atnx-10q_20200331.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, 2020

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, 2020, the registrant had 81,625,343 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

 

33

Item 4.

 

Controls and Procedures

 

34

PART II.

 

OTHER INFORMATION

 

35

Item 1.

 

Legal Proceedings

 

35

Item 1A.

 

Risk Factors

 

35

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

 

36

Item 6.

 

Exhibits

 

37

Signatures

 

38

 

 

 

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,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

71,983

 

 

$

127,674

 

Short-term investments

 

 

41,721

 

 

 

33,139

 

Accounts receivable, net of chargebacks and other deductions of $14,858

   and $14,394, respectively, and provision for credit losses

   of $130 and $124, respectively

 

 

51,418

 

 

 

16,689

 

Inventories

 

 

35,732

 

 

 

32,630

 

Prepaid expenses and other current assets

 

 

17,046

 

 

 

20,794

 

Total current assets

 

 

217,900

 

 

 

230,926

 

Property and equipment, net

 

 

24,616

 

 

 

23,153

 

Goodwill

 

 

38,480

 

 

 

38,513

 

Intangible assets, net

 

 

8,525

 

 

 

8,522

 

Operating lease right-of-use assets, net

 

 

8,266

 

 

 

8,818

 

Total assets

 

$

297,787

 

 

$

309,932

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

18,395

 

 

$

23,331

 

Accrued expenses

 

 

54,739

 

 

 

44,307

 

Current portion of operating lease liabilities

 

 

2,791

 

 

 

3,010

 

Current portion of long-term debt

 

 

871

 

 

 

880

 

Total current liabilities

 

 

76,796

 

 

 

71,528

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term operating lease liabilities

 

 

7,226

 

 

 

7,620

 

Long-term debt and finance lease obligations

 

 

52,896

 

 

 

52,366

 

Deferred tax liabilities

 

 

48

 

 

 

 

Other long-term liabilities

 

 

2,585

 

 

 

2,563

 

Total liabilities

 

 

139,551

 

 

 

134,077

 

Commitments and contingencies (See Note 15)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   March 31, 2020 and December 31, 2019; 83,298,263 and 83,231,063 shares

   issued at March 31, 2020 and December 31, 2019, respectively; 81,625,343

   and 81,558,143 shares outstanding at March 31, 2020 and

   December 31, 2019, respectively

 

 

83

 

 

 

83

 

Additional paid-in capital

 

 

766,253

 

 

 

763,648

 

Accumulated other comprehensive loss

 

 

(1,141

)

 

 

(635

)

Accumulated deficit

 

 

(586,894

)

 

 

(567,465

)

Less: treasury stock, at cost; 1,672,920 shares at March 31, 2020 and

   December 31, 2019

 

 

(7,406

)

 

 

(7,406

)

Total Athenex, Inc. stockholders' equity

 

 

170,895

 

 

 

188,225

 

Non-controlling interests

 

 

(12,659

)

 

 

(12,370

)

Total stockholders' equity

 

 

158,236

 

 

 

175,855

 

Total liabilities and stockholders' equity

 

$

297,787

 

 

$

309,932

 

 

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,

 

 

 

2020

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

Product sales, net

 

$

18,547

 

 

$

25,163

 

License and other revenue

 

 

28,388

 

 

 

144

 

Total revenue

 

 

46,935

 

 

 

25,307

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

Cost of sales

 

 

19,572

 

 

 

19,902

 

Research and development expenses

 

 

17,192

 

 

 

24,475

 

Selling, general, and administrative expenses

 

 

25,748

 

 

 

15,188

 

Total costs and operating expenses

 

 

62,512

 

 

 

59,565

 

Operating loss

 

 

(15,577

)

 

 

(34,258

)

Interest income

 

 

413

 

 

 

283

 

Interest expense

 

 

1,673

 

 

 

1,755

 

Loss before income tax expense

 

 

(16,837

)

 

 

(35,730

)

Income tax expense

 

 

2,881

 

 

 

500

 

Net loss

 

 

(19,718

)

 

 

(36,230

)

Less: net loss attributable to non-controlling interests

 

 

(289

)

 

 

(997

)

Net loss attributable to Athenex, Inc.

 

$

(19,429

)

 

$

(35,233

)

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

 

 

(68

)

 

 

3

 

Foreign currency translation adjustment, net of income taxes

 

 

(438

)

 

 

1,068

 

Comprehensive loss

 

$

(19,935

)

 

$

(34,162

)

Net loss per share attributable to Athenex, Inc. common

   stockholders, basic and diluted (See Note 12)

 

$

(0.24

)

 

$

(0.53

)

Weighted-average shares used in computing net loss per share

   attributable to Athenex, Inc. common stockholders, basic and

   diluted (See Note 12)

 

 

81,539,548

 

 

 

67,011,432

 

 

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, 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 loss, 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

 

 

 

 

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, 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 loss, 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

 

 

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,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(19,718

)

 

$

(36,230

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,086

 

 

 

879

 

Stock-based compensation expense

 

 

2,261

 

 

 

1,778

 

Amortization of debt discount

 

 

256

 

 

 

257

 

Loss on disposal of assets and impairment charges

 

 

173

 

 

 

 

Deferred income taxes

 

 

48

 

 

 

486

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables, net

 

 

(34,728

)

 

 

(7,624

)

Prepaid expenses and other assets

 

 

3,748

 

 

 

(11,911

)

Inventories

 

 

(3,101

)

 

 

3,596

 

Accounts payable and accrued expenses

 

 

4,430

 

 

 

15,798

 

Net cash used in operating activities

 

 

(45,545

)

 

 

(32,971

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,736

)

 

 

(918

)

Payments for licenses

 

 

(64

)

 

 

(4,175

)

Purchases of short-term investments

 

 

(23,571

)

 

 

 

Sales and maturities of short-term investments

 

 

14,920

 

 

 

57,291

 

Net cash (used in) provided by investing activities

 

 

(10,451

)

 

 

52,198

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

435

 

 

 

743

 

Proceeds from exercise of stock options

 

 

344

 

 

 

278

 

Repayment of finance lease obligations and long-term debt

 

 

(47

)

 

 

(45

)

Net cash provided by financing activities

 

 

732

 

 

 

976

 

Net (decrease) increase in cash and cash equivalents

 

 

(55,264

)

 

 

20,203

 

Cash and cash equivalents, beginning of period

 

 

127,674

 

 

 

49,794

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(427

)

 

 

1,006

 

Cash and cash equivalents, end of period

 

$

71,983

 

 

$

71,003

 

Supplemental cash flow disclosures

 

 

 

 

 

 

 

 

Interest paid

 

$

1,390

 

 

$

981

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued purchases of property and equipment

 

$

1,009

 

 

$

634

 

Accrued purchases of licenses

 

$

500

 

 

$

 

ROU assets derecognized from modification of operating lease obligations

 

$

(468

)

 

$

 

ROU assets recognized in exchange for operating lease obligations

 

$

353

 

 

$

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 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’s current clinical pipeline is derived from Orascovery, Src Kinase Inhibition, T-cell receptor-engineered T-cells (“TCR-T”), and Arginine Deprivation Therapy technology platforms. The Company has assembled a strong and experienced leadership team and has established global operations across the pharmaceutical value chain to execute its goal of becoming a global leader in bringing innovative cancer treatments to the market and improve health outcomes. 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, recruiting personnel, 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, 2020 and December 31, 2019 had an accumulated deficit of $586.9 million and $567.5 million, respectively. As of March 31, 2020, the Company had  cash and cash equivalents of $72.0 million, which included $8.7 million funded by New York State for the construction of the Dunkirk facility, and short-term investments of $41.7 million. The Company believes that the existing cash, cash equivalents, and short-term investments will be sufficient to fund current operating plans into the first quarter of 2021 but will not be sufficient to fund current operating plans through one year after the date that these condensed consolidated financial statements are issued. 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 and, to a lesser extent, from convertible bond financing, a senior secured loan, revenue, and grant funding. The Company will require significant additional funds to conduct clinical trials and to fund its commercialization operations. There can be no assurances, however, that additional funding will be available on favorable terms, or at all. Specifically, disruptions in the capital markets and the operations of commercial partners due to the COVID-19 pandemic may make it difficult for us to raise additional funds. 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’s 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; as such, those plans do not alleviate substantial doubt about its ability to continue as a going concern.

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 with Perceptive Advisors LLC (“Perceptive”) 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 the Company to repay the debt in full prior to the date it is otherwise due. If the Company defaults, the lender may seek repayment through the Company’s subsidiary guarantors or by executing on the security interest granted pursuant to the loan agreement.

 

   

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 marketing approval of product candidates, competitors developing new technological innovations, unsuccessful commercialization strategy and launch plans for its 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.

5


 

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, 2020 are not necessarily indicative of the results expected for the year ending December 31, 2020, 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, 2019, filed with the Securities and Exchange Commission (“SEC”) on March 2, 2020.

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, 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.

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 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.

To determine the provision for credit losses for accounts receivable, the Company has disaggregated its accounts receivable by class of customer, as the Company determined that risk profile of its customers is consistent based on the type and industry in which they operate. These customer classes include pharmaceutical wholesalers for specialty product sales, drug manufacturers for active pharmaceutical ingredient (API) sales, and hospitals and end-users for 503B sales. Each class of customer is analyzed for estimated credit losses individually. In doing so, the Company establishes a historical loss matrix, based on the previous collections of accounts receivable by the age of such receivables, and evaluates the current and forecasted financial position of its customers, as available. Further, the Company considers macroeconomic factors and the status of the pharmaceutical industry, including unemployment rates, industry indices, and other factors, to estimate if there are current expected credit losses within its trade receivables based on the trends and the Company’s expectation of the future status of such economic and industry-specific factors. The Company believes that its customers, the majority of which are in the pharmaceutical industries with sound financial condition, and therefore, the Company’s evaluation of macroeconomic and industry-specific factors did not have a significant impact on the provision for credit losses. Despite of the recent economic downturn due to Covid-19 and the shutdown of non-essential businesses, the pharmaceutical industry has largely remained in operation due to a designation as “essential business”. Pharmaceutical wholesalers are expected to maintain higher inventory levels through the COVID-19 pandemic to minimize disruptions caused by supply chain and logistical issues that arise because of the crisis. With stable financial positions at its major U.S. wholesaler customers, the Company does not anticipate impacts to collection of the receivables from them, which consisted of 84% of our overall product sales revenue for the three months ended March 31, 2020. As of March 31, 2020, the Company recorded a provision for credit losses of less than $0.1 million, $0.1 million, and less than $0.1 million for accounts receivable related to the customer classes of pharmaceutical wholesalers, drug manufacturers, and hospitals and end users, respectively.

6


 

Expected credit losses related to contract assets are evaluated on an individual basis. The Company’s contract assets relate to upfront fees or milestone payments due from licensees for which the underlying performance obligations have been satisfied. The Company evaluates the financial status of the licensee and any historical payment activity from them. Macroeconomic and industry-specific factors are considered when estimated current expected credit losses related to contract assets. Contract assets are generally classified as short-term, and the Company is in frequent communication with licensees to establish timely payment terms. If the Company expects that credit losses exist for license-related contract assets, it will record provision for such losses against the contract asset. As of March 31, 2020, the Company determined that credit losses related to its contract asset recognized in connection with its license arrangement are not expected to be significant.

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 certificates of deposit, invests in highly liquid U.S. treasury notes and high-quality investment grade commercial paper. 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, and research and development facility in China, and therefore is subject to foreign currency fluctuation.

Recent Accounting Pronouncements Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, “Reference Rate Reform (Topic 848)” which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective as of March 12, 2020 through December 31, 2022. During 2018, Perceptive issued a senior secured loan to the Company with a principal value of $50.0 million and a maturity date of June 30, 2023. The loan bears interest at a floating per annum rate equal to 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. Provided that, in the event LIBOR can no longer be determined, the parties shall mutually establish an alternative rate of interest and until such time that rate is agreed, the reference rate for purposes of the loan shall be the Wall Street Journal Prime Rate. The ASU guidance allows the Company to account for the modification of the debt contract by prospectively adjusting the effective interest rate. The Company does not expect adoption of this ASU to materially impact the Company’s condensed consolidated financial statements.

Recent Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” to improve reporting requirements specific to loans, receivables, and other financial instruments. The new standard requires that credit losses on financial assets, including trade receivables and held-to-maturity debt securities, measured at amortized cost be determined using an expected loss model, instead of the current incurred loss model. In addition, ASC 326 requires that credit losses related to available-for-sale debt securities be recorded through an allowance for credit losses if the Company does not intend to sell or believes that it is more likely than not they will be require to sell, and limited to the amount by which carrying value exceeds fair value. The new standard also requires enhanced disclosure of credit risk associated with financial assets. The standard is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. The standard is required to be applied using the modified retrospective approach with a cumulative-effect adjustment to retained earnings, if any, upon adoption.

This standard became effective for us on January 1, 2020, and based on the composition of our trade receivables, investment portfolio and other financial assets, current economic conditions and historical credit loss activity, the adoption of this standard did not have a material impact on our condensed consolidated financial statements and related disclosures. A significant portion of the Company’s accounts receivable is from large pharmaceutical wholesalers in the U.S., and a licensing fee receivable from a public company in PRC. The Company’s estimate of expected credit losses as of March 31, 2020, using its expected credit loss evaluation process described above, resulted in no adjustments to the provision for credit losses and no cumulative-effect adjustment to retained earnings on the adoption date of the standard.

Subsequent Events

The Company reviewed and evaluated subsequent events through the issuance date of the Company’s unaudited condensed consolidated financial statements.

7


 

3. Inventories

Inventories consist of the following (in thousands):

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Raw materials and purchased parts

 

$

5,411

 

 

$

4,176

 

Work in progress

 

 

1,663

 

 

 

1,870

 

Finished goods

 

 

28,658

 

 

 

26,584

 

Total inventories

 

$

35,732

 

 

$

32,630

 

 

4. Intangible Assets, net

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

 

 

 

March 31, 2020

 

 

 

Cost/Fair

Value

 

 

Accumulated

Amortization

 

 

Impairments

 

 

Net

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

9,499

 

 

$

3,956

 

 

$

 

 

$

5,543

 

Polymed customer list

 

 

1,593

 

 

 

1,228

 

 

 

 

 

 

365

 

Polymed technology

 

 

3,712

 

 

 

1,344

 

 

 

 

 

 

2,368

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

723

 

 

 

 

 

 

 

 

 

723

 

Effect of currency translation adjustment

 

 

(474

)

 

 

 

 

 

 

 

 

(474

)

Total intangible assets, net

 

$

15,053

 

 

$

6,528

 

 

$

 

 

$

8,525

 

 

 

 

December 31, 2019

 

 

 

Cost/Fair

Value

 

 

Accumulated

Amortization

 

 

Impairments

 

 

Net

 

Amortizable intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

8,935

 

 

$

3,561

 

 

$

 

 

$

5,374

 

Polymed customer list

 

 

1,593

 

 

 

1,164

 

 

 

 

 

 

429

 

Polymed technology

 

 

3,712

 

 

 

1,297

 

 

 

 

 

 

2,415

 

Product rights

 

 

530

 

 

 

360

 

 

 

170

 

 

 

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

728

 

 

 

 

 

 

 

 

 

728

 

Effect of currency translation adjustment

 

 

(424

)

 

 

 

 

 

 

 

 

(424

)

Total intangibles, net

 

$

15,074

 

 

$

6,382

 

 

$

170

 

 

$

8,522

 

 

As of March 31, 2020, licenses at cost include an Orascovery license of $0.4 million, licenses purchased from Gland Pharma Limited (“Gland”) of $4.4 million, a license purchased from MAIA Pharmaceuticals, Inc. (“MAIA”) for $4.0 million, and licenses of other specialty products of $0.7 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 Polymed Therapeutics, Inc. (“Polymed”) and Comprehensive Drug Enterprises (“CDE”). Intangible assets are amortized using an economic consumption model over their useful lives. 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). The Company recorded no impairments of IPR&D during the three months ended March 31, 2020. The weighted-average useful life for all intangible assets was 7.7 years as of March 31, 2020.

8


 

The Company recorded $0.5 million of amortization expense for both the three-month periods ended March 31, 2020 and 2019.   

The Company’s goodwill balance is the result of prior period acquisitions and is allocated to the Global Supply Chain Platform reporting unit and the Oncology Innovation Platform reporting unit. Changes in goodwill balances are due to the effect of foreign currency on goodwill from acquisitions of subsidiaries that have a functional currency other than USD.  

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.

9


 

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, 2020 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

 

$

6,616

 

 

$

6,616

 

 

$

 

 

$

 

Short-term investments - certificates of deposit

 

 

15,162

 

 

 

 

 

 

15,162

 

 

 

 

Short-term investments - commercial paper

 

 

25,533

 

 

 

 

 

 

25,533

 

 

 

 

Financial assets included within short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments - certificates of deposit

 

 

10,101

 

 

 

 

 

 

10,101

 

 

 

 

Short-term investments - commercial paper

 

 

31,469

 

 

 

 

 

 

31,469

 

 

 

 

Available-for-sale investment

 

 

151

 

 

 

151

 

 

 

 

 

 

 

Total assets

 

$

89,032

 

 

$

6,767

 

 

$

82,265

 

 

$

 

 

 

 

Fair Value Measurements at December 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets included within cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

5,460

 

 

$

5,460

 

 

$

 

 

$

 

Short-term investments - certificates of deposit

 

 

15,110

 

 

 

 

 

 

15,110

 

 

 

 

Short-term investments - commercial paper

 

 

51,017

 

 

 

 

 

 

51,017

 

 

 

 

Financial assets included within short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments - certificates of deposit

 

 

10,054

 

 

 

 

 

 

10,054

 

 

 

 

Short-term investments - commercial paper

 

 

22,835

 

 

 

 

 

 

22,835

 

 

 

 

Available-for-sale investment

 

 

250

 

 

 

250

 

 

 

 

 

 

 

Total assets

 

$

104,726