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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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, 2021 

OR

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

For the transition period from              to             

Commission File Number: 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)

 

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

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  

 

As of April 30, 2021, the registrant had 93,512,700  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 Statements 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

 

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

Item 4.

 

Controls and Procedures

 

35

PART II.

 

OTHER INFORMATION

 

36

Item 1.

 

Legal Proceedings

 

36

Item 1A.

 

Risk Factors

 

36

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

Item 3.

 

Defaults Upon Senior Securities

 

36

Item 4.

 

Mine Safety Disclosures

 

36

Item 5.

 

Other Information

 

37

Item 6.

 

Exhibits

 

38

Signatures

 

40

 

 

 

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,

 

 

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,980

 

 

$

69,587

 

Restricted cash

 

 

16,500

 

 

 

16,500

 

Short-term investments

 

 

123,186

 

 

 

138,636

 

Accounts receivable, net of chargebacks and other deductions of $17,264

   and $12,552, respectively, and provision for credit losses

   of $9,482 and $9,637, respectively

 

 

20,189

 

 

 

23,603

 

Inventories

 

 

26,324

 

 

 

28,846

 

Prepaid expenses and other current assets

 

 

16,968

 

 

 

14,789

 

Total current assets

 

 

251,147

 

 

 

291,961

 

Property and equipment, net

 

 

41,778

 

 

 

34,388

 

Goodwill

 

 

38,840

 

 

 

38,891

 

Intangible assets, net

 

 

9,482

 

 

 

10,218

 

Operating lease right-of-use assets, net

 

 

7,462

 

 

 

7,921

 

Other assets

 

 

947

 

 

 

950

 

Total assets

 

$

349,656

 

 

$

384,329

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

15,858

 

 

$

18,673

 

Accrued expenses

 

 

28,714

 

 

 

38,273

 

Current portion of operating lease liabilities

 

 

3,161

 

 

 

3,185

 

Current portion of long-term debt and finance lease obligations

 

 

1,970

 

 

 

2,010

 

Total current liabilities

 

 

49,703

 

 

 

62,141

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term operating lease liabilities

 

 

5,832

 

 

 

6,355

 

Long-term debt and finance lease obligations

 

 

147,265

 

 

 

146,577

 

Deferred tax liabilities

 

 

58

 

 

 

56

 

Other long-term liabilities

 

 

3,674

 

 

 

3,852

 

Total liabilities

 

 

206,532

 

 

 

218,981

 

Commitments and contingencies (See Note 15)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   March 31, 2021 and December 31, 2020; 95,185,620 and 95,066,195 shares

   issued at March 31, 2021 and December 31, 2020, respectively; 93,512,700

   and 93,393,275 shares outstanding at March 31, 2021 and

   December 31, 2020, respectively

 

 

95

 

 

 

95

 

Additional paid-in capital

 

 

904,950

 

 

 

901,864

 

Accumulated other comprehensive loss

 

 

(841

)

 

 

(1,134

)

Accumulated deficit

 

 

(738,694

)

 

 

(713,644

)

Less: treasury stock, at cost; 1,672,920 shares at March 31, 2021 and

   December 31, 2020

 

 

(7,406

)

 

 

(7,406

)

Total Athenex, Inc. stockholders' equity

 

 

158,104

 

 

 

179,775

 

Non-controlling interests

 

 

(14,980

)

 

 

(14,427

)

Total stockholders' equity

 

 

143,124

 

 

 

165,348

 

Total liabilities and stockholders' equity

 

$

349,656

 

 

$

384,329

 

 

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,

 

 

 

2021

 

 

2020

 

Revenue:

 

 

 

 

 

 

 

 

Product sales, net

 

$

20,360

 

 

$

18,547

 

License and other revenue

 

 

20,665

 

 

 

28,388

 

Total revenue

 

 

41,025

 

 

 

46,935

 

Cost of sales

 

 

16,405

 

 

 

19,572

 

Gross Profit

 

 

24,620

 

 

 

27,363

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development expenses

 

 

23,070

 

 

 

17,192

 

Selling, general, and administrative expenses

 

 

22,120

 

 

 

25,748

 

Total operating expenses

 

 

45,190

 

 

 

42,940

 

Operating loss

 

 

(20,570

)

 

 

(15,577

)

Interest income

 

 

29

 

 

 

413

 

Interest expense

 

 

4,908

 

 

 

1,673

 

Loss before income tax expense

 

 

(25,449

)

 

 

(16,837

)

Income tax expense

 

 

154

 

 

 

2,881

 

Net loss

 

 

(25,603

)

 

 

(19,718

)

Less: net loss attributable to non-controlling interests

 

 

(553

)

 

 

(289

)

Net loss attributable to Athenex, Inc.

 

$

(25,050

)

 

$

(19,429

)

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

 

 

16

 

 

 

(68

)

Foreign currency translation adjustment, net of income taxes

 

 

277

 

 

 

(438

)

Comprehensive loss

 

$

(24,757

)

 

$

(19,935

)

Net loss per share attributable to Athenex, Inc. common

   stockholders, basic and diluted (See Note 12)

 

$

(0.27

)

 

$

(0.24

)

Weighted-average shares used in computing net loss per share

   attributable to Athenex, Inc. common stockholders, basic and

   diluted (See Note 12)

 

 

93,429,935

 

 

 

81,539,548

 

 

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

loss

 

 

Shares

 

 

Amount

 

 

stockholders'

equity

 

 

controlling

interests

 

 

stockholders'

equity

 

Balance at January 1, 2020

 

 

83,231,063

 

 

$

83

 

 

$

763,648

 

 

$

(567,465

)

 

$

(635

)

 

 

(1,672,920

)

 

$

(7,406

)

 

$

188,225

 

 

$

(12,370

)

 

$

175,855

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

1,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,864

 

 

 

 

 

 

1,864

 

Restricted stock expense

 

 

(3,000

)

 

 

 

 

 

397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

397

 

 

 

 

 

 

397

 

Stock options exercised

 

 

70,200

 

 

 

 

 

 

344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

344

 

 

 

 

 

 

344

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(19,429

)

 

 

 

 

 

 

 

 

 

 

 

(19,429

)

 

 

(289

)

 

 

(19,718

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(506

)

 

 

 

 

 

 

 

 

(506

)

 

 

 

 

 

(506

)

Balance at March 31, 2020 (unaudited)

 

 

83,298,263

 

 

$

83

 

 

$

766,253

 

 

$

(586,894

)

 

$

(1,141

)

 

 

(1,672,920

)

 

$

(7,406

)

 

$

170,895

 

 

$

(12,659

)

 

$

158,236

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

other

 

 

Treasury Stock

 

 

Total

Athenex,

Inc.

 

 

Non-

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

paid-in

capital

 

 

Accumulated

deficit

 

 

comprehensive

loss

 

 

Shares

 

 

Amount

 

 

stockholders'

equity

 

 

controlling

interests

 

 

stockholders'

equity

 

Balance at January 1, 2021

 

 

95,066,195

 

 

$

95

 

 

$

901,864

 

 

$

(713,644

)

 

$

(1,134

)

 

 

(1,672,920

)

 

$

(7,406

)

 

$

179,775

 

 

$

(14,427

)

 

$

165,348

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

2,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,205

 

 

 

 

 

 

2,205

 

Restricted stock expense

 

 

 

 

 

 

 

 

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

 

 

 

 

 

29

 

Stock options exercised

 

 

119,425

 

 

 

 

 

 

852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

852

 

 

 

 

 

 

852

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(25,050

)

 

 

 

 

 

 

 

 

 

 

 

(25,050

)

 

 

(553

)

 

 

(25,603

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

293

 

 

 

 

 

 

 

 

 

293

 

 

 

 

 

 

293

 

Balance at March 31, 2021 (unaudited)

 

 

95,185,620

 

 

$

95

 

 

$

904,950

 

 

$

(738,694

)

 

$

(841

)

 

$

(1,672,920

)

 

$

(7,406

)

 

$

158,104

 

 

$

(14,980

)

 

$

143,124

 

 

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,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(25,603

)

 

$

(19,718

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,274

 

 

 

1,086

 

Stock-based compensation expense

 

 

2,234

 

 

 

2,261

 

Amortization of debt discount

 

 

779

 

 

 

256

 

Loss on disposal of assets and impairment charges

 

 

 

 

 

173

 

Deferred income taxes

 

 

2

 

 

 

48

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables, net

 

 

3,414

 

 

 

(34,728

)

Prepaid expenses and other assets

 

 

(2,176

)

 

 

3,748

 

Inventories

 

 

2,523

 

 

 

(3,101

)

Accounts payable and accrued expenses

 

 

(12,323

)

 

 

4,430

 

Net cash used in operating activities

 

 

(29,876

)

 

 

(45,545

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(7,341

)

 

 

(1,736

)

Payments for licenses

 

 

(1,088

)

 

 

(64

)

Purchases of short-term investments

 

 

(55,784

)

 

 

(23,571

)

Sales and maturities of short-term investments

 

 

71,250

 

 

 

14,920

 

Net cash provided by (used in) investing activities

 

 

7,037

 

 

 

(10,451

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

 

 

 

435

 

Proceeds from exercise of stock options

 

 

852

 

 

 

344

 

Repayment of finance lease obligations and long-term debt

 

 

(98

)

 

 

(47

)

Net cash provided by financing activities

 

 

754

 

 

 

732

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(22,085

)

 

 

(55,264

)

Cash, cash equivalents, and restricted cash, beginning of period

 

 

86,087

 

 

 

127,674

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

478

 

 

 

(427

)

Cash, cash equivalents, and restricted cash, end of period (See Note 3)

 

$

64,480

 

 

$

71,983

 

Supplemental cash flow disclosures

 

 

 

 

 

 

 

 

Interest paid

 

$

7,708

 

 

$

1,390

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued purchases of property and equipment

 

$

1,215

 

 

$

1,009

 

Accrued purchases of licenses

 

$

1,800

 

 

$

500

 

ROU assets derecognized from modification of operating lease obligations

 

$

 

 

$

(468

)

ROU assets recognized in exchange for operating lease obligations

 

$

 

 

$

353

 

 

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 biopharmaceutical company dedicated to becoming a leader in the discovery, development, and commercialization of next generation drugs 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 has assembled a strong and experienced leadership team and has established operations across the pharmaceutical value chain to execute our goal of becoming a leader in bringing innovative cancer treatments to the market and improving health outcomes.

The Company is organized around three operating segments: (1) its Oncology Innovation Platform, dedicated to the research and development of our proprietary drugs; (2) its Commercial Platform, focused on the sales and marketing of our specialty drugs and the market development of our proprietary drugs; and (3) its Global Supply Chain Platform, dedicated to providing a stable and efficient supply of APIs for our clinical and commercial efforts. The Company’s current clinical pipeline in the Oncology Innovation Platform is derived from four different proprietary technologies: (1) Orascovery, based on a P-glycoprotein (“P-gp”) pump inhibitor, (2) Src Kinase Inhibition, (3) Cell Therapy, and (4) Arginine Deprivation Therapy.

The Company is primarily engaged in conducting research and development activities through corporate collaborators, in-licensing and out-licensing pharmaceutical compounds and technology, conducting preclinical and clinical testing, identifying and evaluating additional drug candidates for potential in-licensing or acquisition, and raising capital to support development and commercialization activities. The Company also conducts commercial sales of specialty products through its wholly owned subsidiary, Athenex Pharmaceutical Division (“APD”), and 503B products through its wholly owned subsidiary, Athenex Pharma Solutions (“APS”).                                 

Significant Risks and Uncertainties

The Company has incurred operating losses since its inception and, as a result, as of March 31, 2021 and December 31, 2020 had an accumulated deficit of $738.7 million and $713.6 million, respectively. As of March 31, 2021, the Company had cash and cash equivalents of $48.0 million, restricted cash of $16.5 million, and short-term investments of $123.2 million.

The Company believes that the existing cash and cash equivalents, restricted cash, and short-term investments will enable us to meet our current operational liquidity needs and fund operations into the second half of 2022. The Company has based these estimates on assumptions that may prove to be wrong, and it could spend the available financial resources much faster than expected and need to raise additional funds sooner than anticipated. Operations have been funded primarily through the sale of common stock, senior secured loans, and to a lesser extent, from convertible bond financing, revenue, and grant funding. The Company will require significant additional funds to conduct clinical trials and to fund its commercialization and manufacturing operations. There can be no assurance that this funding will be available for our use when needed, 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. Further, if the Company is unable to obtain additional financing, the Company will need to reevaluate future operating plans. Although the Company plans to raise additional funds, these plans are subject to market conditions which are outside of its control and therefore cannot be deemed to be probable.    

In February 2021, the Company received a Complete Response Letter (“CRL”) from the U.S. Food and Drug Administration (“FDA”) regarding the Company’s New Drug Application (“NDA”) for oral paclitaxel and encequidar (“Oral Paclitaxel”) for the treatment of metastatic breast cancer. The FDA issues a CRL to indicate that the review cycle for an application is complete and that the application is not ready for approval in its present form. In the CRL, the FDA indicated its concern of safety risk to patients in terms of an increase in neutropenia-related sequelae on the Oral Paclitaxel arm compared with the IV paclitaxel arm in the Phase III study. The FDA also expressed concerns regarding the uncertainty over the results of the primary endpoint of objective response rate (ORR) at week 19 conducted by blinded independent central review (“BICR”). The FDA stated that the BICR reconciliation and re-read process may have introduced unmeasured bias and influence on the BICR. The FDA recommended that Athenex conduct a new adequate and well-conducted clinical trial in a patient population with metastatic breast cancer representative of the population in the U.S. The FDA determined that additional risk mitigation strategies to improve toxicity, which may involve dose optimization as well as, or in addition to, exclusion of patients deemed to be at higher risk of toxicity, are required to support potential approval of the NDA. We are working to consider the appropriate next steps in the development of Oral Paclitaxel. We have been preparing for and plan to request a meeting

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with the FDA and plan to engage in a dialogue on the design and scope of a clinical trial to address the FDA’s requirements and align on the next steps required to obtain approval. The Company’s ability to potentially commercialize Oral Paclitaxel, and the timing of potential commercialization, is dependent on the discussion with the agency, the Company’s resubmission of its NDA, ultimate FDA approval, and potentially additional capital.

The Company 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 regulatory approval of product candidates; competitors developing new technological innovations; unsuccessful commercialization strategy and launch plans for its proprietary drug candidates; risks inherent in litigation, including purported class actions; market acceptance of the Company’s products; and protection of proprietary technology. If the Company or its partners do not successfully commercialize any of the Company’s 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 Athenex, Inc. and those of its subsidiaries in which Athenex, Inc. has a controlling financial interest. Intercompany transactions and balances have been fully eliminated in consolidation.

Results of the Company’s operations for the three months ended March 31, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021, or for any other future annual or interim period. These condensed consolidated 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, 2020, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2021.

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 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, measurement of acquired assets and assumed liabilities in business combinations, provision for credit losses, inventory reserves, deferred income taxes, the estimated useful life and recoverability of long-lived assets, and the valuation of stock-based awards and other items as appropriate. Actual results could differ from those estimates.

Credit Losses

The Company estimates and records a provision for its expected credit losses related to its financial instruments, including its trade receivables and contract assets recorded under Financial Accounting Standards Board (“FASB”) ASC 606, Revenue from Contracts with Customers (“Topic 606”). The Company considers historical collection rates, current financial status of its customers, macroeconomic factors, and other industry-specific factors when evaluating for current expected credit losses. Forward-looking information is also considered in the evaluation of current expected credit losses. However, because of the short time to the expected receipt of accounts receivable and contract assets, the Company believes that the carrying value, net of excepted losses, approximates fair value and therefore, relies more on historical and current analysis of such financial instruments.     

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, restricted cash, and short-term investments. The Company deposits its cash equivalents in interest-bearing money market accounts and certificates of deposit, 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

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rating. The Company also has significant assets and liabilities held in its overseas manufacturing facility, and research and development facility in China, and therefore is subject to foreign currency fluctuation and regulatory uncertainties.

   

3. Restricted Cash

The Company had a restricted cash balance of $16.5 million as of March 31, 2021 and December 31, 2020 held in a controlled bank account in connection with the Company’s senior secured loan agreement and related security agreements (the “Senior Credit Agreement”) with Oaktree Fund Administration, LLC, as administrative agent, and the lenders party thereto (collectively, “Oaktree”). The Senior Credit Agreement requires the Company to maintain, in a debt service reserve account, a minimum cash balance equal to twelve months of interest on the outstanding loans under the Senior Credit Agreement.

4. Inventories

Inventories consist of the following (in thousands):

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Raw materials and purchased parts

 

$

3,054

 

 

$

6,498

 

Work in progress

 

 

1,728

 

 

 

776

 

Finished goods

 

 

21,542

 

 

 

21,572

 

Total inventories

 

$