Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K. All dollar amounts in the below Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented in U.S. dollars, and all dollar and share amounts are presented in thousands, unless otherwise noted or the context otherwise provides.
Overview
BioXcel Therapeutics, Inc. (“BTI” or the “Company”) is a biopharmaceutical company utilizing artificial intelligence (“AI”) approaches to develop transformative medicines in neuroscience and immuno-oncology. We are focused on utilizing cutting-edge technology and innovative research to develop high-value therapeutics aimed at transforming patients’ lives. We employ a proprietary AI platform to reduce therapeutic development costs and potentially accelerate development timelines. Our approach leverages existing approved drugs and/or clinically evaluated product candidates together with big data and proprietary machine learning algorithms to identify new therapeutic indications. We believe this differentiated approach has the potential to reduce the expense and time associated with drug development in diseases with substantial unmet medical needs.
On April 6, 2022, we announced that the United States (“U.S.”) Food and Drug Administration (“FDA”) approved IGALMI (dexmedetomidine or “Dex”) sublingual film for the acute treatment of agitation associated with schizophrenia or bipolar I or II disorder in adults. IGALMI is approved to be self-administrated by patients under the supervision of a health care provider. We deployed the first phase of our sales team for high priority targets in May 2022. Furthermore, on July 6, 2022, we announced that IGALMI was commercially available in doses of 120 and 180 microgram (“mcg”) through the Company’s third-party logistics provider and was available for order through wholesalers.
Our most advanced clinical development program is BXCL501, an investigational proprietary, orally dissolving film formulation of Dex for the treatment of agitation associated with psychiatric and neurological disorders.
We are conducting clinical trials for the at-home use of BXCL501 for agitation associated with bipolar disorders and schizophrenia. We also continue to conduct clinical trials evaluating BXCL501 for the acute treatment of agitation in Alzheimer’s disease patients in residential care facilities and nursing homes and for adjunctive treatment of patients with Major Depressive Disorder (“MDD”).
Our advanced immuno-oncology asset, BXCL701, is an investigational, oral innate immune activator currently being developed as a potential therapy for the treatment of aggressive forms of prostate cancer, pancreatic cancer and other solid and liquid tumors.
On April 19, 2022, we announced the formation of a wholly-owned subsidiary, OnkosXcel Therapeutics, LLC (“OnkosXcel”), to develop potentially transformative medicines in immuno-oncology. OnkosXcel is focused on the sustained expansion and optimization of our immuno-oncology franchise, while providing maximum strategic and financial flexibility. OnkosXcel plans to progress the development of BXCL701 and BXCL702. To support their development, we may pursue third-party investments in, or other strategic options for, OnkosXcel.
We continue to work closely with our clinical sites to monitor the potential impact of the evolving COVID-19 pandemic and the spread of its variants. To date, we have not experienced any significant delays in any of our ongoing or planned clinical trials, except for occasional COVID-19 related disruptions to our TRANQUILITY II and PLACIDITY trials. However, this could change rapidly.
IGALMI Commercial Progress
Since the commercial launch of IGALMI in July 2022, our commercial progress has yielded more than 65 formulary wins. Additionally, more than 600 hospital pharmacy and therapeutics (“P&T”) committees are scheduled to review and
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vote on IGALMI inclusion in their formularies over the next several months. In addition, nearly 50% of target beds are now under group purchasing organization (“GPO”) contracts as of February 28, 2023. We are in active discussions with other leading GPOs. This has been primarily accomplished with our initial 26-person institutional sales force since our trade launch in July 2022.
We expanded our institutional sales force to 70 representatives in December 2022 to cover over 1,700 target hospitals as of February 28, 2023. During the fourth quarter of 2022, our Corporate Account Director team was focused on 59 high-volume, high-control integrated delivery network (“IDN”) accounts. Formulary voting is currently scheduled for approximately 70,000 (25%) of our target IDN beds, with approximately 7,000 (2%) now approved.
We believe the value proposition for IGALMI will continue to evolve as we learn from market response. Staff shortages in the emergency departments (“EDs”) of hospitals, complicated by the potential for staff injuries due to agitated patients, are becoming increasingly concerning to hospital administration. Due to limited agitation treatment options in the ED, intramuscular injection is often used. This approach can be both confrontational and coercive to agitated patients, often making their symptoms worse. Moreover, these patients may occupy ED beds for extended periods due to unresponsive sedation, reducing throughput and increasing costs. These conditions continue to reinforce the need for a drug with IGALMI’s profile.
Our marketing efforts continue to drive awareness through an extensive convention presence, peer influence programs, and digital marketing campaigns. As of December 31, 2022, our peer-led IGALMI speaker programs have educated over 1,000 health care providers, while we have had over 350,000 web sessions on our branded health care provider website and additional touchpoints through other digital marketing efforts. With our sales team expansion and as we begin to garner additional P&T formulary adoption, we plan extensive digital and peer to peer marketing efforts in the first half of 2023 to continue to raise awareness, reinforce key messages and drive additional demand. In addition, we have planned promotional presence at leading national and regional conferences in 2023.
If IGALMI is approved outside the U.S., we would consider launching the product through collaborations with third parties.
Our continued commercialization efforts for IGALMI are designed to build the foundation to launch additional potential follow-on indications, if any, paving the way for our expanding neuroscience therapeutics business.
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Our Clinical Programs
The following is a summary of the status of our major clinical development programs as of the date of this Annual Report on Form 10-K:
For additional information regarding our pipeline candidates, see Part I, Item 1, “Business” in this Annual Report on Form 10-K.
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Basis of Presentation
The Company’s consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).
Components of Our Results of Operations
Product Revenues, Net
Revenues relate to sales of IGALMI from early product trials and reflects limited market access since commercial launch in July 2022. The revenues are net of rebates, chargebacks, discounts and other adjustments. During the fourth quarter of 2022, we began contracting directly with intermediaries such as GPOs.
Operating Costs and Expenses
Cost of Goods Sold
Cost of goods sold primarily relates to the costs of producing, packaging and delivering our product to customers.
Research and Development
Our research and development expenses reflect costs incurred for the research and development of our clinical and preclinical product candidates, which includes payments to BioXcel LLC. Research and development expenses primarily consist of salary, benefits and non-cash stock-based compensation for our research and development personnel, costs incurred under agreements with contract research organizations and sites that conduct our non-clinical studies and clinical trials, costs of outside consultants engaged in research and development activities, including their fees, non-cash stock-based compensation and travel expenses, the cost of acquiring, developing and manufacturing preclinical and clinical trial materials and lab supplies, and depreciation and other expenses.
We expense research and development costs as incurred.
Our research and development costs by program for the years ended December 31, 2022 and 2021 were as follows:
Year ended
December 31,
2022
2021
Direct external costs
BXCL501
$
52,044
$
16,046
BXCL701
9,631
11,092
Other research and development programs
2,687
1,587
Total direct external costs
$
64,362
$
28,725
Internal personnel costs
22,831
21,282
Sub-total direct costs
$
87,193
$
50,007
Indirect costs and overhead
4,213
3,063
Research and development tax credit
(167)
(362)
Total research and development expenses
$
91,239
$
52,708
Selling, General and Administrative
Selling, general and administrative expenses primarily consist of salaries, benefits and non-cash stock-based compensation for our sales, executive and administrative personnel. Selling, general and administrative expenses also include legal expenses to pursue patent protection of our intellectual property, professional fees for audit and tax services and insurance charges.
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We expect that our selling, general and administrative expenses will increase as we expand our clinical programs. We also expect increased selling, general and administrative costs resulting from our clinical trials, the continued commercialization of IGALMI and potential commercialization of our product candidates. We believe that these increases will likely include increased costs for liability insurance, hiring additional personnel to support future market research and current and future product commercialization efforts. In addition, we may also experience increased fees for outside consultants, attorneys, and accountants. We may also incur increased costs to comply with corporate governance, internal controls, investor relations and disclosures and similar requirements applicable to public companies.
Other Expense (Income)
Other expense (income) primarily consists of interest costs associated with the strategic financing facility the Company entered into in April 2022, changes in fair value of derivative financial instruments, and interest income earned on cash and cash equivalents that were comprised primarily of money market funds. We expect that interest expense will increase in the future, as we meet additional milestones and draw down additional funds under the strategic financing facility.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is set forth in Note 3 to the consolidated financial statements included in this Annual Report on Form 10-K.
Results of Operations
Comparison of the Years Ended December 31, 2022 and 2021
Product Revenues, Net
Product revenues, net for the year ended December 31, 2022, were $375, comprised of sales of IGALMI, subsequent to commercial launch in July 2022. Sales to date resulted from early product trials and reflect limited market access. There were no revenues in 2021.
Cost of Goods Sold
Cost of goods sold for the year ended December 31, 2022, were $20, which primarily related to the costs to produce, package and deliver IGALMI to customers. There were no cost of goods sold in 2021.
Research and Development Expense
Research and development expenses for the years ended December 31, 2022 and 2021 were as follows:
Year ended
December 31,
2022
2021
Change
% Change
Personnel and related costs
$
18,272
$
14,624
$
3,648
25
%
Non-cash stock-based compensation
4,558
6,658
(2,100)
(32)
%
Professional fees
14,342
11,932
2,410
20
%
Clinical trials expense
40,630
14,226
26,404
186
%
Chemical, manufacturing and controls cost
10,144
3,506
6,638
189
%
Travel and other costs
3,460
2,124
1,336
63
%
Research and development tax credit
(167)
(362)
195
54
%
Total research and development expenses
$
91,239
$
52,708
$
38,531
73
%
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The increase of $38,531 for the year ended December 31, 2022, relative to the same period in 2021 is primarily attributable to:
● An increase in personnel costs related to our efforts to grow our clinical team as we expanded our clinical trials, particularly evaluating BXCL501 for treatment of agitation in patients with Alzheimer’s disease, as well as BXCL701 for treatment of prostate cancer.
● Increased professional fees due to required toxicology testing for IGALMI.
● An increase in clinical trials expenses due to the on-going TRANQUILITY II study of BXCL501 for the potential treatment of agitation in patients with Alzheimer’s disease.
● Increased chemical, manufacturing and controls (“CMC”) costs associated with producing materials related to testing required for IGALMI, as well as our clinical trials of BXCL501 for the treatment of agitation associated with Alzheimer’s disease and BXCL701 for the treatment of prostate cancer.
● An increase in travel and other costs as we added personnel and increased site visits to pre-COVID-19 levels.
These increases were offset by a decrease in non-cash stock-based compensation, which was the result of lower grant date fair values for awards due to lower trading prices of the Company’s common stock.
The State of Connecticut provides companies with the opportunity to exchange certain research and development credit carryforwards for cash in exchange for foregoing the carryforward of the research and development credit. The credit decreased in the year ended December 31, 2022 due to lower qualified spending in 2022 relative to 2021.
Following IGALMI’s approval by the FDA, we capitalize costs related to commercial production of IGALMI as inventory and expense those CMC costs related to clinical trials.
Selling, General and Administrative Expense
Selling, general and administrative expenses for the years ended December 31, 2022 and 2021 were as follows:
Year ended
December 31,
2022
2021
Change
% Change
Personnel and related costs
$
20,690
$
9,576
$
11,114
116
%
Non-cash stock-based compensation
12,779
12,798
(19)
(0)
%
Professional fees
14,313
10,646
3,667
34
%
Commercial and marketing
13,006
16,070
(3,064)
(19)
%
Insurance
2,370
2,136
234
11
%
Travel and other costs
5,603
3,001
2,602
87
%
Total selling, general and administrative expenses
$
68,761
$
54,227
$
14,534
27
%
The increase of $14,534 for the year ended December 31, 2022, relative to the same period in 2021 is primarily attributable to:
● An increase in personnel and related costs due to our efforts to expand our functional teams, particularly in sales, for the commercial launch of IGALMI in the U.S.
● Increased professional fees, mainly for corporate legal fees, accounting and recruiting costs, primarily relating to the commercial launch of IGALMI in the U.S., formation of OnkosXcel, and higher operating support levels.
● An increase in travel and other costs as the Company resumed a more traditional travel schedule after restrictions relating to the COVID-19 pandemic were eased, and as a result of the commercial launch of
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IGALMI. In addition, we experienced higher technology costs related to the addition of personnel and expansion of our operations.
These increases were offset by lower commercial and marketing costs due to reduced spending for market research and campaign development costs in 2022; we incurred higher market research and campaign development costs in 2021 in anticipation of the potential commercial launch of IGALMI.
Other Expense (Income)
Interest expense increased for 2022 relative to 2021 primarily due to borrowings under the OFA Facilities (defined subsequently herein) the Company entered into in April 2022. The expense was partially offset by interest income earned on cash and cash equivalents that were held primarily in short-term money market funds. Other expense, net is primarily associated with changes in fair value of derivative financial instruments for the period.
Inflation
Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results of operations during the periods presented. For a discussion of inflationary risks to our future revenues under the Inflation Reduction Act, see “ Health care reform measures could hinder or prevent our product candidates ’ commercial success.” in Part I, Item 1A., “Risk Factors” elsewhere in this Annual Report on Form 10-K.
Liquidity and Capital Resources
As of December 31, 2022, we had cash and cash equivalents of $193,725, working capital of $169,970 and stockholders’ equity of $76,775. Net cash used in operating activities was $135,341 and $82,153 for the years ended December 31, 2022 and 2021, respectively. We incurred losses of approximately $165,757 and $106,931 for the years ended December 31, 2022 and 2021, respectively. We have generated limited revenues to date, and we have not yet achieved profitability. We expect that our research and development and selling, general and administrative expenses will continue to increase and, as a result, we will need to generate significant product revenues to achieve profitability. We believe that our current cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements for at least one year from the date of this Annual Report on Form 10-K.
We may obtain additional financing through sales of the Company’s equity securities, third-party investments in or other strategic options for OnkosXcel, entering into strategic partnership arrangements and/or short-term borrowings from banks, stockholders or other related parties, if needed, or a combination of any of the foregoing. There are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all, particularly during when there is market uncertainty or an economic downturn. If we are unable to secure adequate additional funding as and when needed on acceptable or commercially reasonable terms, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more product candidates. In addition, there are various macro-economic trends affecting the financing markets whose impact on our liquidity and future funding requirements are uncertain as of the filing date of this Annual Report on Form 10-K. We will need substantial additional funding, and if we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts. See “ Risks Related to Financial Position and Need for Additional Capital; We will need substantial additional funding, and if we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts. ” in Part I. Item 1A., “Risk Factors” elsewhere in this Annual Report on Form 10-K.
Sources of Liquidity
We have focused our efforts on raising capital and building the products in our pipeline, and only recently on launching sales for our first FDA approved product IGALMI. Since our inception, our operations have been financed primarily from proceeds from the sale of equity securities, including our initial public offering, private placements of our common stock, registered offerings of our common stock, an Open Market Sale Agreement (the “Sale Agreement”) with Jefferies LLC (“Jefferies”), and borrowings under strategic financing arrangements (as described below). We have not
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yet established an ongoing source of revenue sufficient to cover our operating costs and will need to do so in future periods.
In April 2022, we entered into two strategic financing agreements; a Credit Agreement and Guaranty (the “Credit Agreement”) by and among the Company, as the borrower, certain subsidiaries of the Company from time to time party thereto as subsidiary guarantors, the lenders party thereto (the “Lenders”), and Oaktree Fund Administration LLC (“OFA”) as administrative agent, and a Revenue Interest Financing Agreement (the “RIFA”; and together with the Credit Agreement, the “OFA Facilities”) by and among the Company, the purchasers party thereto (the “Purchasers”) and OFA as administrative agent. Pursuant to the Credit Agreement, the Lenders agreed to loan us up to $135,000 in senior secured term loans. On April 28, 2022, we borrowed the first tranche of $70,000 of loans. The remaining two tranches of the commitments under the Credit Agreement may be borrowed at our option prior to December 31, 2024 as follows:
● $35,000 upon satisfaction of certain conditions, including receipt of certain regulatory and financial milestones; and
● $30,000 upon satisfaction of certain conditions, including specified minimum net sales of the Company attributable to sales of BXCL501 for a trailing twelve consecutive month period.
The foregoing additional amounts were not eligible to be borrowed as of December 31, 2022.
Pursuant to the RIFA, the Purchasers agreed to provide us with up to $120,000 in financing for our near-term commercial activities of IGALMI, development and commercialization of BXCL501 and other general corporate purposes. On July 8, 2022, we drew down the first tranche of $30,000 under the RIFA. The remaining commitments under the RIFA may be drawn at our option prior to December 31, 2024, as follows:
● $45,000 payment upon satisfaction of certain conditions, including receipt of certain regulatory and patent related milestones and specified minimum net sales of BXCL501 during any consecutive twelve-month period; and
● $45,000 payment upon satisfaction of certain conditions, including receipt of certain regulatory and patent related milestones and specified minimum net sales of BXCL501 during any consecutive twelve-month period.
The foregoing additional amounts were not eligible to be borrowed as of December 31, 2022.
In connection with the Credit Agreement, we granted to the Lenders certain warrants to purchase up to 278 shares of our common stock, rights to purchase up to $5,000 of our common stock and warrants to purchase up to 175 individual ownership units (i.e., not in thousands) in OnkosXcel.
See Note 8, Debt and Credit Facilities in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information relating to the Credit Agreement and RIFA, including applicable interest rates, payment obligations and certain restrictive and financial covenants thereunder. As of December 31, 2022, we were in compliance with all restrictive and financial covenants under the Credit Agreement and the RIFA.
In June 2021, we sold 3,155 shares of our common stock in a registered offering at a public offering price of $31.70 per share. We received proceeds of $96,937, net of issuance costs of $3,042.
In May 2021, we entered into the Sale Agreement with Jefferies pursuant to which we can offer and sell shares of our common stock, having an aggregate offering price of up to $100,000, from time to time, through an “at the market offering” program under which Jefferies will act as sale agent. We sold 124 shares under the Sale Agreement in June 2021 for proceeds of $4,056, net of issuance costs of $500. We did not sell any shares, and no proceeds were received under the Sale Agreement during the year ended December 31, 2022.
As of March 15, 2023, the Company sold 756 shares under the Sale Agreement with Jefferies in the first quarter of 2023 for net proceeds of $23,917, net of issuance costs of $740.
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Cash Flows
Year ended December 31,
2022
2021
Cash (used in) provided by:
Operating activities
$
(135,341)
$
(82,153)
Investing activities
$
(139)
$
(445)
Financing activities
$
96,237
$
102,447
Operating Activities
Net cash used in operating activities for the year ended December 31, 2022 was $135,341 and was primarily attributable to our net loss of $165,757, a $1,985 increase in inventory of IGALMI and a $3,905 increase in prepaid expenses, other current assets and other assets, partially offset by $17,337 in non-cash stock-based compensation, a $4,611 increase in accrued and payment in kind interest, and $13,030 increase in accounts payable, accrued expenses and other current liabilities.
Net cash used in operating activities was $82,153 for the year ended December 31, 2021, and was primarily attributable to our $106,931 net loss and a $103 decrease in prepaid expense and other assets, partially offset by $19,455 in stock-based compensation and a $4,850 increase in accounts payable and accrued expenses.
Investing Activities
Cash used in investing activities for the year ended December 31, 2022, was $139 and was primarily attributable to the purchase of equipment and leasehold improvements.
Cash used in investing activities was $445 for the year ended December 31, 2021, and was attributable to the purchase of furniture and leasehold improvements.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2022, was $96,237 and was primarily attributable to $98,600 of proceeds received from the OFA Facilities, net of $2,646 of debt issuance costs.
Cash provided by financing activities was $102,447 for the year ended December 31, 2021, and was attributable to $96,937 in net proceeds from the issuance of common stock in our June 2021 public offering, $4,056 in net proceeds from the sale of common stock under the Sale Agreement with Jefferies and proceeds of $1,454 from the exercise of stock options.
Operating Capital and Capital Expenditure Requirements
We expect to continue to incur significant and increasing operating losses at least for the next several years as we commercialize IGALMI and as we expand our clinical trials of and seek marketing approval for BXCL501, BXCL502, BXCL701 and BXCL702, while pursuing development of additional product candidates. We expect to continue to incur net losses in the near term. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our planned clinical trials and our expenditures on other research and development activities.
We have based our projections of operating capital requirements on assumptions that may prove to be incorrect, and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development, and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. We anticipate that our expenses will increase substantially as we:
● continue our clinical development of our product candidates;
● conduct additional research and development with our product candidates;
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● seek to identify, acquire, license, develop and commercialize product candidates;
● integrate acquired technologies into a comprehensive regulatory and product development strategy;
● maintain, expand and protect our intellectual property portfolio;
● hire scientific, clinical, quality control and administrative personnel;
● add operational, financial and management information systems and personnel, including personnel to support our drug development and commercial efforts;
● seek regulatory approvals for any product candidates that successfully complete clinical trials;
● fully develop a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize IGALMI and any product candidates for which we may obtain regulatory approval; and
● continue to operate as a public company.
We believe that our existing cash and cash equivalents as of December 31, 2022, will be sufficient to enable us to fund operating expenses and capital expenditure requirements for at least the next 12 months from the date of the issuance of the consolidated financial statements included in this Annual Report on Form 10-K, including funding our ongoing research and development and commercialization efforts. We expect that we will need to obtain substantial additional funding to fund our ongoing operations. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our existing stockholders may be materially diluted, and the terms of these securities could include liquidation or other preferences that could adversely affect the rights of our existing stockholders. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends, which could adversely impact our ability to conduct our business. If we are unable to raise capital when needed or on attractive terms, we could be forced to significantly delay, scale back or discontinue the development or commercialization of our product candidates, seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and relinquish or license, potentially on unfavorable terms, our rights to our product candidates that we otherwise would seek to develop or commercialize ourselves.
Contractual Obligations and Commitments
In April 2022, the Company signed a commercial supply agreement that requires minimum annual payments for the first three years of the agreement that in aggregate total $10,000 for the three-year period and the minimum commitment for 2023 is $3,000.
In February 2022, we signed a distribution agreement with a third-party to distribute product related to BXCL501 in the U.S. The distributor will be paid defined fees for its services under the agreement, which can be terminated by either party for cause. The distribution agreement can also be terminated by us without cause, subject to payment of agreed termination fees.
BTI leases office space for its corporate headquarters at 555 Long Wharf Drive, New Haven, Connecticut (the “HQ Lease”). The HQ Lease expires in February 2026. The Company has an option to renew the HQ Lease for one additional five-year term. Payments under the HQ Lease are fixed. The Company has approximately $1,209 of payments remaining under the HQ Lease. For additional details, see Note 12, Leases in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information relating to the Company’s leases.
In addition, we are obligated to make quarterly interest and royalty payments under our Credit Agreement and RIFA, respectively. For additional details, see Note 8, Debt and Credit Facilities in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information relating to the Company’s debt payment obligations.
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Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to exercise its judgment. We exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the consolidated financial statements.
On an ongoing basis, we evaluate our estimates and judgments. We base our estimates and judgments on a variety of factors including our historical experience, knowledge of our business and industry, current and expected economic conditions, the attributes of our products and the regulatory environment. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary.
While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.
We define critical accounting policies as those that are reflective of significant judgments and uncertainty and which may potentially result in materially different results under different assumptions and conditions. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. These estimates are subject to an inherent degree of uncertainty. Our critical accounting policies are noted below.
Stock Compensation
The Company has granted stock options, restricted stock units and profit units to employees, directors, and consultants, as well as warrants to other third parties. For employee, director and consultant awards, the value of each grant is estimated on the date of grant using a Black-Scholes option-pricing model. The Black-Scholes pricing model incorporates the volatility of the price of BTI’s stock, the risk-free interest rate, the estimated life of the award, the closing market price of the Company’s stock and the exercise price of the award. Management bases the Company’s estimates of stock price volatility on the historical volatility of the Company’s common stock, as well as a peer group of comparable companies. However, these estimates are neither predictive nor indicative of the future performance of the Company’s stock. For purposes of the calculation, management assumed that no dividends would be paid during the life of the stock awards. The estimates utilized in the Black-Scholes calculation involve inherent uncertainties and the application of management judgment.
Research and Development Expenses
As part of the process of preparing the Company’s consolidated financial statements, BTI’s management is required to estimate prepaid and accrued expenses. This process involves reviewing open contracts, communicating with personnel to identify services that have been performed on behalf of the Company and estimating the level of service performed and the associated cost incurred for the service when BTI has not yet been invoiced or otherwise notified of the actual cost. The majority of the Company’s service providers invoice BTI monthly for services performed or when contractual milestones are met. BTI management makes estimates of prepaid and/or accrued expenses as of each reporting date in the Company’s consolidated financial statements based on facts and circumstances known to management at that time. BTI periodically confirms the accuracy of its estimates with the service providers and makes adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to contract research organizations (“CROs”) in connection with clinical studies, amounts paid to contract manufacturing organizations, and fees paid to sites in connection with clinical trials.
The Company bases its expenses related to clinical studies on management’s estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical trial studies on our behalf. The financial terms of these agreements are subject to an initial negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to vendors exceed the level of services
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provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing certain service fees, BTI management estimates the time period over which services will be performed, enrollment of patients, number of sites activated 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 management’s estimate, management will adjust the accrual or prepaid accordingly. Although the Company does not expect management’s estimates to be materially different from amounts actually incurred, management’s understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in BTI reporting amounts that are too high or too low in any particular period.