The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
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
|
|
|
$
|
5,710
|
|
|
$
|
99,016
|
|
|
$
|
—
|
|
The Company classifies its money market funds within Level 1 because it uses quoted market prices to determine their fair value. The Company classifies its commercial paper, corporate notes, certificates of deposit, and U.S. government bonds within Level 2 because it uses quoted prices for similar assets or liabilities in active markets and each has a specified term and all Level 2 inputs are observable for substantially the full term of each instrument.
The Company owns 68,000 shares of PharmaEssentia, a company publicly traded on the Taiwan OTC Exchange. As of March 31, 2020 and December 31, 2019, the Company’s investment in PharmaEssentia was valued at the reported closing price on such dates. This investment is classified as a Level 1 investment and is recorded as an available-for-sale investment within short-term investments on the Company’s condensed consolidated balance sheet.
10
6. Acquisitions and Business Combinations
CIDAL
On June 27, 2019, the Company entered into a definitive asset purchase agreement (the “APA”) with CIDAL Limited, a British Virgin Islands company limited by shares, and several of its affiliates (“CIDAL”). CIDAL operates as a contract research organization with headquarters in Guatemala and operations in various countries in Central America. Pursuant to the terms of the APA, the Company acquired certain assets of CIDAL in exchange issuing milestone payments of an aggregate of 67,796 shares of the Company’s common stock upon the achievement of certain developmental and regulatory events through the third quarter of 2021. The transactions contemplated by the APA closed on October 31, 2019. The Company believes the acquisition strategically strengthens the Company’s clinical research and operations capabilities and further supports its clinical development worldwide. The Company accounted for the asset purchase using the acquisition method of accounting and accordingly, the identifiable assets acquired, and liabilities assumed were recorded based upon management’s estimates of current fair values as of the acquisition date. The purchase price reflected contingent equity consideration associated with this transaction. The Company received net cash of $0.9 million, acquired property and equipment of less than $0.1 million, assumed liabilities of $1.1 million, and recorded goodwill of approximately $1.0 million, as well as contingent equity consideration associated with the transaction of $0.8 million.
The operating results of CIDAL have been included within the Company’s Oncology Innovation Platform operating segment from the closing date of the acquisition. CIDAL added $0.1 million of revenue and incurred a net loss of $1.0 million for the three months ended March 31, 2020.
7. Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued construction costs
|
|
$
|
19,981
|
|
|
$
|
22,811
|
|
Accrued wages and benefits
|
|
|
8,974
|
|
|
|
7,541
|
|
Accrued inventory purchases
|
|
|
5,792
|
|
|
|
7,194
|
|
Accrued tax withholdings
|
|
|
5,281
|
|
|
|
187
|
|
Accrued selling fees and rebates
|
|
|
3,963
|
|
|
|
1,577
|
|
Accrued costs for product launch
|
|
|
3,953
|
|
|
|
—
|
|
Accrued clinical expenses
|
|
|
3,819
|
|
|
|
2,510
|
|
Accrued operating expenses
|
|
|
2,517
|
|
|
|
1,885
|
|
Accrued R&D licensing fees
|
|
|
384
|
|
|
|
384
|
|
Deferred revenue
|
|
|
75
|
|
|
|
218
|
|
Total accrued expenses
|
|
$
|
54,739
|
|
|
$
|
44,307
|
|
The accrued construction costs relate to the building of the manufacturing facility in Dunkirk, NY, and $19.5 million is expected to be funded by New York State. Of this amount, $8.7 million has been received, and the remaining $10.8 million is recorded within prepaid expenses and other current assets on the Company’s condensed consolidated balance sheet as of March 31, 2020.
8. Income Taxes
The Company did not record a provision for federal income taxes for the three months ended March 31, 2020 because it expects to generate a loss for the year ending December 31, 2020 and the Company’s net deferred tax assets continue to be fully offset by a valuation allowance. Tax expense to date is the result of tax to be withheld in China on a milestone payment in connection with an out-license agreement and recording a deferred tax liability against indefinite lived intangible assets.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. The CARES Act includes several significant business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOLs”) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years, accelerate refunds of previously generated corporate alternative minimum tax credits, change the business interest limitation under IRC section 163(j) of the Internal Revenue Code from 30 percent to 50 percent, and fix qualified improvement property from the Tax Cuts and Jobs Act of 2017. This new legislation did not materially affect the Company’s income tax position.
11
9. Debt and Lease Obligations
Debt
The Company’s debt as of March 31, 2020 and December 31, 2019, consists of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current portion of mortgage
|
|
$
|
674
|
|
|
$
|
686
|
|
Current portion of finance and capital lease obligations
|
|
|
197
|
|
|
|
194
|
|
Current portion of operating lease obligations
|
|
|
2,791
|
|
|
|
3,010
|
|
Long-term portion of finance and capital lease obligations
|
|
|
177
|
|
|
|
227
|
|
Long-term portion of operating lease obligations
|
|
|
7,226
|
|
|
|
7,620
|
|
Chongqing Maliu Credit Agreement
|
|
|
6,055
|
|
|
|
5,731
|
|
Senior secured loan, net of debt discount and financing fees
of $3,336 and $3,592, respectively
|
|
|
46,664
|
|
|
|
46,408
|
|
Total
|
|
$
|
63,784
|
|
|
$
|
63,876
|
|
The mortgage payments, assumed in connection with the acquisition of CDE, extend through December 31, 2020.
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.
During the first quarter of 2019, the Company was issued an unsecured, subordinated bank loan from China Merchants Bank to fund operations in China. This loan had a principal value of $0.7 million, a maturity date of December 11, 2019, and bore interest at a fixed rate of 5.7% annually. The loan was paid in full as of December 31, 2019.
During the second quarter of 2019, the Company entered into a credit agreement which amended the existing partnership agreement with Chongqing Maliu Riverside Development and Investment Co., LTD (“CQ”), for a Renminbi ¥50.0 million (USD $7.2 million at March 31, 2020) line of credit to be used for the construction of the new active pharmaceutical ingredient (“API”) plant in China. The Company is required to repay the principal amount with accrued interest within three years after the plant receives the U.S. Current Good Manufacturing Practices (“cGMP”) certification, with 20% of the total loan with accrued interest is due within the first twelve months following receiving the certification, 30% of the total loan with accrued interest due within twenty-four months, and the remaining balance with accrued interest due within thirty-six months. Interest accrues at the three-year loan interest rate by the People’s Bank of China for the same period on the date of the deposit of the full loan amount. If the Company fails to obtain the cGMP certification within three years upon the acceptance of the plant, it shall return all renovation costs with the accrued interest to CQ in a single transaction within the first ten business days. As of March 31, 2020, the balance due to CQ was $6.1 million.
Lease Obligations
The Company has operating leases for office and manufacturing facilities in several locations in the U.S., Asia, and Latin America and has three finance leases for manufacturing equipment used in its facilities near Buffalo, NY. The components of lease expense are as follows (in thousands):
|
|
Three
Months Ended
March 31, 2020
|
|
|
Three
Months Ended
March 30, 2019
|
|
Operating lease cost
|
|
$
|
755
|
|
|
$
|
781
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
Amortization of assets
|
|
|
34
|
|
|
|
12
|
|
Interest on lease liabilities
|
|
|
6
|
|
|
|
9
|
|
Total net lease cost
|
|
$
|
795
|
|
|
$
|
802
|
|
The Company has elected to exclude short-term leases from its operating lease right-of-use (“ROU”) assets and lease liabilities. Lease costs for short-term leases were not material to the financial statements for the three months ended March 31, 2020. Variable lease costs for the three months ended March 31, 2020 were not material to the financial statements.
12
Supplemental balance sheet information related to leases is as follows (in thousands, except lease term and discount rate):
|
|
March 31, 2020
|
|
Finance leases:
|
|
|
|
|
Property and equipment, at cost
|
|
$
|
688
|
|
Accumulated amortization, net
|
|
|
(143
|
)
|
Property and equipment, net
|
|
$
|
545
|
|
|
|
|
|
|
Current obligations of finance leases
|
|
$
|
197
|
|
Long-term portion of finance leases
|
|
|
177
|
|
Total finance lease obligations
|
|
$
|
374
|
|
|
|
|
|
|
Weighted average remaining lease term (in years):
|
|
|
|
|
Operating leases
|
|
|
5.04
|
|
Finance leases
|
|
|
1.86
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
|
|
12.9
|
%
|
Finance leases
|
|
|
5.9
|
%
|
Supplemental cash flow information related to leases is as follows (in thousands):
|
|
Three
Months Ended
March 31, 2020
|
|
Cash paid for amount included in the measurements of lease
liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
(820
|
)
|
Operating cash flows from finance leases
|
|
|
(6
|
)
|
Financing cash flows from finance leases
|
|
|
(47
|
)
|
|
|
|
|
|
ROU assets derecognized from modification of operating
lease obligations
|
|
|
(468
|
)
|
ROU assets recognized in exchange for operating lease
obligations
|
|
$
|
353
|
|
Future minimum payments and maturities of leases is as follows (in thousands):
Year ending December 31:
|
|
Operating Leases
|
|
Finance Leases
|
|
2020 (remaining nine months)
|
|
$
|
2,278
|
|
$
|
161
|
|
2021
|
|
|
2,837
|
|
|
214
|
|
2022
|
|
|
2,617
|
|
|
21
|
|
2023
|
|
|
2,096
|
|
|
—
|
|
2024
|
|
|
2,002
|
|
|
—
|
|
Thereafter
|
|
|
1,950
|
|
|
—
|
|
Total lease payments
|
|
|
13,780
|
|
|
396
|
|
Less: Imputed interest
|
|
|
(3,763
|
)
|
|
(22
|
)
|
Total lease obligations
|
|
|
10,017
|
|
|
374
|
|
Less: Current obligations
|
|
|
(2,791
|
)
|
|
(197
|
)
|
Long-term lease obligations
|
|
$
|
7,226
|
|
$
|
177
|
|
Pursuant to the public-private partnership agreements with the State of New York and CQ, the Company will rent the manufacturing facilities in Dunkirk, NY and Chongqing, China, respectively. In 2019, construction of the API plant was completed. However, neither lease term had commenced as of March 31, 2020, as neither of the facilities were operational, and no lease costs were incurred in the first quarter of 2020.
13
The Company exercises judgment in determining the discount rate used to measure the lease liabilities. When rates are not implicit within an operating lease, the Company uses its incremental borrowing rate as its discount rate, which is based on yield trends in the biotechnology and healthcare industry and debt instruments held by the Company with stated interest rates. The Company re-assesses its incremental borrowing rate when new leases arise, or existing leases are modified.
10. Related Party Transactions
During the three months ended March 31, 2020 and 2019, the Company entered into transactions with individuals and companies that have financial interests in the Company. Related party transactions included the following:
a.
|
In June 2018, the Company entered into two in-licensing agreements with Avalon BioMedical (Management) Limited (“Avalon”) wherein the Company obtained certain intellectual property (“IP”) from Avalon to develop and commercialize the underlying products. Under these agreements the Company is required to pay upfront fees and future milestone payments and sales-based royalties. During the year ended December 31, 2019, the Company recorded a $1.0 million milestone fee paid to Avalon, as research and development expenses on its condensed consolidated statement of operations and comprehensive loss. During the three months ended March 31, 2020 and 2019, no fees were paid to Avalon in connection with the license agreements. Certain members of the Company’s board and management collectively have a controlling interest in Avalon. The Company does not hold any interest in Avalon and does not have any obligations to absorb losses or any rights to receive benefits from Avalon. As of March 31, 2020, and December 31, 2019, Avalon held 786,061 shares of the Company’s common stock, which represented approximately 1% of the Company’s total issued shares for both periods. Balances due from Avalon recorded on the condensed consolidated balance sheets were not significant.
|
In June 2019, the Company entered into an agreement whereby Avalon will hold a 90% ownership interest and the Company will hold a 10% ownership interest of the newly formed entity under the name Nuwagen Limited (“Nuwagen”), incorporated under the laws of Hong Kong. Nuwagen is principally engaged in the development and commercialization of herbal medicine products for metabolic, endocrine, and other related indications. The Company will contribute nonmonetary assets in exchange for the 10% ownership interest. As of March 31, 2020, the transaction has not closed.
b.
|
The Company earns licensing revenue from PharmaEssentia, an entity in which the Company has an investment classified as available-for-sale (see Note 5—Fair Value Measurements). Funds paid to or received from PharmaEssentia under the license and cost-sharing agreements were not material for the three months ended March 31, 2020, and 2019.
|
c.
|
The Company receives certain clinical development services from ZenRx Limited and its affiliate (“ZenRx”), a company for which one of the Company’s executive officers serves on the board of directors. In connection with such services, the Company made payments to ZenRx of $0.5 and $0.3 million for the three months ended March 31, 2020 and 2019, respectively. In April 2013, the Company entered into a license agreement with ZenRx pursuant to which the Company granted an exclusive, sublicensable license to use certain of the Company’s IP to develop and commercialize oral irinotecan and encequidar, and oral paclitaxel and encequidar in Australia and New Zealand, and a non-exclusive license to manufacture a certain compound, but only for use in Oral Irinotecan and Oral Paclitaxel. ZenRx is responsible for all development, manufacturing and commercialization, and the related costs and expenses, of any product candidates resulting from the agreement. No revenue was earned from this license agreement in the periods presented in these consolidated financial statements.
|
d.
|
Certain family members of executives perform consulting services for the Company. Such services were not significant to the condensed consolidated financial statements.
|
11. Stock-Based Compensation
Common Stock Option Plans
The Company has four equity compensation plans, adopted in 2017, 2013, 2007 and 2004 (the “Plans”) which, taken together, authorize the grant of up to 16,000,000 shares of common stock to employees, directors, and consultants. On May 23, 2019, the board of directors approved the amendment and restatement of the 2017 Omnibus Incentive Plan, which increases the number of shares available for issuance under the 2017 plan by up to 3,500,000 shares, subject to the approval of the Company’s stockholders at the Company’s 2020 annual meeting of stockholders. During the three months ended March 31, 2020, the Company approved a grant of 797,500 stock options which are contingently issuable upon approval of the increase in shares available by the stockholders. Additionally, on June 14, 2017, the Company adopted its 2017 Employee Stock Purchase Plan (the “ESPP”), which authorizes the issuance of up to 1,000,000 shares of common stock for future issuances to eligible employees.
14
Stock Options
The total fair value of stock options vested and recorded as compensation expense during the three months ended March 31, 2020 and 2019, was $1.9 million and $1.7 million, respectively. As of March 31, 2020, $13.0 million of unrecognized cost related to non-vested stock options was expected to be recognized over a weighted-average period of approximately 1.56 years. The total intrinsic value of options exercised was approximately $0.8 million and $0.4 million for the three months ended March 31, 2020 and 2019, respectively.
The following table summarizes the status of the Company’s stock option activity granted under the Plans to employees, directors, and consultants (aggregate intrinsic value in thousands):
|
|
Stock
Options
|
|
|
Weighted-
Average
Exercise price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at December 31, 2019
|
|
|
10,916,936
|
|
|
$
|
8.88
|
|
|
|
5.68
|
|
|
$
|
69,785
|
|
Granted
|
|
|
55,045
|
|
|
|
7.32
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(70,200
|
)
|
|
|
4.84
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited and expired
|
|
|
(58,550
|
)
|
|
|
14.45
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at March 31, 2020
|
|
|
10,843,231
|
|
|
$
|
8.87
|
|
|
|
5.47
|
|
|
$
|
—
|
|
Vested and exercisable at March 31, 2020
|
|
|
8,731,256
|
|
|
$
|
7.67
|
|
|
|
4.88
|
|
|
$
|
619
|
|
The Company determines the fair value of stock-based awards on the grant date using the Black-Scholes option pricing model, which is impacted by assumptions regarding several highly subjective variables. The following table summarizes the weighted-average assumptions used as inputs to the Black-Scholes model during the periods indicated:
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
Weighted average grant date fair value
|
|
$
|
7.32
|
|
|
$
|
8.03
|
|
Expected dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Expected stock price volatility
|
|
|
67
|
%
|
|
|
64
|
%
|
Risk-free interest rate
|
|
|
0.75
|
%
|
|
|
2.63
|
%
|
Expected life of options (in years)
|
|
|
5.0
|
|
|
|
6.3
|
|
Employee Stock Purchase Plan
The ESPP is available to eligible employees (as defined in the plan document). Under the ESPP, shares of the Company’s common stock may be purchased at a discount (15%) of the lesser of the closing price of the Company’s common stock on the first trading or the last trading day of the offering period. The current offering period extends from December 1, 2019 to May 31, 2020. The Company expects to offer six-month offering periods after the current period. The 2017 Plans reserved 1,000,000 shares of common stock for issuance under the ESPP. Stock-based compensation related to the ESPP amounted to $0.1 million for each of the three months ended March 31, 2020 and 2019.
Restricted Stock Awards
The Company granted 131,000 restricted stock awards to employees during 2019. No restricted stock awards were granted during the three months ended March 31, 2020. Stock-based compensation related to the restricted stock awards amounted to $0.4 million for the three months ended March 31, 2020. As of March 31, 2020, $1.0 million of unrecognized cost related to non-vested restricted stock awards were expected to be recognized over a weighted-average period of approximately 0.4 years.
15
Stock-Based Compensation Cost
The components of stock-based compensation and the amounts recorded within research and development expenses and selling, general, and administrative expenses in the Company’s consolidated statements of operations and comprehensive loss consisted of the following for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
$
|
1,864
|
|
|
$
|
1,693
|
|
Restricted stock expense
|
|
|
397
|
|
|
|
—
|
|
Employee stock purchase plan
|
|
|
70
|
|
|
|
85
|
|
Total stock-based compensation expense
|
|
$
|
2,331
|
|
|
$
|
1,778
|
|
Cost of sales
|
|
$
|
54
|
|
|
$
|
64
|
|
Research and development expenses
|
|
|
946
|
|
|
|
591
|
|
Selling, general, and administrative expenses
|
|
|
1,331
|
|
|
|
1,123
|
|
Total stock-based compensation expense
|
|
$
|
2,331
|
|
|
$
|
1,778
|
|
12. Net Loss per Share Attributable to Athenex, Inc. Common Stockholders
Basic net loss per share is calculated by dividing net loss attributable to Athenex, Inc. common stockholders by the weighted-average number of common shares issued, outstanding, and vested during the period. Diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common stock and common stock equivalents for the period using the treasury-stock method. For the purposes of this calculation, warrants to purchase common stock and stock options are considered common stock equivalents but are only included in the calculation of diluted net loss per share when their effect is dilutive.
The following outstanding shares of common stock equivalents were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive:
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Stock options and other common stock equivalents
|
|
|
11,347,475
|
|
|
|
11,219,839
|
|
Unvested restricted shares
|
|
|
105,000
|
|
|
|
—
|
|
Total potential dilutive shares
|
|
|
11,452,475
|
|
|
|
11,219,839
|
|
13. Business Segment, Geographic, and Concentration Risk Information
The Company has three operating segments, which are organized based mainly on the nature of the business activities performed and regulatory environments in which they operate. The Company also considers the types of products from which the reportable segments derive their revenue (only applicable to two reportable segments). Each operating segment has a segment manager who is held accountable for operations and has discrete financial information that is regularly reviewed by the Company’s chief operating decision-maker. Consequently, the Company has concluded each operating segment to be a reportable segment. The Company’s operating segments are as follows:
Oncology Innovation Platform— This operating segment performs research and development on certain of the Company’s proprietary drugs, from the preclinical development of its chemical compounds, to the execution and analysis of its several clinical trials. It focuses specifically on Orascovery and Src Kinase Inhibition research platforms, and TCR-T Immunotherapy and Arginine Deprivation Therapy. This segment operates in the United States, Taiwan, Hong Kong, mainland China, the United Kingdom, and Latin America.
Global Supply Chain Platform— This operating segment includes APS and Polymed and the construction of the manufacturing facilities in Chongqing, China and Dunkirk, New York. APS is a contract manufacturing company that provides small to mid-scale cGMP manufacturing of clinical and commercial products for pharmaceutical and biotech companies and for use as internal supplies to the clinical studies and commercial development of the Company’s proprietary drugs. APS also performs microbiological and analytical testing for raw material and formulated products and has expanded to manufacture and sell pharmaceutical products under Section 503B of the Compounding Quality Act within the Federal Food, Drug & Cosmetic Act (“FDCA”). Polymed is primarily in the
16
business of marketing and selling API in North America, Europe, and Asia from its locations in Texas and China. Polymed also develops new compounds and processing techniques, and recently completed construction of a new API manufacturing facility in Chongqing, China. The 440,000-square-foot facility is expected to commence operations in the second half of 2020. The Company has an existing API manufacturing facility in Chongqing, China, where operations were suspended as a result of the COVID-19 outbreak in China but resumed producing API in March in accordance with local regulatory guidance.
Commercial Platform— This operating segment includes APD and Athenex Oncology, which focus on the manufacturing, distribution, and sales of specialty pharmaceuticals and the pre-launch commercial activities for the Company’s proprietary drugs, respectively. This segment provides services and products to external customers based mainly in the United States.
The Company’s Oncology Innovation Platform segment operates and holds long-lived assets located in the United States, Taiwan, Hong Kong, mainland China, the United Kingdom, and Latin America. The Global Supply Chain Platform segment operates and holds long-lived assets located in the United States and China. The Commercial Platform segment operates and holds long-lived assets located in the United States. For geographic segment reporting, product sales have been attributed to countries based on the location of the customer.
Segment information is as follows (in thousands):
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Total revenue:
|
|
|
|
|
|
|
|
|
Oncology Innovation Platform
|
|
$
|
28,387
|
|
|
$
|
144
|
|
Global Supply Chain Platform
|
|
|
3,714
|
|
|
|
11,339
|
|
Commercial Platform
|
|
|
15,542
|
|
|
|
14,675
|
|
Total revenue for reportable segments
|
|
|
47,643
|
|
|
|
26,158
|
|
Intersegment revenue
|
|
|
(708
|
)
|
|
|
(851
|
)
|
Total consolidated revenue
|
|
$
|
46,935
|
|
|
$
|
25,307
|
|
Intersegment revenue eliminated in the above table reflects sales from the Global Supply Chain Platform to the Oncology Innovation Platform.
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Total revenue by product group:
|
|
|
|
|
|
|
|
|
License fees
|
|
$
|
28,381
|
|
|
$
|
—
|
|
Commercial product sales
|
|
|
17,502
|
|
|
|
20,081
|
|
API sales
|
|
|
1,022
|
|
|
|
4,831
|
|
Contract manufacturing revenue
|
|
|
23
|
|
|
|
251
|
|
Other revenue
|
|
|
7
|
|
|
|
144
|
|
Total consolidated revenue
|
|
$
|
46,935
|
|
|
$
|
25,307
|
|
Intersegment revenue is recognized by the selling segment when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods or services. Upon consolidation, all intersegment revenue and related cost of sales are eliminated from the selling segment’s ledger.
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net loss attributable to Athenex, Inc.:
|
|
|
|
|
|
|
|
|
Oncology Innovation Platform
|
|
$
|
(958
|
)
|
|
$
|
(27,603
|
)
|
Global Supply Chain Platform
|
|
|
(5,986
|
)
|
|
|
(767
|
)
|
Commercial Platform
|
|
|
(12,485
|
)
|
|
|
(6,863
|
)
|
Total consolidated net loss attributable to
Athenex, Inc.
|
|
$
|
(19,429
|
)
|
|
$
|
(35,233
|
)
|
17
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Total depreciation and amortization:
|
|
|
|
|
|
|
|
|
Oncology Innovation Platform
|
|
$
|
175
|
|
|
$
|
189
|
|
Global Supply Chain Platform
|
|
|
496
|
|
|
|
311
|
|
Commercial Platform
|
|
|
415
|
|
|
|
379
|
|
Total consolidated depreciation and
amortization
|
|
$
|
1,086
|
|
|
$
|
879
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Oncology Innovation Platform
|
|
$
|
156,358
|
|
|
$
|
194,183
|
|
Global Supply Chain Platform
|
|
|
81,930
|
|
|
|
63,598
|
|
Commercial Platform
|
|
|
59,499
|
|
|
|
52,151
|
|
Total consolidated assets
|
|
$
|
297,787
|
|
|
$
|
309,932
|
|
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Total revenue:
|
|
|
|
|
|
|
|
|
China
|
|
$
|
28,513
|
|
|
$
|
386
|
|
United States
|
|
|
17,522
|
|
|
|
20,335
|
|
India
|
|
|
—
|
|
|
|
777
|
|
Austria
|
|
|
—
|
|
|
|
2,173
|
|
United Kingdom
|
|
|
—
|
|
|
|
1,023
|
|
Other foreign countries
|
|
|
900
|
|
|
|
613
|
|
Total consolidated revenue
|
|
$
|
46,935
|
|
|
$
|
25,307
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Total property and equipment, net:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
12,467
|
|
|
$
|
11,486
|
|
China
|
|
|
12,149
|
|
|
|
11,667
|
|
Total consolidated property and equipment, net
|
|
$
|
24,616
|
|
|
$
|
23,153
|
|
Customer revenue and accounts receivable concentration amounted to the following for the identified periods. These customers relate to the Commercial Platform segment and the Global Supply Chain Platform segment.
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Percentage of total revenue by customer:
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
60
|
%
|
|
|
0
|
%
|
Customer B
|
|
|
11
|
%
|
|
|
22
|
%
|
Customer C
|
|
|
9
|
%
|
|
|
21
|
%
|
Customer D
|
|
|
7
|
%
|
|
|
12
|
%
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Percentage of total accounts receivable by customer:
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
58
|
%
|
|
|
0
|
%
|
Customer B
|
|
|
14
|
%
|
|
|
45
|
%
|
Customer C
|
|
|
13
|
%
|
|
|
31
|
%
|
Customer D
|
|
|
8
|
%
|
|
|
10
|
%
|
18
14. Revenue Recognition
The Company records revenue in accordance with ASC, Topic 606 “Revenue from Contracts with Customers.” Under Topic 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of Topic 606, the entity performs the following five steps: (i) identifies the contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Below is a description of principal activities – separated by reportable segments – from which the Company generates its revenue.
|
1.
|
Oncology Innovation Platform
|
The Company out-licenses certain of its IP to other pharmaceutical companies in specific territories that allow the customer to use, develop, commercialize, or otherwise exploit the licensed IP. In accordance with Topic 606, the Company analyzes the contracts to identify its performance obligations within the contract. Most of the Company’s out-license arrangements contain multiple performance obligations and variable pricing. After the performance obligations are identified, the Company determines the transaction price, which generally includes upfront fees, milestone payments related to the achievement of developmental, regulatory, or commercial goals, and royalty payments on net sales of licensed products. The Company considers whether the transaction price is fixed or variable, and whether such consideration is subject to return. Variable consideration is only included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. If any portion of the transaction price is constrained, it is excluded from the transaction price until the constraint no longer exists. The Company then allocates the transaction price to the performance obligation to which the consideration is related. Where a portion of the transaction price is received and allocated to continuing performance obligations under the terms of the arrangement, it is recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied.
The Company’s contracts may contain one or multiple promises, including the license of IP and development services. The licensed IP is capable of being distinct from the other performance obligations identified in the contract and is distinct within the context of the contract, as upon transfer of the IP, the customer is able to use and benefit from it, and the customer could obtain the development services from other parties. The Company also considers the economic and regulatory characteristics of the licensed IP and other promises in the contract to determine if it is a distinct performance obligation. The Company considers if the IP is modified or enhanced by other performance obligations through the life of the agreement and whether the customer is contractually or practically required to use updated IP. The IP licensed by the Company has been determined to be functional IP. The IP is not modified during the license period and therefore, the Company recognizes revenues from any portion of the transaction price allocated to the licensed IP when the license is transferred to the customer and they can benefit from the right to use the IP. For the three months ended March 31, 2020, the Company recognized revenue of $28.3 million, net of $1.7 million value added tax (“VAT”) collected on behalf of the third party when it had transferred the IP to the customer, and recognized $0 for the same period ended March 31, 2019.
Other performance obligations included in most of the Company’s out-licensing agreements include performing development services to reach clinical and regulatory milestone events. The Company satisfies these performance obligations at a point-in-time, because the customer does not simultaneously receive and consume the benefits as the development occurs, the development does not create or enhance an asset controlled by the customer, and the development does not create an asset with no alternative use. The Company considers milestone payments to be variable consideration measured using the most likely amount method, as the entitlement to the consideration is contingent on the occurrence or nonoccurrence of future events. The Company allocates each variable milestone payment to the associated milestone performance obligation, as the variable payment relates directly to the Company’s efforts to satisfy the performance obligation and such allocation depicts the amount of consideration to which the Company expects to be entitled for satisfying the corresponding performance obligation. The Company re-evaluates the probability of achievement of such performance obligations and any related constraint and adjusts its estimate of the transaction price as appropriate. To date, no amounts have been constrained in the initial or subsequent assessments of the transaction price. The Company recognized revenue allocated to development performance obligations upon transfer to the customer of $0 for each of the three months ended March 31, 2020 and 2019.
19
Certain out-license agreements include performance obligations to manufacture and provide drug product in the future for commercial sale when the licensed product is approved. For the commercial, sales-based royalties, the consideration is predominantly related to the licensed IP and is contingent on the customer’s subsequent sales to another commercial customer. Consequently, the sales- or usage-based royalty exception would apply. Revenue will be recognized for the commercial, sales-based milestones as the underlying sales occur.
The Company exercises significant judgment when identifying distinct performance obligations within its out-license arrangements, determining the transaction price, which often includes both fixed and variable considerations, and allocating the transaction price to the proper performance obligation. The Company did not use any other significant judgments related to out-licensing revenue during the three months ended March 31, 2020 and 2019.
|
2.
|
Global Supply Chain Platform
|
The Company’s Global Supply Chain Platform manufactures API for use internally in its research and development activities as well as its clinical studies, and for sale to pharmaceutical customers globally. The Company generates additional revenue on this platform, by providing small to mid-scale cGMP manufacturing of clinical and commercial products for pharmaceutical and biotech companies and selling pharmaceutical products under 503B regulations set forth by the FDA.
Revenue earned by the Global Supply Platform is recognized when the Company has satisfied its performance obligation, which is the shipment or the delivery of drug products. The underlying contracts for these sales are generally purchase orders and the Company recognizes revenue at a point-in-time. Any remaining performance obligations related to product sales are the result of customer deposits and are reflected in the deferred revenue contract liability balance.
The Company’s Commercial Platform generates revenue by distributing specialty products through independent pharmaceutical wholesalers. The wholesalers then sell to an end-user, normally a hospital, alternative healthcare facility, or an independent pharmacy, at a lower price previously established by the end-user and the Company. Upon the sale by the wholesaler to the end-user, the wholesaler will chargeback the difference between the original list price and price at which the product was sold to the end-user. The Company also offers cash discounts, which approximate 2.3% of the gross sales price, as an incentive for prompt customer payment, and, consistent with industry practice, the Company’s return policy permits customers to return products within a window of time before and after the expiration of product dating. Further, the Company offers contractual allowances, generally rebates or administrative fees, to certain wholesale customers, group purchasing organizations (“GPOs”), and end-user customers, consistent with pharmaceutical industry practices. Revenues are recorded net of provisions for variable consideration, including discounts, rebates, GPO allowances, price adjustments, returns, chargebacks, promotional programs and other sales allowances. Accruals for these provisions are presented in the consolidated financial statements as reductions in determining net sales and as a contra asset in accounts receivable, net (if settled via credit) and other current liabilities (if paid in cash). As of March 31, 2020, and December 31, 2019, the Company’s total provision for chargebacks and other deductions included as a reduction of accounts receivable totaled $14.9 million and $14.4 million, respectively. The Company’s total provision for chargebacks and other revenue deductions was $24.9 million, and $17.5 million for the three months ended March 31, 2020, and 2019, respectively.
The Company exercises significant judgment in its estimates of the variable transaction price at the time of the sale and recognizes revenue when the performance obligation is satisfied. Factors that determine the final net transaction price include chargebacks, fees for service, cash discounts, rebates, returns, warranties, and other factors. The Company estimates all of these variables based on historical data obtained from previous sales finalized with the end-user customer on a product-by-product basis. At the time of sale, revenue is recorded net of each of these deductions. Through the normal course of business, the wholesaler will sell the product to the end-user, determining the actual chargeback, return products, and take advantage of cash discounts, charge fees for services, and claim warranties on products. The final transaction price per product is compared to the initial estimated net sale price and reviewed for accuracy. The final prices and other factors are immediately included in the Company’s historical data from which it will estimate the transaction price for future sales. The underlying contracts for these sales are generally purchase orders including a single performance obligation, generally the shipment or delivery of products and the Company recognizes this revenue at a point-in-time.
20
Disaggregation of revenue
The following represents the Company’s revenue for its reportable segment by country, based on the locations of the customer.
|
|
For the Three Months Ended March 31, 2020
|
|
|
|
(In Thousands)
|
|
|
|
Oncology
Innovation
Platform
|
|
|
Global Supply
Chain Platform
|
|
|
Commercial
Platform
|
|
|
Consolidated
Total
|
|
China
|
|
$
|
28,308
|
|
|
$
|
205
|
|
|
$
|
—
|
|
|
$
|
28,513
|
|
United States
|
|
|
—
|
|
|
|
1,980
|
|
|
|
15,542
|
|
|
|
17,522
|
|
Other foreign countries
|
|
|
79
|
|
|
|
821
|
|
|
|
—
|
|
|
|
900
|
|
Total revenue
|
|
$
|
28,387
|
|
|
$
|
3,006
|
|
|
$
|
15,542
|
|
|
$
|
46,935
|
|
|
|
For the Three Months Ended March 31, 2019
|
|
|
|
(In Thousands)
|
|
|
|
Oncology
Innovation
Platform
|
|
|
Global Supply
Chain Platform
|
|
|
Commercial
Platform
|
|
|
Consolidated
Total
|
|
United States
|
|
$
|
—
|
|
|
$
|
5,660
|
|
|
$
|
14,675
|
|
|
$
|
20,335
|
|
Austria
|
|
|
—
|
|
|
|
2,173
|
|
|
|
—
|
|
|
|
2,173
|
|
United Kingdom
|
|
|
—
|
|
|
|
1,023
|
|
|
|
—
|
|
|
|
1,023
|
|
India
|
|
|
—
|
|
|
|
777
|
|
|
|
—
|
|
|
|
777
|
|
China
|
|
|
144
|
|
|
|
242
|
|
|
|
—
|
|
|
|
386
|
|
Other foreign countries
|
|
|
—
|
|
|
|
613
|
|
|
|
—
|
|
|
|
613
|
|
Total revenue
|
|
$
|
144
|
|
|
$
|
10,488
|
|
|
$
|
14,675
|
|
|
$
|
25,307
|
|
The Company also disaggregates its revenue by product group which can be found in Note 13 – Business Segment, Geographic, and Concentration Risk Information.
Contract balances
The following table provides information about receivables and contract liabilities from contracts with customers. The Company has not recorded any contract assets from contracts with customers.
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
(In Thousands)
|
|
Accounts receivable, gross
|
|
$
|
66,406
|
|
|
$
|
31,207
|
|
Chargebacks and other deductions
|
|
|
(14,858
|
)
|
|
|
(14,394
|
)
|
Provision for credit losses
|
|
|
(130
|
)
|
|
|
(124
|
)
|
Accounts receivable, net
|
|
$
|
51,418
|
|
|
$
|
16,689
|
|
Deferred revenue
|
|
|
75
|
|
|
|
218
|
|
Total contract liabilities
|
|
$
|
75
|
|
|
$
|
218
|
|
The following tables illustrate accounts receivable and contract asset balances by reportable segments.
|
|
March 31, 2020
|
|
|
|
(In Thousands)
|
|
|
|
Oncology
Innovation
Platform
|
|
|
Global Supply
Chain Platform
|
|
|
Commercial
Platform
|
|
|
Consolidated
Total
|
|
Accounts receivable, gross
|
|
$
|
30,110
|
|
|
$
|
1,505
|
|
|
$
|
34,791
|
|
|
$
|
66,406
|
|
Chargebacks and other deductions
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(14,857
|
)
|
|
|
(14,858
|
)
|
Provision for credit losses
|
|
|
—
|
|
|
|
(116
|
)
|
|
|
(14
|
)
|
|
|
(130
|
)
|
Accounts receivable, net
|
|
|
30,110
|
|
|
|
1,388
|
|
|
|
19,920
|
|
|
|
51,418
|
|
21
|
|
December 31, 2019
|
|
|
|
(In Thousands)
|
|
|
|
Oncology
Innovation
Platform
|
|
|
Global Supply
Chain Platform
|
|
|
Commercial
Platform
|
|
|
Consolidated
Total
|
|
Accounts receivable, gross
|
|
$
|
49
|
|
|
$
|
1,522
|
|
|
$
|
29,636
|
|
|
$
|
31,207
|
|
Chargebacks and other deductions
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(14,393
|
)
|
|
|
(14,394
|
)
|
Provision for credit losses
|
|
|
—
|
|
|
|
(114
|
)
|
|
|
(10
|
)
|
|
|
(124
|
)
|
Accounts receivable, net
|
|
$
|
49
|
|
|
$
|
1,407
|
|
|
$
|
15,233
|
|
|
$
|
16,689
|
|
As of March 31, 2020, $30.0 million of accounts receivable, net, related to an upfront fee receivable in connection with the license agreement entered into with Guangzhou Xiangxue Pharmaceutical Co., Ltd (“Xiangxue”) in December 2019 (the “2019 Xiangxue License Agreement”). During the three months ended March 31, 2020, the Company satisfied its performance obligation under the 2019 Xiangxue License Agreement to deliver to Xiangxue a license of functional IP and the data required to use and benefit from the use of the IP. The Company recorded $28.3 million of consideration receivable, net of $1.7 million VAT, that was allocated to the performance obligation. This amount is recorded within accounts receivable, net on the Company’s condensed consolidated balance sheet.
As of March 31, 2020, $0.1 million of the deferred revenue balance relates to customer deposits made by customers of the Global Supply Chain Platform and is included within accrued expenses on the condensed consolidated balance sheet. Upon the delivery of certain drug product, the Company will recognize revenue of $0.1 million. Other amounts included within the deferred revenue balance are not material to the consolidated financial statements.
As of December 31, 2019, $0.2 million of the deferred revenue balance relates to customer deposits made by customers of the Global Supply Chain Platform and is included within accrued expenses on the consolidated balance sheet. Upon delivery of certain drug product, the Company will recognize revenue of $0.2 million. Other amounts included within the deferred revenue balance are not material to the consolidated financial statements.
There were no other material changes to contract balances during the three months ended March 31, 2020.
15. Commitments and Contingencies
Future minimum payments under the non-cancelable operating leases consists of the following as of March 31, 2020 (in thousands):
Year ending December 31:
|
|
Minimum
payments
|
|
2020 (remaining nine months)
|
|
$
|
2,278
|
|
2021
|
|
|
2,837
|
|
2022
|
|
|
2,617
|
|
2023
|
|
|
2,096
|
|
2024
|
|
|
2,002
|
|
Thereafter
|
|
|
1,950
|
|
|
|
$
|
13,780
|
|
Legal Proceedings
From time to time, the Company may become subject to other legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not currently a party to any other material legal proceedings, nor is it aware of any pending or threatened litigation that, in the Company’s opinion, would have a material adverse effect on the business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
22