Published: 2023-02-28 00:00:00 ET

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Business

On November 1, 2022, we completed the separation (the “Separation”) of our antibody discovery business and certain related assets and liabilities (the “OmniAb Business”) through a spin-off of OmniAb to Ligand’s shareholders of record as of October 26, 2022 on a pro rata basis (the “Distribution”) and merger (the “Merger”) of OmniAb with a wholly owned subsidiary of a separate public company, OmniAb, Inc. (formerly known as Avista Public Acquisition Corp. II (“New OmniAb”)), in a Reverse Morris Trust transaction pursuant to the Agreement and Plan of Merger, dated as of March 23, 2022 (the “Merger Agreement”), and the Separation and Distribution Agreement, dated as of March 23, 2022 (the “Separation Agreement”) (the Merger Agreement and Separation Agreement, collectively with the other related transaction documents, the “Transaction Agreements”). Pursuant to the Transaction Agreements, Ligand contributed to OmniAb cash and certain assets and liabilities constituting the OmniAb Business, including but not limited to the equity interests of Ab Initio Biotherapeutics, Inc., Crystal Bioscience, Inc., Icagen, LLC, Taurus Biosciences, LLC and xCella Biosciences, Inc.

After the spin-off of our OmniAb antibody discovery business, Ligand is a revenue-generating biopharmaceutical company focused on developing or acquiring technologies that help pharmaceutical companies discover and develop medicines. We operate in one business segment: development and licensing of biopharmaceutical assets.

Basis of Presentation and Principles of Consolidation

Our consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of our parent company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Discontinued operations

The Company determined that the spin-off of the OmniAb Business in November 2022 met the criteria for classification as a discontinued operation in accordance with ASC Subtopic 205-20, Discontinued Operations (“ASC 205-20”). Accordingly, the accompanying consolidated financial statements for all periods presented have been updated to present the assets and liabilities associated with the OmniAb Business separately as discontinued operations on the consolidated balance sheets and the results of all discontinued operations reported as a separate component of loss in the consolidated statements of operations and comprehensive loss (see Note 2, Spin-off of OmniAb). All disclosures have been adjusted to reflect continuing operations.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results may differ from those estimates.

Concentrations of Business Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash equivalents and investments. We invest excess cash principally in United States government debt securities, investment grade corporate debt securities, mutual funds and certificates of deposit. We maintain some cash and cash equivalents balances with financial institutions that are in excess of the Federal Deposit Insurance Corporation insurance limits. We have established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates.

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Revenue from significant partners, which is defined as 10% or more of our total revenue, was as follows:

			Year ended December 31,
			2022						2021(a)						2020(a)
Partner A			45%						47%						51%
Partner B			16%						12%						17%
Partner C			<10%						<10%						<10%

(a) Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.

We obtain Captisol primarily from two sites related to a single supplier, Hovione. If this supplier were not able to supply the requested amounts of Captisol from each site, and if our safety stocks of material were depleted, we would be unable to continue to derive revenues from the sale of Captisol until we obtained material from an alternative source, which could take a considerable length of time.

Cash Equivalents

Cash equivalents consist of highly liquid investments with maturities of three months or less from the date of acquisition.

Short-term Investments

Short-term investments primarily consist of investments in debt and equity securities. We classify our short-term investments as “available-for-sale”. Such investments are carried at fair value, with unrealized gains and losses on debt securities included in the statement of comprehensive income (loss), net of tax, and unrealized gains and losses on equity securities included the consolidated statement of operations. We determine the cost of investments based on the specific identification method. We determine the realized gains or losses on the sale of available-for-sale securities using the specific identification method and includes net realized gains and losses as a component of other income or expense within the consolidated statements of operations.

Debt securities consist of certificates of deposit, corporate debt securities, and securities of government-sponsored entities have effective maturities greater than three months and less than twenty-five months from the date of acquisition. Debt securities available-for-sale in an unrealized loss position are assessed for the current expected credit losses methodology. We start by assessing whether we intend to sell the security, or whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings. For debt securities available-for-sale that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes in interest rates, and any changes to the rating of the security by a rating agency, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income or loss, as applicable.

Equity securities are mutual funds, investments in privately held companies (non-marketable equity securities), and companies that have completed initial public offerings (marketable equity securities). Mutual funds are valued at their publicly quoted net asset value (NAV) price on the last day of the period. Our non-marketable equity securities without readily determinable market values are initially measured at cost and adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment. Our marketable equity securities are measured at fair value. Equity investments are classified as short-term investments, or non-current other assets, based on the nature of the securities and their availability for use in current operations.

Accounts Receivable

Our accounts receivable arise primarily from sales on credit to customers. We establish an allowance for credit losses to present the net amount of accounts receivable expected to be collected. The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual customers.

Inventory

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Inventory, which consists of finished goods, is stated at the lower of cost or net realizable value. We determine cost using the specific identification method. We analyze our inventory levels periodically and write down inventory to net realizable value if it has become obsolete, has a cost basis in excess of its expected net realizable value or is in excess of expected requirements. During the year ended December 31, 2022, we recorded an obsolete inventory charge of $1.1 million. There were no adjustments to inventory recorded for the years ended December 31, 2021 and 2020. As of December 31, 2022 and 2021, inventory included prepayments of $5.9 million and $24.6 million, respectively, to our supplier for Captisol.

Property and Equipment

Property and equipment are stated at cost, subject to review for impairment, and depreciated over the estimated useful lives of the assets, which generally range from three to ten years, using the straight-line method. Amortization of leasehold improvements is recorded over the shorter of the lease term or estimated useful life of the related asset. Maintenance and repairs are charged to operations as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operating income or expense.

Acquisitions

We first determine whether a set of assets acquired constitute a business and should be accounted for as a business combination. If the assets acquired are not a business, we account for the transaction as an asset acquisition. Business combinations are accounted for by using the acquisition method of accounting which requires us to use significant estimates and assumptions, especially with respect to intangible assets. We record the excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, as goodwill.

Under the acquisition method of accounting, we recognize separately from goodwill the identifiable assets acquired, the liabilities assumed, including contingent consideration and all contractual contingencies, generally at the acquisition date fair value. Contingent purchase consideration to be settled in cash are remeasured to estimated fair value at each reporting period with the change in fair value recorded in statement of operations. Costs that we incur to complete the business combination such as investment banking, legal and other professional fees are not considered part of consideration and we charge them to general and administrative expense as they are incurred.

Should the initial accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we record those adjustments to our financial statements in the period of change, if any.

Under the acquisition method of accounting for business combinations, if we identify changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period adjustment and we record the offset to goodwill. We record all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.

Contingent Liabilities

In connection with the acquisition of Pfenex in October 2020, we entered into a CVR agreement pursuant to which former equity holders of Pfenex received one nontransferable contractual right entitling such holder to receive $2.00 per share (or approximately $77.8 million total) in the event that Pfenex’s teriparatide injection product received notice from the FDA that such product is therapeutically equivalent with respect to FORTEO® (teriparatide injection) on or before December 31, 2021. The FDA did not provide notice of such event prior to the CVR expiration date and as a result, the Pfenex CVRs expired without payment.

In connection with the acquisition of CyDex in January 2011, we recorded a contingent liability for amounts potentially due to holders of the CyDex CVRs and former license holders. The liability is periodically assessed based on events and circumstances related to the underlying milestones, royalties and material sales.

In connection with the acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs for each Metabasis share. The fair values of the CVRs are remeasured at each reporting date through the term of the related agreement.

Any change in fair value is recorded in our consolidated statement of operations. For additional information, see “Note (5), Fair Value Measurement and Note (8), Balance Sheet Account Details.”

Goodwill, Intangible Assets and Other Long-Lived Assets

Goodwill, which has an indefinite useful life, represents the excess of cost over fair value of net assets acquired. Goodwill is reviewed for impairment at least annually during the fourth quarter, or more frequently if an event occurs indicating the potential for impairment. During the goodwill impairment review, we assess qualitative factors to determine whether it is more

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likely than not that the fair value of our reporting unit is less than the carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of our reporting unit is less than the carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to perform the quantitative assessment. We will then evaluate goodwill for impairment by comparing the estimated fair value of the reporting unit to its carrying value, including the associated goodwill. To determine the fair value, we generally use a combination of market approach based on Ligand and comparable publicly traded companies in similar lines of businesses and the income approach based on estimated discounted future cash flows. Our cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors. We may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the quantitative assessment for the goodwill impairment test. We performed the annual assessment for goodwill impairment during the fourth quarter of 2022, noting no impairment.

Our identifiable intangible assets are typically composed of acquired core technologies, licensed technologies, contractual relationships, customer relationships and trade names. The cost of identifiable intangible assets with finite lives is generally amortized on a straight-line basis over the assets’ respective estimated useful lives. We regularly perform reviews to determine if any event has occurred that may indicate that intangible assets with finite useful lives and other long-lived assets are potentially impaired. If indicators of impairment exist, an impairment test is performed to assess the recoverability of the affected assets by determining whether the carrying amount of such assets exceeds the undiscounted expected future 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 of the assets exceeds the fair value. Factors that may indicate potential impairment include market conditions, industry and economic trends, changes in regulations, clinical success, historical and forecasted financial results, market capitalization, significant changes in the ability of a particular asset to generate positive cash flows, and the pattern of utilization of a particular asset. We did not identify indicators of impairment for the finite-lived intangibles at December 31, 2022.

Commercial license and other economic rights

As of December 31, 2022 and 2021, commercial license and other economic rights consist of the following (in thousands):

						December 31, 2022																		December 31, 2021
						Gross						Adjustments(1)						Net						Gross						Adjustments(2)						Net
Aziyo and CorMatrix						$	17,696					$	(9,538)					$	8,158					$	17,696					$	(9,461)					$	8,235
Selexis and Dianomi						10,602						(8,578)						2,024						10,602						(8,727)						1,875
Total						$	28,298					$	(18,116)					$	10,182					$	28,298					$	(18,188)					$	10,110

(1) Amounts represent accumulated amortization to principal of $11.6 million and credit loss adjustments of $6.5 million as of December 31, 2022.

(2) Amounts represent accumulated amortization to principal of $11.7 million and credit loss adjustments of $6.5 million as of December 31, 2021.

Commercial license and other economic rights as of December 31, 2022 represent a portfolio of future milestone and royalty payment rights acquired from Selexis in April 2013 and April 2015, CorMatrix in May 2016, and Dianomi in January 2019. Commercial license rights acquired are accounted for as financial assets, and other economic rights are accounted for as funded research and developments as further discussed below.

In May 2019, we entered into a development funding and royalties agreement with Novan, pursuant to which we would receive certain payments at specified milestones, as well as royalties on any future net sales of SB206, a product candidate being developed to treat molluscum contagiosum, and any other Novan products used for the treatment of molluscum (“Novan Molluscum Products”). We paid Novan an upfront payment of $12.0 million, which Novan is required to use to fund the development of SB206. We are not obligated to provide additional funding to Novan for the development or commercialization of SB206. Pursuant to the agreement, we would receive up to $20.0 million of milestone payments upon the achievement by Novan of certain regulatory milestones for SB206 or any other Novan Molluscum Product and commercial milestones. In addition to the milestone payments, Novan will pay us tiered royalties from 7.0% to 10.0% based on aggregate annual net sales of SB206 or any other Novan Molluscum Product in North America.

In December 2018, we entered into a development funding and royalties agreement with Palvella. Pursuant to the agreement, we will receive up to $8.0 million of milestone payments upon the achievement by Palvella of certain corporate, financing and regulatory milestones for PTX-022, a product candidate being developed to treat pachyonychia congenita. In addition to the milestone payments, Palvella will pay us tiered royalties from 5.0% to 9.8% based on aggregate annual worldwide net sales of any PTX-022 products, if approved, subject to Palvella’s right to reduce the royalty rates by making payments in certain circumstances. We made an upfront payment of $10.0 million, which Palvella is required to use to fund the development of PTX-022. We are not obligated to provide additional funding to Palvella for development or commercialization of PTX-022.

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We determined the economic rights related to Novan and Palvella should be characterized as a funded research and development arrangement, thus we account for them in accordance with ASC 730-20, Research and Development Arrangement, and reduce our asset as the funds are expended by Novan and Palvella. As of December 31, 2019, Novan had used up the $12.0 million upfront payment provided by us. As such, our other economic rights related to Novan had been fully amortized as of December 31, 2019. As of December 31, 2020, the fund has been fully expended by Palvella and our cost basis for the asset has been reduced to zero, and therefore we will recognize milestones and royalties as revenue when earned. During 2020, we recorded a $3.0 million milestone from Palvella under contract revenue, which has been included in our consolidated statement of operations for the year ended December 31, 2020.

In May 2017, we entered into a royalty agreement with Aziyo pursuant to which we will receive royalties from certain marketed products that Aziyo acquired from CorMatrix. Pursuant to the agreement, we received $10.0 million in 2017 from Aziyo to buydown the royalty rates on the products CorMatrix sold to Aziyo. The agreement closed on May 31, 2017, in connection with the closing of the asset sale from CorMatrix to Aziyo (the “CorMatrix Asset Sale”). Per the agreement, we will receive a 5% royalty on the products Aziyo acquired in the CorMatrix Asset Sale, reduced from the original 20% royalty from CorMatrix pursuant to the previously disclosed interest purchase agreement, dated May 3, 2016 (the “Original Interest Purchase Agreement”) between CorMatrix and us. In addition, Aziyo has agreed to pay us up to $10.0 million of additional milestones tied to cumulative net sales of the products Aziyo acquired in the CorMatrix Asset Sale and to extend the term on these royalties by one year. The royalty agreement will terminate on May 31, 2027. In addition, in May 2017, we entered into an amended and restated interest purchase agreement (the “Amended Interest Purchase Agreement”) with CorMatrix, which supersedes in its entirety the Original Interest Purchase Agreement. Other than removing the commercial products sold to Aziyo in the CorMatrix Sale, the terms of the Amended Interest Purchase Agreement remain unchanged with respect to the CorMatrix developmental pipeline products, including the royalty rate of 5% on such pipeline products. The Amended Interest Purchase Agreement will terminate 10 years from the date of the first commercial sale of such products.

We account for the Aziyo commercial license right as a financial asset in accordance with ASC 310, Receivables, and amortize the commercial license right using the effective interest method whereby we forecast expected cash flows over the term of the arrangement to arrive at an annualized effective interest. The annual effective interest associated with the forecasted cash flows from the royalty agreement with Aziyo as of December 31, 2022 is 19.0%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest. The payments received in the year ended December 31, 2022 and 2021 were allocated accordingly between revenue and the amortization of the commercial license rights.

Prior to 2020, we accounted for commercial license rights related to developmental pipeline products such as Selexis and Dianomi on a non-accrual basis. These developmental pipeline products are non-commercialized, non-approved products that require FDA or other regulatory approval, and thus have uncertain cash flows. The developmental pipeline products are on a non-accrual basis as we are not yet able to forecast future cash flows given their pre-commercial stages of development. We will prospectively update the yield model under the effective interest method once the underlying products are commercialized and we can reliably forecast expected cash flows. Income will be calculated by multiplying the carrying value of the commercial license right by the effective interest rate. We regularly perform reviews to determine if any event has occurred that may indicate the carrying value of these commercial license rights are potentially impaired. If the affected commercial license rights are not recoverable, we estimate the fair value of the assets and record an impairment loss if the carrying value of the assets exceeds the fair value. During 2020, given the expected cash flow from the Selexis program, we started to account for the Selexis commercial license right as a financial asset in accordance with ASC 310, and amortize the commercial license right using the effective interest method whereby we forecast expected cash flows over the term of the arrangement to arrive at an annualized effective interest. The annual effective interest associated with the forecasted cash flows from the royalty agreement with Selexis as of December 31, 2022 is 24.6%. Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest. The payments received in the year ended December 31, 2022 and 2021 were allocated accordingly between revenue and the amortization of the commercial license rights. We still accounted for commercial license rights related to Dianomi on a non-accrual basis as of December 31, 2022.

For commercial license rights, we have elected a prospective approach to account for changes in estimated cash flows and selected a method for determining when an impairment would be recognized and how to measure that impairment. In circumstances where our new estimate of expected cash flows is greater than previously expected, we will update our yield prospectively. In circumstances where our new estimate of expected cash flows is less than previously expected and below our original estimated yield we record an impairment. Impairment is recognized by reducing the financial asset to an amount that represents the present value of our most recent estimate of expected cash flows discounted by the original effective interest rate. In circumstances where our new estimate of expected cash flows is less than previously expected, but not below our original estimated yield, we update our yield prospectively.

As a result of adopting ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit losses on Financial Instruments (Topic 326), we now recognize an allowance for current expected credit losses on the commercial license rights subject to credit risk. We recorded a $5.5 million pre-tax reserve for credit losses upon adoption of the standard on January 1,

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2020. We estimated the credit losses at the individual asset level by considering the performance against the programs, the company operating performance and the macroeconomic forecast. In addition, we have judgmentally applied credit loss risk factors to the future expected payments with consideration given to the timing of the payment. Given the higher inherent credit risk associated with longer term receivables, we applied a lower risk factor to the earlier years and progressively higher risk factors to the later years. During the twelve months ended December 31, 2022 and 2021, we further considered the current and expected future economic and market conditions. We concluded a reduction of $0.3 million and $0.5 million to the allowance for credit losses in other expense, net, in our consolidated statements of operations for the year ended 2022 and 2021, respectively.

Revenue Recognition

Our revenue is generated primarily from royalties on sales of products commercialized by our partners, Captisol material sales, and contract revenue for services, license fees and development, regulatory and sales based milestone payments.

We apply the following five-step model in accordance with ASC 606, Revenue from Contracts with Customers, in order to determine the revenue: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Royalties

We receive royalty revenue on sales by our partners of products covered by patents that we or our partners own under contractual agreements. 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. However, we apply the royalty recognition constraint required under the guidance for sales-based royalties which requires a royalty to be recorded no sooner than the underlying sale occurs. Therefore, royalties on sales of products commercialized by our partners are recognized in the quarter the product is sold. Our partners generally report sales information to us on a one quarter lag. Thus, we estimate the expected royalty proceeds based on an analysis of historical experience and interim data provided by our partners including their publicly announced sales. Differences between actual and estimated royalty revenues are adjusted in the period in which they become known, typically the following quarter.

Captisol Sales

Revenue from Captisol sales is recognized when control of Captisol material or intellectual property license rights is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. For Captisol material, we consider our performance obligation is satisfied at a point in time, once we have transferred control of the product, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We have elected to recognize the cost of freight and shipping when control over Captisol material has transferred to the customer as an expense in Cost of Captisol. 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.

Contract Revenue

Our contracts with customers often will include variable consideration in the form of contingent milestone-based payments. We include contingent milestone based payments in the estimated transaction price when it is probable a significant reversal in the amount of cumulative revenue recognized will not occur. 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, which typically occurs with our contracts for R&D services.

For R&D services we recognize revenue over time and 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

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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 judgement. If our estimates or judgements 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 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.

Deferred Revenue

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.

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the consolidated balance sheet. Except for royalty revenue, we generally receive payment at the point we satisfy our obligation or soon after. Therefore, we do not generally carry a contract asset balance. Any fees billed in advance of being earned are recorded as deferred revenue. During the twelve months ended December 31, 2022, the amount recognized as revenue that was previously deferred at December 31, 2021 was $0.4 million. During the twelve months ended December 31, 2021, the amount recognized as revenue that was previously deferred at December 31, 2020 was $23.3 million.

Disaggregation of Revenue

Royalty revenue for 2022, 2021 and 2020 for continuing operations are reported as below (in thousands):

						Year ended December 31,
						2022						2021						2020
Kyprolis						$	30,116					$	27,472					$	25,164
Evomela						10,197						10,079						6,377
Teriparatide injection						15,785						5,260						—
Rylaze						8,796						2,420						—
Other						7,633						3,696						2,255
						$	72,527					$	48,927					$	33,796

The following table represents disaggregation of Captisol and contract revenue for continuing operations (in thousands):

						Year ended December 31,
						2022						2021						2020
Captisol
Captisol - Core						$	16,429					$	23,423					$	24,566
Captisol - COVID(a)						88,066						140,827						85,393
						$	104,495					$	164,250					$	109,959
Contract
Service Revenue						$	1,117					$	3,737					$	9,330
License Fees						2,849						634						119
Milestone						9,150						17,584						5,217
Other						6,107						6,412						5,141
						$	19,223					$	28,367					$	19,807

(a) Captisol - COVID represents revenue on Captisol supplied for use in formulation with remdesivir, an antiviral treatment for COVID-19.

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Research and Development Expenses

Research and development expense consists of labor, material, equipment, and allocated facilities costs of our scientific staff who are working pursuant to our collaborative agreements and other research and development projects. Also included in research and development expenses are third-party costs incurred for our research programs including in-licensing costs, contract research organization (CRO) costs and costs incurred by other research and development service vendors. We expense these costs as they are incurred. When we make payments for research and development services prior to the services being rendered, we record those amounts as prepaid assets on our consolidated balance sheet and we expense them as the services are provided.

Share-Based Compensation

We incur share-based compensation expense related to restricted stock, ESPP, and stock options.

Restricted stock unit (RSU) and performance stock unit (PSU) are all considered restricted stock. The fair value of restricted stock is determined by the closing market price of our common stock on the date of grant. We recognize share-based compensation expense based on the fair value on a straight-line basis over the requisite service periods of the awards, taking into consideration of forfeitures as they occur. PSU generally represents a right to receive a certain number of shares of common stock based on the achievement of corporate performance goals and continued employment during the vesting period. At each reporting period, we reassess the probability of the achievement of such corporate performance goals and any expense change resulting from an adjustment in the estimated shares to be released are treated as a cumulative catch-up in the period of adjustment. A limited amount of PSUs contain a market condition dependent upon the Company’s relative and absolute total stockholder return over a three-year period, with a range of 0% to 200% of the target amount granted to be issued under the award. Share-based compensation expense for these PSUs is measured using the Monte-Carlo simulation valuation model and is not adjusted for the achievement, or lack thereof, of the market conditions.

The Black-Scholes-Merton option-pricing model is used to estimate the fair value of stock purchases under our ESPP and stock options granted. The model assumptions include expected volatility, term, dividends, and the risk-free interest rate. We look to historical and implied volatility of our stock to determine the expected volatility. The expected term of an award is based on historical forfeiture experience, exercise activity, and on the terms and conditions of the stock awards. The expected dividend yield is determined to be 0% given that except for 2007, during which we declared a cash dividend on our common stock of $2.50 per share, we have not paid any dividends on our common stock in the past and currently do not expect to pay cash dividends or make any other distributions on common stock in the future. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards.

We grant options, RSUs and PSUs to employees and non-employee directors. Non-employee directors are accounted for as employees. Options and RSUs granted to certain non-employee directors typically vest one year from the date of grant. Options granted to employees typically vest 1/8 on the six month anniversary of the date of grant, and 1/48 each month thereafter for forty-two months. RSUs and PSUs granted to employees vest over three years. All option awards generally expire ten years from the date of grant.

Share-based compensation expense for awards to employees and non-employee directors is recognized on a straight-line basis over the vesting period until the last tranche vests.

Income Taxes

The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date.

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 the ability to recover deferred tax assets within the jurisdiction which they arise we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, history of earnings and reliable forecasting, 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

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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.

Income (Loss) Per Share

Basic income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Diluted loss per share is computed based on the sum of the weighted average number of common shares outstanding during the period.

Potentially dilutive common shares consist of shares issuable under the 2023 Notes, stock options and restricted stock. The 2023 Notes have a dilutive impact when the average market price of the Company’s common stock exceeds the applicable conversion price of the respective notes. It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. Potentially dilutive common shares from stock options and restricted stock are determined using the average share price for each period under the treasury stock method. In addition, the following amounts are assumed to be used to repurchase shares: proceeds from exercise of stock options and the average amount of unrecognized compensation expense for stock options and restricted stock. In loss periods, basic net loss per share and diluted net loss per share are identical since the effect of otherwise dilutive potential common shares is anti-dilutive and therefore excluded.

In accordance with ASC 260, Earnings per Share, if a company had a discontinuing operation, the company uses income from continuing operations, adjusted for preferred dividends and similar adjustments, as its control number to determine whether potential common shares a dilutive. The following table presents the calculation of weighted average shares used to calculate basic and diluted income (loss) per share (in thousands):

			Year Ended December 31,
			2022						2021						2020
Weighted average shares outstanding:			16,868						16,630						16,185
Dilutive potential common shares:
Restricted stock			—						96						56
Stock options			—						520						584
Shares used to compute diluted income per share			16,868						17,246						16,825
Potentially dilutive shares excluded from calculation due to anti-dilutive effect			6,241						4,793						8,458

Comprehensive Income (Loss)

Comprehensive income (loss) represents net income (loss) adjusted for the change during the periods presented in unrealized gains and losses on available-for-sale debt securities, foreign currency translation adjustments, and reclassification adjustments for realized gains or losses included in net income (loss). The unrealized gains or losses are reported on the Consolidated Statements of Comprehensive Income (Loss).

Foreign Currency Translation

The British Pound Sterling was the functional currency of our subsidiary, Vernalis, which was sold in fourth quarter of the year ended December 31, 2020. For the year ended December 31, 2020, the corresponding financial statements have been translated into U.S. Dollars in accordance with ASC 830-30, Translation of Financial Statements. Assets and liabilities are translated at end-of-period rates while revenues and expenses are translated at average rates in effect during the period in which the activity took place. Equity is translated at historical rates and the resulting cumulative translation adjustments are included as a component of accumulated other comprehensive income (loss).

Accounting Standards Updates, Recently Adopted

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In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The guidance simplifies the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. Consequently, a convertible debt instrument, such as the Company’s 2023 Notes, will be accounted for as a single liability measured at its amortized cost, if no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments and requires additional disclosures. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

We adopted this guidance effective January 1, 2022 under the modified retrospective approach and the comparative information has not been restated and continues to be presented according to accounting standards in effect for those periods. The cumulative effect of the change was recognized as an adjustment to the opening balance of retained earnings at the date of adoption and our 2023 Notes are no longer bifurcated into separate liability and equity components. The principal amount of the 2023 Notes is classified as a single liability measured at amortized cost in the consolidated balance sheet for the period ended December 31, 2022. Upon adoption of ASU 2020-06 on January 1, 2022, we recorded an adjustment to the 2023 Notes liability component, deferred tax liabilities, additional paid-in-capital and retained earnings. This adjustment was calculated based on the carrying amount of the 2023 Notes as if it had always been treated as a single liability measured at amortized cost. Furthermore, we recorded an adjustment to the debt issuance costs contra liability and equity (additional paid-in-capital) components under the same premise, as if debt issuance costs had always been treated as a contra liability only. Under this transition method, the cumulative effect of the accounting change increased the carrying amount of the 2023 Notes by $20.4 million, reduced deferred tax liabilities by $4.4 million, reduced additional paid-in capital by $51.1 million and increased retained earnings by $35.1 million. The net balance of the 2023 Notes at January 1, 2022 was $341.1 million which included an unamortized discount of $2.2 million.

Accounting Standards Not Yet Adopted

We do not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on our consolidated financial statements or disclosures.

On March 23, 2022, we entered into the Separation Agreement to separate our OmniAb Business and the Merger Agreement, pursuant to which Avista Public Acquisition Corp. II (“APAC”) would combine with OmniAb, and acquire Ligand's OmniAb Business, in a Reverse Morris Trust transaction (collectively, the “Transactions”). In connection with the execution of the Merger Agreement, we made organizational changes to better align our organizational structure with our strategy and operations, and management reorganized the reportable segments to better reflect how the business is evaluated by the chief operating decision maker. Beginning in the first quarter of 2022, we operated the following two reportable segments: (1) OmniAb business and (2) Ligand core business. The OmniAb business segment is focused on enabling the discovery of therapeutic candidates for our partners by pairing antibody repertoires generated from our proprietary transgenic animals with our OmniAb business platform screening tools. The Ligand core business segment is a biopharmaceutical business focused on developing or acquiring technologies that help pharmaceutical companies deliver and develop medicines. We performed a fair value analysis utilizing a combination of income approach and market approach to determine the fair value of each segment in order to appropriately allocate the goodwill between the segments as of the announcement date. We reassigned goodwill using a relative fair value allocation method, which resulted in goodwill of a $105.7 million and $75.5 million being allocated to Ligand core business and OminAb business, respectively.

After the closing date of the Transactions on November 1, 2022, the historical financial results of OmniAb have been reflected in our consolidated financial statements as discontinued operations under GAAP for all periods presented through the date of the Distribution. Pursuant to the Transaction Agreements, Ligand contributed to OmniAb cash and certain specific assets and liabilities constituting the OmniAb Business. Pursuant to the Distribution, Ligand distributed on a pro rata basis to its shareholders as of October 26, 2022 shares of the common stock of OmniAb representing 100% of Ligand’s interest in OmniAb. Immediately following the Distribution, Orwell Merger Sub Inc., a wholly-owned subsidiary of APAC, merged with and into OmniAb, with OmniAb continuing as the surviving company in the Merger and as a wholly owned subsidiary of New OmniAb. The entire transaction was completed on November 1, 2022, and following the Merger, New OmniAb is an independent, publicly traded company whose common stock trades on NASDAQ under the symbol “OABI.” After the Distribution, we do not beneficially own any shares of common stock in OmniAb and no longer consolidate OmniAb into our financial results for periods ending after November 1, 2022.

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The transfer of assets and liabilities to OmniAb was effected through a contribution in accordance with the Merger Agreement, as summarized below (in thousands):

			As of November 1, 2022
ASSETS
Current assets:
Cash and cash equivalents			$	1,842
Other current assets			9,019
Total current assets			10,861
Intangible assets, net			165,422
Goodwill			75,533
Property and equipment, net			19,921
Operating lease assets			21,290
Other assets			1,449
Total assets			$	294,476
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current contingent liabilities			$	1,569
Deferred revenue			8,582
Current operating lease liabilities			1,610
Current finance lease liabilities			1
Total current liabilities			11,762
Long-term contingent liabilities			4,175
Deferred income taxes, net			18,978
Long-term operating lease liabilities			24,823
Other long-term liabilities			5,006
Total liabilities			64,744
Net assets transferred to OmniAb			$	229,732

Discontinued operations

In connection with the Merger, the Company determined its antibody discovery business qualified for discontinued operations accounting treatment in accordance with ASC 205-20. The following table summarizes revenue and expenses of the discontinued operations for the years ended December 31, 2022, 2021 and 2020 (in thousands):

			Year Ended December 31,
			2022						2021						2020
Revenues:
Royalties			$	1,289					$	—					$	—
Contract revenue			25,275						35,589						22,857
Total revenues			26,564						35,589						22,857
Operating costs and expenses:
Amortization of intangibles			10,847						12,945						11,800
Research and development			38,466						36,907						18,889
General and administrative			13,383						10,693						3,823
Total operating costs and expenses			62,696						60,545						34,512
Loss from operations			(36,132)						(24,956)						(11,655)
Other income (expense):
Gain from short-term investments			—						1,266						1,900
Interest expense			—						(7)						(5)
Other income (expense), net			554						(1,210)						(2,070)
Total other expense, net			554						49						(175)
Loss before income tax			(35,578)						(24,907)						(11,830)
Income tax benefit			7,436						5,692						2,247
Net loss			$	(28,142)					$	(19,215)					$	(9,583)

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There were no assets and liabilities related to discontinued operations as of December 31, 2022, as all balances were transferred to OmniAb upon Separation. The following table summarizes the assets and liabilities of the discontinued operations as of December 31, 2021 (in thousands):

			December 31, 2021
ASSETS
Current assets:
Other current assets			$	1,100
Total current assets of discontinued operations			1,100
Intangible assets, net			174,349
Goodwill			75,533
Property and equipment, net			7,320
Operating lease assets			13,332
Finance lease assets			6
Other assets			243
Total assets of discontinued operations			$	271,883
LIABILITIES
Current liabilities:
Current contingent liabilities			$	2,538
Deferred revenue			10,342
Current operating lease liabilities			685
Current finance lease liabilities			1
Total current liabilities of discontinued operations			13,566
Long-term contingent liabilities			4,826
Deferred income taxes, net			28,239
Long-term operating lease liabilities			13,238
Other long-term liabilities			9,225
Total liabilities of discontinued operations			$	69,094

The following table summarizes the significant non-cash items, capital expenditures of the discontinued operations, and financing activities that are included in the consolidated statements of cash flows for the years ended December 31, 2022, 2021 and 2020 (in thousands):

			Year Ended December 31,
			2022						2021						2020
Operating activities:
Change in fair value of contingent consideration			$	(554)					$	1,210					$	2,070
Depreciation and amortization			13,218						14,553						12,503
Stock-based compensation expense			9,404						9,457						5,602
Investing activities:
Cash paid for acquisition, net of cash acquired			$	—					$	—					$	(27,127)
Purchase of property, plant and equipment			(5,572)						(4,070)						(1,753)
Payments to CVR Holders			(960)						(720)						—
Financing activities:
Payments to CVR Holders			$	(1,545)					$	(1,050)					$	(2,325)
Supplemental cash flow disclosures:
Purchases of property, plant and equipment included in accounts payable and accrued expenses			$	2,310					$	1,231					$	—

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is considered a related party as we maintain a seat on Viking's board of directors and we do not exert significant influence over Viking.

As of December 31, 2022 and December 31, 2021, we recorded our common stock in Viking in “short-term investments” at fair value of $63.1 million and $30.9 million, respectively. At December 31, 2020, we owned warrants to purchase up to 1.5 million shares of Viking's common stock at an exercise price of $1.50 per share, and during the year ended December 31, 2021 we exercised all outstanding Viking warrants. As of December 31, 2022 and December 31, 2021, we have zero Viking warrants outstanding. During the year ended December 31, 2021, we also sold 0.6 million Viking shares. See further discussion in “Note (5), Fair Value Measurement.”

Excluding the impact of OmniAb, we completed one acquisition from January 1, 2020 through December 31, 2022, where we applied the acquisition method of accounting for business combinations. Accordingly, we recorded the tangible and intangible assets acquired and liabilities assumed at their estimated fair values as of the applicable date of acquisition.

Pfenex Acquisition

On October 1, 2020, we acquired Pfenex, which develops next-generation and novel protein therapeutics to improve existing therapies and create new therapies for biological targets linked to critical, unmet diseases using a protein expression technology platform.

The purchase price of $465.1 million included $429.6 million cash consideration paid upon acquisition, and a contingent CVR payment of up to $77.8 million in cash based on a certain specified milestone with an estimated initial fair value of $37.0 million. The CVR will only be paid in full if the milestone is achieved by December 31, 2021. The amount of the CVR included in purchase price was reduced by $1.5 million which was determined to be post-combination expense. The fair value of the CVR liability was determined using a probability adjusted income approach. These cash flows were then discounted to present value using a discount rate based on market participants' cost of debt reflective of the Company, which was 7.1%. The liability is periodically assessed based on events and circumstances related to the underlying milestone, and any change in fair value is recorded in our consolidated statements of operations. During the year ended December 31, 2021, we wrote off the entire CVR liability of $37.6 million to other operation income, primarily due to not achieving the specific development and regulatory milestone by December 31, 2021 as defined by Pfenex CVR.

In connection with the acquisition, a portion of Pfenex's equity awards that were outstanding and unvested prior to the acquisition became fully vested per the terms of the merger agreement. The acceleration of vesting required us to allocate the fair value of the equity attributable to pre-combination service to the purchase price and the remaining amount was considered our post-combination expense. We paid $17.3 million in cash for equity compensation, which is attributable to pre-combination services and is reflected as a component of the total purchase price paid of $429.6 million. In addition, the fair value of equity compensation attributable to the post-combination service period was $8.7 million. These amounts were associated with the accelerated vesting of stock options previously granted to Pfenex employees and were fully paid in cash, which was recognized as general and administrative expenses during the fourth quarter of 2020.

We recorded $20.7 million of acquisition-related costs for legal, severance and other costs in connection with the acquisition within operating expenses in our consolidated statement of operations for 2020. The following table sets forth an allocation of the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed, with the excess recorded to goodwill (in thousands):

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Cash			$	51,407
Restricted cash			200
Accounts and unbilled receivables			1,359
Property and equipment, net			7,823
Right-of-use asset			3,070
Other assets			1,338
Intangibles acquired			385,000
Goodwill(1)			82,303
Accounts payable			(6,814)
Accrued liabilities			(9,606)
Deferred revenue			(3,908)
Lease liabilities			(3,070)
Other liabilities			(1,382)
Deferred tax liabilities, net			(42,622)
Total consideration			$	465,098

(1) Goodwill represents the excess of the purchase price over the preliminary fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to the assembled workforce of experienced personnel at Pfenex and expected synergies. None of the goodwill is deductible for tax purposes.

The intangibles acquired and their weighted average useful life are as follows (in thousands, except useful lives):

			Approximate Fair Value			Estimated useful life (in years)
Contractual Relationships:
Alvogen			$	114,000		12
Merck			117,000			12
Jazz			80,000			17
SII			49,000			10
Arcellx			2,000			17
Acquired Technologies			23,000			10-19
			$	385,000

The fair values of the contractual relationships were based on the discounted cash flow method that estimated the present value of the potential royalties, milestones and collaboration revenue streams derived from the licensing of the related technologies over the estimated contractual relationship period. The fair values of the acquired technologies were based on the discounted cash flow method that estimated the present value of the potential royalties, milestones, collaboration and product revenue streams derived from the licensing of the related technologies over the estimated useful lives. These projected cash flows were discounted to present value using discount rate, which varies from 12% to 15%. The intangible assets acquired are being amortized on a straight-line basis over the estimated useful life.

Approximately $2.0 million of revenue and $19.3 million of loss before income taxes of Pfenex were included in the consolidated statement of operations for the year ended December 31, 2020. The following summary presents our unaudited pro forma consolidated results of operations for the years ended December 31, 2020 and December 31, 2019 as if the Pfenex acquisition had occurred on January 1, 2019, which gives effect to certain transaction accounting adjustments, including amortization of acquired intangibles and stock based compensation expense for retained Pfenex employees. The transaction accounting adjustments do not include non-recurring adjustments related to Pfenex's executive salary, board of director compensation, and salary of Pfenex employees involved in the reduction of force as part of the acquisition, estimated to be $7.1 million in 2020 and $4.8 million in 2019. The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated as if the date indicated, nor is it necessarily indicative of future operating results (in thousands, except per share amounts):

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We measure certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. We establish a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels are described in the below with level 1 having the highest priority and level 3 having the lowest:

Level 1 - Observable inputs such as quoted prices in active markets

Level 2 - Inputs other than the quoted prices in active markets that are observable either directly or indirectly

Level 3 - Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions

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The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2022 and 2021 (in thousands):

Fair Value Measurements at Reporting Date Using
December 31, 2022									Quoted Prices in Active Markets for Identical Assets						Significant Other Observable Inputs						Significant Unobservable Inputs
			Total						(Level 1)						(Level 2)						(Level 3)
Assets:
Short-term investments (1)			$	103,742					$	3,992					$	99,615					$	135
Investment in Viking common stock (2)			63,122						63,122						—						—
Total assets			$	166,864					$	67,114					$	99,615					$	135
Liabilities:
Contingent liabilities - Cydex			$	84					$	—					$	—					$	84
Contingent liabilities - Metabasis (3)			3,429						—						3,429						—
Liability for amounts owed to a former licensor			44						44						—						—
Total liabilities			$	3,557					$	44					$	3,429					$	84

Fair Value Measurements at Reporting Date Using
December 31, 2021(a)									Quoted Prices in Active Markets for Identical Assets						Significant Other Observable Inputs						Significant Unobservable Inputs
			Total						(Level 1)						(Level 2)						(Level 3)
Assets:
Short-term investments (1)			$	290,697					$	9,735					$	280,553					$	409
Investment in Viking common stock (2)			30,889						30,889						—						—
Total assets			$	321,586					$	40,624					$	280,553					$	409
Liabilities:
Contingent liabilities - Cydex			$	349					$	—					$	—					$	349
Contingent liabilities - Metabasis (3)			3,358						—						3,358						—
Liability for amounts owed to a former licensor			86						86						—						—
Total liabilities			$	3,793					$	86					$	3,358					$	349

(a) Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.

(1) Excluding our investment in Viking, our short-term investments in marketable debt and equity securities are classified as available-for-sale securities based on management's intentions and are at level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Short-term investments in mutual funds are valued at their net asset value (NAV) on the last day of the period. We have classified marketable securities with original maturities of greater than one year as short-term investments based upon our ability and intent to use any and all of those marketable securities to satisfy the liquidity needs of our current operations. In addition, we have investment in warrants resulting from Seelos Therapeutics Inc. milestone payments that were settled in shares during the first quarter of 2019 and are at level 3 of the fair value hierarchy, based on Black Scholes value estimated by management on the last day of the period.

(2) Investment in Viking warrants, which we received as a result of Viking’s partial repayment of the Viking note receivable and our purchase of Viking common stock and warrants in April 2016, is classified as level 1 as the fair value is determined using quoted market prices in active markets for the same securities. The change of the fair value is recorded in “gain (loss) from short-term investments” in our consolidated statement of operations. See further discussion in “Note (3), Short-term Investments: Investment in Viking.”

(3) In connection with our acquisition of Metabasis in January 2010, we issued Metabasis stockholders four tradable CVRs, one CVR from each of four respective series of CVR, for each Metabasis share. The CVRs entitle Metabasis stockholders to cash payments as frequently as every six months as cash is received by us from proceeds from the sale or partnering of any of the Metabasis drug development programs, among other triggering events. The liability for the CVRs is determined using quoted prices in a market that is not active for the underlying CVR. The carrying amount of the liability may fluctuate significantly based upon quoted market prices and actual amounts paid under the agreements may be materially differ than the carrying amount of the liability. Several of the Metabasis drug development programs have been outlicensed to Viking, including VK2809. VK2809 is a novel selective TR-β agonist with potential in multiple indications, including hypercholesterolemia, dyslipidemia, NASH, and X-ALD. Under the terms of the agreement with Viking, we may be entitled to up to $375.0 million of development, regulatory and commercial milestones and tiered royalties on potential future sales including a $10.0 million payment upon initiation of a Phase 3 clinical trial.

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A reconciliation of the level 3 financial instruments as of December 31, 2022 is as follows (in thousands):

Liabilities
Fair value of level 3 financial instruments as of December 31, 2021			$	349
Fair value adjustments to contingent liabilities			(265)
Fair value of level 3 financial instruments as of December 31, 2022			$	84

A reconciliation of the level 3 financial instruments as of December 31, 2021 is as follows (in thousands):

Liabilities
Fair value of level 3 financial instruments as of December 31, 2020			$	38,107
Payments to CVR holders and other contingency payments			(50)
Fair value adjustments to contingent liabilities			(37,708)
Fair value of level 3 financial instruments as of December 31, 2021			$	349

Assets Measured on a Non-Recurring Basis

We apply fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to our goodwill, indefinite-lived intangible assets, and long-lived assets.

We evaluate goodwill and indefinite-lived intangible assets annually for impairment and whenever circumstances occur indicating that goodwill might be impaired. We determine the fair value of our reporting unit based on a combination of inputs, including the market capitalization of Ligand, as well as Level 3 inputs such as discounted cash flows, which are not observable from the market, directly or indirectly. We determine the fair value of our indefinite-lived intangible assets using the income approach based on Level 3 inputs.

Other than the finance lease equipment discussed in “Note (6), Leases”, there was no impairment of our goodwill, indefinite-lived assets, or long-lived assets recorded during the twelve months ended December 31, 2022.

Fair Value of Financial Instruments

In May 2018, we issued the 2023 Notes. We use quoted market rates in an inactive market, which are classified as a Level 2 input, to estimate the fair value of our 2023 Notes. The carrying value of the notes does not reflect the market rate. See “Note (7), Convertible Senior Notes” for additional information related to the fair value.

Finance lease

In May 2020 and January 2021, we entered into an agreement and the first amendment with Hovione, our third-party manufacturer, to increase our manufacturing of Captisol, respectively. The agreements are considered to include an embedded finance lease under ASC 842, Leases, as it provides the Company the right to use the underlying equipment to exclusively manufacture Captisol. As of December 31, 2021, we have fully paid consideration of $69.1 million for prepaid inventory and capacity ramp-up fee. We allocated consideration in the agreements between lease and non-lease components using relative standalone prices. Since the inception of the agreements, we have allocated $50.2 million of the consideration paid to the non-lease component which is accounted for as prepaid inventory and being amortized to cost of Captisol based on the usage. The remaining balance of $18.9 million was recognized as a right of use asset.

Given the current COVID status, our forecast for COVID-related Captisol has been significantly reduced, which triggered an indicator of impairment of the right of use asset as of December 31, 2022. We performed a recoverability test at the asset group level by comparing the sum of the estimated undiscounted future cash flows attributable to the asset group to its carrying value and identified the asset was impaired. We recorded a $9.8 million of impairment charge based on the fair value of the right of use asset which has been recognized in cost of Captisol in our consolidated statement of operations for the year ended December 31, 2022. As of December 31, 2022 the remaining right of use asset balance is $4.0 million which will be amortized straight-line over the remaining 6 years lease term.

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Operating lease

We lease certain office facilities and equipment primarily under various operating leases. Our operating leases have remaining contractual terms up to ten years, some of which include options to extend the leases for up to five years. Our lease agreements do not contain any material residual value guarantees, material restrictive covenants, or material termination options. Our operating lease costs are primarily related to facility leases for administration offices and research and development facilities.

Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.

In addition to base rent, certain of our operating leases require variable payments, such as insurance and common area maintenance. These variable lease costs, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term.

The depreciable life of lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

Operating and Finance Lease Assets and Liabilities (in thousands):

			December 31, 2022						December 31, 2021(a)
Assets
Operating lease assets			$	10,914					$	3,210
Finance lease assets			4,095						16,201
Total lease assets			$	15,009					$	19,411
Liabilities
Current operating lease liabilities			$	670					$	1,368
Current finance lease liabilities			45						45
			715						1,413
Long-term operating lease liabilities			10,336						2,256
Long-term finance lease liabilities			5						58
Total lease liabilities			$	11,056					$	3,727

(a) Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.

Maturity of Operating and Finance Lease Liabilities as of December 31, 2022 (in thousands):

Maturity Dates						Operating Leases						Finance Leases
2023						$	1,425					$	49
2024						1,483						2
2025						1,576						—
2026						1,621						—
2027						1,667						—
Thereafter						7,614						—
Total lease payments						15,386						51
Less imputed interest						(4,380)						(1)
Present value of lease liabilities						$	11,006					$	50

As of December 31, 2022, our operating leases have a weighted-average remaining lease term of 9.3 years and a weighted-average discount rate of 7.1%. As of December 31, 2021, our operating leases have a weighted-average remaining lease term of 2.9 years and a weighted-average discount rate of 5.1%. Cash paid for amounts included in the measurement of operating lease liabilities was $1.7 million and $1.5 million for the twelve months ended December 31, 2022 and 2021, respectively. Operating lease expense was $0.7 million (net of sublease income of $0.7 million) and $1.0 million (net of sublease income of $0.4 million) for the twelve months ended December 31, 2022 and 2021, respectively.

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0.75% Convertible Senior Notes due 2023

In May 2018, we issued $750 million aggregate principal amount of 2023 Notes, bearing cash interest at a rate of 0.75% per year, payable semi-annually. The net proceeds from the offering, after deducting the initial purchasers' discount and offering expenses, were approximately $733.1 million. The 2023 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on a conversion rate as discussed below.

Holders of the 2023 Notes were entitled to convert the notes at any time prior to the close of business on the business day immediately preceding November 15, 2022, under any of the following circumstances:

(1) during any fiscal quarter (and only during such fiscal quarter) commencing after September 30, 2018, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day was greater than 130% of the conversion price on such trading day;

(2) during the five business day period immediately following any 10 consecutive trading day period, in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the last reported sale price of our common stock on such trading day and the conversion rate on each such trading day; or

(3) upon the occurrence of certain specified corporate events as specified in the indenture governing the notes.

In advance of the Distribution of the shares of common stock of OmniAb to Ligand’s shareholders on November 1, 2022, a notice of convertibility was delivered to the holders of the 2023 Notes. No holders exercised their right to convert their 2023 Notes during the applicable period for conversion. After we completed the Separation of the OmniAb Business, on November 15, 2022, the conversion rate was adjusted to 4.8390 shares of common stock per $1,000 principal amount of the 2023 Notes which represents a conversion price of approximately $206.65 per share. The maximum conversion rate of the 2023 Notes was adjusted to 6.2907 per $1,000 principal amount of the 2023 Notes which represents a conversion price of approximately $158.97. The conversion rate for the 2023 Notes was adjusted in accordance with the requirements of the Indenture based on calculations determined with reference to a valuation period of the first 10 consecutive trading days after, and including, the ex-dividend date of the spin-off (as determined in the Indenture). The conversion rate and maximum conversion rate are subject to further adjustment under the circumstances and pursuant to the terms set forth in the Indenture.

The notes will have a dilutive effect to the extent the average market price per share of common stock for a given reporting period exceeds the current conversion price of $206.65. In connection with the issuance of the 2023 Notes, we incurred $16.9 million of issuance costs, which primarily consisted of underwriting, legal and other professional fees. The portion of these costs allocated to the liability component totaling $13.7 million is amortized to interest expense using the effective interest method over the five years expected life of the 2023 Notes, and the effective interest rate as of December 31, 2022 is 0.5%. During the year ended December 31, 2022 we recognized a total of $1.8 million in interest expense which includes $1.1 million in contractual interest expense and $0.7 million in amortized issuance costs.

It is our intent and policy to settle conversions through combination settlement, which essentially involves payment in cash equal to the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion.

During 2021, we repurchased $152.0 million in principal of the 2023 Notes for $156.0 million in cash, including accrued interest of $0.3 million. We accounted for the repurchase as a debt extinguishment, which resulted in (1) a loss of $7.3 million reflected in other income (expense), net, in our consolidated statement of operations for the year ended December 31, 2021, (2) a $13.7 million reduction in debt discount, and (3) a $10.2 million reduction to additional paid in capital, related to the reacquisition of the equity component in our consolidated balance sheet as of December 31, 2021. After the repurchases, approximately $343.3 million in principal amount of the 2023 Notes remain outstanding.

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During 2022, we repurchased $266.4 million in principal amount of the 2023 Notes for $261.4 million in cash, including accrued interest of $0.5 million We accounted for the repurchase as a debt extinguishment, which resulted in a gain of $4.2 million reflected in other income (expense), net, in our consolidated statement of operations for the year ended December 31, 2022, and a $1.3 million reduction in debt discount. After the repurchases, approximately $76.9 million in principal amount of the 2023 Notes remain outstanding.

Convertible Bond Hedge and Warrant Transactions

In conjunction with the 2023 Notes, in May 2018, we entered into convertible bond hedges and sold warrants covering 3,018,327 shares of our common stock to minimize the impact of potential dilution to our common stock and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 2023 Notes. The convertible bond hedges have an exercise price of $206.65 per share and are exercisable when and if the 2023 Notes are converted. We paid $140.3 million for these convertible bond hedges. If upon conversion of the 2023 Notes, the price of our common stock is above the exercise price of the convertible bond hedges, the counterparties will deliver shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of common stock at the conversion date and the exercise price, multiplied by the number of shares of common stock related to the convertible bond hedge transaction being exercised. The convertible bond hedges and warrants described below are separate transactions entered into by us and are not part of the terms of the 2023 Notes. Holders of the 2023 Notes and warrants will not have any rights with respect to the convertible bond hedges.

Concurrently with the convertible bond hedge transactions, we entered into warrant transactions whereby we sold warrants covering 3,018,327 shares of common stock with an exercise price of $315.38 per share, subject to certain adjustments. We received $90.0 million for these warrants. The warrants have various expiration dates ranging from August 15, 2023 to February 6, 2024. The warrants will have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants, as measured under the terms of the warrant transactions. The common stock issuable upon exercise of the warrants will be in unregistered shares, and we do not have the obligation and do not intend to file any registration statement with the SEC registering the issuance of the shares under the warrants.

In April 2020, in connection with the repurchases of $234.4 million in principal of the 2023 Notes for $203.8 million in cash, including accrued interest of $0.6 million, during the quarter ended March 31, 2020, we entered into amendments with Barclays Bank PLC, Deutsche Bank AG, London Branch, and Goldman Sachs & Co. LLC to the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. The amendments provide that the options under the convertible note hedges corresponding to such repurchased 2023 Notes will remain outstanding notwithstanding such repurchase.

In January 2021, in connection with the repurchases of approximately $20.3 million in principal of the 2023 Notes for approximately $19.1 million in cash, including accrued interest of $0.1 million, during the quarter ended December 31, 2020, we entered into amendments with Barclays Bank PLC, Deutsche Bank AG, London Branch, and Goldman Sachs & Co. LLC to the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. The amendments provide that the options under the convertible note hedges corresponding to such repurchased 2023 Notes will remain outstanding notwithstanding such repurchase.

During the year ended December 31, 2021, in connection with the repurchases of $152.0 million in principal of the 2023 Notes for $156.0 million in cash, including accrued interest of $0.3 million, we entered into Warrant Early Unwind Agreements and Bond Hedge Unwind Agreements with Barclays Bank PLC, Deutsche Bank AG, and Goldman Sachs & Co. LLC to unwind a portion of the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. We paid $18.4 million as part of the Warrant Early Unwind Agreements reducing the number of shares covered by the warrants from 3,018,327 to 2,559,254. We received $18.9 million as part of the Bond Hedge Early Unwind Agreements reducing the number of options under the convertible bond hedges to 598,021. These unwind transactions resulted in a $0.5 million net increase in additional paid-in-capital in our consolidated balance sheet as of December 31, 2021.

In August 2022, in connection with the repurchases of $227.8 million in principal of the 2023 Notes for $223.7 million in cash, including accrued interest of $0.4 million made during the six months ended June 30, 2022, we entered into Bond Hedge Unwind Agreements with Barclays Bank PLC, Deutsche Bank AG, and Goldman Sachs & Co. LLC to unwind a portion of the convertible note hedges transactions we initially entered into in connection with the issuance of the 2023 Notes. We received $0.2 million as part of these Bond Hedge Early Unwind Agreements reducing the number of options under the convertible bond hedges to 370,219 as of December 31, 2022. This transaction resulted in a $0.2 million net increase in additional paid-in-capital in our consolidated balance sheet as of December 31, 2022.

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The following table summarizes information about the equity and liability components of the 2023 Notes (in thousands).

			December 31, 2022						December 31, 2021
Principal amount of 2023 Notes outstanding			$	76,854					$	343,301
Unamortized discount (including unamortized debt issuance cost)			(159)						(22,584)
Total long-term portion of notes payable			$	76,695					$	320,717
Fair value of convertible senior notes outstanding (Level 2)			$	74,789					$	341,801

As of December 31, 2022, there were no events of default or violation of any covenants under our financing obligations.

Short-term Investments

Excluding our investments in Viking, the following table summarizes the various investment categories at December 31, 2022 and 2021 (in thousands):

			Cost						Gross unrealized gains						Gross unrealized losses						Estimated fair value
December 31, 2022
Short-term investments
Mutual Funds			$	81,815					$	—					$	(1050)					$	80,765
Bank deposits			5,012						2						(34)						4,980
Commercial paper			7,211						3						—						7,214
Corporate bonds			6,701						13						(58)						6,656
Corporate equity securities			5,807						262						(4,239)						1,830
U.S. government securities			2,232						—						(70)						2,162
Warrants			—						135						—						135
			$	108,778					$	415					$	(5,451)					$	103,742
December 31, 2021
Short-term investments
Mutual fund			$	152,136					$	—					$	(249)					$	151,887
Bank deposits			63,389						13						(21)						63,381
Commercial paper			36,008						2						(12)						35,998
Corporate bonds			29,308						17						(38)						29,287
Corporate equity securities			5,807						402						(2,027)						4,182
U.S. government securities			5,577						—						(23)						5,554
Warrants			—						408						—						408
			$	292,225					$	842					$	(2,370)					$	290,697

Gain (loss) from short-term investments on our consolidated statements of operations includes both realized and unrealized gain (loss) from our short-term investments in public equity and warrant securities, and realized gain (loss) from available-for-sale debt securities.

The following table summarizes our available-for-sale debt securities by contractual maturity (in thousands):

			December 31, 2022
			Amortized Cost						Fair Value
Within one year			$	57,158					$	57,036
After one year through five years			2,794						2,769
Total			$	59,952					$	59,805

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The following table summarizes our available-for-sale debt securities in an unrealized loss position (in thousands):

			Less than 12 months												12 months or greater												Total
			Gross Unrealized Losses						Estimated Fair Value						Gross Unrealized Losses						Estimated Fair Value						Gross Unrealized Losses						Estimated Fair Value
December 31, 2022
Bank deposits			$	(34)					$	2,470					$	—					$	—					$	(34)					$	2,470
Corporate bonds			(21)						3,887						(37)						947						(58)						4,834
Commercial paper			—						3,836						—						—						—						3,836
U.S. Government Securities			(70)						2,161						—						—						(70)						2,161
Total			$	(125)					$	12,354					$	(37)					$	947					$	(162)					$	13,301
December 31, 2021
Bank deposits			$	(13)					$	20,008					$	—					$	—					$	(13)					$	20,008
Corporate bonds			(15)						27,252						(5)						2,996						(20)						30,248
Commercial paper			(6)						6,689						(32)						10,125						(38)						16,814
U.S. Government Securities			—						—						(23)						5,553						(23)						5,553
Total			$	(34)					$	53,949					$	(60)					$	18,674					$	(94)					$	72,623

Our investment policy is capital preservation and we only invested in U.S.-dollar denominated investments. We held a total of 12 positions which were in an unrealized loss position as of December 31, 2022. We believe that we will collect the principal and interest due on our debt securities that have an amortized cost in excess of fair value. The unrealized losses are largely due to changes in interest rates and not to unfavorable changes in the credit quality associated with these securities that impacted our assessment on collectability of principal and interest. We do not intend to sell these securities nor do we believe that we will be required to sell these securities before the recovery of the amortized cost basis. Accordingly, no credit losses were recognized for the twelve months ended December 31, 2022.

Property and equipment are stated at cost and consists of the following (in thousands):

			December 31,
			2022						2021
Lab and office equipment			$	14,172					$	13,417
Leasehold improvements			7,446						5,265
Computer equipment and software			989						924
			22,607						19,606
Less accumulated depreciation and amortization			(10,125)						(6,415)
			$	12,482					$	13,191

Depreciation of equipment is computed using the straight-line method over the estimated useful lives of the assets which ranges from three to ten years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or their related lease term, whichever is shorter. Depreciation expense of $3.8 million, $2.4 million, and $1.5 million was recognized for the twelve months ended December 31, 2022, 2021, and 2020, respectively, and was included in operating expenses.

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Goodwill and identifiable intangible assets consist of the following (in thousands):

			December 31,
			2022						2021
Indefinite-lived intangible assets
Goodwill			$	105,673					$	105,673
Definite-lived intangible assets
Complete technology			55,211						55,211
Less: Accumulated amortization			(22,560)						(18,916)
Trade name			2,642						2,642
Less: Accumulated amortization			(1,577)						(1,444)
Customer relationships			29,600						29,600
Less: Accumulated amortization			(17,670)						(16,184)
Contractual relationships			362,000						362,000
Less: Accumulated amortization			(65,191)						(36,218)
Total goodwill and other identifiable intangible assets, net			$	448,128					$	482,364

Amortization of finite-lived intangible assets is computed using the straight-line method over the estimated useful life of the asset of up to 20 years. Amortization expense of $34.2 million, $34.2 million, and $11.6 million was recognized for the years ended December 31, 2022, 2021, and 2020, respectively. Estimated amortization expense for the years ending December 31, 2023 through 2027 is $34.1 million per year. For each of the years ended December 31, 2022, 2021, and 2020, there was no material impairment of intangible assets with finite lives.

Accrued liabilities consist of the following (in thousands):

			December 31,
			2022						2021
Compensation			$	6,201					$	6,532
Professional fees			662						2,046
Amounts owed to former licensees			3,989						630
Royalties owed to third parties			12						149
Return reserve and customer refunds			—						2,420
Acquisition related liabilities			—						1,000
Subcontractor			—						1,759
Supplier			634						848
Other			4,183						2,195
			$	15,681					$	17,579

Contingent liabilities:

In connection with the acquisition of CyDex in January 2011, we issued a series of CVRs and also assumed certain contingent liabilities. We may be required to make additional payments upon achievement of certain clinical and regulatory milestones to the CyDex shareholders and former license holders.

In connection with the acquisition of Metabasis in January 2010, we entered into four CVR agreements with Metabasis shareholders. The CVRs entitle the holders to cash payments as frequently as every six months as proceeds are received by us upon the sale or licensing of any of the Metabasis drug development programs and upon the achievement of specified milestones.

For CVRs associated with the Pfenex, see “Note (4), Acquisitions” for more information.

The following table summarizes roll-forward of contingent liabilities as of December 2022 and 2021 (in thousands):

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Share-based Compensation Expense

The following table summarizes share-based compensation expense from continuing operations (in thousands):

			December 31,
			2022						2021(a)						2020(a)
Share-based compensation expense as a component of:
Research and development expenses			$	10,970					$	9,341					$	8,513
General and administrative expenses			39,911						19,985						16,612
			$	50,881					$	29,326					$	25,125

(a) Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.

Conversion and Modification of Equity Awards Outstanding at Separation Date

In connection with the OmniAb Separation on November 1, 2022, under the provisions of the existing plans, we adjusted our outstanding equity awards in accordance with the Merger Agreement to preserve the intrinsic value of the awards immediately before and after the Distribution. Upon the Distribution, employees holding stock options, restricted stock units and performance restricted stock units denominated in pre-Distribution Ligand stock received a number of otherwise-similar awards either in post-Distribution Ligand stock or in a combination of post-Distribution Ligand stock and OmniAb stock based on conversion ratios outlined for each group of employees in the Merger Agreement that we entered into in connection with the Distribution. The equity awards that were granted prior to March 2, 2022 were converted under the shareholder method, wherein employees holding outstanding equity awards received equity awards in both Ligand and OmniAb. For equity awards granted after March 2, 2022, for Ligand employees, the number of awards that were outstanding at the Separation were proportionately adjusted into post-Distribution Ligand stock to maintain the aggregate intrinsic value of the awards at the date of the Separation; for OmniAb employees, the number of awards that were outstanding at the Separation were proportionately adjusted into post-Distribution OmniAb stock to maintain the aggregate intrinsic value of the awards at the date of the Separation. The conversion ratio was determined based on the relative values of Ligand common stock in the “regular way” and “ex-distribution” markets during the five-trading day period prior to the closing of the business combination.

These modified awards otherwise retained substantially the same terms and conditions, including term and vesting provisions. Additionally, we will not incur any future compensation cost related to equity awards held by OmniAb employees and directors. We will incur future compensation cost related to OmniAb equity awards held by our employees.

Stock Plans

In June 2022, our stockholders approved the amendment and restatement of the Ligand Pharmaceuticals Incorporated 2002 Stock Incentive Plan (the “2002 Plan”). The amended and restated 2002 Plan, which is referred to herein as the “Restated Plan” was amended to increase the shares available for issuance by 1.0 million.

On July 29, 2022, our board of directors (the “Board”) approved the Ligand Pharmaceuticals Incorporated 2022 Employment Inducement Plan (the “2022 Inducement Plan”). The terms of the 2022 Inducement Plan are substantially similar to the terms of the Restated Plan with the exception that incentive stock options may not be issued under the 2022 Inducement Plan and awards under the 2022 Inducement Plan may only be issued to eligible recipients under the applicable Nasdaq Listing Rules. The 2022 Inducement Plan was adopted by the Board without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules. The Board has initially reserved 300,000 shares of the Company’s common stock for issuance pursuant to awards granted under the 2022 Inducement Plan.

As of December 31, 2022, there were 1.3 million shares available for future option grants or direct issuance under the Restated Plan and the 2022 Inducement Plan.

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Following is a summary of our stock option plan activity and related information:

 

			Shares						Weighted Average Exercise Price						Weighted Average Remaining Contractual Term in Years						Aggregate Intrinsic Value (In thousands)
Balance at January 1, 2020			1,956,379						$	77.54					5.45						$	72,002
Granted			806,300						$	92.93
Exercised			(156,845)						$	21.26
Forfeited			(44,012)						$	91.30
Balance at December 31, 2020			2,561,822						$	85.59					6.09						$	59,033
Exercisable at December 31, 2020			1,611,830						$	76.05					4.54						$	53,286
Options vested and expected to vest as of December 31, 2020			2,561,822						$	85.59					6.09						$	59,033
Granted			393,589						$	159.12
Exercised			(619,731)						$	54.28
Forfeited			(136,082)						$	110.83
Balance at December 31, 2021			2,199,598						$	106.00					6.34						$	113,302
Exercisable at December 31, 2021			1,391,952						$	98.16					5.12						$	80,849
Options vested and expected to vest as of December 31, 2021			2,199,598						$	106.00					6.34						$	113,302
Granted			863,245						$	91.34
Exercised			(34,941)						$	38.56
Forfeited			(40,069)						$	78.46
Balance at October 31, 2022			2,987,833						$	102.92					0						$	14,835
Exercisable at October 31, 2022			1,769,629						$	102.38					0						$	13,722
Options vested and expected to vest as of October 31, 2022, before Separation and Regrant			2,987,833						$	102.92					0						$	14,835
Cancellation due to Separation, Before Regrant			(2,987,833)
Balance at November 1, 2022, Before Regrant			—
Granted (1)			3,584,760						$	60.10
Exercised			(50,449)						$	30.24
Forfeited			(542,838)						$	56.20
Balance at December 31, 2022			2,991,473						$	61.31					6.07						$	30,477
Exercisable at December 31, 2022			1,559,662						$	60.83					4.51						$	17,951
Options vested and expected to vest as of December 31, 2022			2,991,473						$	61.31					6.07						$	30,477

(1) Options granted primarily relate to the modifications in connection with the Separation which resulted in new stock option grants at the modification date fair value.

The weighted-average grant-date fair value of all stock options granted during 2022, 2021 and 2020 was $28.90, $80.08, and $41.39 per share, respectively. The total intrinsic value of all options exercised during 2022, 2021 and 2020 was approximately $4.6 million, $77.3 million, and $11.9 million, respectively.

Cash received from options exercised, net of fees paid, in 2022, 2021 and 2020 was $2.6 million, $33.0 million and $2.5 million, respectively.

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Following is a further breakdown of the options outstanding as of December 31, 2022:

Range of exercise prices			Options outstanding						Weighted average remaining  life in years						Weighted average exercise price						Options exercisable						Weighted average exercise price
$12.78-$43.36			395,660						2.32						$	35.76					366,426						$	35.44
$46.20-$52.78			279,405						6.63						$	50.24					122,734						$	50.18
$52.84-$52.84			580,629						7.59						$	52.84					88,647						$	52.84
$54.81-$57.22			391,280						6.47						$	56.24					198,283						$	56.26
$58.28-$67.03			477,042						5.78						$	64.11					274,719						$	62.90
$67.24-$69.70			403,187						6.93						$	68.98					207,981						$	68.60
$70.04-$93.12			254,738						5.56						$	87.72					204,332						$	89.21
$99.80-$99.80			3,389						5.84						$	99.80					3,389						$	99.80
$103.42-$103.42			193,177						7.26						$	103.42					80,185						$	103.42
$114.15-$114.15			12,966						5.47						$	114.15					12,966						$	114.15
			2,991,473						6.07						$	61.31					1,559,662						$	60.83

The assumptions used for the specified reporting periods and the resulting estimates of weighted-average grant date fair value per share of options granted:

			Year Ended December 31,
			2022						2021						2020
Risk-free interest rate			1.4%-4.3%						0.4%-1.2%						0.2%-1.4%
Expected volatility			49%-55%						47%-63%						47%-71%
Expected term			2.0 to 6.5 years						4.7 to 6.3 years						4.7 to 5.1 years

As of December 31, 2022, there was $32.7 million of total unrecognized compensation cost related to non-vested stock options under the 2002 Plan. That cost is expected to be recognized over a weighted average period of 2.7 years.

As of December 31, 2022, there was $4.8 million of total unrecognized compensation cost related to non-vested OmniAb stock options received upon aforementioned spin-off conversion. That cost is expected to be recognized over a weighted average period of 1.8 years.

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Restricted Stock Activity

The following is a summary of our restricted stock activity and related information: 

			Shares						Weighted-Average Grant Date Fair Value
Outstanding at January 1, 2020			147,259						$	125.11
Granted			111,306						$	89.73
Vested			(52,363)						$	121.69
Forfeited			—						$	—
Outstanding at January 1, 2021			206,202						$	106.88
Granted			167,292						$	169.63
Vested			(98,501)						$	125.59
Forfeited			(10,850)						$	141.85
Outstanding at December 31, 2021			264,143						$	138.21
Granted			260,577						$	89.99
Vested			(138,867)						$	120.57
Forfeited			(19,383)						$	58.45
Outstanding at October 31, 2022, before Separation and Regrant			366,470						$	114.83
Forfeited due to Separation, Before Regrant			(366,470)
Balance at November 1, 2022, Before Regrant			—
Granted			424,473						$	75.61
Vested			(73,385)						$	75.17
Forfeited			(2,635)						$	89.05
Balance at December 31, 2022			348,453						$	75.60

As of December 31, 2022, unrecognized compensation cost related to non-vested stock awards under the 2002 Plan amounted to $12.4 million. That cost is expected to be recognized over a weighted average period of 1.7 years.

As of December 31, 2022, there was $1.2 million of total unrecognized compensation cost related to non-vested OmniAb stock awards received upon aforementioned spin-off conversion. That cost is expected to be recognized over a weighted average period of 1.0 years.

Employee Stock Purchase Plan

As of December 31, 2022, 35,881 shares of our common stock are available for future issuance under the Amended Employee Stock Purchase Plan, or ESPP. The ESPP permits eligible employees to purchase up to 1,250 shares of Ligand common stock per calendar year at a discount through payroll deductions. The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first of a six month offering period or purchase date, whichever is lower. There were 8,479, 8,448 and 6,455 shares issued under the ESPP in 2022, 2021 and 2020, respectively.

Share Repurchases

In September 2019, our Board of Directors approved a stock repurchase program authorizing the repurchase of up to $500.0 million of our common stock from time to time over a period of up to three years. This repurchase program expired in September 2022. During the year ended December 31, 2022 and 2021, we did not repurchase any common stock, respectively. During the year ended December 31, 2020, we repurchased 934,079 shares for $78.0 million.

At-the Market Equity Offering Program

On September 30, 2022, we filed a registration statement on Form S-3 (the “Shelf Registration Statement”), which became automatically effective upon filing, covering the offering of common stock, preferred stock, debt securities, warrants and units.

On September 30, 2022, we also entered into an At-The-Market Equity Offering Sales Agreement (the “Sales Agreement”) with Stifel, Nicolaus & Company, Incorporated (the “Agent”), under which we may, from time to time, sell shares of our common stock having an aggregate offering price of up to $100.0 million in “at the market” offerings through the Agent (the

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We record an estimate of a loss when the loss is considered probable and estimable. Where a liability is probable and there is a range of estimated loss and no amount in the range is more likely than any other number in the range, we record the minimum estimated liability related to the claim in accordance with ASC 450, Contingencies. As additional information becomes available, we assess the potential liability related to our pending litigation and revises our estimates. Revisions in our estimates of potential liability could materially impact our results of operations.

On October 31, 2019, we received three civil complaints filed in the U.S. District Court for the Northern District of Ohio on behalf of several Indian tribes. The Northern District of Ohio is the Court that the Judicial Panel on Multi-District Litigation (“JPML”) has assigned more than one thousand civil cases which have been designated as a Multi-District Litigation (“MDL”) and captioned In Re: National Prescription Opiate Litigation. The allegations in these complaints focus on the activities of defendants other than the Company and no individualized factual allegations have been advanced against us in any of the three complaints. We reject all claims raised in the complaints and intend to vigorously defend these matters.

CyDex, a wholly owned subsidiary of Ligand, and Baxter Healthcare Corp. (“Baxter”) are parties to a license agreement relating to Ligand’s Captisol® technology and, more specifically, relating to Captisol®-enabled Nexterone® (amiodarone HCl premixed injection). CyDex contended that Baxter has not paid all of the royalties due to CyDex under the terms of the license agreement and Baxter contends that it has overpaid royalties for several years. On April 6, 2021, Baxter initiated an arbitration with AAA pursuant to the arbitration provision of the license agreement. On April 21, 2021, CyDex filed an answering statement and counterdemand. On December 2, 2021, Baxter filed an Amended Notice of Arbitration Demand seeking a declaration limiting the “royalty term” of the license agreement to “the later of i) the expiration of the licensed [p]atent; or ii) when there are no longer any CyDex patents listed in the Orange Book for [Nexterone®].” Baxter later clarified its position, and asserted that royalties should have ceased being due upon the May 4, 2022 expiry of CyDex’s U.S. Patent No. 6,869,939. The parties conducted a three-day arbitration hearing May 24-26, 2022. In a September 9, 2022 Final Award, the Tribunal ruled in CyDex’s favor by (1) denying Baxter’s request for a partial refund of previously paid royalties, (2) granting CyDex’s request for underpaid royalties, and (3) concluding that “[g]oing forward Baxter shall pay CyDex” a royalty consistent with CyDex’s construction of the license agreement until, at least, the March 13, 2029 expiry of CyDex’s U.S. Patent No. 7,635,773.

On April 22, 2022, Pfenex Inc. (“Pfenex”), a wholly owned subsidiary of Ligand, received a notice of alleged breach from Beijing Kangchen Biological Technology Co., Ltd. (“Kangchen”) with respect to a Development and License Agreement , dated April 18, 2018, between Pfenex and Kangchen (“License Agreement”) pertaining to the development and commercialization of teriparatide in certain Southeast Asian countries. The allegations in the notice focused on the activities of Pfenex and other parties. On June 16, 2022, we rejected all claims raised by Kangchen in the notice. On June 24, 2022, Kangchen served Pfenex a notice of termination of the License Agreement and demanded initiation of the dispute resolution process in accordance with the License Agreement. On June 29, 2022, we again rejected all claims raised by Kangchen in the notice of termination and agreed to engage in the applicable dispute resolution process, including good faith negotiations between the parties. On October 20, 2022, we agreed to make a single lump sum payment to Kangchen in connection with a termination agreement that, among other things, terminates the License Agreement and releases all claims between the parties arising from the License Agreement. The payment was recorded as general and administrative expense during the year ended December 31, 2022. A termination agreement between Pfenex and Kangchen went into effect in December 2022.

From time to time, we may also become subject to other legal proceedings or claims arising in the ordinary course of our business. We currently believe that none of the claims or actions pending against us is likely to have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations. Given the unpredictability inherent in litigation, however, we cannot predict the outcome of these matters.

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The components of the income tax expense (benefit) for continuing operations are as follows (in thousands):

			Year Ended December 31,
			2022						2021						2020
Current expense (benefit):
Federal			$	10,097					$	460					$	10,820
State			193						(22)						541
Foreign			452						—						23
			10,742						438						11,384
Deferred expense (benefit):
Federal			(3,656)						(2,901)						(13,456)
State			34,144						(1,685)						(3,234)
			30,488						(4,586)						(16,690)
Total income tax expense (benefit)			$	41,230					$	(4,148)					$	(5,306)

A reconciliation of income tax expense (benefit) from continuing operations to the amount computed by applying the statutory federal income tax rate to the net income (loss) from continuing operations is summarized as follows (in thousands):

 

			Year Ended December 31,
			2022						2021						2020
Tax at federal statutory rate			$	7,562					$	15,163					$	272
State, net of federal benefit			264						(82)						(1,231)
FDII			(2,395)						(637)						(1,652)
Rate change for changes in federal, foreign or state law			(535)						(7,963)						(164)
Change in uncertain tax positions			(158)						480						(673)
Sale of Vernalis R&D			—						—						127,372
Contingent liabilities			15						(7,993)						(266)
Foreign tax differential on income/loss of foreign subsidiaries			103						(114)						(3,839)
Research and development credits			256						(1,628)						(168)
Debt repurchases			626						—						—
Subpart F income			853						1,392						25
Share-based compensation			1,279						(12,080)						(623)
Provision to return adjustments			2,232						(1,347)						(5,920)
Officer compensation			5,869						3,239						2,410
Change in valuation allowance			24,799						11,245						(121,864)
Other			460						(3,823)						1,015
			$	41,230					$	(4,148)					$	(5,306)

We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. Significant components of our deferred tax assets and liabilities as of December 31, 2022 and 2021 are shown below. We assess the positive and negative evidence to determine if sufficient future taxable income will be generated to use the existing deferred tax assets. Our evaluation of evidence resulted in management concluding that the majority of our deferred tax assets will be realized. However, we maintain a valuation allowance to offset certain net deferred tax assets as management believes realization of such assets are uncertain as of December 31, 2022, 2021 and 2020. The valuation allowance increased $21.5 million in 2022, increased $11.4 million in 2021 and decreased $116.5 million in 2020.

We offset all deferred tax assets and liabilities by jurisdiction, as well as any related valuation allowance, and present them on our consolidated balance sheet as a non-current deferred income tax asset or liability (as applicable). Deferred tax assets

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(liabilities) are comprised of the following:

			December 31,
			2022						2021
			(in thousands)
Deferred tax assets:
Net operating loss carryforwards			$	53,960					$	63,471
Research credit carryforwards			26,309						26,908
Stock compensation			11,158						9,743
Other			19,542						12,989
			110,969						113,111
Valuation allowance for deferred tax assets			(57,472)						(35,931)
Net deferred tax assets			$	53,497					$	77,180
Deferred tax liabilities:
Identified intangibles			(64,696)						(66,848)
Other			(10,886)						(5,459)
Net deferred tax liabilities			$	(75,582)					$	(72,307)
Deferred income taxes, net			$	(22,085)					$	4,873

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 requires taxpayers to capitalize and amortize R&D expenditures over five years for domestic research and 15 years for foreign research pursuant to Section 174 of the Internal Revenue Code of 1986, as amended. We recorded an increase of $4.7 million to our current federal income tax expense and deferred tax assets for continuing operations during 2022 due to the capitalization of R&D under Section 174.

As of December 31, 2022, we had federal net operating loss carryforwards set to expire through 2037 of $81.1 million and $168.3 million of state net operating loss carryforwards that begin to expire in 2028. We also have $8.5 million of federal research and development credit carryforwards, which expire through 2040. We have $29.0 million of California research and development credit carryforwards that have no expiration date. In addition, we have approximately $96.1 million of non-U.S. net operating loss carryovers and approximately $15.6 million of non-U.S. capital loss carryovers that have no expiration date.

At December 31, 2021 we had federal net operating loss carryforwards set to expire through 2037 of $117.5 million and $170.1 million of state net operating loss carryforwards that begin to expire in 2028. We also had $9.3 million in federal research and development credit carryforwards, which expire through 2040, and $29.0 million of California research and development credit carryforwards that have no expiration date. In addition, we had approximately $101.6 million of non-U.S. capital loss carryovers and approximately $17.5 million of non-U.S. capital loss carryovers that have no expiration date.

Pursuant to Section 382 and 383 of the Internal Revenue Code of 1986, as amended, utilization of our net operating losses and credits may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. The deferred tax assets as of December 31, 2022 are net of any previous limitations due to Section 382 and 383.

We account for income taxes by evaluating a probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Our remaining liabilities for uncertain tax positions are presented net of the deferred tax asset balances on the accompanying consolidated balance sheet.

A reconciliation of the amount of unrecognized tax benefits at December 31, 2022, 2021 and 2020 is as follows (in thousands):

			December 31,
			2022						2021						2020
Balance at beginning of year			$	29,550					$	31,619					$	28,647
Additions based on tax positions related to the current year			58						252						3,911
Additions for tax positions of prior years			—						751						15
Reductions for tax positions of prior years			(512)						(3,072)						(954)
Balance at end of year			$	29,096					$	29,550					$	31,619

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Included in the balance of unrecognized tax benefits at December 31, 2022 is $27.3 million of tax benefits that, if recognized would impact the effective rate. There are no positions for which it is reasonably possible that the uncertain tax benefit will significantly increase or decrease within twelve months.

We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2022 and December 31, 2021, we recognized an immaterial amount of interest and penalties. We file income tax returns in the United States, various state jurisdictions, United Kingdom, and Canada with varying statutes of limitations. The federal statute of limitation remains open for the 2019 tax year to the present. The state income tax returns generally remain open for the 2018 tax year through the present. Net operating loss and research credit carryforwards arising prior to these years are also open to examination if and when utilized. The Ligand California tax returns for 2019 and 2020 are currently under audit. We believe our reserve for unrecognized tax benefits and contingent tax issues is adequate with respect to all open years.

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The following table contains quarterly financial information for 2022 and 2021. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.

			Three months ended,
			March 31, 2022			June 30, 2022			September 30, 2022			December 31, 2022			Total
			(in thousands, except per share data)
			(unaudited)
Total revenues			$	36,516		$	50,126		$	59,221		$	50,382		$	196,245
Research and development			$	9,179		$	8,467		$	9,239		$	9,197		$	36,082
General and administrative			$	11,925		$	12,086		$	14,920		$	31,131		$	70,062
Total operating costs and expenses			$	34,383		$	41,464		$	46,880		$	70,481		$	193,208
Net income (loss) from continuing operations			$	(12,929)		$	12,599		$	9,645		$	(14,534)		$	(5,219)
Net loss from discontinued operations			$	(2,456)		$	(13,494)		$	(9,241)		$	(2,951)		$	(28,142)
Net income (loss)			$	(15,385)		$	(895)		$	404		$	(17,485)		$	(33,361)
Basic net income (loss) from continuing operations per share			$	(0.77)		$	0.75		$	0.57		$	(0.86)		$	(0.31)
Basic net loss from discontinued operations per share			$	(0.15)		$	(0.80)		$	(0.55)		$	(0.17)		$	(1.67)
Diluted net income (loss) from continuing operations per share			$	(0.77)		$	0.74		$	0.56		$	(0.86)		$	(0.31)
Diluted net loss from discontinued operations per share			$	(0.15)		$	(0.79)		$	(0.54)		$	(0.17)		$	(1.67)
Shares used in the computation of basic net income (loss) per share			16,824			16,868			16,888			16,890			16,868
Shares used in the computation of diluted net income (loss) per share			16,824			17,058			17,132			16,890			16,868

			Three months ended,
			March 31, 2021			June 30, 2021			September 30, 2021			December 31, 2021			Total
			(in thousands, except per share data)
			(unaudited)
Total revenues			$	46,592		$	78,854		$	59,694		$	56,404		$	241,544
Research and development			$	9,046		$	7,482		$	7,430		$	8,147		$	32,105
General and administrative			$	10,815		$	12,412		$	10,967		$	12,596		$	46,790
Total operating costs and expenses			$	36,875		$	24,941		$	34,597		$	41,280		$	137,693
Net income (loss) from continuing operations			$	22,767		$	36,442		$	20,338		$	(3,194)		$	76,353
Net loss from discontinued operations			$	(4,660)		$	(5,717)		$	(6,615)		$	(2,223)		$	(19,215)
Net income (loss)			$	18,107		$	30,725		$	13,723		$	(5,417)		$	57,138
Basic net income (loss) from continuing operations per share			$	1.39		$	2.19		$	1.22		$	(0.19)		$	4.59
Basic net loss from discontinued operations per share			$	(0.28)		$	(0.34)		$	(0.40)		$	(0.13)		$	(1.16)
Diluted net income (loss) from continuing operations per share			$	1.32		$	2.12		$	1.19		$	(0.19)		$	4.43
Diluted net loss from discontinued operations per share			$	(0.27)		$	(0.33)		$	(0.39)		$	(0.13)		$	(1.11)
Shares used in the computation of basic net income (loss) per share			16,435			16,659			16,688			16,733			16,630
Shares used in the computation of diluted net income (loss) per share			17,248			17,172			17,142			16,733			17,246

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