OmniAb, Inc. (OABI) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 financial statements and related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties, including those described in the section entitled “Forward-Looking Statements and Market Data.” Our actual results and the timing of selected events could 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 set forth under the section entitled “Risk Factors” or in other parts of this Annual Report.
Overview
Our mission is to enable the rapid development of innovative therapeutics by pushing the frontiers of drug discovery technologies. We intend to achieve this mission by enabling the discovery of high-quality therapeutic candidates and by being the partner of choice for pharmaceutical and biotechnology companies. We believe that pairing the large and diverse antibody repertoires generated from our proprietary transgenic animals with our cutting-edge and high-throughput validated screening tools will deliver high-quality therapeutic candidates for a wide range of diseases.
Our OmniAb technology platform creates and screens diverse antibody repertoires and is designed to quickly identify optimal antibodies for our partners’ drug development efforts. We harness the power of Biological Intelligence, which we built into our proprietary transgenic animals and paired with our high-throughput screening technologies to enable the discovery of high-quality, fully-human antibody therapeutic candidates. We believe these antibodies are high quality because they are naturally optimized in our proprietary host systems for affinity, specificity, developability and functional performance. Our partners have access to these antibody candidates that are based on unmatched biological diversity and optimized through integration across a full range of technologies, including antigen design, transgenic animals, deep screening and characterization. We provide our partners both integrated end-to-end capabilities and highly customizable offerings, which address critical industry challenges and provide optimized antibody discovery solutions. As of December 31, 2022, we had 69 active partners with 291 active programs using the OmniAb technology, including 23 OmniAb-derived antibodies in clinical development by our partners, and three approved products of our partners: (i) zimberelimab, which was approved in China for the treatment of recurrent or refractory classical Hodgkin’s lymphoma, (ii) sugemalimab, which was approved in China for the first-line treatment of metastatic (stage IV) non-small cell lung cancer in combination with chemotherapy, as well as for patients with unresectable stage III non-small cell lung cancer whose disease has not progressed following concurrent or sequential platinum-based chemoradiotherapy, and (iii) teclistamab, which received accelerated approval in the U.S. for adult patients with relapsed or refractory multiple myeloma who have received at least four prior lines of therapy, including a proteasome inhibitor, an immunomodulatory agent, and an anti-CD38 monoclonal antibody, and conditional marketing authorization in Europe as monotherapy for the treatment of adult patients with relapsed and refractory multiple myeloma.
We partner with numerous pharmaceutical and biotechnology companies, varying in size, clinical stage, geography and therapeutic focus. Our license agreements are negotiated separately for each discovery partner, and as a result, the financial terms and contractual provisions vary from agreement to agreement. We structure our license agreements with partners to typically include: (i) upfront or annual payments for technology access (license revenue) and payments for performance of research services (service revenue); (ii) downstream payments in the form of preclinical, intellectual property, clinical, regulatory, and commercial milestones (milestone revenue); and (iii) royalties on net sales of our partners’ products, if any. We succeed when our partners are successful and our agreements are structured to align economic and scientific interests. Our typical royalty rates for antibody discovery contracts are currently in the low- to mid-single digits, and can vary depending on the other economic terms in the agreement. Our future success and the potential to receive these payments are entirely dependent on our partners’ efforts over which we have no control. If our partners determine not to proceed with the future development of a drug candidate, we will not receive any future payments related to that program. Additionally, unless publicly disclosed by our partners, we do not have access to information related to our partners’ clinical trial results, including serious adverse events, or ongoing communications with regulatory agencies regarding our partners’ current clinical programs, which limits our visibility into how such programs may be progressing.
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For the years ended December 31, 2022 and 2021, our revenue was $59.1 million and $34.7 million, respectively. For the years ended December 31, 2022 and 2021, our net loss was $22.3 million and $27.0 million, respectively. Historically, our revenue has been derived from payments for technology access, collaborative research services and milestones. We believe the long-term value of our business will be driven by partner royalties as such payments are based on global sales of potential future partner antibodies, which generally provide for larger and recurring payments as compared to technology access, research and milestone payments. While in 2022 we recognized royalty revenue from our partners’ sales of zimberelimab and sugemalimab in China, we believe our revenue will be materially driven by milestones in the shorter term, and by royalties in the longer term, from our partnered programs in the United States and Europe. However, drug discovery and development has significant uncertainty in timing and likelihood of reaching marketing authorization, and we cannot be certain when, if at all, royalty payments will be a material portion of our revenue. Furthermore, we do not control the progression, clinical development, regulatory strategy or eventual commercialization of antibodies discovered using our platform, and as a result, we are entirely dependent on our partners’ efforts and decisions with respect to such antibodies.
Closing of the Business Combination and Separation from Ligand
On November 1, 2022, in accordance with the terms of the Separation Agreement, Ligand transferred the Legacy OmniAb business, including certain related subsidiaries of Ligand, to Legacy OmniAb and made a contribution to the capital of Legacy OmniAb of $1.8 million, after deducting certain transaction and other expenses reimbursable by Legacy OmniAb. Following the Separation, as contemplated by the Separation Agreement, Ligand distributed on a pro rata basis to its stockholders all of the Legacy OmniAb Common Stock held by Ligand, such that each holder of Ligand Common Stock was entitled to receive one share of Legacy OmniAb Common Stock for each share of Ligand Common Stock held by such holder as of the record date for the Distribution.
Following the Separation and Distribution, on November 1, 2022, we consummated the Business Combination, by and among us (formerly known as APAC), Ligand, Legacy OmniAb and Merger Sub, pursuant to which Merger Sub merged with and into Legacy OmniAb, with Legacy OmniAb becoming a wholly owned subsidiary of OmniAb.
Prior to completion of the Separation, on November 1, 2022, Legacy OmniAb operated as part of Ligand and not as a separate, publicly-traded company. Legacy OmniAb’s combined financial statements were derived from Ligand’s historical accounting records and were presented on a carve-out basis. All revenues and expenses as well as assets and liabilities directly associated with Legacy OmniAb’s business activity were included as a component of the combined financial statements. The combined financial statements also included allocations of certain general, administrative, sales and marketing expenses from Ligand’s corporate office and from other Ligand businesses to Legacy OmniAb and allocations of related assets, liabilities, and Ligand’s investment, as applicable. We believe the allocations have been determined on a reasonable basis; however, the amounts were not necessarily representative of the amounts that would have been reflected in the combined financial statements had Legacy OmniAb been an entity that operated separately from Ligand during the periods presented.
Following the Separation, we began accounting for our financial activities as an independent entity. Our financial statements as of December 31, 2022 and for the period from November 1, 2022 through December 31, 2022 are based on the reported results of OmniAb as a standalone company. The accompanying consolidated and combined financial statements include the accounts of OmniAb and its wholly owned subsidiaries. All intercompany transactions and accounts within OmniAb have been eliminated.
Key Business Metrics
We regularly review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that the following metrics are important to understanding our current business. These metrics may change or may be substituted for additional or different metrics as our business continues to grow.
| Metric | December 31, 2022 | December 31, 2021 | % Change | ||
|---|---|---|---|---|---|
| Active partners | 69 | 57 | 21% | ||
| Active programs | 291 | 252 | 15% | ||
| Active clinical programs and approved products | 26 | 25 | 4% | ||
| Approved products | 3 | 2 | 50% |
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Active partners represents the number of partners that have an active program or have executed a license agreement in advance of initiating an active program. We view this metric as an indication of the competitiveness of our platform and our current level of market penetration. The metric also relates to our opportunities to secure additional active programs.
Active programs represents a program for which research work has commenced or where an antigen is introduced into our animals and remains so as long as the program is actively being developed or commercialized. This number includes active clinical programs and approved products separately disclosed above. We view this metric as an indication of the usage of our technology and the potential for mid- and long-term milestone and royalty payments.
Active clinical programs represents the number of unique programs for which an Investigational New Drug (“IND”) or equivalent under other regulatory regimes has been filed based on an OmniAb-derived antibody and which are in clinical development by our partners and we continue to count programs as active as long as they are actively being developed or commercialized. Where the date of such application is not known to us, we use the official start date from clinical trial registries for the purpose of calculating this metric. This number includes approved products separately disclosed below. We view this metric as an indication of our near- and mid-term potential revenue from milestone fees and potential royalty payments in the long term.
Approved products represents an OmniAb-derived antibody for which our partner has received marketing approval. We view this metric as an indication of our near- and mid-term potential revenue from royalty payments.
Impact of COVID-19 Pandemic
To date, we have not experienced material disruptions in our business operations or financial impacts as a result of the COVID-19 pandemic. While it is not possible at this time to estimate the impact that COVID-19 or other public health epidemic could have on our business in the future, the continued spread of COVID-19 and variants of the virus, the rate of vaccinations regionally and globally and the measures taken by the government authorities, and any future epidemic disease outbreaks, could: disrupt the supply chain and the manufacture or shipment of products and supplies for use by us in our discovery activities and by our partners for their discovery and development activities; delay, limit or prevent us or our partners’ from continuing research and development activities; impede our negotiations with partners and potential partners; impede testing, monitoring, data collection and analysis and other related activities, by us and our partners; interrupt or delay the operations of the FDA or other regulatory authorities, which may impact review and approval timelines for initiation of clinical trials or marketing; impede the launch or commercialization of any approved products; any of which could delay our partnership programs, increase our operating costs, and have a material adverse effect on our business, financial condition and results of operations. In addition, if COVID-19 or any other epidemic disease infects our genetically modified animals, which form the basis of our platform, or if there is an outbreak among our employees or subcontractor’s employees who maintain and care for these animals, we and our partners may be unable to produce antibodies for development.
Results of Operations
A discussion regarding our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 is presented below.
Revenue
| (Dollars in thousands) | 2022 | 2021 | $ Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Milestone revenue | $ | 33,871 | $ | 10,164 | $ | 23,707 | 233 | % | ||||||
| Service revenue | 18,784 | 20,084 | (1,300) | (6) | % | |||||||||
| License fees | 5,055 | 4,500 | 555 | 12 | % | |||||||||
| Royalty revenue | 1,367 | — | 1,367 | NM(1) | ||||||||||
| Total revenue | $ | 59,077 | $ | 34,748 | $ | 24,329 | 70 | % |
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(1)Percentage change is not meaningful.
Total revenue increased $24.3 million, or 70%, in the year ended December 31, 2022 as compared to 2021 driven primarily by (1) additional milestone revenue following the first commercial sale of teclistamab in the U.S. during the year ended December 31, 2022 and (2) royalty revenue from our partners’ sales of zimberelimab and sugemalimab.
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Operating Costs and Expenses
| (Dollars in thousands) | 2022 | 2021 | $ Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Research and development | $ | 48,364 | $ | 39,232 | $ | 9,132 | 23 | % | ||||||
| General and administrative | 24,903 | 16,947 | 7,956 | 47 | % | |||||||||
| Amortization of intangibles | 13,050 | 12,968 | 82 | 1 | % | |||||||||
| Other operating (income) expense, net | (592) | 1,210 | (1,802) | (149) | % | |||||||||
| Total operating expenses | $ | 85,725 | $ | 70,357 | $ | 15,368 | 22 | % |
Our R&D expenses increased $9.1 million, or 23%, in the year ended December 31, 2022 compared with 2021, primarily due to an increase in rent expense for newly leased facilities and increased personnel-related costs driven by our increased investment in the growth and development of the OmniAb business. General and administrative expenses increased $8.0 million, or 47% in the year ended December 31, 2022 compared with 2021, primarily due to increased personnel-related costs and costs associated with our obligations as a public company. Other operating income, net, of $0.6 million and other operating expense, net, of $1.2 million in the years ended December 31, 2022 and 2021, respectively, resulted from fair value adjustments to contingent earnout liabilities issued in connection with acquisitions.
Other income (expense)
| (Dollars in thousands) | 2022 | 2021 | $ Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Interest income | $ | 587 | $ | — | $ | 587 | NM(1) | |||||||
| Interest expense | — | (7) | 7 | NM(1) | ||||||||||
| Other income, net | — | 1,266 | (1,266) | NM(1) | ||||||||||
| Total other income, net | $ | 587 | $ | 1,259 | $ | (672) | (53) | % |
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(1)Percentage change is not meaningful.
Interest income of $0.6 million in the year ended December 31, 2022 was due to interest earned on short-term investments. Other income, net of $1.3 million in the year ended December 31, 2021 included a gain from sale of an equity security. Interest expense for the year ended December 31, 2021 was related to certain equipment financing.
Income tax benefit
| (Dollars in thousands) | 2022 | 2021 | $ Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Loss before income tax | $ | (26,061) | $ | (34,350) | $ | 8,289 | (24) | % | ||||||
| Income tax benefit | 3,727 | 7,308 | (3,581) | (49) | % | |||||||||
| Net loss | $ | (22,334) | $ | (27,042) | $ | 4,708 | (17) | % | ||||||
| Effective Tax Rate | 14.3 | % | 21.3 | % |
Our effective tax rate is affected by recurring items, such as the U.S. federal and state statutory tax rates and the relative amounts of income we earn in those jurisdictions. The tax rate is also affected by discrete items that may occur in any given year, but are not consistent from year to year.
Our effective tax rate for the year ended December 31, 2022 differed from the federal statutory tax rate of 21.0% due to share-based compensation expense which is not tax deductible and an increase to our valuation allowance recorded against deferred tax assets, partially offset by the tax benefit of research and development tax credits and the impact of changes in our state tax rate. Our effective tax rate for the year ended December 31, 2021 differed from the federal statutory tax rate of 21.0% due to share-based compensation expense which is not tax deductible and an increase to our valuation allowance recorded against deferred tax assets, offset by the tax benefit of research and development tax credits.
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Liquidity and Capital Resources
Prior to November 1, 2022, funding from Ligand was our primary source of liquidity. On November 1, 2022, with the closing of the Business Combination, we were capitalized with $95.8 million in net cash. As of December 31, 2022, our cash, cash equivalents and short-term investments were $88.3 million. In January 2023, we received an aggregate of $35.0 million in milestone payments in connection with teclistamab; we recognized $25.0 million as revenue in the fourth quarter of 2022 and the remainder is expected to be recognized in 2023 in accordance with the terms of the license agreement. We believe our cash, cash equivalents and short-term investments and the cash we expect to generate from operations will provide us the flexibility we need to meet operating, investing, and financing needs and support our operations through at least the next 12 months.
If our anticipated cash flows from operations and current cash are insufficient to satisfy our liquidity requirements because of increased expenditures or lower demand for our technology platform, or the realization of other risks, we may be required to raise additional capital through issuances of public or private equity or debt financing or other capital sources. Such additional financing may not be available on terms acceptable to us or at all. In any event, we may consider raising additional capital in the future to expand our business, to pursue strategic investments or acquisitions, to take advantage of favorable market conditions or financing opportunities or for other reasons. Our future capital requirements will depend on many factors, including, but not limited to:
•our ability to achieve revenue growth;
•the costs of expanding our operations, including our business development and marketing efforts;
•our rate of progress in selling access to our platform and marketing activities associated therewith;
•our rate of progress in, and cost of research and development activities associated with, our platform technologies and our internal developed programs to the extent we pursue any such programs;
•the effect of competing technological and market developments;
•the impact of the COVID-19 pandemic or other epidemic diseases on global social, political and economic conditions;
•our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company;
•the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents and other intellectual property and proprietary rights; and
•the costs associated with any technologies that we may in-license or acquire.
We anticipate that our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures and other general corporate purposes.
Additionally, we may receive up to $218.6 million from the exercise of the Warrants, assuming the exercise in full of all the Warrants for cash, but not from the sale of the shares of Common Stock issuable upon such exercise. As of the date of this Annual Report, our Warrants are “out-of-the money,” which means that the trading price of the shares of our Common Stock underlying our Warrants is below the $11.50 exercise price of the Warrants. For so long as the Warrants remain “out-of-the money,” we do not expect warrant holders to exercise their Warrants. Therefore, any cash proceeds that we may receive in relation to the exercise of such securities will be dependent on the trading price of our Common Stock. If the market price for our Common Stock is less than the exercise price of the Warrants, warrant holders will be unlikely to exercise such securities. We expect to use the net proceeds from the exercise of the Warrants, if any, for general corporate and working capital purposes, although we believe we can fund our operations with cash on hand.
Cash Flow Summary
A discussion regarding our cash flow summary for the year ended December 31, 2022 compared to the year ended December 31, 2021 is presented below.
| in thousands | 2022 | 2021 | $ Change | % Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net cash provided by (used in): | |||||||||||||||
| Operating activities | $ | (3,587) | $ | (5,672) | $ | 2,085 | (37) | % | |||||||
| Investing activities | (73,313) | (4,025) | (69,288) | NM(1) | |||||||||||
| Financing activities | $ | 110,739 | $ | 9,697 | $ | 101,042 | NM(1) |
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(1)Percentage change is not meaningful.
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Cash Used in Operating Activities:
During the year ended December 31, 2022, cash used in operating activities of $3.6 million primarily reflected our net loss of $22.3 million for the period, adjusted by net non-cash charges of $29.6 million which primarily included $18.3 million in share-based compensation, and $18.2 million in depreciation and amortization, partially offset by $6.4 million of deferred income taxes, net, as well as changes in our operating assets and liabilities in the amount of $10.8 million.
During the year ended December 31, 2021, cash used in operating activities of $5.7 million primarily reflected our net loss of $27.0 million for the period, adjusted by net non-cash charges of $24.0 million which primarily included $15.1 million in share-based compensation, and $16.3 million in depreciation and amortization, partially offset by $7.3 million of deferred income taxes, net, as well as changes in our operating assets and liabilities in the amount of $2.6 million.
Cash Used in Investing Activities:
During the year ended December 31, 2022, cash used in investing activities of $73.3 million primarily consisted of $54.8 million of cash used to purchase short-term investments and $17.2 million of cash used to purchase property and equipment.
During the year ended December 31, 2021, cash used in investing activities of $4.0 million primarily consisted of $4.1 million of cash used to purchase property and equipment.
Cash Provided by Financing Activities:
As Ligand managed our cash and financing arrangements prior to the completion of the Separation, all excess cash generated through earnings was deemed remitted to Ligand and all sources of cash were deemed funded by Ligand. Cash provided by financing activities during the year ended December 31, 2022 and 2021 primarily included cash transferred to us from Ligand based on changes in our cash used for operations.
During the year ended December 31, 2022, cash provided by financing activities was $110.7 million which primarily consisted of $96.2 million of proceeds from the issuance of common stock upon the business combination and $18.6 million net transfer from Ligand, partially offset by $4.3 million in payments for deferred transaction costs and $2.0 million of payments to CVR holders.
During the year ended December 31, 2021, cash provided by financing activities was $9.7 million which primarily consisted of $10.7 million net transfer from Ligand partially offset by $1.1 million of payments to CVR holders.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated and combined financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see “Note 2 – Summary of Significant Accounting Policies” in the notes to the consolidated and combined financial statements appearing elsewhere in this Annual Report for a full description of accounting pronouncements which we have recently adopted and the impact to our financial statements upon adoption. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.
Revenue Recognition
License revenue is generally recognized at a point in time once we grant access to our intellectual property rights. We do not have future performance obligations under these license arrangements. We generally satisfy our obligation to grant intellectual property rights on the effective date of the contract.
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Our contracts with customers often will include future contingent milestone based payments. We include contingent milestone based payments in the estimated transaction price when the milestones are determined to be probable of being achieved. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone based payment is sales-based, we apply the royalty recognition constraint and record revenue when the underlying sale has taken place. Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development with our partners will not reach development based milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon the development milestone or regulatory approval. Depending on the terms of the arrangement, we may also defer a portion of the consideration received if we have to satisfy a future obligation.
For research and development services that we recognize over time, we measure our progress using an input method. The input methods we use are based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time it will take us to complete the activities, or the costs we may incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make numerous estimates and use significant judgment. If our estimates or judgments change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods.
We expense incremental costs of obtaining a contract when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial. We did not incur any incremental costs of obtaining a contract during the periods reported.
We occasionally have sub-license obligations related to arrangements for which we receive license fees, milestones and royalties. We evaluate the determination of gross as a principal versus net as an agent reporting based on each individual agreement.
Intangible Assets and Other Long-Lived Assets — Impairment Assessments
We regularly perform reviews to determine if an event occurred that may indicate the carrying values of our intangible and other long-lived assets are impaired. If indicators of impairment exist, we assess the recoverability of the affected long-lived assets by comparing its carrying amounts to its undiscounted cash flows. If the affected assets are not recoverable, we estimate the fair value of the assets and record an impairment loss if the carrying value exceeds the fair value. Factors that may indicate potential impairment include a significant decline in our stock price and market capitalization compared to net book value, significant changes in the ability of an asset to generate positive cash flows and the pattern of utilization of a particular asset.
In order to estimate the fair value of identifiable intangible assets and other long-lived assets, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows.
Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of our reporting unit, we may be required to record future impairment charges for purchased intangible assets. Impairment charges could materially decrease our future net income and result in lower asset values on our balance sheet.
Income Taxes
Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated current and future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations in the United States are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of our future taxable income could impact the deferred tax assets and liabilities provided for in the combined financial statements and would require an adjustment to the provision for income taxes.
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Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating our ability to recover deferred tax assets within the jurisdiction which they arise, we consider all available positive and negative evidence. Factors reviewed can include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, our history of earnings and reliability of our forecasts, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies.
We recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of our return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.
Prior to the Separation on November 1, 2022, OmniAb operated as part of Ligand and not as a stand-alone company. We determined the OmniAb income tax provision as if Legacy OmniAb had filed consolidated federal income tax returns and combined state income tax returns separate from Ligand since its inception on January 8, 2016 when Ligand acquired Legacy OmniAb (originally known as “Open Monoclonal Technology, Inc.” or “OMT”). We recorded a current federal and state income tax expense for the ten months ended October 31, 2022 and for the year ended December 31, 2021 to reflect OmniAb’s federal tax liability and state minimum taxes due on a carve-out basis. We recorded a deferred federal and state income tax benefit for the ten months ended October 31, 2022 and for the year ended December 31, 2021 to reflect the change in the net deferred tax liability for the periods. The difference between the tax attributes we historically calculated on a carve-out basis and the actual tax attributes that we received as a standalone entity on November 1, 2022 was adjusted through additional paid-in-capital.
Recent Accounting Pronouncements
For the summary of recent accounting pronouncements applicable to our consolidated and combined financial statements, see “Item 8. Financial Statements and Supplementary Data—Notes to Consolidated and Combined Financial Statements—Note 2 – Summary of Significant Accounting Policies.”
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). As an emerging growth company, we may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:
•being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
•not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the Sarbanes-Oxley Act);
•not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, unless the SEC determines the new rules are necessary for protecting the public;
•reduced disclosure obligations regarding executive compensation; and
•exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We may take advantage of these provisions until the earlier of: (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of the IPO, (b) in which we have total annual gross revenue of at least $1.235 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common equity that is held by non-affiliates exceeds $700.0 million as of the end of the prior fiscal year’s second fiscal quarter; and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
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We have elected to take advantage of certain of the reduced disclosure obligations in this Annual Report and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information in this Annual Report and that we provide to our stockholders in the future may be different than what you might receive from other public reporting companies in which you hold equity interests.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. We intend to rely on this and other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley.