Print Page      Close Window     

SEC Filings

10-Q
ATHENEX, INC. filed this Form 10-Q on 05/09/2019
Entire Document
 
atnx-10q_20190331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2019

OR

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

For the transition period from              to             

Commission File Number: 001-38112

 

ATHENEX, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

43-1985966

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

1001 Main Street, Suite 600

Buffalo, NY

14203

(Address of principal executive offices)

(Zip Code)

 

(716) 427-2950

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

ATNX

 

The Nasdaq Global Select Market

 

As of May 1, 2019, the registrant had 67,065,698 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


Table of Contents

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

1

Item 1.

 

Financial Statements

 

1

 

 

Condensed Consolidated Balance Sheets (Unaudited)

 

1

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

 

2

 

 

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)

 

3

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

4

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

5

Item 2.

 

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

 

23

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

Item 4.

 

Controls and Procedures

 

33

PART II.

 

OTHER INFORMATION

 

34

Item 1.

 

Legal Proceedings

 

34

Item 1A.

 

Risk Factors

 

34

Item 6.

 

Exhibits

 

35

Signatures

 

36

 

 

 

i


PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

(In thousands, except share and per share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

71,003

 

 

$

49,794

 

Short-term investments

 

 

341

 

 

 

57,629

 

Accounts receivable, net of chargebacks and other deductions of $10,448

   and $13,101, respectively, and allowance for doubtful accounts

   of $8 and $9, respectively

 

 

20,576

 

 

 

12,951

 

Inventories

 

 

25,191

 

 

 

28,787

 

Prepaid expenses and other current assets

 

 

33,569

 

 

 

21,658

 

Total current assets

 

 

150,680

 

 

 

170,819

 

Property and equipment, net

 

 

12,249

 

 

 

11,447

 

Goodwill

 

 

37,589

 

 

 

37,495

 

Intangible assets, net

 

 

10,361

 

 

 

10,848

 

Operating lease right-of-use assets, net

 

 

9,428

 

 

 

 

Deferred income tax assets

 

 

 

 

 

486

 

Total assets

 

$

220,307

 

 

$

231,095

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

20,389

 

 

$

12,997

 

Accrued expenses

 

 

42,571

 

 

 

37,718

 

Current portion of operating lease liabilities

 

 

3,067

 

 

 

 

Current portion of long-term debt

 

 

1,720

 

 

 

961

 

Total current liabilities

 

 

67,747

 

 

 

51,676

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Deferred compensation

 

 

2,605

 

 

 

2,825

 

Deferred rent

 

 

 

 

 

2,022

 

Long-term operating lease liabilities

 

 

8,362

 

 

 

 

Long-term debt and finance lease obligations

 

 

46,012

 

 

 

45,803

 

Total liabilities

 

 

124,726

 

 

 

102,326

 

Commitments and contingencies (See Note 15)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.001 per share, 250,000,000 shares authorized at

   March 31, 2019 and December 31, 2018; 68,718,618 and 68,668,986 shares

   issued at March 31, 2019 and December 31, 2018, respectively; 67,045,698

   and 66,996,066 shares outstanding at March 31, 2019 and

   December 31, 2018, respectively

 

 

69

 

 

 

69

 

Additional paid-in capital

 

 

593,035

 

 

 

591,064

 

Accumulated other comprehensive income (loss)

 

 

415

 

 

 

(656

)

Accumulated deficit

 

 

(478,949

)

 

 

(443,716

)

Less: treasury stock, at cost; 1,672,920 shares at March 31, 2019 and

   December 31, 2018

 

 

(7,406

)

 

 

(7,406

)

Total Athenex, Inc. stockholders' equity

 

 

107,164

 

 

 

139,355

 

Non-controlling interests

 

 

(11,583

)

 

 

(10,586

)

Total stockholders' equity

 

 

95,581

 

 

 

128,769

 

Total liabilities and stockholders' equity

 

$

220,307

 

 

$

231,095

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

Product sales, net

 

$

25,163

 

 

$

12,605

 

License fees and consulting revenue

 

 

105

 

 

 

25,091

 

Grant revenue

 

 

39

 

 

 

140

 

Total revenue

 

 

25,307

 

 

 

37,836

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

Cost of sales

 

 

19,902

 

 

 

11,326

 

Research and development expenses

 

 

24,475

 

 

 

21,303

 

Selling, general, and administrative expenses

 

 

15,188

 

 

 

13,080

 

Total costs and operating expenses

 

 

59,565

 

 

 

45,709

 

Operating loss

 

 

(34,258

)

 

 

(7,873

)

Interest expense (income)

 

 

1,472

 

 

 

(227

)

Loss before income tax expense (benefit)

 

 

(35,730

)

 

 

(7,646

)

Income tax expense (benefit)

 

 

500

 

 

 

(307

)

Net loss

 

 

(36,230

)

 

 

(7,339

)

Less: net loss attributable to non-controlling interests

 

 

(997

)

 

 

(41

)

Net loss attributable to Athenex, Inc.

 

$

(35,233

)

 

$

(7,298

)

Unrealized gain (loss) on investment, net of income taxes

 

 

3

 

 

 

(35

)

Foreign currency translation adjustment, net of income taxes

 

 

1,068

 

 

 

718

 

Comprehensive loss

 

$

(34,162

)

 

$

(6,615

)

Net loss per share attributable to Athenex, Inc. common stockholders, basic

   and diluted (See Note 12)

 

$

(0.53

)

 

$

(0.12

)

Weighted-average shares used in computing net loss per share attributable to

   Athenex, Inc. common stockholders, basic and diluted (See Note 12)

 

 

67,011,432

 

 

 

61,655,294

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

.

 

2


ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(In thousands, except share data)

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

other

 

 

Treasury Stock

 

 

Total Athenex,

Inc.

 

 

Non-

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

paid-in

capital

 

 

Accumulated

deficit

 

 

comprehensive

income (loss)

 

 

Shares

 

 

Amount

 

 

stockholders'

equity

 

 

controlling

interests

 

 

stockholders'

equity

 

Balance at January 1, 2018

 

 

59,894,362

 

 

$

60

 

 

$

423,805

 

 

$

(326,276

)

 

$

(146

)

 

 

(1,672,920

)

 

$

(7,406

)

 

$

90,037

 

 

$

685

 

 

$

90,722

 

Sale of common stock, net of costs and discounts of $4,611

 

 

4,765,000

 

 

 

4

 

 

 

68,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

68,055

 

 

 

 

 

 

68,055

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

2,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,161

 

 

 

 

 

 

2,161

 

Restricted stock expense

 

 

 

 

 

 

 

 

540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

540

 

 

 

 

 

 

540

 

Stock options and warrants exercised

 

 

289,487

 

 

 

1

 

 

 

1,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,263

 

 

 

 

 

 

1,263

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(7,298

)

 

 

 

 

 

 

 

 

 

 

 

(7,298

)

 

 

(41

)

 

 

(7,339

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

683

 

 

 

 

 

 

 

 

 

683

 

 

 

 

 

 

683

 

Balance at March 31, 2018 (unaudited)

 

 

64,948,849

 

 

$

65

 

 

$

495,819

 

 

$

(333,574

)

 

$

537

 

 

 

(1,672,920

)

 

$

(7,406

)

 

$

155,441

 

 

$

644

 

 

$

156,085

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

other

 

 

Treasury Stock

 

 

Total Athenex,

Inc.

 

 

Non-

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

paid-in

capital

 

 

Accumulated

deficit

 

 

comprehensive

income (loss)

 

 

Shares

 

 

Amount

 

 

stockholders'

equity

 

 

controlling

interests

 

 

stockholders'

equity

 

Balance at January 1, 2019

 

 

68,668,986

 

 

$

69

 

 

$

591,064

 

 

$

(443,716

)

 

$

(656

)

 

 

(1,672,920

)

 

$

(7,406

)

 

$

139,355

 

 

$

(10,586

)

 

$

128,769

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

1,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,693

 

 

 

 

 

 

1,693

 

Stock options and warrants exercised

 

 

49,632

 

 

 

 

 

 

278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

278

 

 

 

 

 

 

278

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(35,233

)

 

 

 

 

 

 

 

 

 

 

 

(35,233

)

 

 

(997

)

 

 

(36,230

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,071

 

 

 

 

 

 

 

 

 

1,071

 

 

 

 

 

 

1,071

 

Balance at March 31, 2019 (unaudited)

 

 

68,718,618

 

 

$

69

 

 

$

593,035

 

 

$

(478,949

)

 

$

415

 

 

 

(1,672,920

)

 

$

(7,406

)

 

$

107,164

 

 

$

(11,583

)

 

$

95,581

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

3


 

ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(36,230

)

 

$

(7,339

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

879

 

 

 

868

 

Stock-based compensation expense

 

 

1,778

 

 

 

2,701

 

Amortization of debt discount

 

 

257

 

 

 

 

Deferred rent expense

 

 

 

 

 

168

 

Gain on disposal of assets

 

 

 

 

 

(62

)

Deferred income taxes

 

 

486

 

 

 

(321

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables, net

 

 

(7,624

)

 

 

623

 

Prepaid expenses and other assets

 

 

(11,911

)

 

 

494

 

Inventories

 

 

3,596

 

 

 

(2,010

)

Accounts payable and accrued expenses

 

 

15,798

 

 

 

(7,848

)

Net cash used in operating activities

 

 

(32,971

)

 

 

(12,726

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(918

)

 

 

(1,177

)

Payments for licenses

 

 

(4,175

)

 

 

 

Purchases of short-term investments

 

 

 

 

 

(67,256

)

Sale of short-term investments

 

 

57,291

 

 

 

11,633

 

Net cash provided by (used in) investing activities

 

 

52,198

 

 

 

(56,800

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of stock

 

 

 

 

 

72,666

 

Proceeds from issuance of debt

 

 

743

 

 

 

 

Costs incurred related to the sale of stock

 

 

 

 

 

(4,611

)

Proceeds from exercise of stock options

 

 

278

 

 

 

1,263

 

Repayment of finance lease obligations and long-term debt

 

 

(45

)

 

 

(337

)

Net cash provided by financing activities

 

 

976

 

 

 

68,981

 

Net increase (decrease) in cash and cash equivalents

 

 

20,203

 

 

 

(545

)

Cash and cash equivalents, beginning of period

 

 

49,794

 

 

 

39,284

 

Effect of exchange rate changes on cash and cash equivalents

 

 

1,006

 

 

 

478

 

Cash and cash equivalents, end of period

 

$

71,003

 

 

$

39,217

 

Supplemental cash flow disclosures

 

 

 

 

 

 

 

 

Interest paid

 

$

981

 

 

$

13

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued purchases of property and equipment

 

$

634

 

 

$

104

 

Right-of-use assets recognized in exchange for new operating lease obligations

 

$

583

 

 

$

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

Athenex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Company and Nature of Business

Organization and Description of Business

Athenex, Inc. and subsidiaries (the “Company” or “Athenex”), originally under the name Kinex Pharmaceuticals LLC (“Kinex”), formed in November 2003, commenced operations on February 5, 2004, and operated as a limited liability company until it was incorporated in the State of Delaware under the name Kinex Pharmaceuticals, Inc. on December 31, 2012. The Company changed its name to Athenex, Inc. on August 26, 2015.

Athenex is a global biopharmaceutical company dedicated to the discovery, development and commercialization of novel therapies for the treatment of cancer. The Company’s mission is to improve the lives of cancer patients by creating more effective, safer and tolerable treatments. The Company’s current clinical pipeline is derived from Orascovery, Src Kinase Inhibition, T-cell receptor-engineered T-cells (TCR-T), and Arginine deprivation therapy research platforms. The Company has assembled a leadership team and has established global operations in the U.S. and China across the pharmaceutical value chain to execute its mission to become a global leader in bringing innovative cancer treatments to the market and improve health outcomes. The Company’s primary activities since commencement have been conducting research and development internally and through corporate collaborators, in-licensing and out-licensing pharmaceutical compounds and technology, and conducting clinical trials. The Company also conducts commercial sales of specialty products through its wholly-owned subsidiary, Athenex Pharmaceutical Division (APD), under its Commercial Platform.  

Follow-On Offering

In January 2018, the Company completed an underwritten public follow-on offering of 4,300,000 shares of its common stock. The Company granted the underwriters a 30-day option to purchase up to an additional 645,000 shares of common stock. In February 2018, the underwriters partially exercised their option, purchasing an additional 465,000 shares of common stock. All shares were offered by the Company at a price of $15.25 per share. Net proceeds were $68.1 million, after deducting underwriting discounts and commissions and offering expenses of $4.6 million.

Debt and Equity Offering

On July 3, 2018, the Company closed a privately placed debt and equity financing deal with Perceptive Advisors LLC and its affiliates (“Perceptive”) for gross proceeds of $100.0 million and received aggregate net proceeds of $97.1 million, net of fees and offering expenses. The Company entered into a 5-year senior secured loan for $50.0 million of this financing and issued 2,679,528 shares of its common stock at a purchase price of $18.66 per share for the remaining $50.0 million. The loan matures on the fifth anniversary from the closing date and bears interest at a floating per annum rate equal to London Interbank Offering Rates (“LIBOR”) (with a floor of 2.0%) plus 9.0%. The Company is required to make monthly interest-only payments with a bullet payment of the principal at maturity. The loan agreement contains specified financial maintenance covenants.  In connection with the loan agreement, the Company granted Perceptive a warrant for the purchase of 425,000 shares of common stock at a purchase price of $18.66 per share. This was accounted for as a detachable warrant at its fair value and is recorded as an increase to additional paid-in-capital on the condensed consolidated statement of stockholders’ equity.

Significant Risks and Uncertainties

The Company has incurred operating losses since its inception and, as a result, as of March 31, 2019 and December 31, 2018 had an accumulated deficit of $478.9 million and $443.7 million, respectively. Operations have been funded primarily through the sale of common stock and, to a lesser extent, from convertible bond financing, senior secured loan, revenue, and grant funding. The Company will require significant additional funds to conduct clinical trials and to fund its operations. There can be no assurances, however, that additional funding will be available on favorable terms, or at all. If adequate funds are not available, the Company may be required to delay, modify, or terminate its research and development programs or reduce its planned commercialization efforts. The Company believes that it will be able to obtain additional working capital through equity financings or other arrangements to fund operations, including additional public offerings; however, there can be no assurance that such additional financing, if available, can be obtained on terms acceptable to the Company. If the Company is unable to obtain such additional financing, the Company will need to reevaluate future operating plans and might delay, modify, or terminate its research and development programs or reduce its planned commercialization efforts. Accordingly, there is substantial doubt regarding the Company’s ability to continue as a going concern.

5


 

These condensed consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of the business. The Company’s recurring losses from operations and negative cash flows from operations have raised substantial doubt regarding its ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

The Company has a senior secured loan agreement which contains various covenants. A breach of any of these covenants could result in a default. If a default under this loan agreement is not cured or waived, the default could result in the acceleration of debt, which could require us to repurchase or repay the debt in full prior to the date it is otherwise due. If we default, the lender may seek repayment through our subsidiary guarantors or by executing on the security interest granted pursuant to the loan agreement.

Athenex is subject to a number of risks similar to other biopharmaceutical companies, including, but not limited to, the lack of available capital, possible failure of preclinical testing or clinical trials, inability to obtain marketing approval of product candidates, competitors developing new technological innovations, unsuccessful commercialization strategy and launch plans for our proprietary drug candidates, market acceptance of the Company’s products, and protection of proprietary technology. If the Company does not successfully commercialize any of its product candidates, it will be unable to generate sufficient product revenue and might not, if ever, achieve profitability and positive cash flow.

2.

Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information necessary for a full presentation of financial position, results of operations, and cash flows in conformity with GAAP. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of the Company for the periods presented. These condensed consolidated financial statements reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. Intercompany transactions and balances have been fully eliminated in consolidation.

Results of the operations for the three months ended March 31, 2019 are not necessarily indicative of the results expected for the full fiscal year or for any future annual or interim period. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 11, 2019.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amount of revenue and expenses during the reporting period. Such management estimates include those relating to assumptions used in clinical research accruals, chargebacks, allowance for doubtful accounts, inventory reserves, income taxes, the estimated useful life and recoverability of long-lived assets, and the valuation of stock-based awards. Actual results could differ from those estimates.

Leases

The Company determines if an arrangement contains a lease at inception.  For arrangements where the Company is the lessee, the Company will evaluate whether to account for the lease as either an operating or financing lease.  Operating leases are included in right-of-use assets (“ROU assets”) and operating lease liabilities on the condensed consolidated balance sheet as of March 31, 2019.  The Company’s finance leases are included in property and equipment, net and long-term debt and finance lease obligations on the condensed consolidated balance sheet.  A majority of the Company’s operating leases are for real estate properties used in operations located in the U.S. and Asia.  The Company’s finance leases are for manufacturing equipment in the U.S.

6


 

ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date.  ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received.  The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the operating lease liabilities as the Company’s leases generally do not provide an implicit rate.  The Company uses the stated rate per each lease agreement in determining the finance lease liabilities.  Lease terms may include options to extend or terminate when the Company is reasonably certain that the option will be exercised.  Lease expense for operating leases is recognized on a straight-line basis over the lease term.  

The Company elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for short-term leases.

Concentration of Credit Risk, Other Risks and Uncertainties

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and short-term investments. The Company deposits its cash equivalents in interest-bearing money market accounts and invests in highly liquid U.S. treasury notes, commercial paper and corporate bonds. The Company deposits its cash with multiple financial institutions. Cash balances exceed federally insured limits. The primary focus of the Company’s investment strategy is to preserve capital and meet liquidity requirements. The Company’s investment policy addresses the level of credit exposure by limiting the concentration in any one corporate issuer and establishing a minimum allowable credit rating. The Company also has significant assets and liabilities held in its overseas manufacturing facility in China, and therefore is subject to foreign currency fluctuation.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, "Leases (Topic 842)," which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model that requires a lessee to recognize a ROU asset representing the right to use the underlying asset over the lease term and lease liability on the balance sheet for all leases with a term longer than 12 months. Lease obligations are to be measured at the present value of lease payments and accounted for using the effective interest method. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. For finance leases, the leased asset is depreciated on a straight-line basis and recorded separately from the interest expense in the income statement resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. The ASU requires that assets and liabilities be presented or disclosed separately and classified appropriately as current and noncurrent. The ASU further requires additional disclosure of certain qualitative and quantitative information related to lease agreements. In July 2018, the FASB issued new guidance that provided for a new optional transition method that allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to opening retained earnings. Under this approach, comparative periods are not restated.

The Company adopted the new lease standard on January 1, 2019 and used the effective date as our date of initial application. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company (1) to not reassess whether any expired or existing contracts are or contain leases, (2) to not reassess the lease classification for any expired or existing leases, and (3) to not reassess initial direct costs for any existing leases. The Company also elected the single component practical expedient, which requires the Company, by class of underlying asset, not to allocate the total consideration to the lease and nonlease components based on their relative stand-alone selling prices. This single component practical expedient requires the Company to account for the lease component and nonlease component(s) associated with that lease as a single component if (i) the timing and pattern of transfer of the lease component and the nonlease component(s) associated with it are the same and (ii) the lease component would be classified as an operating lease if it were accounted for separately. In preparation for adoption of the standard, the Company implemented internal controls to enable the preparation of financial information. The standard had a material impact on our consolidated balance sheet, with no material impact on our consolidated statement of operations and comprehensive loss. On the adoption date, the Company recognized $9.8 million of operating lease ROU assets, $11.9 million of operating lease liabilities, and derecognized its existing deferred rent balance of $2.1 million.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic 718, “Compensation – Stock Compensation,” which only included share-based payments to employees, to include share-based payments issued to nonemployees for goods and services. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will only need to remeasure liability-classified awards that have not yet been settled as of the date of adoption, and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company adopted this standard on January 1, 2019 and the adoption of this ASU did not impact the Company’s condensed consolidated financial statements.

7


 

3. Inventories

Inventories consist of the following (in thousands):

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Raw materials and purchased parts

 

$

3,962

 

 

$

4,092

 

Work in progress

 

 

3,174

 

 

 

3,166

 

Finished goods

 

 

18,055

 

 

 

21,529

 

Total inventories

 

$

25,191

 

 

$

28,787

 

 

4. Intangible Assets, net

The Company’s identifiable intangible assets, net, consist of the following (in thousands):

 

 

 

March 31, 2019

 

 

 

Cost/Fair

Value

 

 

Accumulated

Amortization

 

 

Impairments

 

 

Net

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

8,935

 

 

$

2,432

 

 

$

 

 

$

6,503

 

Polymed customer list

 

 

1,593

 

 

 

974

 

 

 

 

 

 

619

 

Polymed technology

 

 

3,712

 

 

 

1,125

 

 

 

 

 

 

2,587

 

Product rights

 

 

530

 

 

 

295

 

 

 

 

 

 

235

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CDE in-process research and development (IPR&D)

 

 

728

 

 

 

 

 

 

 

 

 

728

 

Effect of currency translation adjustment

 

 

(311

)

 

 

 

 

 

 

 

 

(311

)

Total intangible assets, net

 

$

15,187

 

 

$

4,826

 

 

$

 

 

$

10,361

 

 

 

 

December 31, 2018

 

 

 

Cost/Fair

Value

 

 

Accumulated

Amortization

 

 

Impairments

 

 

Net

 

Amortizable intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

8,935

 

 

$

2,060

 

 

$

 

 

$

6,875

 

Polymed customer list

 

 

1,593

 

 

 

938

 

 

 

 

 

 

655

 

Polymed technology

 

 

3,712

 

 

 

999

 

 

 

 

 

 

2,713

 

Product rights

 

 

530

 

 

 

263

 

 

 

 

 

 

267

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CDE in-process research and development (IPR&D)

 

 

1,026

 

 

 

 

 

 

298

 

 

 

728

 

Effect of currency translation adjustment

 

 

(390

)

 

 

 

 

 

 

 

 

(390

)

Total intangibles, net

 

$

15,406

 

 

$

4,260

 

 

$

298

 

 

$

10,848

 

 

As of March 31, 2019, licenses at cost include an Orascovery license of $0.4 million and licenses purchased from Gland Pharma Limited (“Gland”) of $4.3 million, and a license purchased from MAIA Pharmaceuticals, Inc. (“MAIA”) for $4.0 million. The Orascovery license with Hanmi Pharmaceuticals Co. Ltd. (“Hanmi”) was purchased directly from Hanmi and is being amortized on a straight-line basis over a period of 12.75 years, the remaining life of the license agreement at the time of purchase. The licenses purchased from Gland are being amortized on a straight-line basis over a period of 5 years, the remaining life of the license agreement at the time of purchase.  The license purchased from MAIA is being amortized over a period of 7 years, the remaining life of the license agreement at the time of purchase.

The remaining intangible assets were acquired in connection with the acquisitions of Athenex Pharma Solutions (“APS” or “Athenex Pharma Solutions,” and formerly known as QuaDPharma), Polymed Therapeutics, Inc. (“Polymed”), and Comprehensive Drug Enterprises (“CDE”). Intangible assets are amortized using an economic consumption model over their useful lives. The APS customer list was being amortized on a straight-line basis over 7 years. The Polymed customer list and technology are amortized on a straight-line basis over 6 and 12 years, respectively. The CDE in-process research and development, (“IPR&D”), will not be amortized until the related projects are completed. IPR&D will be tested annually for impairment, unless conditions exist causing an earlier impairment test (e.g., abandonment of project). No impairment charges were recorded during the three months ended March 31, 2019.  The weighted-average useful life for all intangible assets was 7.58 years as of March 31, 2019.

8


 

The Company recorded $0.5 million and $0.4 million of amortization expense for the three months ended March 31, 2019 and 2018, respectively. 

5. Fair Value Measurements

Financial instruments consist of cash and cash equivalents, short-term investments, an equity investment, accounts receivable, accounts payable, accrued liabilities, and debt. Short-term investments and the equity investment are stated at fair value. Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and debt, are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date of such amounts.

ASC 820, Fair Value Measurements, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the ASC 820 are described as follows:

Level 1—Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2—Inputs to the valuation methodology include:

 

Quoted prices for similar assets or liabilities in active markets;

 

Quoted prices for identical or similar assets or liabilities in inactive markets;

 

Inputs other than quoted prices that are observable for the asset or liability;

 

Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and

 

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3—Inputs to the valuation methodology are unobservable, supported by little or no market activity, and are significant to the fair value measurement.

Transfers between levels, if any, are recorded as of the beginning of the reporting period in which the transfer occurs. There were no transfers between Levels 1, 2 or 3 for any of the periods presented.

The following tables represent the fair value hierarchy for those assets and liabilities that the Company measures at fair value on a recurring basis (in thousands):

 

 

 

Fair Value Measurements at March 31, 2019 Using:

 

 

 

Total

 

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale investment

 

$

341

 

 

$

341

 

 

$

 

 

$

 

Total assets

 

$

341

 

 

$

341

 

 

$

 

 

$

 

9


 

 

 

 

Fair Value Measurements at December 31, 2018 Using:

 

 

 

Total

 

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets included within cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

25

 

 

 

 

$

25

 

 

 

 

$

 

 

 

 

$

 

Short-term investments - commercial paper

 

 

5,396

 

 

 

 

 

 

 

 

 

 

5,396

 

 

 

 

 

 

Financial assets included within short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments - commercial paper

 

 

36,544

 

 

 

 

 

 

 

 

 

 

36,544

 

 

 

 

 

 

Short-term investments - corporate notes

 

 

16,699

 

 

 

 

 

 

 

 

 

 

16,699

 

 

 

 

 

 

Short-term investments - U.S. government bonds

 

 

3,998

 

 

 

 

 

 

 

 

 

 

3,998

 

 

 

 

 

 

Available-for-sale investment

 

 

388