Form 10-Q MEI Pharma, Inc. For: Dec 31

February 10, 2022 4:02 PM EST

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10-Q
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Table of Contents

 

ROC

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended December 31, 2021

OR

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

 

 

For the transition period from

 

to

 

 

 

Commission File Number: 000-50484

 

MEI Pharma, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

DELAWARE

 

51-0407811

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

11455 El Camino Real, San Diego, CA 92130

(Address of principal executive offices) (Zip Code)

(858) 369-7100

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.00000002 par value

 

MEIP

 

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ☐

As of February 8, 2022, the number of shares outstanding of the issuer’s common stock, $0.00000002 par value, was 132,985,545.

 

 

 


Table of Contents

 

MEI PHARMA, INC.

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

Page

 

 

 

 

PART I

 

FINANCIAL INFORMATION

 

 

3

 

 

 

 

Item 1:

 

Financial Statements (Unaudited)

 

 

3

 

 

 

 

 

 

Condensed Balance Sheets as of December 31, 2021 and June 30, 2021

 

 

3

 

 

 

 

 

 

Condensed Statements of Operations for the three and six months ended December 31, 2021 and 2020

 

 

4

 

 

 

 

 

 

Condensed Statements of Stockholders’ Equity for the three and six months ended December 31, 2021 and 2020

 

 

5

 

 

 

 

 

 

Condensed Statements of Cash Flows for the six months ended December 31, 2021 and 2020

 

 

6

 

 

 

 

 

 

Notes to Condensed Financial Statements

 

 

7

 

 

 

 

Item 2:

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

19

 

 

 

 

Item 3:

 

Quantitative and Qualitative Disclosures about Market Risk

 

 

33

 

 

 

 

Item 4:

 

Controls and Procedures

 

 

33

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

34

 

 

 

 

Item 1:

 

Legal Proceedings

 

 

34

 

 

 

 

Item 1A:

 

Risk Factors

 

 

34

 

 

 

 

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

34

 

 

 

 

Item 3:

 

Defaults upon Senior Securities

 

 

34

 

 

 

 

Item 4:

 

Mine Safety Disclosures

 

 

34

 

 

 

 

Item 5:

 

Other Information

 

 

34

 

 

 

 

Item 6:

 

Exhibits

 

 

35

 

 

 

SIGNATURES

 

 

36

 

 

 

2


Table of Contents

 

PART I FINANCIAL INFORMATION

Item 1: Condensed Financial Statements – Unaudited

MEI PHARMA, INC.

CONDENSED BALANCE SHEETS

(In thousands, except per share amounts)

 

 

 

December 31,
2021

 

 

June 30,
2021

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,551

 

 

$

8,543

 

Short-term investments

 

 

173,200

 

 

 

144,883

 

Total cash, cash equivalents and short-term investments

 

 

185,751

 

 

 

153,426

 

Contract assets

 

 

10,151

 

 

 

7,582

 

Prepaid expenses and other current assets

 

 

4,823

 

 

 

3,809

 

Total current assets

 

 

200,725

 

 

 

164,817

 

Operating lease right-of-use asset

 

 

7,325

 

 

 

7,774

 

Property and equipment, net

 

 

1,414

 

 

 

1,507

 

Total assets

 

$

209,464

 

 

$

174,098

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

6,256

 

 

$

6,355

 

Accrued liabilities

 

 

9,765

 

 

 

8,402

 

Deferred revenue

 

 

13,515

 

 

 

14,609

 

Operating lease liability

 

 

987

 

 

 

928

 

Total current liabilities

 

 

30,523

 

 

 

30,294

 

Deferred revenue, long-term

 

 

80,527

 

 

 

72,717

 

Operating lease liability, long-term

 

 

6,855

 

 

 

7,370

 

Warrant liability

 

 

14,309

 

 

 

22,355

 

Total liabilities

 

 

132,214

 

 

 

132,736

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value; 100 shares authorized; none outstanding

 

 

 

 

 

 

Common stock, $0.00000002 par value; 226,000 shares authorized; 132,905 and
   
112,615 shares issued and outstanding at December 31, 2021 and June 30, 2021,
   respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

422,705

 

 

 

369,171

 

Accumulated deficit

 

 

(345,455

)

 

 

(327,809

)

Total stockholders’ equity

 

 

77,250

 

 

 

41,362

 

Total liabilities and stockholders’ equity

 

$

209,464

 

 

$

174,098

 

 

See accompanying notes to condensed financial statements.

3


Table of Contents

 

MEI PHARMA, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended
December 31,

 

 

Six Months Ended
December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenue

 

$

18,222

 

 

$

9,167

 

 

$

31,609

 

 

$

13,001

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

494

 

 

 

 

 

 

1,003

 

Research and development

 

 

21,531

 

 

 

22,224

 

 

 

41,484

 

 

 

35,220

 

General and administrative

 

 

7,926

 

 

 

5,650

 

 

 

15,835

 

 

 

11,565

 

Total operating expenses

 

 

29,457

 

 

 

28,368

 

 

 

57,319

 

 

 

47,788

 

Loss from operations

 

 

(11,235

)

 

 

(19,201

)

 

 

(25,710

)

 

 

(34,787

)

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of warrant liability

 

 

5,458

 

 

 

7,083

 

 

 

8,046

 

 

 

20,307

 

Interest and dividend income

 

 

11

 

 

 

164

 

 

 

18

 

 

 

439

 

Other income

 

 

 

 

 

500

 

 

 

 

 

 

495

 

Net loss

 

$

(5,766

)

 

$

(11,454

)

 

$

(17,646

)

 

$

(13,546

)

Net loss:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(5,766

)

 

$

(11,454

)

 

$

(17,646

)

 

$

(13,546

)

Diluted

 

$

(11,224

)

 

$

(18,537

)

 

$

(25,692

)

 

$

(33,853

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.05

)

 

$

(0.10

)

 

$

(0.15

)

 

$

(0.12

)

Diluted

 

$

(0.09

)

 

$

(0.16

)

 

$

(0.22

)

 

$

(0.30

)

Shares used in computing net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

126,725

 

 

 

112,524

 

 

 

115,982

 

 

 

112,480

 

Diluted

 

 

128,160

 

 

 

114,461

 

 

 

118,657

 

 

 

114,709

 

 

See accompanying notes to condensed financial statements.

 

4


Table of Contents

 

MEI PHARMA, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

Common Shares

 

 

Additional
Paid-In Capital

 

 

Accumulated Deficit

 

 

Total Stockholders’ Equity

 

Balance at June 30, 2021

 

 

112,615

 

 

$

369,171

 

 

$

(327,809

)

 

$

41,362

 

Net loss

 

 

 

 

 

 

 

 

(11,880

)

 

 

(11,880

)

Issuance of common stock for vested restricted stock units

 

 

63

 

 

 

(194

)

 

 

 

 

 

(194

)

Share-based compensation expense

 

 

 

 

 

2,539

 

 

 

 

 

 

2,539

 

Balance at September 30, 2021

 

 

112,678

 

 

 

371,516

 

 

 

(339,689

)

 

 

31,827

 

Net loss

 

 

 

 

 

 

 

 

(5,766

)

 

 

(5,766

)

Issuance of common stock, net of issuance costs of $3,672

 

 

20,125

 

 

 

48,653

 

 

 

 

 

 

48,653

 

Exercise of stock options

 

 

102

 

 

 

212

 

 

 

 

 

 

212

 

Share-based compensation expense

 

 

 

 

 

2,324

 

 

 

 

 

 

2,324

 

Balance at December 31, 2021

 

 

132,905

 

 

$

422,705

 

 

$

(345,455

)

 

$

77,250

 

 

 

 

Common Shares

 

 

Additional
Paid-In Capital

 

 

Accumulated Deficit

 

 

Total Stockholders’ Equity

 

Balance at June 30, 2020

 

 

111,514

 

 

$

355,452

 

 

$

(277,234

)

 

$

78,218

 

Net loss

 

 

 

 

 

 

 

 

(2,092

)

 

 

(2,092

)

Issuance of common stock, net of issuance costs of $64

 

 

958

 

 

 

3,136

 

 

 

 

 

 

3,136

 

Exercise of stock options

 

 

50

 

 

 

124

 

 

 

 

 

 

124

 

Share-based compensation expense

 

 

 

 

 

2,942

 

 

 

 

 

 

2,942

 

Balance at September 30, 2020

 

 

112,522

 

 

 

361,654

 

 

 

(279,326

)

 

 

82,328

 

Net loss

 

 

 

 

 

 

 

 

(11,454

)

 

 

(11,454

)

Exercise of stock options

 

 

6

 

 

 

15

 

 

 

 

 

 

15

 

Share-based compensation expense

 

 

 

 

 

2,609

 

 

 

 

 

 

2,609

 

Balance at December 31, 2020

 

 

112,528

 

 

$

364,278

 

 

$

(290,780

)

 

$

73,498

 

 

See accompanying notes to condensed financial statements.

5


Table of Contents

 

MEI PHARMA, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended
December 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(17,646

)

 

$

(13,546

)

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

 

 

 

 

 

 

Change in fair value of warrant liability

 

 

(8,046

)

 

 

(20,307

)

Share-based compensation

 

 

4,863

 

 

 

5,551

 

Depreciation and amortization

 

 

152

 

 

 

143

 

Non-cash lease expense

 

 

449

 

 

 

482

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

 

 

 

20,420

 

Contract assets

 

 

(2,569

)

 

 

(7,026

)

Prepaid expenses and other current assets

 

 

(1,014

)

 

 

(1,268

)

Accounts payable

 

 

(99

)

 

 

3,118

 

Accrued liabilities

 

 

1,363

 

 

 

5,012

 

Deferred revenue

 

 

6,716

 

 

 

2,334

 

Operating lease liability

 

 

(456

)

 

 

26

 

Net cash used in operating activities

 

 

(16,287

)

 

 

(5,061

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(59

)

 

 

(700

)

Purchases of short-term investments

 

 

(173,300

)

 

 

(215,176

)

Proceeds from maturity of short-term investments

 

 

144,983

 

 

 

215,208

 

Net cash used in investing activities

 

 

(28,376

)

 

 

(668

)

Cash flows from financing activities:

 

 

 

 

 

 

Payment of RSU tax withholdings in exchange for common shares surrendered by RSU holders

 

 

(194

)

 

 

 

Proceeds from exercise of stock options

 

 

212

 

 

 

139

 

Proceeds from issuance of common stock, gross

 

 

52,325

 

 

 

3,200

 

Payment of issuance costs

 

 

(3,672

)

 

 

(64

)

Net cash provided by financing activities

 

 

48,671

 

 

 

3,275

 

Net increase (decrease) in cash and cash equivalents

 

 

4,008

 

 

 

(2,454

)

Cash and cash equivalents at beginning of the period

 

 

8,543

 

 

 

12,331

 

Cash and cash equivalents at end of the period

 

$

12,551

 

 

$

9,877

 

Supplemental disclosures:

 

 

 

 

 

 

Income taxes paid

 

$

 

 

$

(8

)

Operating lease right-of-use assets obtained in exchange for operating lease liabilities

 

$

 

 

$

8,689

 

 

See accompanying notes to condensed financial statements.

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MEI PHARMA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1. The Company and Summary of Significant Accounting Policies

The Company

MEI Pharma, Inc. is a late-stage pharmaceutical company committed to the development and commercialization of novel cancer therapies intended to improve outcomes for patients. Our portfolio of drug candidates includes three clinical-stage assets, including zandelisib (f/k/a ME-401), currently in multiple ongoing clinical studies intended to support marketing applications with the U.S. Food and Drug Administration (“FDA”) and other regulatory authorities globally. Our common stock is listed on the Nasdaq Capital Market under the symbol “MEIP.”

Clinical Development Programs

We build our pipeline by licensing or acquiring 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 (formerly known as ME-401), an oral phosphatidylinositol 3-kinase (“PI3K”) delta inhibitor;
Voruciclib, an oral cyclin-dependent kinase (“CDK”) inhibitor; and
ME-344, a mitochondrial inhibitor targeting the oxidative phosphorylation (“OXPHOS”) complex.

The results of pre-clinical studies and completed clinical trials are not necessarily predictive of future results, and our current drug candidates may not have favorable results in later studies or trials. The commercial opportunity will be reduced or eliminated if competitors develop and market products that are more effective, have fewer side effects or are less expensive than our drug candidates. We will need substantial additional funds to progress the clinical trial programs for the drug candidates zandelisib, voruciclib, and ME-344, and to develop new compounds. The actual amount of funds that will be needed are determined by a number of factors, some of which are beyond our control. Negative U.S. and global economic conditions may pose challenges to our business strategy, which relies on funding from the financial markets or collaborators.

Liquidity

We have accumulated losses of $345.5 million since inception and expect to incur operating losses and generate negative cash flows from operations for the foreseeable future. As of December 31, 2021, we had $185.8 million in cash and cash equivalents and short-term investments. We believe that these resources will be sufficient to meet our obligations and fund our liquidity and capital expenditure requirements for at least the next 12 months from the issuance of these financial statements. Our current business operations are focused on continuing the clinical development of our drug candidates. Changes to our research and development plans or other changes affecting our operating expenses may affect actual future use of existing cash resources. Our research and development expenses are expected to increase in the foreseeable future. We cannot determine with certainty costs associated with ongoing and future clinical trials or the regulatory approval process. The duration, costs and timing associated with the development of our product candidates will depend on a variety of factors, including uncertainties associated with the results of our clinical trials.

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.

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the accompanying financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented.

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The accompanying unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto as of and for the fiscal year ended June 30, 2021, included in our Annual Report on Form 10-K (“2021 Annual Report”) filed with the Securities and Exchange Commission on September 2, 2021. Interim results are not necessarily indicative of results for a full year.

Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the current year financial statement presentation of contract assets and cash flows from financing activities. These changes did not impact previously reported net loss, loss per share, stockholders’ equity, total assets or cash flows.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. We use estimates that affect the reported amounts (including assets, liabilities, revenues and expenses) and related disclosures. Actual results could materially differ from those estimates.

Revenue Recognition

Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers (“Topic 606” or the “new revenue standard”)

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, milestone payments for specific achievements designated in the agreements, and royalties on the sale of products. At the inception of arrangements that include milestone payments, we use judgment to evaluate whether the milestones are probable of being achieved and we estimate the amount to include in the transaction price using the most likely method. If it is probable that a significant revenue reversal will 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 the probability of achievement of development milestones 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.

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,

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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):

 

 

 

Three Months Ended
December 31,

 

 

Six Months Ended
December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

KKC License Agreements

 

$

18,222

 

 

$

9,090

 

 

$

31,609

 

 

$

12,658

 

Helsinn License Agreement

 

 

 

 

 

77

 

 

 

 

 

 

343

 

 

 

$

18,222

 

 

$

9,167

 

 

$

31,609

 

 

$

13,001

 

Timing of Revenue Recognition:

 

 

 

 

 

 

 

 

 

 

 

 

Services performed over time

 

$

18,222

 

 

$

9,167

 

 

$

31,609

 

 

$

13,001

 

 

 

$

18,222

 

 

$

9,167

 

 

$

31,609

 

 

$

13,001

 

 

The KKC Commercialization Agreement and KKC Japan License Agreement (Note 3) included other distinct performance obligations satisfied over time, and accordingly we recognized $31.6 million and $12.7 million related to our progress toward satisfying those obligations during the six months ended December 31, 2021 and 2020, respectively.

Based on the characteristics of the Helsinn License Agreement (Note 3), we recognized revenue based on the extent of progress towards completion of the performance obligations. The Helsinn License Agreement was terminated in November 2021.

Contract Balances

Contract liabilities are included in “Deferred revenue” and “Deferred revenue long-term”. The following table presents changes in contract assets and contract liabilities accounted for under Topic 606 during the six months ended December 31, 2021 and 2020 (in thousands):

 

 

 

Six Months Ended
December 31,

 

 

 

2021

 

 

2020

 

Accounts Receivable

 

 

 

 

 

 

Accounts Receivable, beginning of period

 

$

 

 

$

83

 

Amounts billed

 

 

35,757

 

 

 

8,355

 

Payments received

 

 

(35,757

)

 

 

(8,037

)

Accounts Receivable, end of period

 

$

 

 

$

401

 

Contract assets

 

 

 

 

 

 

Contract assets, beginning of period

 

$

7,582

 

 

$

2,858

 

Billable amounts

 

 

38,326

 

 

 

15,381

 

Amounts billed

 

 

(35,757

)

 

 

(8,355

)

Contract assets, end of period

 

$

10,151

 

 

$

9,884

 

Contract liabilities

 

 

 

 

 

 

Contract liabilities, beginning of period

 

$

22,781

 

 

$

17,955

 

Net change

 

 

6,716

 

 

 

2,334

 

Contract liabilities, end of period

 

$

29,497

 

 

$

20,289

 

 

The timing of revenue recognition, invoicing and cash collections results in billed accounts receivable and unbilled receivables (contract assets) 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 contract assets and liabilities reported on the Condensed Balance Sheet relate to the KKC Commercialization Agreement.

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As of December 31, 2021, we had $10.5 million of contract assets related to our remaining performance obligations under the KKC Commercialization Agreement. Our contract assets are comprised of amounts that are billable based on the contractual provisions of the license agreement but not yet billed.

As of December 31, 2021, we had $94.0 million of deferred revenue associated with the KKC Commercialization Agreement, of which $64.5 million relates to the U.S. license which is a unit of account under the scope of Topic 808 and is not a deliverable under Topic 606, and $29.5 million relates to the Ex-U.S. License and development services performance obligations which are under the scope of Topic 606.

Our contract liabilities accounted for under Topic 606 relate to the amount of initial upfront consideration that was allocated to the research and development performance obligations as well as additional cost reimbursements in excess of revenue recognized. Contract liabilities are expected to be recognized over the duration of the performance obligations based on the costs incurred relative to total expected costs. Our contract liabilities may fluctuate due to changes in the total estimated cost of the performance obligations and our expected reimbursement of those costs. For the six months ended December 31, 2021, we recognized revenue of $10.5 million that was included in the contract liabilities balance at June 30, 2021 related to performance obligations under ASC 606.

For the six months ended December 31, 2020, we recognized revenue of $7.9 million that was included in the contract liabilities balance at June 30, 2020 related to performance obligations under ASC 606. To date we have not recognized any amounts related to units of account under Topic 808.

Revenues from Collaborators

We earn revenue in connection with collaboration agreements, which are described in Note 3, License 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 elements of 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 deferred revenue in the accompanying consolidated 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 Condensed 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.

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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 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 December 31, 2021, we have established a valuation allowance to fully reserve our net deferred tax assets. Tax rate changes are reflected in income during the period such changes are enacted. Changes in our ownership may limit the amount of net operating loss carryforwards that can be utilized in the future to offset taxable income.

There have been no material changes in our unrecognized tax benefits since June 30, 2021, and, as such, the disclosures included in our 2021 Annual Report continue to be relevant for the six months ended December 31, 2021.

Leases

We account for our leases under FASB ASC Topic 842, Leases (“ASC 842”). Leases which are identified within the scope of ASC 842 and which have a term greater than one year are recognized on our Condensed Balance Sheet as ROU assets and lease liabilities. Operating lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected remaining lease term. The lease term includes any renewal options and termination options that we are reasonably certain to exercise. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, we use our incremental borrowing rate. The incremental borrowing rate is determined based on the rate of interest that we would pay to borrow on a collateralized basis an amount equal to the lease payments for a similar term and in a similar economic environment. The interest rate implicit in lease contracts to calculate the present value is typically not readily determinable. As such, significant management judgment is required to estimate the incremental borrowing rate.

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. 

Note 2. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value is as follows:

Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

We measure the following financial instruments at fair value on a recurring basis. The fair values of these financial instruments were as follows (in thousands):

 

 

 

December 31, 2021

 

 

June 30, 2021

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Warrant liability

 

$

 

 

$

 

 

$

14,309

 

 

$

 

 

$

 

 

$

22,355

 

Total

 

$

 

 

$

 

 

$

14,309

 

 

$