16. Form 10-K Summary
None.
132
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and
the Board of Directors of Karyopharm Therapeutics Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Karyopharm Therapeutics Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Adoption of ASU
No. 2016-02
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU)
No. 2016-02,
Leases
, and related amendments.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
133
Table of Contents
Accrued Research and Development Costs
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2014.
Boston, Massachusetts
February 24, 2021
134
Table of Contents
Karyopharm Therapeutics Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
December 31,
Assets
Current assets:
Prepaid expenses and other current assets 9,285 7,289
Operating lease right-of-use assets 9,363 10,617
Liabilities and stockholders’ equity
Current liabilities:
Other current liabilities 609 500
Operating lease liabilities, net of current portion 11,285 13,202
Deferred revenue, net of current portion — 2,192
Stockholders’ equity:
Accumulated other comprehensive income (loss) 518 (37 )
Total liabilities and stockholders’ equity $ 313,050 $ 294,963
The accompanying notes are an integral part of these consolidated financial statements.
13
5
Table of Contents
Karyopharm Therapeutics Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
For the Years Ended December 31,
Revenues:
Operating expenses:
Other income (expense):
Other income (expense), net 206 (50 ) (33 )
Income tax provision (309 ) (40 ) (26 )
Net loss per share—basic and diluted $ (2.72 ) $ (3.22 ) $ (3.14 )
The accompanying notes are an integral part of these consolidated financial statements.
13
6
Table of Contents
Karyopharm Therapeutics Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
For the Years Ended December 31,
Comprehensive income (loss):
Unrealized gains on investments 288 207 39
Foreign currency translation adjustments 267 — (66 )
The accompanying notes are an integral part of these consolidated financial statements.
1
37
Table of Contents
Karyopharm Therapeutics Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
Common Shares
Vesting of restricted stock 114 — — — — —
Stock-based compensation expense — — 17,275 — — 17,275
Equity component of convertible senior notes — — 67,850 — — 67,850
Unrealized gain on investments — — — 39 — 39
Foreign currency translation adjustment — — — (66 ) — (66 )
Vesting of restricted stock 18 — — — — —
Stock-based compensation expense — — 15,291 — — 15,291
Unrealized gain on investments — — — 207 — 207
Vesting of restricted stock 204 — — — — —
Stock-based compensation expense — — 24,407 — — 24,407
Unrealized gain on investments — — — 288 — 288
Foreign currency translation adjustment — — — 267 — 267
The accompanying notes are an integral part of these consolidated financial statements.
1
38
Table of Contents
Karyopharm Therapeutics Inc.
Consolidated Statements of Cash Flows
(in thousands)
For the Year Ended December 31,
Operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Net amortization of premiums and discounts on investments 1,419 (1,382 ) 29
Amortization of debt discount and issuance costs 8,071 7,193 1,420
Realized and unrealized gain on marketable equity securities (15 ) — —
Inventory obsolescence charge 329 — —
Change in fair value of embedded derivative liability (500 ) — —
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (1,996 ) (868 ) (4,663 )
Operating lease right-of-use assets 1,254 1,094 —
Deferred rent — — 2,646
Operating lease liabilities (1,646 ) (1,175 ) —
Investing activities
Purchases of property and equipment (145 ) (206 ) (2,363 )
Financing activities
Proceeds from deferred royalty obligation, net — 73,609 —
Supplemental disclosures:
Cash paid for interest on convertible debt $ 5,175 $ 5,175 $ —
Cash paid for interest on deferred royalty obligation $ 6,014 $ — $ —
The accompanying notes are an integral part of these consolidated financial statements.
1
39
Table of Contents
Karyopharm Therapeutics Inc.
Notes to Consolidated Financial Statements
1. Organization and Operations
The Company
We are a commercial-stage pharmaceutical company pioneering novel cancer therapies and dedicated to the discovery, development and commercialization of
first-in-class
drugs directed against nuclear export for the treatment of cancer and other diseases. Our
S
elective
I
nhibitor of
N
uclear
E
xport
(
SINE
) compounds function by binding with and inhibiting the nuclear export protein exportin 1 (“XPO1”). Our initial focus has been on seeking the regulatory approval and commercialization of our lead SINE compound, selinexor, as an oral agent in cancer indications with significant unmet clinical need. We were incorporated in Delaware on December 22, 2008 and have a principal place of business in Newton, Massachusetts.
Our lead asset, XPOVIO
®
(selinexor), received its initial U.S. approval from the U.S. Food and Drug Administration (the “FDA”) in July 2019 and is currently approved and marketed for the following indications: (i) in combination with bortezomib and dexamethasone for the treatment of adult patients with multiple myeloma who have received at least one prior therapy; (ii) in combination with dexamethasone for the treatment of adult patients with relapsed or refractory multiple myeloma who have received at least four prior therapies and whose disease is refractory to at least two proteasome inhibitors, at least two immunomodulatory agents, and an anti-CD38 monoclonal antibody; and (iii) for the treatment of adult patients with relapsed or refractory diffuse large
B-cell
lymphoma (“DLBCL”), not otherwise specified, including DLBCL arising from follicular lymphoma, after at least two lines of systemic therapy.
While we began to generate revenue from the sales of XPOVIO in July 2019, to date, we have financed our operations through a combination of product revenue sales and through private placements of our preferred stock, proceeds from our initial public offering and
follow-on
offerings of common stock, proceeds from the issuance of convertible debt, proceeds pursuant to a revenue interest financing agreement (deferred royalty obligation), and cash generated from our business development activities. As of December 31, 2020, we had an accumulated deficit
of $1.1 billion. We expect to continue to incur significant expenses and we will need to continue to rely on additional financing to achieve our business objectives. We expect that our cash, cash equivalents and investments at December 31, 2020 will be sufficient to fund our current operating plans and capital expenditure requirements for at least twelve months from the date of issuance of these financial statements.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Segment Information
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, in deciding how to allocate resources and in assessing performance. We view our operations and manage our business in one operating segment, which is the business of discovering, developing and commercializing drugs to treat cancer and certain other diseases. All of our revenue to date has been derived in the U.S. All of our material long-lived assets reside in the U.S.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
14
0
Table of Contents
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
On an ongoing basis, we evaluate our estimates, including estimates related to our net product revenue, clinical trial accruals, stock-based compensation expense, interest expense on our deferred royalty obligation and other reported amounts of expenses during the reported period. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Although we regularly assess these estimates, actual results could differ from those estimates. Changes in estimates are recorded in the period in which they become known.
Principles of Consolidation
The consolidated financial statements at December 31, 2020 include the accounts of (i) Karyopharm Therapeutics Inc., (ii) Karyopharm Securities Corp. (“KPSC”, our wholly-owned Massachusetts corporation incorporated in December 2013), (iii) Karyopharm Europe GmbH (our wholly-owned German limited liability company, incorporated in September 2014), (iv) Karyopharm Therapeutics (Bermuda) Ltd. (our limited liability company, registered in Bermuda in March 2015), and (v) Karyopharm Israel Ltd. (our wholly-owned Israeli subsidiary formed in June 2018). All intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of demand deposit accounts and deposits in short-term money market funds. Cash equivalents are stated at cost, which approximates fair value. We consider all highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. We do not hold any money market funds with significant liquidity restrictions that would be required to be excluded from cash equivalents.
Investments
We determine the appropriate classification of our investments in debt securities at the time of purchase. All of our securities are classified as
available-for-sale
and are reported as short-term investments or long-term investments based on maturity dates and whether such assets are reasonably expected to be realized in cash or sold or consumed during the normal cycle of business.
Available-for-sale
investments are recorded at fair value. Short-term and long-term investments are composed of corporate debt securities, commercial paper and U.S. government and agency securities. We review investments whenever the fair value of an investment is less than the amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. We evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for a credit loss is recorded on our consolidated balance sheet, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that is not related to a credit loss is recognized in other comprehensive income (loss). Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when we believe the uncollectability of
an available-for-sale
security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Concentrations of Credit Risk and
Off-Balance
Sheet Risk
Financial instruments which potentially subject us to credit risk consist primarily of cash, cash equivalents and investments. We hold these investments in highly rated financial institutions, and, by policy, limit the
14
1
Table of Contents
amounts of credit exposure to any one financial institution. These amounts at times may exceed federally insured limits. We have not experienced any credit losses in such accounts and do not believe we are exposed to any significant credit risk on these funds. We have no
off-balance
sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.
Fair Value Measurements
Financial instruments, including cash, restricted cash, prepaid expenses and other current assets, accounts payable and accrued expenses, are presented at amounts that approximate fair value at December 31, 2020 and 2019.
We are required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs:
Our cash equivalents are comprised of money market funds, U.S. government and agency securities, commercial paper and corporate debt securities. We measure these investments at fair value. The fair value of cash equivalents held in money market funds and U.S. government and agency securities is determined based on “Level 1” inputs.
Items classified as Level 2 within the valuation hierarchy consist of commercial paper, corporate debt securities, and U.S. government and agency securities. We estimate the fair values of these marketable securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for the same or similar securities, issuer credit spreads, benchmark yields, and other observable inputs. We validate the prices provided by our third-party pricing sources by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances.
In certain cases where there is limited activity or less transparency around inputs to valuation, the related assets or liabilities are classified as Level 3. The embedded derivative liability associated with our deferred royalty obligation is measured at fair value using an option pricing Monte Carlo simulation model and is included as a component of the deferred royalty obligation. The embedded derivative liability is subject to remeasurement at the end of each reporting period, with changes in fair value recognized as a component of other income (expense), net. The assumptions used in the option pricing Monte Carlo simulation model include: (i) our estimates of the probability and timing of related events; (ii) the probability-weighted net sales of XPOVIO and any of our other future products, including worldwide net product sales and upfront payments, milestone payments and royalties; (iii) our risk-adjusted discount rate that includes a company specific risk premium; (iv) our cost of debt; (v) volatility; and (vi) the probability of a change in control occurring during the term of the instrument. Our embedded derivative liability, as well as the estimated fair value of the deferred royalty obligation, is described in Note 15, “
Long-Term obligations
.”
14
2
Table of Contents
The following table presents information about our financial assets and liability that have been measured at fair value at December 31, 2020 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):
Financial assets
Cash equivalents:
Money market funds $ 3,586 $ 3,586 $ — $ —
U.S. government and agency securities 16,000 16,000 — —
Corporate debt securities 2,755 — 2,755 —
Investments:
Short-term:
U.S. government and agency securities 3,002 — 3,002 —
Long-term:
Corporate debt securities (one to two-year maturity) 23,309 — 23,309 —
U.S. government and agency securities (one to two-year maturity) 906 — 906 —
Financial liability
Embedded derivative liability $ 1,800 $ — $ — $ 1,800
The following table presents information about our financial assets that have been measured at fair value at December 31, 2019 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):
Financial assets
Cash equivalents:
Investments:
Short-term:
U.S. government and agency securities 4,997 — 4,997 —
Long-term:
Corporate debt securities (one to two-year maturity) 2,016 — 2,016 —
Financial liability
Embedded derivative liability $ 2,300 $ — $ — $ 2,300
14
3
Table of Contents
The following table sets forth a summary of the changes in the estimated fair value of our embedded derivative liability during the year ended December 31, 2020 (in thousands):
Embedded Derivative Liability
Change in fair value of derivative since issuance (500 )
Our Level 3 embedded derivative liability, as well as the estimated fair value of the deferred royalty obligation, is described in Note 15, “
Long-Term Obligations
”.
Property and Equipment, Net
Property and equipment are recorded at cost, less accumulated
depreciation and amortization.
Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful economic lives of the related assets. Expenditures for maintenance and repairs are charged to expense while the costs of significant improvements are capitalized. Upon retirement or sale, the costs of the assets disposed of and the related accumulated
depreciation or amortization is eliminated from the balance sheets and any related gains or losses are reflected in the consolidated statements of operations.
Leases
We adopted Accounting Standards Update (“ASU”)
2016-02,
Leases (Topic 842)
, as well as subsequent amendments, which were codified in ASC 842, on January 1, 2019, using the optional transition method. Pursuant to the guidance under
ASU 2016-02,
we elected the optional package of practical expedients to leases that commenced prior to the effective date, which allowed us to not reassess: (i) whether expired or existing contracts contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The new standard also allows entities to make certain policy elections, some of which we elected, including: (i) a policy to not record
right-of-use
assets and leases on the balance sheet for short-term leases that qualify and (ii) a policy to not separate lease and
non-lease
components for certain classes of underlying assets on contracts entered into or modified after the effective date. We did not elect the use of hindsight in estimating the lease term for leases subject to transition to the new standard.
The standard had a material impact on our consolidated balance sheet as of December 31, 2019, specifically through recognition of
right-of-use
assets of $11.7 million and lease liabilities of $16.0 million for our existing operating lease for office space in Newton, MA on the effective date. The difference between the operating lease
right-of-use
assets and operating lease liabilities is due to the change in classification of deferred rent and lease incentives through December 31, 2018 of $4.3 million from liabilities to a reduction in our operating lease
right-of-use
assets. The standard did not have a material impact on our consolidated statements of operations and comprehensive loss for the year ended December 31, 2019, as expense for our existing operating leases continues to be recognized consistent with the recognition pattern before adoption of the new standard.
At the inception of an arrangement, we determine if an arrangement is, or contains, a lease based on the unique facts and circumstances present in that arrangement. Lease classification, recognition, and measurement are then determined at the lease commencement date. For arrangements that contain a lease we (i) identify lease and
non-lease
components, (ii) determine the consideration in the contract, (iii) determine whether the lease is an operating or financing lease; and (iv) recognize lease
right-of-use
assets and liabilities. Lease liabilities and their corresponding
right-of-use
assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable and as such, we use
14
4
Table of Contents
our incremental borrowing rate based on the information available at the lease commencement date, which represents an internally developed rate that would be incurred to borrow, on a collateralized basis, over a similar term, an amount equal to the lease payments in a similar economic environment. Most leases include options to renew and, or, terminate the lease, which can impact the lease term. The exercise of these options is at our discretion and we do not include any of these options within the expected lease term as we are not reasonably certain we will exercise these options.
Fixed, or in substance fixed, lease payments on our operating lease are recognized over the expected term of the lease on a straight-line basis. Variable lease expenses that are not considered fixed, or in substance fixed, are recognized as incurred. Fixed and variable lease expense on our operating lease is recognized within operating expenses within our consolidated statements of operations.
Long-Lived Assets
We review the carrying values of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair values less costs to sell. We have not recorded an impairment in any period since inception.
Accrued Research and Development Costs
As part of the process of preparing our consolidated financial statements, we estimate our accrued research and development costs. This process involves reviewing quotes and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. Most of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued research and development costs at each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development costs include fees paid to contract research organizations (“CROs”), and contract manufacturing organizations (“CMOs”), in connection with research and development activities for which we have not yet been invoiced.
We base our expenses related to CROs and CMOs on our estimates of the services received and efforts expended pursuant to quotes and contracts with CROs and CMOs that conduct research and development activities on our behalf. The payment terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our service providers will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimates, we adjust the accrual or prepayment accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. Our estimates have not been materially different than amounts actually incurred to date.
Revenue Recognition
We adopted
ASU 2014-09,
Revenue from Contracts with Customers
, as well as subsequent amendments, which were codified in ASC 606, on January 1, 2018, using the modified retrospective method for all contracts not completed as of the date of adoption. The adoption of ASC 606 did not have a material impact on our consolidated financial position, results of operations, stockholder’s equity or cash flows as of the adoption date, as no transition adjustment for any of our contracts with customers was required.
14
5
Table of Contents
ASC 606 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, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform 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) we satisfy a performance obligation. 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.
Product Revenue Recognition
In the third quarter of 2019, we began to ship XPOVIO in the U.S. to specialty pharmacies and specialty distributors, collectively referred to as our customers, under a limited number of distribution arrangements with such third parties. Our specialty pharmacy customers resell XPOVIO directly to patients, while our specialty distributor customers resell XPOVIO to healthcare entities, who then resell to patients.
In connection with negotiating and executing contracts with our customers, our policy is to expense incremental costs of obtaining a contract when incurred, if the expected amortization period of the asset that we would have recognized is one year or less. However, no such costs have been incurred to date. In addition to distribution agreements with our customers, we enter into certain arrangements with group purchasing organizations and/or other payors that provide for government mandated and/or privately negotiated rebates, chargebacks, and discounts with respect to the purchase of our products.
In the context of ASC 606, each unit of XPOVIO that is ordered by our customers represents a distinct performance obligation that is completed when control of the product is transferred to the customer. Accordingly, we recognize product revenue when the customer obtains control of our product, which occurs at a point in time, generally upon delivery pursuant to our agreements with our customers. If taxes should be collected from customers relating to product sales and remitted to governmental authorities, they will be excluded from revenue.
Revenue from product sales is recorded at the net sales price, which includes estimates of variable consideration for which reserves are reported. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are generally classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). Certain of the amounts noted are known at the time of sale based on contractual terms and, therefore, are recorded pursuant to the most likely amount method under ASC 606. Other amounts are estimated and take into consideration a range of possible outcomes, which are probability-weighted and recorded in accordance with the expected value method in ASC 606 for relevant factors, such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the respective underlying contracts. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contracts with our customers will not occur in a future period.
The following are the components of variable consideration related to product revenue:
Cash discounts and distributor fees:
We provide customary discounts on XPOVIO sales to our customers for prompt payment, terms for which are explicitly stated in our contracts with such customers. We also pay fees
14
6
Table of Contents
for distribution services to our customers for sales order management, data, and distribution services, terms for which are also explicitly stated in our contracts with such customers. Such fees are not for a distinct good or service and, accordingly, are recorded as a reduction of revenue, as well as a reduction to accounts receivable (cash discounts) or as a component of accrued expenses (distributor fees).
Product returns:
Consistent with industry practice, we offer our customers and other indirect purchasers a limited right of return for purchased units of XPOVIO for damage, defect, recall, and/or product expiry (beginning three months prior to the product’s expiration date and ending twelve months after the product’s expiration date). We estimate the amount of product sales that will be returned using a probability-weighted estimate, initially calculated based on data from similar products and other qualitative considerations, such as visibility into the inventory remaining in the distribution channel. Reserves for estimated returns are recorded as a reduction of revenue in the period that the related revenue is recognized, as well as a component of accrued expenses.
Based on the distribution model for XPOVIO, contractual inventory limits with our customers, the price of XPOVIO, and limited contractual return rights, we currently believe there will be minimal XPOVIO returns. However, we will update our estimated return liability each reporting period based on actual shipments of XPOVIO subject to contractual return rights, changes in expectations about the amount of estimated and/or actual returns, and other qualitative considerations.
Chargebacks:
Chargebacks for fees and discounts represent the estimated obligations resulting from our contractual commitments to provide products to qualified healthcare entities at prices lower than the list prices charged to our customers who purchase XPOVIO directly from us. Our customers charge us for the discount provided to the healthcare entities. Chargebacks are generally determined at the time of resale to the qualified healthcare provider by our customers. Accordingly, reserves for chargebacks consist of credits that we expect to issue for units that remain in the distribution channel inventory at the end of the reporting period that we expect will be sold to qualified healthcare entities, as well as chargebacks that customers have claimed, but for which we have not yet issued a credit. We record reserves for chargebacks based on contractual terms in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. We generally issue credits to the customer for such amounts within a few weeks after the customer notifies us of the resale to a discount-eligible healthcare entity.
Government rebates
: We are subject to discount obligations under state Medicaid programs, Medicare, the Department of Veterans Affairs, the Department of Defense, and others. These reserves 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. For Medicare, we estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under Medicare Part D. Our liability for these rebates consists of invoices received for claims from prior and current quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in distribution channel inventories at the end of the reporting period.
Other incentives:
Other incentives offered by us include
co-payment
assistance, which we provide as financial assistance to patients with commercial insurance that requires prescription drug
co-payments
by the patient. We calculate the accrual for
co-payment
assistance based on estimates of claims and the average
co-payment
assistance amounts per claim that we expect to receive associated with sales of XPOVIO that have been recognized as revenue but remain in distribution channel inventories at the end of the reporting period. Such estimates are based on industry experience with similar products, as well as actual amounts from our product sales to date. Any adjustments to such estimated liabilities on units in the distribution channel at period end, as well as actual amounts incurred on units sold through the distribution channel during the period, are recorded in the same period that 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.
1
47
Table of Contents
Product revenue reserves and allowances:
As noted above, cash discounts and chargebacks are recorded as reductions of accounts receivable and product returns, distributor fees, government rebates, and other incentives are recorded as a component of accrued expenses. To date, we have determined a material reversal of revenue would not occur in a future period, for the estimates detailed above, as of December 31, 2020 and, therefore, the transaction price was not reduced further during the year ended December 31, 2020. 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 product revenue, net and earnings in the period in which such variances become known.
License and Asset Purchase Agreements
We generate revenue from license or similar agreements with pharmaceutical companies for the development and commercialization of certain of our product candidates. Such agreements may include the transfer of intellectual property rights in the form of licenses, transfer of technological
know-how,
delivery of drug substances, research and development services, and participation on certain committees with the counterparty. Payments made by the customers may include
non-refundable
upfront fees, payments upon the exercise of customer options, payments based upon the achievement of defined milestones, and royalties on sales of product candidates if they are successfully approved and commercialized.
If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize the transaction price allocated to the license as revenue upon transfer of control of the license. We evaluate all other promised goods or services in the agreement to determine if they are distinct. If they are not distinct, they are combined with other promised goods or services to create a bundle of promised goods or services that is distinct. Optional future services where any additional consideration paid to us reflects their standalone selling prices do not provide the customer with a material right and, therefore, are not considered performance obligations. If optional future services are priced in a manner which provides the customer with a significant or incremental discount, they are material rights, and are accounted for as performance obligations.
We utilize judgment to determine the transaction price. In connection therewith, we evaluate contingent milestones at contract inception to estimate the amount which is not probable of a material reversal to include in the transaction price using the most likely amount method. Milestone payments that are not within our control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received and therefore the variable consideration is constrained. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each reporting period, we
re-evaluate
the probability of achieving development milestone payments that may not be subject to a material reversal and, if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative
catch-up
basis, which would affect license and other revenue, as well as earnings, in the period of adjustment.
We then determine whether the performance obligations or combined performance obligations are satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from
non-refundable,
upfront fees. We evaluate the measure of progress, as applicable, for each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded within deferred revenue. Contract liabilities within deferred revenue are recognized as revenue after control of the goods or services is transferred to the customer and all revenue recognition criteria have been met.
1
48
Table of Contents
For arrangements that include sales-based royalties, including sales-based milestone payments, and a license of intellectual property that is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of when the related sales occur or when the performance obligation to which some or all of the royalties have been allocated has been satisfied (or partially satisfied).
Accounts Receivable
In general, accounts receivable consists of amounts due from customers, net of customer allowances for cash discounts and chargebacks. Our contracts with customers have standard payment terms that generally require payment within 30 days for specialty pharmacy customers and 65 days for specialty distributor customers. We analyze accounts for collectability, and periodically evaluate the creditworthiness of our customers. As of December 31, 2020 and 2019, respectively, we determined there were no credit losses associated with our accounts receivable based upon our review of contractual payment terms and individual customer circumstances, and therefore, an allowance for doubtful accounts was not required.
Inventory
Prior to regulatory approval, we expense costs relating to the production of inventory as research and development expense in the period incurred. We capitalize the costs to manufacture our products incurred after regulatory approval when, based on our judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. Such costs are generally recorded as costs of sales upon shipment. In connection therewith, 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. Raw materials and work in process includes all inventory costs prior to packaging and labelling, including raw material, active pharmaceutical ingredient, and drug product. Finished goods include packaged and labelled products. Raw materials and work in process that may be used for either research and development or commercial sale are classified as inventory until the material is consumed or otherwise allocated for research and development. If the material is intended to be used for research and development, it is expensed as research and development once that determination is made.
Prior to FDA approval of XPOVIO, all costs related to the manufacturing of XPOVIO that could potentially be available to support the commercial launch of our products were charged to research and development expense in the period incurred, as there was no alternative future use. We analyze our inventory levels for recoverability each reporting period. In the period in which there is an impairment identified, we write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value, and inventory in excess of expected sales requirements as cost of sales. The determination of whether inventory costs will be realizable is based on our estimates. If actual market conditions are less favorable than we project, additional write-downs of inventory may be required, which would be recorded as cost of sales.
Cost of Sales
Cost of sales includes the cost of producing and distributing inventories that are related to product revenue during the respective period, including salaryrelated and stock-based compensation expense for employees involved with production and distribution, freight, and indirect overhead costs, as well as third-party royalties payable on net product revenue. In addition, shipping and handling costs for product shipments are recorded in cost of sales as incurred. Finally, cost of sales may also include costs related to excess or obsolete inventory adjustment charges, abnormal costs, unabsorbed manufacturing and overhead costs, and manufacturing variances.
1
49
Table of Contents
Deferred Royalty Obligation
We treat the liability related to net revenues, as discussed further in Note 15, “
Long-term obligations”
, as a deferred royalty obligation, amortized under the effective interest rate method over the estimated life of the revenue streams. We recognize interest expense thereon using the effective rate, which is based on our current estimates of future revenues over the life of the arrangement. In connection therewith, we periodically assess our expected revenues using internal projections, impute interest on the carrying value of the deferred royalty obligation, and record interest expense using the imputed effective interest rate. To the extent our estimates of future revenues are greater or less than previous estimates or the estimated timing of such payments is materially different than previous estimates, we will account for any such changes by adjusting the effective interest rate on a prospective basis, with a corresponding impact to the reclassification of our deferred royalty obligation. The assumptions used in determining the expected repayment term of the deferred royalty obligation and amortization period of the issuance costs requires that we make estimates that could impact the short-term and long-term classification of such costs, as well as the period over which such costs will be amortized.
Research and Development Expenses
Research and development costs are charged to expense as incurred and include, but are not limited to:
• costs associated with preclinical activities and regulatory operations.
Costs for certain research and development activities, such as clinical trials, are recognized based on various inputs, including an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, and other information provided to us by our vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are accordingly reflected in the financial statements as prepaid or accrued research and development costs.
Comprehensive Loss
Comprehensive loss consists of net loss and changes in equity during a period from transactions and other equity and circumstances generated from
non-owner
sources, and currently consists of net loss, unrealized gains and losses on investments and foreign currency translation adjustments.
Foreign Currency Transactions
The functional currency of our subsidiaries in Germany and Israel are the Euro and Shekel, respectively. Foreign currency transaction gains and losses are recorded in the consolidated statements of operations. Net foreign exchange losses of $0.3 million were recorded in other income (expense), net for the year ended December 31, 2020. Net foreign exchange losses of less than $0.1 million were recorded in other income (expense), net for the years ended December 31, 2019 and 2018.
15
0
Table of Contents
Income Taxes
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We provide a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. We have evaluated available evidence and concluded that we may not realize the benefit of our deferred tax assets; therefore, a valuation allowance has been established for the full amount of the deferred tax assets. We recognize interest and/or penalties related to income tax matters in income tax expense. Our state tax provision pertains to income generated by our KPSC entity. Our foreign tax provision pertains to foreign income taxes due by our German and Israel subsidiaries, both of which operate on a cost-plus profit margin basis.
Accounting for Stock-Based Compensation
We account for our stock-based compensation awards in accordance with FASB ASC Topic 718,
Compensation—Stock Compensation
(“ASC 718”). ASC 718 requires all stock-based payments to employees and
non-employees,
including grants of employee stock options, restricted stock and restricted stock units, as well as modifications to existing stock options and shares issued under our employee stock purchase plan (“ESPP”), to be recognized in the consolidated statements of operations based on their fair values. We use the Black-Scholes option pricing model to determine the fair value of options granted.
Compensation expense related to awards to employees and
non-employees
with service based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the requisite service period of the award, which is generally the vesting term. Forfeitures are recognized as they occur.
Net Loss Per Share
Basic and diluted net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Our potential dilutive shares, stock options, unvested restricted stock and restricted stock units are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.
The following potentially dilutive securities were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect (in thousands):
As of December 31,
We have the option to settle the conversion obligation for our 3.00% convertible senior notes due 2025 (the “Notes”) in cash, shares or any combination of the two. As the Notes were not convertible as of December 31, 2020, they were not participating securities and they did not have an impact on the calculation of basic earnings or loss per share. Based on our net loss position, there was no impact on the calculation of dilutive loss per share during the year ended December 31, 2020.
Recently Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU
No. 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU
2016-13”).
Certain amendments thereto were also issued by the FASB. ASU
2016-13
and the related amendments require that credit losses be reported as an allowance using an expected loss model, representing the
15
1
Table of Contents
entity’s current estimate of credit losses expected to be incurred. The previous accounting guidance, as applied by us through December 31, 2019, was based on an incurred loss model. For
available-for-sale
debt securities with unrealized losses, ASU
2016-13
and the related amendments now require allowances to be recorded instead of reducing the amortized cost of the investment. ASU
2016-13
and the related amendments were effective for
interim and annual fiscal periods beginning after December 15, 2019. We adopted this guidance effective January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU
No. 2018-13,
Fair Value Measurement
—