MEI PHARMA, INC. The following discussion and analysis should be read in conjunction with "Item 8. Financial Statements and Supplementary Data" included below in this Amended Annual Report. Operating results are not necessarily indicative of results that may occur in future periods.
This discussion and analysis contains forward-looking statements that involve a number of risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in the forward-looking statements as a result of many factors including, but not limited to, those set forth under "Cautionary Statement About Forward-Looking Statements" and "Risk Factors" in Item 1A. included above in this Amended Annual Report. All forward-looking statements included in this Amended Annual Report are based on the information available to us as of the time we file this Amended Annual Report, and except as required by law, we undertake no obligation to update publicly or revise any forward-looking statements.
The following information has been adjusted to reflect the restatement of our financial statements as described in the Explanatory Note at the beginning of this Amended Annual Report and in Note 1, "Restatement of Previously Issued Financial Statements," in Notes to Financial Statements of this Amended Annual Report.
Overview
We are a late-stage pharmaceutical company committed to the development and
commercialization of novel cancer therapies intended to improve outcomes for
patients.
Clinical Development Programs
We build our pipeline by licensing promising cancer agents and creating value in programs through development, commercialization and strategic partnerships, as appropriate. Our objective is to leverage the mechanisms and properties of our pipeline drug candidates to optimize the balance between efficacy and tolerability to meet the needs of patients with cancer. Our drug candidate pipeline includes:
•
Zandelisib (f/k/a ME-401), an oral phosphatidylinositol 3-kinase ("PI3K") delta
inhibitor;
•
Voruciclib, an oral cyclin-dependent kinase 9 ("CDK9") inhibitor;
•
ME-344, a mitochondrial inhibitor targeting the oxidative phosphorylation
("OXPHOS") complex; and
•
Pracinostat, an oral histone deacetylase ("HDAC") inhibitor.
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For a more complete discussion of our business, see the section of this Amended Annual Report "Item 1- Business" above.
Equity Transactions
Shelf Registration Statement
We have a shelf registration statement that permits us to sell, from time to
time, up to
At-The-Market Equity Offering
On
Underwritten Registered Offering
In
Warrants
As of
Critical Accounting Policies and Management Estimates
Management's discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been prepared in
accordance with
Revenue Recognition
Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("Topic 606")
We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For enforceable contracts with our customers, we first identify the distinct performance obligations - or accounting units - within the contract. Performance obligations are commitments in a contract to transfer a distinct good or service to the customer.
Payments received under commercial arrangements, such as licensing technology rights, may include non-refundable fees at the inception of the arrangements, cost reimbursements, milestone payments for specific achievements designated in the agreements, and royalties on the sale of products. At the inception of arrangements that include variable consideration, we use judgment to estimate the amount of variable consideration to include in the transaction price using the most likely method. If it is probable that a significant revenue reversal will
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not occur, the estimated amount is included in the transaction price. Milestone payments that are not within our or the licensee's control, such as regulatory approvals, are not included in the transaction price until those approvals are received. At the end of each reporting period, we re-evaluate estimated variable consideration included in the transaction price and any related constraint and, as necessary, we adjust our estimate of the overall transaction price. Any adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
We develop estimates of the stand-alone selling price for each distinct performance obligation. Variable consideration that relates specifically to our efforts to satisfy specific performance obligations is allocated entirely to those performance obligations. Other components of the transaction price are allocated based on the relative stand-alone selling price, over which management has applied significant judgment. We develop assumptions that require judgment to determine the stand-alone selling price for license-related performance obligations, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical, regulatory and commercial success. We estimate stand-alone selling price for research and development performance obligations by forecasting the expected costs of satisfying a performance obligation plus an appropriate margin.
In the case of a license that is a distinct performance obligation, we recognize revenue allocated to the license from non-refundable, up-front fees at the point in time when the license is transferred to the licensee and the licensee can use and benefit from the license. For licenses that are bundled with other distinct or combined obligations, we use judgment to assess the nature of the performance obligation to determine whether the performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. If the performance obligation is satisfied over time, we evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. From time to time, we perform additional services for KKC at their request, the costs of which are fully reimbursed to us. We record the reimbursement for such pass through services as revenue at 100% of reimbursed costs as control of the additional services for KKC is transferred at the time we incur such costs. The costs we incur for these additional services are incurred solely for the benefit of KKC and have no alternative use to us.
The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Revenue is recorded proportionally as costs are incurred. We generally use the cost-to-cost measure of progress because it best depicts the transfer of control to the customer which occurs as we incur costs. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation (an "input method" under Topic 606). We use judgment to estimate the total cost expected to complete the research and development performance obligations, which include subcontractors' costs, labor, materials, other direct costs and an allocation of indirect costs. We evaluate these cost estimates and the progress each reporting period and, as necessary, we adjust the measure of progress and related revenue recognition.
For arrangements that include sales-based or usage-based royalties, we recognize revenue at the later of (i) when the related sales occur or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any sales-based or usage-based royalty revenue from license agreements.
We recognized revenue associated with the following license agreements (in
thousands):
Years Ended June 30,
2021 2020
(As Restated) (As Restated) 2019
License Agreement:
KKC Agreements $ 34,356 $ 26,386 $ 2,557
Helsinn License Agreement 440 1,370 2,358
$ 34,796 $ 27,756 $ 4,915
Timing of Revenue Recognition:
Services performed over time $ 31,302 $ 6,768 $ 4,036
Pass through services at a point in time 3,494 - -
License transferred at a point in time - 20,988 879
$ 34,796 $ 27,756 $ 4,915 The KKC Commercialization Agreement and KKC Japan License Agreement (Note 2)
included other distinct performance obligations satisfied over time, and
accordingly we recognized
Based on the characteristics of the Helsinn License Agreement (Note 4), control
of the remaining deliverables occurs and therefore we recognized revenue based
on the extent of progress towards completion of the performance obligations.
Accordingly, we recognized
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and 2019, respectively. As of
Contract Balances
Receivables are included in our balance sheet in "Prepaid expenses and other
current assets", and contract liabilities are included in "Deferred revenue" and
"Deferred revenue, long-term". The following table presents changes in
receivables, unbilled receivables, and contract liabilities accounted for under
Topic 606 during the years ended
Years Ended June 30,
2021 2020
(As Restated) (As Restated)
Accounts receivable
Accounts receivable, beginning of year $ 83 $ -
Amounts billed 25,682 1,292
Payments received (25,765 ) (1,209 )
Accounts receivable, end of year $ - $ 83
Unbilled receivables
Unbilled receivables, beginning of year $ 2,858 $ 511
Billable amounts 30,406 3,639
Amounts billed (25,682 ) (1,292 )
Unbilled receivables, end of year $ 7,582 $ 2,858
Contract liabilities
Contract liabilities, beginning of year
(4,798 ) (25,234 )
Payments received 367 36,568
Contract liabilities, end of year
The timing of revenue recognition, invoicing and cash collections results in billed accounts receivable and unbilled receivables, and deferred revenue (contract liabilities). We invoice our customers in accordance with agreed-upon contractual terms, typically at periodic intervals or upon achievement of contractual milestones. Invoicing may occur subsequent to revenue recognition, resulting in contract assets. We may receive advance payments from our customers before revenue is recognized, resulting in contract liabilities. The unbilled receivables and contract liabilities reported on the Balance Sheets relate to the KKC Commercialization Agreement, the KKC Japan License Agreement and Helsinn License Agreement.
As of
As of
Our contract liabilities accounted for under Topic 606 relate to the amount of initial upfront consideration that was allocated to the development services performance obligations. Contract liabilities are recognized over the duration of the performance obligations based on the costs incurred relative to total expected costs.
Revenues from Collaborators
We earn revenue in connection with collaboration agreements, which are described in Note 2, KKC Agreements.
At contract inception, we assess whether the collaboration arrangements are within the scope of ASC Topic 808, Collaborative Arrangements ("Topic 808"), to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed based on the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of Topic 808 that contain multiple units of account, we first determine which units of account within the arrangement are within the scope of Topic 808 and which elements are within the scope of Topic 606. For units of account within collaboration arrangements that are accounted for pursuant to Topic 808, an appropriate recognition method is determined and applied consistently, by analogy to authoritative accounting literature. For units of account within collaboration arrangements that are accounted for pursuant to Topic 606, we recognize revenue as discussed above. Consideration received that does not meet the requirements to satisfy Topic 606 revenue recognition criteria is recorded as
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deferred revenue in the accompanying balance sheets, classified as either short-term or long-term deferred revenue based on our best estimate of when such amounts will be recognized.
Research and Development Costs
Research and development costs are expensed as incurred and include costs paid to third-party contractors to perform research, conduct clinical trials and develop and manufacture drug materials. Clinical trial costs, including costs associated with third-party contractors, are a significant component of research and development expenses. We expense research and development costs based on work performed. In determining the amount to expense, management relies on estimates of total costs based on contract components completed, the enrollment of subjects, the completion of trials, and other events. Costs incurred related to the purchase or licensing of in-process research and development for early-stage products or products that are not commercially viable and ready for use, or have no alternative future use, are charged to expense in the period incurred.
Share-Based Compensation
Share-based compensation expense for employees and directors is recognized in the Statement of Operations based on estimated amounts, including the grant date fair value and the expected service period. For stock options, we estimate the grant date fair value using a Black-Scholes valuation model, which requires the use of multiple subjective inputs including estimated future volatility, expected forfeitures and the expected term of the awards. We estimate the expected future volatility based on the stock's historical price volatility. The stock's future volatility may differ from the estimated volatility at the grant date. For restricted stock unit ("RSU") equity awards, we estimate the grant date fair value using our closing stock price on the date of grant. We recognize the effect of forfeitures in compensation expense when the forfeitures occur. The estimated forfeiture rates may differ from actual forfeiture rates which would affect the amount of expense recognized during the period. We recognize the value of the awards over the awards' requisite service or performance periods. The requisite service period is generally the time over which our share-based awards vest.
Warrant Liability
In
Leases
Effective
Rent expense for operating leases is recognized on a straight-line basis over the lease term based on the total lease payments. We have elected the practical expedient to not separate lease and non-lease components for our real estate leases. Our non-lease components are primarily related to property maintenance, which varies based on future outcomes, and thus is recognized in rent expense when incurred.
Income Taxes
Our income tax expense consists of current and deferred income tax expense or benefit. Current income tax expense or benefit is the amount of income taxes expected to be payable or refundable for the current year. A deferred income tax asset or liability is recognized for the future tax consequences attributable to tax credits and loss carryforwards and to differences between the financial statement carrying amounts
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of existing assets and liabilities and their respective tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. As of
Results of Operations
The following information has been adjusted to reflect the restatement of our financial statements as described in the Explanatory Note at the beginning of this Amended Annual Report and in Note 1, Restatement of Previously Issued Financial Statements, in the Notes to Financial Statements of this Amended Annual Report.
Comparison of Years Ended
We had a loss from operations of
Revenue: We recognized revenue of
Cost of Revenue: We recognized cost of revenue of
Research and Development: The following is a summary of our research and development expenses to supplement the more detailed discussion below. The dollar values in the following table are in thousands.
Years Ended June 30,
Research and development expenses 2021 2020
Zandelisib $ 46,052 $ 17,356
Voruciclib 2,939 1,946
ME-344 960 62
Other 19,447 14,701
Total research and development expenses
Research and development expenses consist primarily of clinical trial costs
(including payments to contract research organizations "CROs"), pre-clinical
study costs, and costs to manufacture our drug candidates for non-clinical and
clinical studies. Other research and development expenses consist primarily of
salaries and personnel costs, share-based compensation, legal costs, and other
costs not allocated to specific drug programs. Research and development expenses
were
General and Administrative: General and administrative expenses increased by
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Other income or expense: We recorded a non-cash gain of
Comparison of Years Ended
We have omitted discussion of the results of operations for the fiscal year
ended
New Accounting Pronouncements
See Note 1 to the Financial Statements included in Item 8 of this Amended Annual Report.
Off-Balance Sheet Arrangements
We do not currently have any off-balance-sheet arrangements.
Liquidity and Capital Resources
We have accumulated losses of
To date, we have obtained cash and funded our operations primarily through equity financings and license agreements. In order to continue the development of our drug candidates, at some point in the future we expect to pursue one or more capital transactions, whether through the sale of equity securities, debt financing, license agreements or entry into strategic partnerships. There can be no assurance that we will be able to continue to raise additional capital in the future.
Sources and Uses of Our Cash
Net cash used in operations for the year ended
Net cash provided by investing activities for the year ended
Net cash provided by financing activities during the year ended
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We have contracted with various consultants and third parties to assist us in pre-clinical research and development and clinical trials work for our leading drug compounds. The contracts are terminable at any time, but obligate us to reimburse the providers for any time or costs incurred through the date of termination. Additionally, we have employment agreements with certain of our current employees that provide for severance payments and accelerated vesting for share-based awards if their employment is terminated under specified circumstances.
We have leased approximately 32,800 square feet of office space in
Presage License Agreement
In
S*Bio Purchase Agreement
We are party to a definitive asset purchase agreement with S*Bio, pursuant to
which we acquired certain assets comprised of intellectual property and
technology including rights to pracinostat. We agreed to make certain milestone
payments to S*Bio based on the achievement of certain clinical, regulatory and
net sales-based milestones, as well as to make certain contingent earnout
payments to S*Bio. Milestone payments will be made to S*Bio up to an aggregate
amount of
COVID-19
As a result of the ongoing and rapidly evolving COVID-19 pandemic, various
public health orders and guidance measures have been implemented across much of
While we continue to enroll and dose patients in our clinical trials, our
clinical development program timelines may continue to be subject to potential
negative impacts from the ongoing pandemic in the
We may experience enrollment delays and suspensions, patient withdrawals, postponement of planned clinical or preclinical studies, redirection of site resources from studies, and study deviations or noncompliance. We may also need to maintain or implement study modifications, suspensions, or terminations, the introduction of additional remote study procedures and modified informed consent procedures, study site changes, direct delivery of investigational products to patient homes or alternative sites, which may require state licensing, and changes or delays in site monitoring. The foregoing may require that we consult with relevant review and ethics committees, Institutional Review Boards ("IRBs"), and the FDA. The foregoing may also impact the integrity of our study data. The COVID-19 outbreak may further increase the need for clinical trial patient monitoring and regulatory reporting of adverse effects, and may delay regulatory authority meetings, inspections, or the regulatory review of marketing or investigational applications or submissions.
The COVID-19 pandemic may also impact our ability to procure the necessary supply of our investigational drug products, as well as any ancillary supplies necessary for the conduct of our studies. Third party manufacturers may also need to implement measures and changes, or deviate from typical manufacturing requirements that may otherwise adversely impact our product candidates.
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In light of the COVID-19 outbreak, the FDA issued a number of new guidance
documents. Specifically, as a result of the potential effect of the COVID-19
outbreak on many clinical trial programs in the
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