Item 5. Market for Registrant’s Common Equity
ITEM 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is listed on the Nasdaq Capital Market and trades under the symbol “TGTX”.
Holders
The number of record holders of our common stock as of February 23, 2024 was 214.
Dividends
We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2023, regarding the securities authorized for issuance under our equity compensation plans, the TG Therapeutics, Inc. Amended and Restated 2012 Incentive Plan (the 2012 Incentive Plan) and the TG Therapeutics, Inc. 2022 Incentive Plan (the 2022 Incentive Plan). There were no additional shares available to be issued under the 2012 Incentive Plan.
Equity Compensation Plan Information
Number of
securities
remaining
available for
Number of
future issuance
securities to be
under equity
issued upon
Weighted-average
compensation
exercise of
exercise price of
plans (excluding
outstanding
outstanding
securities reflected
Plan Category
options
options
in column 1)
Equity compensation plans approved by security holders
4,697,029
$
6.98
8,751,892
Equity compensation plans not approved by security holders
—
—
—
Total
4,697,029
$
6.98
8,751,892
For information about all of our equity compensation plans see Note 6 to our Consolidated Financial Statements included in this report.
COMMON STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on our common stock for the period from December 31, 2018 through December 31, 2023, with the cumulative total return over such period on (i) the U.S. Index of The Nasdaq Stock Market and (ii) the Biotechnology Index of The Nasdaq Stock Market. The graph assumes an investment of $100 on December 31, 2018, in our common stock (at the adjusted closing market price) and in each of the indices listed above, and assumes the reinvestment of all dividends. Measurement points are December 31 of each year.
* $100 invested on December 31, 2018 in stock or index, including reinvestment of dividends. Fiscal Years ending December 31.
ITEM 6. REMOVED AND RESERVED
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ITEM 7. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those factors discussed in “Risk Factors.” See also the “Special Cautionary Notice Regarding Forward-Looking Statements” set forth at the beginning of this report.
You should read the following discussion and analysis in conjunction with “Item 8. Financial Statements and Supplementary Data,” and our consolidated financial statements beginning on page F-1 of this report.
Overview
TG Therapeutics is a fully-integrated, commercial stage, biopharmaceutical company focused on the acquisition, development and commercialization of novel treatments for B-cell diseases. In addition to a research pipeline including several investigational medicines, TG has received approval from the FDA for BRIUMVI (ublituximab-xiiy) for the treatment of adult patients with RMS, to include clinically isolated syndrome, relapsing-remitting disease, and active secondary progressive disease, in adults. We also actively evaluate complementary products, technologies and companies for in-licensing, partnership, acquisition and/or investment opportunities.
On February 5, 2021, we announced that the FDA granted accelerated approval of umbralisib, the Company’s PI3K delta inhibitor, then commercially referred to as UKONIQ, for the treatment of adult patients with relapsed or refractory MZL who have received at least one prior anti-CD20 based regimen and adult patients with relapsed or refractory FL who have received at least three prior lines of systemic therapy. On April 15, 2022, we announced the voluntary withdrawal of UKONIQ from sale for the approved indications. During the year ended December 31, 2023, our only sources of product revenues were from the sales of BRIUMVI. Product revenues are recorded net of estimates of variable consideration. For further discussion of our revenue recognition policy, see “Critical Accounting Policies and Significant Judgements and Estimates” below.
Cost of revenue consists primarily of materials and third-party manufacturing costs, as well as freight and royalties owed to our licensing partner for BRIUMVI sales. Based on our policy to expense costs associated with the manufacture of our products prior to regulatory approval, a portion of the manufacturing costs of BRIUMVI units recognized as revenue during the year ended December 31, 2023 were expensed prior to receipt of FDA approval on December 28, 2022, and therefore are not included in costs of product revenue during the current period.
Our other research and development expenses consist primarily of expenses relating to the design, development, manufacture, testing and enhancement of our drug candidates and technologies, milestone expenses related to in-licensing of new product candidates, fees paid to consultants and outside service providers for clinical and laboratory development, personnel expenses and other facilities-related expenses. We expense our research and development costs as they are incurred. Research and development expenses for the years ended December 31, 2023, 2022 and 2021 were approximately $63.2 million, $112.1 million and $198.5 million respectively, excluding noncash compensation expenses related to research and development.
The following table sets forth the research and development expenses per project, exclusive of noncash compensation expenses, for the periods presented.
(in thousands)
2023
2022
2021
Ublituximab
$
50,972
$
59,307
$
112,522
Umbralisib
5,925
38,468
63,033
Early Clinical Pipeline & Pre-Clinical
6,285
14,353
22,977
Total
$
63,182
$
112,128
$
198,532
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Our selling, general and administrative expenses consist primarily of expenses related to the commercial launch of our products, including salaries and related expenses for our commercialization team and commercial development activities. Other selling, general and administrative expenses consist of executive, finance and other administrative personnel, recruitment expenses, professional fees and other corporate expenses, including investor relations, legal activities and facilities-related expenses.
Our results of operations include noncash compensation expenses as a result of the grants of restricted stock and stock options. Compensation expense for awards of restricted stock and stock options granted to employees and directors represents the fair value of the award recorded over the respective vesting periods of the individual awards. The expense is included in the respective categories of expense in the consolidated statements of operations. We expect to continue to incur significant noncash compensation expenses.
We recognize all share-based payments to employees and non-employee directors (as compensation for service) as noncash compensation expense in the consolidated financial statements based on the fair values of such payments. Stock-based compensation expense recognized each period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2023 and 2022
The following table summarizes the results of operations for the years ended December 31, 2023 and 2022:
(in thousands)
2023
2022
Product revenue, net
$
92,005
$
2,633
License, milestone and other revenue
141,657
152
Total Revenue
$
233,662
$
2,785
Costs and expenses:
Cost of revenue
14,131
265
Research and development:
Noncash compensation
13,010
13,224
Other research and development
63,182
112,128
Total research and development
76,192
125,352
Selling, General and administrative:
Noncash compensation
24,923
5,961
Other selling, general and administrative
97,783
64,046
Total selling, general and administrative
122,706
70,007
Total costs and expenses
213,029
195,624
Interest expense
12,615
10,191
Other income
(5,044
)
(4,695
)
Total other expense, net
7,571
5,496
Net income (loss) before taxes
13,062
(198,335
)
Income taxes
390
Net income (loss)
$
12,672
$
(198,335
)
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Product Revenue, net . Product revenue, net increased for the year ended December 31, 2023 compared to the comparable period ended December 31, 2022 primarily due to an increase in net product revenues from sales of our sole commercial product, BRIUMVI, which was commercially launched in the U.S. in January 2023, following FDA approval. Product revenue, net for the year ended December 31, 2022, consisted of net product sales of UKONIQ, which was officially withdrawn from the market in May 2022.
License Revenue . License revenue was $140.2 million and $0.2 million for the years ended December 31, 2023 and December 31, 2022, respectively. License revenue for the year ended December 31, 2023 is predominantly comprised of recognition of license revenue from the one-time $140.0 million non-refundable upfront payment recognized in the third quarter of 2023 as part of the Commercialization Agreement with Neuraxpharm (see Note 2 for more information). License revenue for the year ended December 31, 2022 is comprised of recognition of a portion of the upfront payment from the ublituximab sublicense agreement with Ildong.
Other Revenue . Other revenue was $1.5 million and zero for the year ended December 31, 2023 and December 31, 2022, respectively. Other revenue for the year ended December 31, 2023 is comprised of consideration received for development and regulatory activities performed on behalf of Neuraxpharm in accordance with the Commercialization Agreement.
Cost of Revenue. Cost of revenue for the year ended December 31, 2023 increased compared to the comparable period ended December 31, 2022 due to increased product sales resulting from the commercial launch of BRIUMVI in the U.S. market which began in January 2023 following FDA approval. During the year ended December 31, 2023 the cost of revenue consisted primarily of third-party manufacturing, distribution, overhead costs and royalties on net sales of BRIUMVI owed to our licensing partner. Based on our policy to expense costs associated with the manufacture of our products prior to regulatory approval, a portion of the manufacturing costs of BRIUMVI units recognized as revenue during the year ended December 31, 2023 were expensed as research and development expenses prior to receipt of FDA approval, and therefore are not reflected in the cost of revenue. We expect the cost of revenue for BRIUMVI to increase in relation to product revenues as we deplete these inventories and we expect to use the remaining pre-commercialization inventory for product sales through the first half of 2025
Noncash Compensation Expense (Research and Development). Noncash compensation expense (research and development) related to equity incentive grants totaled $13.0 million for the year ended December 31, 2023, as compared to $13.2 million during the comparable period in 2022.
Other Research and Development Expense . Other research and development expense decreased for the year ended December 31, 2023, by approximately $48.9 million to $63.2 million as compared to the prior year ended December 31, 2022. The decrease in other research and development expense during the year ended December 31, 2023 was primarily attributable to reduced manufacturing expense, a decrease in license milestones and reduced clinical trial related expenses. Prior to the approval of BRIUMVI, manufacturing costs pertaining to BRIUMVI were expensed to research and development expense in the period incurred, and following approval are reflected in inventory.
Noncash Compensation Expense (Selling, General and Administrative). Noncash compensation expense (selling, general and administrative) related to equity incentive grants totaled $24.0 million for the year ended December 31, 2023, as compared to $6.0 million during the comparable period in 2022. The increase in noncash compensation expense was primarily due to vesting of milestone-based grants and a decrease in forfeitures during the year ended December 31, 2023 compared to the year ended December 31, 2022.
Other Selling, General and Administrative. Other selling, general and administrative expenses increased for the year ended December 31, 2023, by approximately $33.9 million to $97.8 million as compared to the prior year ended December 31, 2022. The increase was primarily due to other selling, general and administrative costs, including personnel and consultants, associated with the approval and commercialization of BRIUMVI, as well as increase in advisory fees pertaining to the Commercialization Agreement with Neuraxpharm during the year ended December 31, 2023.
Interest Expense. Interest expense for the year ended December 31, 2023 was $12.6 million compared to $10.2 million for the comparable period ended December 31, 2022. The $2.4 million increase is mainly due to greater interest expense related to First Amendment to the Amended Loan Agreement
Other Income. Other income increased by $0.3 million to $5.0 million for the year ended December 31, 2023, as compared to $4.7 million for the year ended December 31, 2022.
Income Taxes. Income tax increased by $0.4 million to $0.4 million for the year ended December 31, 2023, as compared to zero for the year ended December 31, 2022. The $0.4 million increase is due to state tax liabilities incurred during the year ended December 31, 2023.
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Comparison of the Years Ended December 31, 2022 and 2021
The following table summarizes the results of operations for the years ended December 31, 2022 and 2021:
(in thousands)
2022
2021
Product revenue, net
$
2,633
$
6,537
License revenue
152
152
Total Revenue
$
2,785
$
6,689
Costs and expenses:
Cost of product revenue
265
790
Research and development:
Noncash compensation
13,224
24,047
Other research and development
112,128
198,532
Total research and development
125,352
222,579
General and administrative:
Noncash compensation
5,961
37,227
Other selling, general and administrative
64,046
90,863
Total general and administrative
70,007
128,090
Total costs and expenses
195,624
351,459
Interest expense
10,191
5,638
Other income
(4,695
)
(2,307
)
Total other expense, net
5,496
3,331
Net Loss
$
(198,335
)
$
(348,101
)
Revenues . Total revenue for the year ended December 31, 2022 decreased compared to the comparable period ended December 31, 2021 due to a decrease in net product revenues resulting from the voluntary withdrawal from the U.S. market of our sole commercial product, UKONIQ.
Cost of Product Revenue. Cost of product revenue for the year ended December 31, 2022 decreased compared to the comparable period ended December 31, 2021 due to the stoppage of product sales resulting from the withdrawal from the U.S. market of our sole commercial product UKONIQ. During the year ended December 31, 2022 the cost of product revenue consists primarily of freight and royalties on net sales of UKONIQ owed to our licensing partner. Based on our policy to expense costs associated with the manufacture of our products prior to regulatory approval, the manufacturing costs of UKONIQ units recognized as revenue during the year ended December 31, 2022 were expensed as research and development expenses prior to receipt of FDA approval on February 5, 2021, and therefore are not included in costs of product revenue during the current period.
Noncash Compensation Expense (Research and Development). Noncash compensation expense (research and development) related to equity incentive grants totaled $13.2 million for the year ended December 31, 2022, as compared to $24.0 million during the comparable period in 2021. The decrease in noncash compensation expense was primarily due to forfeitures of restricted stock during the year ended December 31, 2022, as well as an overall decreased headcount during the year ended December 31, 2022 compared to the year ended December 31, 2021.
Other Research and Development Expense . Other research and development expense decreased for the year ended December 31, 2022, by approximately $86.4 million to $112.1 million as compared to the prior year ended December 31, 2021. The decrease in research and development expense is primarily attributable to reduced clinical trial related expenses, headcount, lower fees paid to consultants and outside service providers, license milestones and decreased manufacturing expense during the year ended December 31, 2022.
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Noncash Compensation Expense (Selling, General and Administrative). Noncash compensation expense (selling, general and administrative) related to equity incentive grants totaled $6.0 million for the year ended December 31, 2022, as compared to $37.2 million during the comparable period in 2021. The decrease in noncash compensation expense was primarily due to forfeitures of restricted stock during the year ended December 31, 2022, as well as an overall decreased headcount during the year ended December 31, 2022 compared to the year ended December 31, 2021.
Other Selling, General and Administrative. Other selling, general and administrative expenses decreased for the year ended December 31, 2022, by approximately $26.8 million to $64.0 million as compared to the prior year ended December 31, 2021. The decrease was due primarily to lower other selling, general and administrative costs, as a result of our withdrawal of UKONIQ and decreased headcount, during the period ended December 31, 2022.
Interest Expense. Interest expense for the year ended December 31, 2022 was $10.2 million compared to $5.6 million for the comparable period ended December 31, 2021. The $4.6 million increase is mainly due to greater interest expense related to the Amended Loan Agreement entered into in December 2021.
Other Income. Other income increased by $2.4 million to $4.7 million for the year ended December 31, 2022, as compared to $2.3 million for the year ended December 31, 2021. The increase is mainly due to greater interest income, as well as a research & development tax credit refund received by our Australian subsidiary during the year ended December 31, 2022.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have incurred operating losses since our inception; however, the Company experienced a net profit during the twelve months ended December 31, 2023 due to a $140.0 million non-refundable upfront payment recognized as license revenue in the third quarter of 2023 as part of our Commercialization Agreement with Neuraxpharm (see Note 2 for more information). We expect to continue to incur operating losses in the near term and may never become profitable. As of December 31, 2023, we have an accumulated deficit of $1.5 billion.
Our major sources of cash have been proceeds from private placements and public offerings of equity securities, from our loan and security agreements executed with Hercules (see Note 7 for more information), and the upfront payment from the Commercialization Agreement (see Note 2 for more information). Substantially all our operating losses have resulted from costs incurred in connection with our research and development programs and from selling, general and administrative costs associated with our operations, including our commercialization activities. As of December 31 2023, we had generated $ 92 .0 million in product revenue from sales of BRIUMVI. BRIUMVI first became commercially available in the United States in January of 2023. Even with the commercialization of BRIUMVI and the possible future commercialization of our other drug candidates, we may not become profitable. Our ability to achieve profitability depends on our ability to generate revenue and many other factors, including our ability to successfully commercialize our drug candidates alone or in partnership; successfully complete any post-approval regulatory obligations and our ability to maintain or obtain regulatory approval for our drug candidates. We may continue to incur operating losses even now that we are generating revenues from BRIUMVI.
As of December 31, 2023, we had $217.5 million in cash and cash equivalents, and investment securities. We anticipate that our cash, cash equivalents, and investment securities as of December 31, 2023, combined with projected revenues associated with the sale of BRIUMVI in the U.S. and ex-U.S., will provide sufficient liquidity for more than a twelve-month period from the date of filing this Annual Report on Form 10-K. The actual amount of cash that we will need to operate is subject to many factors, including, but not limited to, our commercialization efforts for BRIUMVI, preparations for the potential commercialization of our other drug candidates, and the timing, design and conduct of clinical trials for our drug candidates as well as the costs associated with licensing or otherwise acquiring new product candidates. We may be dependent upon significant future financing to provide the cash necessary to execute our ongoing and future operations, including the commercialization of any of our drug candidates.
Discussion of Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2023 and 2022:
(in thousands)
2023
2022
Net cash used in operating activities
$
(31,413
)
$
(176,170
)
Net cash used in investing activities
$
(50,651
)
$
(20,013
)
Net cash provided by (used in) financing activities
$
72,705
$
(391
)
Cash used in operating activities for the year ended December 31, 2023 was $31.4 million as compared to $176.2 million for the year ended December 31, 2022. The decrease in cash used in operating activities was due primarily to the one-time upfront payment of $140.0 million from Neuraxpharm, as part of the Commercialization Agreement during the year ended December 31, 2023.
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For the year ended December 31, 2023, net cash used in investing activities was $50.7 million as compared to $20.0 million for the year ended December 31, 2022. The increase in net cash used in investing activities was primarily due to greater investment in short-term securities during the year ended December 31, 2023.
For the year ended December 31, 2023, net cash provided by financing activities was $72.7 million as compared to net cash used in financing activities of $0.4 million for the year ended December 31, 2022. The increase in net cash provided by financing activities was primarily attributable to proceeds from debt financings and net proceeds from the issuance of common stock as part of our ATM program that took place during the year ended December 31, 2022.
ATM Program
On September 5, 2019, we filed an automatic “shelf registration” statement on Form S-3 (the 2019 WKSI Shelf) as a “well-known seasoned issuer” as defined in Rule 405 under the Securities Act, which registered an unlimited and indeterminate amount of debt or equity securities for future issuance and sale. The 2019 WKSI Shelf was declared effective in September 2019. In connection with the 2019 WKSI Shelf, we entered into an At-the-Market Issuance Sales Agreement (the 2020 ATM) with Jefferies LLC, Cantor Fitzgerald & Co. and B. Riley Securities, Inc. (each a 2020 Agent and collectively, the 2020 Agents), relating to the sale of shares of our common stock. Under the 2020 ATM, we paid the 2020 Agents a commission rate of up to 3.0% of the gross proceeds from the sale of any shares of common stock. In November 2020, we entered into an At-the-Market Issuance Sales Agreement (the 2021 ATM) with the same terms and agents (each a 2021 Agent and collectively, the 2021 Agents) as the 2020 ATM.
During the year ended December 31, 2021, we sold a total of 72,000 shares of common stock under the 2021 ATM for aggregate total gross proceeds of approximately $2.5 million at an average selling price of $34.25 per share, resulting in net proceeds of approximately $2.4 million after deducting commissions and other transactions costs.
On September 2, 2022, we filed an automatic “shelf registration” statement on Form S-3 (the 2022 WKSI Shelf) as a “well-known seasoned issuer” as defined in Rule 405 under the Securities Act, which registered an unlimited and indeterminate amount of debt or equity securities for future issuance and sale. The 2022 WKSI Shelf was declared effective in September 2022. In connection with the 2022 WKSI Shelf, we entered into an At-the-Market Issuance Sales Agreement (the 2022 ATM) with Cantor Fitzgerald & Co. and B. Riley Securities, Inc. (each a 2022 Agent and collectively, the 2022 Agents), relating to the sale of shares of our common stock. Under the 2022 ATM, we will pay the 2022 Agents a commission rate of up to 3.0% of the gross proceeds from the sale of any shares of common stock. The 2022 ATM has replaced the 2021 ATM as the only active ATM program.
During the year ended December 31, 2023, we sold a total of 1,385,700 shares of common stock under the 2022 ATM for aggregate total gross proceeds of approximately $47.1 million at an average selling price of $34.01 per share, resulting in net proceeds of approximately $46.3 million after deducting commissions and other transactions costs.
The 2022 WKSI Shelf is currently our only active shelf registration statement. We may offer any combination of the securities registered under the 2022 WKSI Shelf from time to time in response to market conditions or other circumstances if we believe such a plan of financing is in the best interests of our stockholders. We may need to file additional shelf registration statements in the future to provide us with the flexibility to raise additional capital to finance our operations as needed.
Debt Financings
On February 28, 2019 (the Closing Date), we entered into a term loan facility of up to $60.0 million (Term Loan) with Hercules Capital, Inc. (Hercules), the proceeds of which were used for research and development programs and for general corporate purposes. The Term Loan is governed by a loan and security agreement, dated February 28, 2019 (the Loan Agreement), which provides for up to four separate advances. The first advance of $30.0 million was drawn on the Closing Date. An additional $30.0 million was available with different milestones and time points that have lapsed.
On December 30, 2021 (the First Amendment Closing Date), the Company entered into an Amended and Restated Loan and Security Agreement (the Amended Loan Agreement) with Hercules Capital, Inc. The Amended Loan Agreement amended the terms of the Loan Agreement to, among other things, (i) increase the aggregate principal amount of the loan, available at the Company’s option, from $60.0 million to $200.0 million (the Amended Term Loan), (ii) issue a first advance of $70.0 million drawn at the First Amendment Closing Date, a portion of which was used to refinance the current outstanding loan balance of approximately $7.8 million and pay for expenses incurred by the Lender in executing the agreements, (iii) change the draw amounts and dates available in Tranche 2 through Tranche 4 including increasing the amount available under Tranche 2 subject to the achievement of performance milestones from $10.0 million to $20.0 million, increasing the amount available under Tranche 3 subject to the achievement of performance milestones from $10.0 million to $45.0 million, and increasing the amount under Tranche 4 subject to the approval of Hercules’ investment committee from $10.0 million to $65.0 million, (iv) extend the maturity date of the facility from the original March 1, 2022 to January 1, 2026, (v) reset and extend the interest only period from April 1, 2021 to February 1, 2025 and extendable to August 1, 2025 subject to the achievement of certain performance milestones, and (vi) modify the cash interest rate to be the greater of either (a) the “prime rate” as reported in The Wall Street Journal plus 2.15%, and (b) 5.40%. The performance milestones are based on achievement of certain U.S. Food and Drug Administration approvals and impact the potential extension of the interest only period, access to future advances under the Loan Agreement and minimum cash levels required under the Amended Loan Agreement.
On March 31, 2023 (the First Amendment Effective Date), the Company entered into a First Amendment to the Amended and Restated Loan and Security Agreement (the First Amendment) with Hercules. The First Amendment amended the terms of the Amended Loan Agreement to, among other things, (i) issue an advance of $25.0 million drawn at the First Amendment Effective Date (the Tranche 3A Advance), (ii) provide for the formal expiration of Tranche 2, (iii) change the draw amounts and dates available under subsequent tranches, including splitting the remaining balance of Tranche 3 into two additional advances in an aggregate principal amount of up to $20.0 million, in increments of $10.0 million (a Tranche 3B Advance and a Tranche 3C Advance), decreasing the amount available under Tranche 4 from $65.0 million to $60.0 million, and adding a Tranche 5 of $25.0 million, subject to the achievement of revenue related performance milestones, (iv) extend the interest only period from February 1, 2025 to August 1, 2025 and (v) modify the cash interest rate to be the greater of either (a) the “prime rate” as reported in The Wall Street Journal plus 1.20%, and (b) 8.95%. In addition to the cash interest rate, the principal balance will accrue paid-in-kind interest at a rate of 2.25%, which amount will be capitalized and added to the outstanding principal balance of the Amended Term Loan and payable at the maturity date of the Amended Loan Agreement, as amended, The Amended Loan Agreement, as amended, contains financial covenants that require the Company to maintain certain levels of unrestricted cash and additional financial covenants related to market capitalization. As of December 31, 2023, we are in compliance with all financial covenants.
The Amended Loan Agreement, as amended also contains warrant coverage of 2.95% of the total amount funded. A warrant (the Warrant) was issued by the Company to Hercules to purchase 115,042 shares of common stock with an exercise price of $17.95 for the initial amount funded at the Closing Date. The Warrant shall be exercisable for seven years from the date of issuance. Hercules may exercise the Warrant either by (a) cash or check or (b) through a net issuance conversion. Additionally, a warrant was issued by the Company to Hercules to purchase 50,172 shares of common stock with an exercise price of $14.70 for the amount funded pertaining to the Tranche 3A Advance (the First Amendment Warrant). The First Amendment Warrant shall be exercisable for seven years from the date of issuance. Hercules may exercise the First Amendment Warrant either by (a) cash or check or (b) through a net issuance conversion.
In addition, the Company is required to pay a final payment fee equal to 5.95% of the aggregate principal amount of the Term Loan Advances (as defined in the Amended Loan Agreement, as amended)
The Company may, at its option, prepay the Amended Term Loan in full or in part, subject to a prepayment penalty equal to (i) 1.5% of the principal amount prepaid if the prepayment occurs prior to the first anniversary of the First Amendment Effective Date, and (ii) 1.0% of the principal amount prepaid if the prepayment occurs on or after the first anniversary of the First Amendment Effective Date.
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Leases
In October 2014, we entered into an agreement (the Office Agreement) with Fortress Biotech, Inc. (FBIO) to occupy approximately 45% of the 24,000 square feet of New York City office space leased by FBIO. The Office Agreement requires us to pay our respective share of the average annual rent and other costs of the 15-year lease. We approximate an average annual rental obligation of $1.8 million under the Office Agreement. We began to occupy this new space in April 2016, with rental payments beginning in the third quarter of 2016. Also in connection with this lease, we have pledged $1.3 million to secure a line of credit as a security deposit for the Office Agreement, which has been recorded as restricted cash in the accompanying condensed consolidated balance sheets.
Total rental expense was approximately $2.2 million, $2.7 million and $2.2 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Future minimum lease commitments as of December 31, 2023 total, in the aggregate, approximately $15.0 million through December 31, 2032. Our future minimum lease commitments include our office leases in New York, New Jersey and North Carolina as of December 31, 2023.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and related disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the applicable period. Actual results may differ from these estimates under different assumptions or conditions.
We define critical accounting policies as those that are reflective of significant judgments and uncertainties 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 include the following:
Revenue Recognition . Pursuant to Topic 606, we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, Topic 606 includes provisions within a five-step model that includes i) identifying the contract with a customer, ii) identifying the performance obligations in the contract, iii) determining the transaction price, iv) allocating the transaction price to the performance obligations, and v) recognizing revenue when, or as, an entity satisfies a performance obligation.
At contract inception, we assess the goods or services promised within each contract and assess whether each promised good or service is distinct and determine those that are performance obligations. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied.
Product Revenue, Net – The Company recognizes product revenues, net of variable consideration related to certain allowances and accruals, when the customer takes control of the product, which is typically upon delivery to the customer. Product revenue is recorded at the net sales price, or transaction price. The Company records product revenue reserves, which are classified as a reduction in product revenues, to account for the components of variable consideration. Variable consideration includes the following components, which are described below: chargebacks, government rebates, trade discounts and allowances, product returns, and co-payment assistance.
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These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is expected to be settled with a credit against the Company's customer account) or a liability (if the amount is expected to be settled with a cash payment). The Company's estimates of reserves established for variable consideration are calculated based upon a consistent application of the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. These estimates reflect the Company's current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. The amount of variable consideration that is included in the transaction price may be subject to constraint and is included in net product revenues only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration received may ultimately differ from the Company's estimates. If actual results vary, the Company adjusts these estimates, which could have an effect on earnings in the period of adjustment. For a complete discussion of the accounting for product revenue, see Note 1 – Organization and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.
License Revenue - Revenue recognized from license agreements will include royalties on sales, upfront, milestone and other payments, if any, under any current or future licensing agreements, including revenues related to the supply of our drug candidates or approved drugs to our various licensing partners under these types of contracts. For a complete discussion of the accounting for license revenue, see Note 1 – Organization and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.
Stock Compensation . We have granted stock options and restricted stock to employees, directors and consultants, as well as warrants to other third parties. For employee, director and consultant grants the value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model takes into account volatility in the price of our stock, the risk-free interest rate, the estimated life of the option, the closing market price of our stock and the exercise price. We base our estimates of our stock price volatility on the historical volatility of our common stock and our assessment of future volatility; however, these estimates are neither predictive nor indicative of the future performance of our stock. For purposes of the calculation, we assumed that no dividends would be paid during the life of the options and warrants. The estimates utilized in the Black-Scholes calculation involve inherent uncertainties and the application of management judgment. In addition, because some of the options, restricted stock and warrants issued to employees, consultants and other third parties vest upon the achievement of certain milestones, the total expense is uncertain. Compensation expense for such awards that vest upon the achievement of milestones is recognized when the achievement of such milestones becomes probable.
Accrued Research and Development Expenses. As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts, communicating with our personnel to identify 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. The majority of our service providers invoice us monthly for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of 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. Examples of estimated accrued research and development expenses include:
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fees paid to contract research organizations (CROs) in connection with clinical studies;
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fees paid to contract manufacturing organizations (CMOs);
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fees paid to trial sites in connection with clinical studies; and
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fees paid to vendors associated with licenses/milestones.
We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical 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 our vendors will exceed the level of services 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, we estimate 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 our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our 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 us reporting amounts that are too high or too low in any particular period.
RECENTLY ISSUED ACCOUNTING STANDARDS
Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s financial statements.
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