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: 001-36540

 

PFENEX INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

27-1356759

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

10790 Roselle Street, San Diego, CA

92121

(Address of Principal Executive Offices)

(Zip Code)

 

(858) 352-4400

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, par value $0.001 per share

 

PFNX

 

NYSE American

 

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, a 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

 

Smaller 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 May 5, 2020, the registrant had 34,291,901 shares of Common Stock ($0.001 par value) outstanding.

 

 


 

PFENEX INC.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements

3

 

 

Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

3

 

 

Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019

4

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

5

 

 

Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019

6

 

 

Notes to Consolidated Financial Statements

7

Item 2.

 

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

24

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

37

Item 4.

 

Controls and Procedures

37

PART II. OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

39

Item 1A.

 

Risk Factors

39

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

78

Item 3.

 

Defaults Upon Senior Securities

78

Item 4.

 

Mine Safety Disclosures

79

Item 5.

 

Other Information

79

Item 6.

 

Exhibits

80

EXHIBIT INDEX

80

SIGNATURES

82

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

PFENEX INC.

Consolidated Balance Sheets

 

 

 

March 31,

2020

(unaudited)

 

 

December 31,

2019

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

65,602

 

 

$

55,624

 

Restricted cash

 

 

200

 

 

 

200

 

Accounts and unbilled receivables, net

 

 

3,744

 

 

 

5,628

 

Other current assets

 

 

1,719

 

 

 

2,308

 

Total current assets

 

 

71,265

 

 

 

63,760

 

Property and equipment, net

 

 

8,465

 

 

 

7,744

 

Right-of-use asset

 

 

3,718

 

 

 

3,903

 

Other long-term assets

 

 

145

 

 

 

170

 

Intangible assets, net

 

 

3,607

 

 

 

3,733

 

Goodwill

 

 

5,577

 

 

 

5,577

 

Total assets

 

$

92,777

 

 

$

84,887

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

375

 

 

$

673

 

Accrued liabilities

 

 

4,608

 

 

 

7,351

 

Current portion of deferred revenue

 

 

407

 

 

 

75

 

Lease liabilities – short-term

 

 

884

 

 

 

951

 

Other current liabilities

 

 

601

 

 

 

616

 

Total current liabilities

 

 

6,875

 

 

 

9,666

 

Lease Liabilities – long-term

 

 

2,699

 

 

 

2,896

 

Other non-current liabilities

 

 

28

 

 

 

26

 

Total liabilities

 

 

9,602

 

 

 

12,588

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued

   and outstanding

 

 

 

 

 

 

Common stock, par value $0.001, 200,000,000 shares authorized; 34,265,401 and

   32,266,708 shares issued and outstanding at March 31, 2020 and December 31,

   2019, respectively

 

 

35

 

 

 

33

 

Additional paid-in capital

 

 

291,033

 

 

 

270,008

 

Accumulated deficit

 

 

(207,893

)

 

 

(197,742

)

Total stockholders’ equity

 

 

83,175

 

 

 

72,299

 

Total liabilities and stockholders’ equity

 

$

92,777

 

 

$

84,887

 

 

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

3


 

PFENEX INC.

Consolidated Statements of Operations

(unaudited)

 

 

 

Three Months Ended

March 31,

 

(in thousands, except per share data)

 

2020

 

 

2019

 

Revenue

 

 

 

 

 

 

 

 

License and service revenue

 

$

301

 

 

$

6,593

 

Product revenue

 

 

381

 

 

 

1,269

 

Total revenue

 

 

682

 

 

 

7,862

 

Cost of revenue

 

 

 

 

 

 

 

 

License and service

 

 

242

 

 

 

903

 

Product

 

 

98

 

 

 

663

 

Total cost of revenue

 

 

340

 

 

 

1,566

 

Gross profit

 

 

342

 

 

 

6,296

 

Operating expense

 

 

 

 

 

 

 

 

Research and development

 

 

5,811

 

 

 

7,880

 

Selling, general and administrative

 

 

4,732

 

 

 

4,543

 

Total operating expense

 

 

10,543

 

 

 

12,423

 

Net loss from operations

 

 

(10,201

)

 

 

(6,127

)

Other income, net

 

 

50

 

 

 

69

 

Net loss

 

$

(10,151

)

 

$

(6,058

)

Net loss per common share:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.31

)

 

$

(0.19

)

Weighted-average common shares used in calculating net loss per share:

 

 

 

 

 

 

 

 

Basic and diluted

 

 

33,151

 

 

 

31,487

 

 

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

4


 

PFENEX INC.

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(10,151

)

 

$

(6,058

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

340

 

 

 

311

 

Amortization of intangible assets

 

 

126

 

 

 

133

 

Stock-based compensation expense

 

 

878

 

 

 

777

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts and unbilled receivables

 

 

1,883

 

 

 

(1,289

)

Other assets

 

 

614

 

 

 

(254

)

Accounts payable

 

 

(275

)

 

 

(822

)

Accrued liabilities

 

 

(2,403

)

 

 

(1,312

)

Deferred revenue

 

 

332

 

 

 

(1,824

)

Net cash used in operating activities

 

 

(8,656

)

 

 

(10,338

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Acquisitions of property and equipment

 

 

(1,433

)

 

 

(111

)

Net cash used in investing activities

 

 

(1,433

)

 

 

(111

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of discount and offering costs

 

 

18,830

 

 

 

 

Repayments of financial lease obligations

 

 

(82

)

 

 

 

Repayments of capital lease obligations

 

 

 

 

 

(130

)

Proceeds from exercise of stock options and other stock issuances

 

 

1,319

 

 

 

113

 

Net cash provided by (used in) financing activities

 

 

20,067

 

 

 

(17

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

9,978

 

 

 

(10,466

)

Cash, cash equivalents and restricted cash

 

 

 

 

 

 

 

 

Beginning of period

 

 

55,824

 

 

 

56,420

 

End of period

 

$

65,802

 

 

$

45,954

 

Supplemental disclosures of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Asset acquisitions in accounts payable and accrued expenses

 

$

203

 

 

$

222

 

Supplemental schedule of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2

 

 

$

7

 

 

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

5


 

PFENEX INC.

Consolidated Statements of Stockholders’ Equity

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

in Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

31,468

 

 

$

32

 

 

$

262,405

 

 

$

(201,300

)

 

$

61,137

 

Adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

$

2,500

 

 

 

2,500

 

Exercise of stock options

 

 

15

 

 

 

 

 

 

60

 

 

 

 

 

 

60

 

Issuance of common stock under employee stock

   purchase plan

 

 

17

 

 

 

 

 

 

53

 

 

 

 

 

 

53

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

777

 

 

 

 

 

 

777

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(6,058

)

 

 

(6,058

)

Balance at March 31, 2019

 

 

31,500

 

 

$

32

 

 

$

263,295

 

 

$

(204,858

)

 

$

58,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

 

32,267

 

 

$

33

 

 

$

270,008

 

 

$

(197,742

)

 

$

72,299

 

Exercise of stock options

 

 

225

 

 

 

 

 

 

1,238

 

 

 

 

 

 

1,238

 

Issuance of common stock under employee stock

   purchase plan

 

 

20

 

 

 

 

 

 

81

 

 

 

 

 

 

81

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

878

 

 

 

 

 

 

878

 

Issuance of common stock, net of discount and

   offering costs

 

 

1,753

 

 

 

2

 

 

 

18,828

 

 

 

 

 

 

18,830

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(10,151

)

 

 

(10,151

)

Balance at March 31, 2020

 

 

34,265

 

 

$

35

 

 

$

291,033

 

 

$

(207,893

)

 

$

83,175

 

 

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

6


 

PFENEX INC.

Notes to Consolidated Financial Statements

1. Organization and Summary of Significant Accounting Policies

Business Activities and Organization

Pfenex Inc. (the Company or Pfenex) is a development and licensing biotechnology company focused on leveraging its Pfēnex Expression Technology® to develop and improve protein therapies for unmet patient needs. Using the patented Pfēnex Expression Technology platform, the Company has created an advanced pipeline of potential therapeutic equivalents, and novel and next generation therapeutics. On October 4, 2019, the U.S. Food and Drug Administration (FDA) approved the new drug application (NDA) for PF708 submitted in accordance with the 505(b)(2) regulatory pathway, with Forteo® (teriparatide injection) as the reference drug. Like Forteo, this FDA-approved PF708 product is indicated for the treatment of osteoporosis in certain patients at high risk for fracture. Marketing authorization applications are pending in other jurisdictions.  In addition, the Company is developing hematologic oncology products in collaboration with Jazz Pharmaceuticals Ireland Limited (Jazz) including PF743 (JZP-458), a recombinant Erwinia asparaginase, and PF745 (JZP-341), a long-acting Erwinia asparaginase. Both PF743 and PF745 are being developed for the treatment of Acute Lymphoblastic Leukemia (ALL) and other hematological malignancies. The Company also uses its Pfēnex Expression Technology platform to produce CRM197, a diphtheria toxoid carrier protein used in prophylactic and therapeutic vaccine candidates under development by Merck & Co., Inc. (Merck) and Serum Institute of India Private Ltd. (SIIPL). Both have licenses to the Pfēnex Expression Technology for the production of CRM197 for use in conjugate vaccine products.  The Company also leverages its proprietary Pseudomonas fluorescens expression platform to establish partnerships with third parties focused on the production of difficult-to-produce proteins and other biologic products. The Company is focused on developing its portfolio of partnered as well as wholly-owned peptides and complex proteins. Currently, the Company is exploring opportunities to develop novel modalities through an assessment program designed to evaluate and pursue validated biologic pathways that are differentially druggable via a selected modality in specific disease areas. In addition, the Company is exploring a range of platform partnerships with third parties who have products and/or platforms that are compatible with its Pfēnex Expression Technology platform.

FDA-Approved PF708 Product

On October 4, 2019, the FDA approved the NDA for PF708 submitted in accordance with the 505(b)(2) regulatory pathway, with Forteo (teriparatide injection) as the reference drug. The FDA-approved PF708 product is indicated for the treatment of osteoporosis in certain patients at high risk for fracture. In November 2019, the Company transferred the NDA to Alvogen pursuant to the Development and License Agreement, described below, between the companies.  In addition, the Company has been continuing its efforts to obtain an “A” therapeutic equivalence designation for the product relative to its reference drug, Forteo. A determination of therapeutic equivalence may permit the FDA-approved PF708 product to be automatically substituted for Forteo, depending on applicable laws and policies within each of the 50 states in the United States. Consistent with the Company’s interactions with the FDA and the agency’s draft guidance document on demonstrating the therapeutic equivalence of drug-device combination products, the Company completed a comparative human factors study comparing the FDA-approved PF708 product and Forteo, designed to further support a finding that the FDA-approved PF708 product is therapeutically equivalent to Forteo. On October 14, 2019, the Company announced the successful completion of this PF708 comparative use human factors study and submission of the final study report to the FDA.  On April 9, 2020, the FDA informed Alvogen that additional comparative use human factors data, specifically from additional Forteo experienced users, would be required before the agency could make a determination about therapeutic equivalence. FDA has indicated that the review of the PF708 therapeutic equivalence package continues and provided guidance on study methodology to generate this additional comparative use human factors data.  The Company plans to work closely with Alvogen and the FDA to generate and submit these additional data as soon as possible. The Company expects to continue to support Alvogen with its commercial strategy planning in the U.S. while continuing to seek “A” therapeutic equivalence designation.  

In April 2018, the Company and China NT Pharma Group Company Ltd. (NT Pharma) entered into a Development and License Agreement (NT Pharma Agreement), pursuant to which the Company granted an exclusive license to NT Pharma to commercialize PF708, upon receipt of applicable marketing authorizations, in Mainland China, Hong Kong, Singapore, Malaysia and Thailand and a non-exclusive license to conduct development activities in such territories with respect to PF708. The Company will be responsible for commercial manufacturing and providing product for commercial sale to NT Pharma. The Company will facilitate this obligation via its commercial partner Alvogen. NT Pharma is responsible for all regulatory submissions, development costs and costs associated with regulatory approvals in such territories. The total value of payments and potential payments associated with the NT Pharma agreement is $25 million.  In addition, the Company may be eligible to receive royalties on sales of the product in the territory.

7


 

Effective April 21, 2020, the Company entered into a Deed of Assignment and Amendment (Deed) with NT Pharma. Pursuant to the Deed, the Company agreed to allow NT Pharma to assign its rights and obligations under the NT Pharma Agreement with the Company to Beijing Kangchen Biological Technology Co., Ltd. (Kangchen), a wholly-owned subsidiary of Beijing Konruns Pharmaceutical Co., Ltd (Konruns).

In June 2018, the Company and Alvogen Malta Operations Ltd. (Alvogen) entered into a Development and License Agreement (Alvogen Agreement) pursuant to which Alvogen has the exclusive right to commercialize and manufacture PF708 in the United States. In November 2019, the Company transferred the NDA to Alvogen pursuant to the Development and License Agreement. The total value of payments and potential payments associated with the Alvogen Agreement is $22.5 million.  In addition, the Company may be eligible to receive royalties on sales of the product in the U.S.

In February 2019, the Company and Alvogen entered into additional agreements extending Alvogen’s rights to commercialize and manufacture PF708, upon receipt of applicable marketing authorizations, to include the European Union (EU), certain countries in the Middle East and North Africa (MENA) and to the rest of world (ROW) territories (excluding certain Asian countries granted to NT Pharma). Alvogen is responsible for local activities and for overseeing any clinical development, regulatory, litigation, commercial manufacturing and commercialization activities in these jurisdictions.  The total value of payments and potential payments associated with the Alvogen EU, MENA and ROW agreements is $3.8 million. In addition, the Company may be eligible to receive royalties on sales of the product in the EU and MENA territories.

Collaboration Partner: Jazz Pharmaceuticals Ireland Limited

In July 2016, the Company and Jazz announced an agreement under which the Company granted Jazz worldwide rights to develop and commercialize multiple early stage hematologic oncology product candidates, including PF743 (JZP-458), a recombinant Erwinia asparaginase, and PF745 (JZP-341), a long-acting Erwinia asparaginase. In December 2017, the parties amended the Jazz agreement, bringing the total value of payments and potential payments associated with the collaboration to $224.5 million. In addition, the Company may be eligible to receive tiered royalties on worldwide sales of any products resulting from the collaboration at rates reduced from those under the 2016 agreement.

Pfēnex Expression Technology Licenses: CRM197

The Company has both licenses and supply agreements in place for CRM197, which is a non-toxic mutant of diphtheria toxin.  CRM197 is a well-characterized protein and functions as a carrier for polysaccharides and haptens, making them immunogenic. The Company has developed unique CRM197 production strains based on its Pfēnex Expression Technology platform. As a result of these development efforts, the Company previously entered into commercial licenses for production strains capable of producing CRM197 with both Merck and SIIPL. Merck and SIIPL are using the CRM197 produced via the licensed production strain in multiple clinical stage products. Those products currently include Merck’s 15-valent pneumococcal conjugate vaccine, PCV-15 (V114), currently in several ongoing Phase 3 clinical studies, and SIIPL’s 10-valent pneumococcal conjugate vaccine Pneumosil®, which achieved WHO Prequalification in December 2019, and a pentavalent meningococcal conjugate vaccine currently in a Phase 3 clinical study. The CRM197 production strains utilized by both Merck and SIIPL are unique and exclusively licensed to each party. These commercial license agreements with Merck and SIIPL contemplate potential maintenance and milestone fees as well as royalties on net sales. Additionally, as part of the SIIPL commercial license agreement, SIIPL supplies both reagent grade and cGMP CRM197 to Pfenex, which supplies the product to vaccine development-focused pharmaceutical partners.

Arcellx Development, Evaluation and License Agreement

The Company previously entered into a development, evaluation and license agreement with Arcellx which provides access to the Pfēnex Expression Technology platform to advance Arcellx’s proprietary sparX proteins that activate, silence and reprogram Antigen- Receptor Complex T cell-based therapies. Under the terms of the agreement, Pfenex is eligible to receive development funding in addition to development, regulatory and commercial milestones ranging from $2.6 million to $18 million for each product incorporating a sparX protein expressed using the Pfēnex Expression Technology, as well as royalties on worldwide sales of any such products. The Company has completed the development of both sparX 1 and sparX 2 and Arcellx has opted into the commercial license for both production strains.

Other Pipeline Products

In the third quarter of 2019 the Company added PF810, a peptide based next generation therapeutic, to its wholly owned pipeline. PF810 is currently in preclinical development.

8


 

At the Market Offering Program

In March 2018, the Company entered into an equity sales agreement (2018 Sales Agreement) with William Blair & Company, L.L.C. (William Blair) to sell shares of the Company’s common stock having aggregate sales proceeds of up to $20.0 million, from time to time, through an “at the market” (ATM) equity offering program under which William Blair will act as sales agent. Under the 2018 Sales Agreement, the Company sets the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. As of December 31, 2019, the Company had not sold any shares under the 2018 Sales Agreement.  In January 2020, the Company sold 500,000 shares for proceeds net of discounts and offering costs of $6.0 million, and in February 2020, the Company sold an additional 1,253,443 shares for proceeds net of discounts and offering costs of $12.8 million.  As of February 2020, the ATM was fully utilized, and no shares remained available for sale under the 2018 Sales Agreement.

 

In May 2020, the Company entered into an equity sales agreement (2020 Sales Agreement) with William Blair and H.C. Wainwright & Co., LLC (Wainwright) to sell shares of the Company’s common stock having aggregate sales proceeds of up to $60.0 million, from time to time, through an ATM equity offering program under which William Blair and Wainwright will act as sales agents. As of May 7, 2020, the Company had not sold any shares under this 2020 Sales Agreement.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, for interim financial information and with the instructions of the Securities and Exchange Commission, or SEC, on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC. The results of operations for the interim period shown in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full year.

Use of Estimates

The preparation of the accompanying unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts (including assets, liabilities, revenues and expenses) and related disclosures. Estimates have been prepared on the basis of the most current and best available information. However, actual results could differ from those estimates.

Risk and Uncertainties

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, the performance of the Company’s commercial partner Alvogen, uncertainty of results of clinical trials and reaching milestones, uncertainty of timing and types of regulatory approval of the Company’s product candidates, uncertainty of market acceptance of the Company’s products if approved for sale, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals.

Products developed by the Company require clearances from international and domestic regulatory agencies prior to commercial sales in such jurisdictions. There can be no assurance that the products will receive the necessary clearances. If the Company is denied clearance, clearance is delayed or the Company is unable to maintain clearance, it could have a materially adverse impact on the Company.

As of March 31, 2020, the Company had an accumulated deficit of $207.9 million and expects to incur operating losses for the next few years. The Company believes that its existing cash and cash equivalents and cash inflow from operations will be sufficient to meet its anticipated cash needs for at least the next 12 months from the date these unaudited consolidated financial statements are issued.

9


 

The Company will require substantial cash to achieve its objectives of discovering, developing and commercializing drugs, as this process typically takes many years and potentially hundreds of millions of dollars for an individual drug. The Company may not have adequate available cash, or assets that could be readily turned into cash, to meet these objectives in the long term. It will need to obtain significant funds under its existing collaborations and license agreements, under new collaboration, licensing or other commercial agreements for one or more of its product candidates and programs or patent portfolios, or from other potential sources of liquidity, which may include the sale of equity, issuance of debt or other transactions. However, there can be no assurance that any additional financing or strategic investments will be available to the Company on acceptable terms, if at all. If events or circumstances occur such that it does not obtain additional funding, the Company will most likely be required to reduce its plans and/or certain discretionary spending, which could have a material adverse effect on its ability to achieve its intended business objectives.

COVID-19 Pandemic

The novel coronavirus outbreak of COVID-19 has had and likely will continue to have significant effects on businesses and health care institutions around the world.  While it is not possible at this time to estimate the overall impact that the COVID-19 pandemic could have on the Company’s business, the continued rapid spread of COVID-19, both across the United States and through much of the world, and the measures taken by the governments of countries and local authorities have disrupted and could delay the Company from advancing its product pipeline, delay the Company’s and the Company’s collaboration partners’ clinical trials, delay the Company’s overall preclinical activities, and disrupt the Company’s manufacture or shipment of both drug substance and finished drug product for the Company’s product candidates for preclinical testing and clinical trials and adversely impact the Company’s and the Company’s collaboration partners’ business, financial condition or operating results.

As the COVID-19 pandemic has developed, the Company has taken numerous steps to help ensure the health and safety of its employees and their families. The Company is maintaining social distancing and enhanced cleaning protocols and usage of personal protective equipment, where appropriate. Since the stay at home order was put in place in the state of California, the volume of ongoing lab work has been reduced, and only critical program work in the lab has continued with staggered lab employee work shifts to minimize risk of exposure to COVID19, which has and may continue to disrupt or delay the Company’s ability to conduct clinical and preclinical research activities. Employees whose tasks can be performed offsite have been instructed to work from home.  

The Company has been actively monitoring its supply chain during the COVID-19 pandemic, including third party materials and service suppliers for both the Company as well as the Company’s partners.  To date, there have not been any known supply disruptions due to the pandemic, but contingency planning is ongoing with the Company’s partners to reduce the possibility of an interruption to manufacturing or the availability of necessary materials.

In April 2020, the Company announced that the FDA informed Alvogen that additional comparative use human factors data from Forteo experienced users would be necessary for the FDA to make a determination regarding the therapeutic equivalence of the FDA-approved PF708 product relative to Forteo. The COVID-19 pandemic could cause delays in initiating and conducting a comparative use human factors study to generate the additional data requested by the FDA to evaluate the therapeutic equivalence of the FDA-approved PF708 product and Forteo. The Company’s collaboration partners could also experience delays or disruptions that could severely impact their clinical trials and/or preclinical studies.  Each of these could adversely affect the Company’s and the Company’s collaboration partners’ ability to obtain regulatory approval for and to commercialize the Company’s products and product candidates, increase the Company’s operating expenses, and have a material adverse effect on the Company’s business and financial results.

The Company has considered the impacts of the COVID-19 pandemic on its long-lived assets.  The Company is unaware of any events or changes in circumstances in the current quarter to indicate that the carrying amounts may not be recoverable and would result in impairment.

COVID-19 has also caused volatility in the global financial markets and threatened a slowdown in the global economy, which may negatively affect the Company’s ability to raise additional capital on attractive terms or at all.

Cash and Cash Equivalents

The Company considers all highly liquid investments that are readily convertible into cash and have an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash amounts that are restricted as to withdrawal or usage are presented as restricted cash. In January 2017, the Company entered into a Borrower’s Pledge Agreement, which required $0.2 million in restricted cash to be provided as security for its commercial credit card arrangement with one of the Company’s banks.

10


 

Fair Value of Financial Instruments

Financial instruments, including cash, cash equivalents, restricted cash and the lines of credit, are carried at cost, which management believes approximates fair value because of the short-term maturity of these instruments. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1—Observable inputs such as quoted prices in active markets for identical assets or liabilities. Level 1 assets at March 31, 2020 and December 31, 2019 included the Company’s cash, cash equivalents and restricted cash. There were no Level 1 liabilities;

 

Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly. The Company had no Level 2 assets or liabilities at March 31, 2020 or December 31, 2019; and

 

Level 3—Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities in which there is little or no market data. The Company had no Level 3 assets or liabilities at March 31, 2020 or December 31, 2019.

Revenue

Company revenues to date have been generated primarily through collaboration and license agreements. The Company’s collaboration and license agreements frequently contain multiple elements including (i) intellectual property licenses, and (ii) product research and development services. Consideration received under these arrangements may include upfront payments, research and development funding, cost reimbursements, milestone payments, payments for product sales and royalty payments. The Company’s customers include Alvogen, NT Pharma, Jazz, Arcellx, and BARDA.

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

Performance Obligations

The following is a general description of principal goods and services from which the Company generates revenue.

License to intellectual property: The Company generates revenue from licensing its intellectual property including know-how and development and commercialization rights. These licenses provide customers with the right to further research, develop and commercialize internally-discovered or collaborated drug candidates, or the right to use the Company’s Pfēnex Expression Technology platform to further research, develop and commercialize customer drug candidates. The consideration the Company receives is in the form of nonrefundable upfront consideration related to the functional intellectual property licenses and is recognized when the Company transfers such license to the customer unless the license is combined with other goods or services into one performance obligation, in which case the revenue is recognized over a period of time based on the estimated pattern in which the Company satisfies the combined performance obligation. The Company’s licensing agreements are generally cancelable. Customers have the right to terminate the contracts between a range of 30 days and 12 months with written notice. The Company has the right to terminate the contracts generally only if the customer is in breach of the contract and fails to remedy the breach in accordance with the contractual terms.

Research and development services: The Company generates revenue from research and development services it provides to its customers and primarily includes scientific research activities, preparation for clinical trials, and assistance during regulatory approval application process. Revenue associated with these services is recognized based on the Company’s estimated fair value of selling price for such services and the pattern in which the Company performs the services. The pattern of performance is generally determined to be the amount of incurred costs related to the service portion of the contract with the customer as a percentage of total expected costs associated with the service portion of the contract.

11


 

Product Revenue: The Company generates revenue from product sales and recognizes revenue when control of the products is transferred to customers, typically upon shipment, in an amount that reflects the consideration the Company expects to receive in exchange for those products. The Company’s principal product sales relate to the sales of its product, CRM 197. The Company’s product sales agreements are not subject to rebates or discounts.  Product replacement or refund is available at the Company’s discretion if the product is found to be defective or nonconforming. Historically, product returns have been immaterial.

Contracts with Multiple Performance Obligations

Most of the Company’s collaboration and license agreements with customers contain multiple promised goods or services. Based on the characteristics of the promised goods and services the Company analyzes whether they are separate or combined performance obligations. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The estimated standalone selling price is based on the adjusted market assessment approach including estimated present value of future cash flows and cost plus margin approach, taking into consideration the type of services, estimates of hourly market rates, and stage of the development.

Variable Consideration

The Company’s contracts with customers primarily include two types of variable consideration: (i) development and regulatory milestone payments, which are due to the Company upon achievement of specific development and regulatory milestones and (ii) one-time sales-based payments and sales-based royalties associated with licensed intellectual property.

Due to uncertainty associated with achievement of the development and regulatory milestones, the related milestone payments are excluded from the contract consideration and the corresponding revenue is not recognized until Company management concludes it is probable that reversal of such milestone revenue will not occur.  As part of the Company’s evaluation of the constraint, the Company considers numerous factors, including whether the achievement of the milestone is outside of the Company’s control, contingent upon regulatory approval or dependent on licensee efforts.

Product sales-based royalties under licensed intellectual property and one-time payments are accounted for under the royalty exception. The Company recognizes revenue for sales-based royalties under licensed intellectual property and one-time payments at the later of when the sales occur or the performance obligation is satisfied or partially satisfied.

The transaction price is reevaluated each reporting period and as uncertain events are resolved or other changes in circumstances occur.

Disaggregation of Revenue

The Company operates in one reportable business segment. It provides goods and services to its customers in collaboration and license agreements pursuant to various geographical markets. In the following table, revenue is disaggregated by major customers, timing of revenue recognition and revenue classification:

 

 

 

Three months ended

 

 

Three months ended

 

 

 

 

31-Mar-19

 

 

31-Mar-20

 

 

 

 

(in thousands)

 

 

(in thousands)

 

 

Customers

 

License and

service

 

 

Product

 

 

Total

 

 

License and

service

 

 

Product

 

 

Total

 

 

Alvogen

 

$

3,300

 

 

$

 

 

$

3,300

 

(w)

$

 

 

$

132

 

 

$

132

 

(w)

Jazz

 

 

1,837

 

 

 

 

 

 

1,837

 

(x)

 

 

 

 

 

 

 

 

 

Arcellx

 

 

697

 

 

 

 

 

 

697

 

(x)

 

50

 

 

 

 

 

 

50

 

(w)

BARDA

 

 

722

 

 

 

 

 

 

722

 

(x)

 

199

 

 

 

 

 

 

199

 

(x)

Other

 

 

37

 

 

 

1,269

 

 

 

1,306

 

(z)

 

52

 

 

 

249

 

 

 

301

 

(y)

Total

 

$

6,593

 

 

$

1,269

 

 

$

7,862

 

 

$

301

 

 

$

381

 

 

$

682

 

 

(w) - Revenue recognized at point in time

 

 

(x) - Revenue recognized over time

 

 

(y) - 95% revenue recognized at point in time, 5% revenue recognized over time

 

 

(z) - 97% revenue recognized at point in time, 3% revenue recognized over time

 

 

 

12


 

Contract Assets and Contract Liabilities

The Company receives payments from customers based on contractual terms. Accounts receivable are recorded when the right to consideration becomes unconditional. For research and development services, the Company generally bills its customers monthly or quarterly as the services are performed.  The Company satisfies its performance obligation on product sales when the products are shipped. Payment terms on invoiced amounts are typically 30 days.

Contract assets include amounts related to the Company’s contractual right to consideration for both completed and partially completed performance obligations that have not been invoiced and for which the Company does not yet have the right to payment. As of December 31, 2019, the Company’s contract assets balance was $0.2 million related to partially completed performance obligations associated to the BARDA contract. As of March 31, 2020, the Company had a contract assets balance of $0.1 million related to partially completed performance obligations associated to the BARDA contract.  

As of December 31, 2019, the Company had an accounts receivable balance of $5.4 million related to contracts with customers. As of March 31, 2020, the Company had an accounts receivable balance of $3.7 million related to contracts with customers. The decrease in the accounts receivable balance primarily relates to settlement of the accounts receivable balance related to Alvogen executing sublicense agreements in Europe and the Middle East in December 2019, and the overall decrease in CRM197 product sales during the first quarter of 2020.   

Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. As of December 31, 2019, the Company had a contract liability balance of $0.7 million. As of March 31, 2020, the Company had a contract liability balance of $1.0 million, consisting of $0.4 million related to deferred revenue and $0.6 million recorded to other current liabilities related to a payment received in 2019 from Alvogen for raw material supplies and manufacturing.

Cost to Obtain and Fulfill a Contract

The Company generally does not incur costs to obtain new contracts. Costs to fulfill contracts are expensed as incurred.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments and accounts and unbilled receivables. The Company has established guidelines intended to limit its exposure to credit risk by placing investments with high credit quality financial institutions, diversifying its investment portfolio and placing investments with maturities that help maintain safety and liquidity. All cash and cash equivalents were held at three major financial institutions as of March 31, 2020 and December 31, 2019. For the Company’s cash position of $65.8 million as of March 31, 2020, which included restricted cash of $0.2 million, the Company has exposure to credit loss for amounts in excess of insured limits in the event of non-performance by the institutions; however, the Company does not anticipate non-performance.

Additional credit risk is related to the Company’s concentration of receivables. As of March 31, 2020, and December 31, 2019, receivables were concentrated among tone and two customers representing 77% and 90% of total net receivables, respectively. No allowance for doubtful accounts was recorded at March 31, 2020 or December 31, 2019.

For the three months ended March 31, 2020 and 2019, revenue was concentrated among three customers and/or collaboration partners representing 73% and 76% of total revenues for each period, respectively.  

A portion of revenue is earned from entities located outside the United States. Non-U.S. revenue is denominated in U.S. dollars. A breakdown of the Company’s revenue from U.S. and non-U.S. based sources for the three months ended March 31, 2020 and 2019 is as follows:

 

 

 

Three Months Ended

March 31,

 

(in thousands)

 

2020

 

 

2019

 

US Revenue

 

$

286

 

 

$

2,275

 

Non-US Revenue

 

 

396

 

 

 

5,587

 

 

 

$

682

 

 

$

7,862

 

 

13


 

During the three months ended March 31, 2020, entities located in the U.S. accounted for $0.3 million, or 42% of the Company’s revenue, Switzerland accounted for $0.2 million, or 26% of the Company’s revenue, and Malta accounted for $0.1 million, or 19% of the Company’s revenue. During the three months ended March 31, 2019, entities located in Malta accounted for $3.3 million, or 42% of the Company’s revenue, Ireland accounted for $1.8 million, or 23% of the Company’s revenue, and the U.S. accounted for $2.3 million, or 29% of the Company’s revenue.

 

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for the Company beginning in the first quarter of fiscal year 2020, with early adoption permitted. The Company has adopted this standard as of January 1, 2020 using the prospective method. The impact of adopting this standard to the Company’s consolidated financial statements was immaterial.

Effective January 1, 2019 (Adoption Date), the Company adopted ASC 606, Revenue from Contracts with Customers (ASC 606). ASC 606 supersedes prior revenue recognition guidance and establishes a comprehensive revenue recognition model with a broad principle that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. The Company adopted this standard as of January 1, 2019 using the modified retrospective method for those contracts which were not substantially completed as of the transition date.  As a result, the Company has changed its accounting policy for revenue recognition as detailed above.  The cumulative impact to the Company’s accumulated deficit balance at the Adoption Date as a result of the adoption of ASC 606 was a decrease of $2.5 million.  The decrease relates to a reduction of deferred revenue associated to an upfront payment received from NT Pharma in 2018.  The Company’s initial adoption of ASC 606 was reported in the Company’s 2019 Form 10-K.  The comparative financial information reported in this Form 10-Q has been presented reflecting this $2.5 million adjustment. However, based on reporting requirements, the interim information included in the Form 10-Qs originally filed with the SEC during 2019 has not been restated to reflect this change and continues to be reported under the accounting standards in effect for the periods presented.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (ASC 718), which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The Company has adopted this standard as of January 1, 2019.  The impact of adopting this standard to the Company’s consolidated financial statements was immaterial. The Company’s initial adoption of ASC 606 was reported in the Company’s 2019 Form 10-K.  The comparative financial information reported in this Form 10-Q has been presented with the adjustments triggered by adopting this standard; however, the comparative information included in the 2019 Form 10-Qs originally filed with the SEC during 2019 have not been restated and continues to be reported under the accounting standards in effect for the periods presented.

Recently Issued Accounting Pronouncements

ASU 2019-12. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application of Topic 740. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted in any interim period for which financial statements have not yet been made available for issuance. The Company is currently evaluating the effect that ASU 2019-12 will have on its consolidated financial statements and related disclosures.

14


 

2. Fair Value Measurements

The fair value measurements of the Company’s cash equivalents and investments, which are measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, were determined using the inputs described above and are as follows:

 

 

 

 

 

 

 

Fair Value Measurements at Reporting

Date Using

 

 

 

Total

 

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

 

(in thousands)

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

65,802

 

 

$

65,802

 

 

$

 

 

$

 

Total assets measured at fair value

 

$

65,802

 

 

$

65,802

 

 

$

 

 

$

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

55,824

 

 

$

55,824

 

 

$

 

 

$

 

Total assets measured at fair value

 

$

55,824

 

 

$

55,824

 

 

$

 

 

$

 

 

Cash and money market funds at March 31, 2020 and December 31, 2019 include restricted cash, which is included in current assets on the balance sheet.

3. Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows.

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

65,602

 

 

$

55,624

 

Restricted cash

 

 

200

 

 

 

200

 

Total cash, cash equivalents and restricted cash shown in

   the statement of cash flows

 

$

65,802

 

 

$

55,824

 

 

The Company’s restricted cash balance of $0.2 million is bank collateral for its corporate credit card program.

 

4. Property and Equipment

Property and equipment consisted of the following:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(in thousands)

 

Furniture and equipment

 

$

331

 

 

$

346

 

Computers and IT equipment

 

 

498

 

 

 

498

 

Purchased software

 

 

434

 

 

 

434

 

Lab and research equipment

 

 

10,227

 

 

 

9,202

 

Leasehold improvements

 

 

1,023

 

 

 

959

 

Construction in progress

 

 

965

 

 

 

1,242

 

Other fixed assets

 

 

83

 

 

 

83

 

Total property and equipment, gross

 

 

13,561

 

 

 

12,764

 

Less: accumulated depreciation and amortization

 

 

(5,096

)

 

 

(5,020

)

Total property and equipment, net

 

$

8,465

 

 

$

7,744

 

 

15


 

For the three months ended March 31, 2020 and 2019, total depreciation and amortization expense is included in research and development, selling, general and administrative expenses and cost of sales in the accompanying consolidated statements of operations was as follows:

 

 

 

Three Months Ended

March 31,

 

(in thousands)

 

2020

 

 

2019

 

Cost of revenue

 

$

4

 

 

$

11

 

Research and development

 

 

332

 

 

 

253

 

Selling, general and administrative

 

 

4

 

 

 

47

 

Total depreciation and amortization expense

 

$

340

 

 

$

311

 

 

5. Intangible Assets

Intangible assets consisted of the following:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(in thousands)

 

Customer relationships

 

$

3,750

 

 

$

3,750

 

Developed technology

 

 

4,400

 

 

 

4,400

 

Trade names

 

 

921

 

 

 

921

 

Total intangible assets, gross

 

 

9,071

 

 

 

9,071

 

Less: Accumulated amortization

 

 

(5,464

)

 

 

(5,338

)

Total intangible assets, net

 

$

3,607

 

 

$

3,733

 

 

Amortization expense related to intangible assets was $0.1 million for both the three months ended March 31, 2020 and 2019. Amortization expense is included within selling, general and administrative expense in the accompanying consolidated statements of operations. As of March 31, 2020, estimated amortization expense for the next five years amounts to approximately $0.5 million per year.

6. Accrued Liabilities

Accrued liabilities consisted of the following:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(in thousands)

 

Accrued vacation

 

$

647

 

 

$

547

 

Accrued bonuses

 

 

640

 

 

 

2,657

 

Other accrued employee-related liabilities

 

 

800

 

 

 

905

 

Accrued professional fees

 

 

909

 

 

 

755

 

Accrued supplier liability

 

 

611

 

 

 

917

 

Accrued subcontractor costs

 

 

535

 

 

 

750

 

Other accrued liabilities

 

 

466

 

 

 

820

 

Total accrued liabilities

 

$

4,608

 

 

$

7,351

 

 

7. Significant Revenue Generating Contracts

The Company has three types of revenue generating agreements (i) those for which the Company co-develops or assists customers in developing their products (Collaboration Agreements), (ii) those for which the Company receives funding to advance its own products (Funding Agreements), and (iii) those for which the Company sells its reagent protein and other products.

16


 

Collaboration and License Agreements

Alvogen

In June 2018, the Company entered into an agreement with Alvogen in which the Company granted Alvogen exclusive rights to commercialize PF708 in the United States. The Company was responsible for development and registration of PF708, while Alvogen was responsible for providing additional regulatory and development expertise. In November 2019, the Company transferred the NDA to Alvogen pursuant to the Development and License Agreement. Alvogen has assumed responsibility for costs related to litigation, commercial manufacturing and supply chain, and commercialization of PF708. In consideration for the licenses and other rights granted in the development and license agreement, the Company received an upfront payment of $2.5 million, which was recorded to deferred revenue as of December 31, 2018. The original contract included up to an additional $25 million in support and regulatory milestone payments.

In February 2019, the Company and Alvogen entered into agreements expanding the Company’s and Alvogen’s collaboration to develop and commercialize PF708 to the European Union (EU), to certain countries in the Middle East and North Africa (MENA) and to the ROW territories (the latter defined as all countries outside of the EU, US and MENA, excluding Mainland China, Hong Kong, Singapore, Malaysia and Thailand). The EU, MENA and ROW agreements allow for Alvogen to sublicense the license rights to a third party in exchange for consideration to the Company, payable upon Alvogen’s receipt of consideration (other than royalties) from a sublicensee. During 2019, Pfenex received upfront payments from the EU, MENA and ROW agreements totaling $1.1 million, a milestone payment of $0.3 million from the EU agreement, and sublicense consideration of $2.2 million for the EU and MENA agreements 

As of March 31, 2020, the Company was eligible to receive up to $20 million in support and regulatory milestone payment upon obtaining an “A” therapeutic equivalence designation for the FDA-approved PF708 product relative to the reference drug Forteo.  The Company was eligible to receive this $20 million milestone if the “A” therapeutic equivalence designation was achieved by April 4, 2020.  Because the “A” therapeutic equivalence designation was not achieved by April 4, 2020, the Company is now eligible to receive up to $15 million in support and regulatory milestone payments. The Company is eligible to receive this $15 million milestone if the “A” therapeutic equivalence designation is achieved by October 4, 2020.  If the “A” therapeutic equivalence designation is not achieved by October 4, 2020, the Company becomes eligible to receive up to $7.5 million in support and regulatory milestone payments.  If the “A” therapeutic equivalence designation is not achieved by October 4, 2021, the Company is not eligible to receive any additional regulatory milestone payments.  As of March 31, 2020 the Company is eligible to receive up to a 50% gross profit split related to the US agreement, an additional $250 thousand in support and regulatory milestone payments and up to 50% gross profit split on sales related to the EU agreement, approximately $240 thousand in support and regulatory milestone payments and 60% gross profit split on sales related to the ROW agreement, and 60% gross profit split on sales related to the MENA agreement.

The Company assessed this arrangement in accordance with ASC 606 and identified the following performance obligations: (1) license to intellectual property, PF708, (2) development services, including preparing and submitting an NDA for PF708, manufacturing process quality services and support FDA pre-approval inspections for the facilities named in the NDA application, and (3) cost of goods sold (COGS) reduction activities related to PF708 manufacturing.  The Company concluded that each of these performance obligations were distinct because Alvogen can benefit from the good or service either on its own or together with other resources that are readily available, and each performance obligation is separately identifiable from other promises within the contract. The performance obligations have not changed with the EU, MENA, and ROW agreements as Alvogen is receiving a license for substantially the same Pfenex technology in each respective geographic Territory (i.e., the EU, MENA, and ROW Territories defined in those Agreements) as the Pfenex technology in the US Agreement.

As noted above, in 2018, the Company received a $2.5 million upfront payment in connection with the Alvogen Agreement. This upfront payment was fully refundable if the Company did not obtain FDA approval of the PF708 NDA by June 2021. Due to the uncertainty associated with the FDA approval of the NDA, the Company determined that this amount should be fully constrained until FDA approval of the NDA, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The FDA approved the NDA in October 2019, at which time the upfront payment was included in the transaction price.  

In February 2019, the Company received a $0.5 million nonrefundable upfront license fee for executing the EU agreement and a $0.3 million nonrefundable upfront license fee for executing the MENA agreement. These upfront payments were considered fixed and included in the transaction price at contract inception.

Also in February 2019, the Company achieved a development milestone of $2.5 million related to the acceptance of the PF708 NDA by the FDA. This milestone was constrained at the Adoption Date and not included in the transaction price until the date the FDA accepted the NDA, in February 2019.

17


 

In May 2019, the Company achieved a development milestone of $250 thousand for the EU agreement when Alvogen’s sublicensee submitted a Marketing Authorization Application (MAA) for PF708 to the Kingdom of Saudi Arabia's Saudi Food and Drug Authority (SFDA). This development milestone was constrained until the date the MAA was submitted, in May 2019.

In October 2019, the Company achieved a development milestone related to the original agreement of $2.5 million for the FDA approval of PF708 NDA. Due to the uncertainty associated with the FDA approval of the NDA, the Company determined that this amount should be fully constrained until FDA approval of the NDA.  This amount is included in the transaction price at the date the FDA approved the NDA.

The Company received $1.0 million sublicense consideration related to the EU agreement and $1.2 million sublicense consideration related to the MENA agreement. These fees are considered variable consideration but are included in the transaction price at the date the sublicense contracts were executed by Alvogen to the third parties, in December 2019.

The estimated total transaction price was allocated between satisfied and unsatisfied performance obligations based on the relative standalone selling prices of the identified performance obligations. The Company uses an adjusted market assessment approach and an expected cost plus a margin approach to estimate the standalone selling price for the performance obligations.  The Company allocated the $2.5 million transaction price of the original upfront payment, $0.8 million nonrefundable upfront license fee for the EU and MENA agreements, $5.0 million transaction price of the two milestone achievements of the original agreement, $250 thousand transaction price of the milestone achievement of the EU agreement, $2.2 million sublicense consideration for the EU and MENA agreements, $0.3 million of initial payments related to the ROW agreement, and $113 thousand of a milestone achievement of the EU agreement to the license to intellectual property and development services performance obligations.  The transaction price is allocated to each performance obligation based on the valuation of the standalone selling price relative to the other identified performance obligations, or 89% of the transaction price is allocated to the license to intellectual property performance obligation and 11% is allocated to the development services performance obligation. None of the transaction price is allocated to the COGS reduction activities performance obligation due to the immateriality in the valuation of the standalone selling price relative to the other two identified performance obligations.

During the three months ended March 31, 2020 and 2019, the Company recorded revenue of $0.1 million and $3.3 million related to the Alvogen agreement, respectively. As of March 31, 2020, the Company had no deferred revenue balance related to the Alvogen agreement. As of March 31, 2019, the Company had a deferred revenue balance of $2.5 million related to the Alvogen agreement.

NT Pharma

In April 2018, the Company entered into an agreement with NT Pharma under which the Company granted NT Pharma non-exclusive development and exclusive commercialization rights to PF708 in Mainland China, Hong Kong, Singapore, Malaysia and Thailand. Effective April 21, 2020, the Company entered into a Deed of Assignment and Amendment (Deed) with NT Pharma. Pursuant to the Deed, the Company agreed to allow NT Pharma to assign its rights and obligations under the NT Pharma Agreement with the Company to Kangchen, a wholly-owned subsidiary of Konruns. NT Pharma is responsible for any further development required to achieve regulatory approval as well as commercialization activities in the applicable territories.

As noted above, in 2018 the Company received $2.5 million upfront license fee in connection with the NT Pharma Agreement. This upfront payment was fully refundable if the Company did not submit the PF708 NDA to the FDA by the contractual deadline of December 31, 2018 or if the Company did not subsequently provide NT Pharma the associated documents related to the NDA filing.

As of March 31, 2019, the Company may be eligible to receive up to $22.5 million in payments based on the achievement of certain development, regulatory, and sales-related milestones. In addition, the Company is eligible to receive double-digit royalties on net product sales.

The Company assessed this arrangement in accordance with ASC 606 and identified the following performance obligations: (1) license to intellectual property, PF708, and (2) development services including preparing and submitting an NDA for PF708 and providing NT Pharma with documents related to the NDA submission.  The Company concluded that each of these performance obligations were distinct because NT Pharma can benefit from the good or service either on its own or together with other resources that are readily available, and each performance obligation is separately identifiable from other promises within the contract.

18


 

The estimated total transaction price was allocated between satisfied and unsatisfied performance obligations based on the relative standalone selling prices of the identified performance obligations. The Company uses an adjusted market assessment approach and an expected cost plus margin approach to estimate the standalone selling price for the performance obligations. The Company allocated the $2.5 million transaction price of the original upfront payment as such: $1.3 million to the development services performance obligation and $1.2 million to license to the intellectual property performance obligation.

The Company concluded that under ASC 606 the $2.5 million should be recognized as of the Adoption Date as the work was substantially complete (including the satisfaction of the performance obligations above) and a significant revenue reversal was not probable.  However, under ASC 605, the Company concluded that the upfront payment of $2.5 million was not fixed and determinable, and that due to a contract clause, the $2.5 million could be payable to NT Pharma if the NDA was not filed by a specified date and additional deliverables were required after NDA submission. Therefore, under ASC 605 the upfront payment was recorded as deferred revenue in the accompanying consolidated balance sheet at December 31, 2018.  As a result of the adoption of ASC 606, the Company adjusted its accumulated deficit balance at January 1, 2019 by decreasing the amount by $2.5 million.

During each of the three months ended March 31, 2020 and 2019, the Company recorded no revenue related to the NT Pharma agreement.

Jazz

In July 2016, the Company entered into a development and license agreement with Jazz Pharmaceuticals for the development and commercialization of multiple early stage hematologic oncology product candidates, including PF743, a recombinant crisantaspase, and PF745, a recombinant crisantaspase with half-life extension technology, and in the third quarter of 2017, achieved a process development milestone. The agreement also includes an option for Jazz to negotiate a license for a recombinant pegaspargase (PF690) product candidate with the Company. Under the agreement, the Company received an upfront payment of $5.0 million and an option payment of $10.0 million in July 2016 and may be eligible to receive additional payments based on achievement of certain research and development, regulatory and sales-related milestones.

In December 2017, the Company and Jazz entered into an amended and restated agreement. In connection with the amendment and restatement of the Jazz Agreement (as amended, the Amended Jazz Agreement), the Company received a total of $18.5 million, consisting of an upfront payment of $5.0 million and a payment of $13.5 million for development achievement.

As a result of the Amended Jazz Agreement, the total payments and potential payments to the Company is $224.5 million. The Company has received $62 million of upfront and milestone payments through March 31, 2020 and may be eligible to receive additional payments of up to $162.5 million based on achievement of certain research and development, regulatory and sales-related milestones. The total remaining milestones are categorized as follows: $3.5 million based on achievement of certain research and development milestones; $34.0 million for certain regulatory milestones; and $125.0 million for sales milestones.

Upon implementation of ASC 606 on January 1, 2019, the Company applied a practical expedient for contract modifications applicable to contracts that were modified before the implementation date.  The Company assessed this arrangement in accordance with ASC 606 and identified the following performance obligations: (1) research and development services related to the Pegaspargase product candidate option (“Pegaspargase Data Package”), (2) license and research and development activities of the PF743 product, and (3) license and research and development activities of the PF745 product. The Company concluded that the development activities for PF743 are highly interrelated and integrated with the license to intellectual property, so the research and development activities and license were combined into one performance obligation for PF743. Similarly, the Company concluded that the development activities for PF745 are highly interrelated and integrated with the license to intellectual property, so the research and development activities and license were combined into one performance obligation for PF745. The Company concluded that each of these performance obligations were distinct because Jazz can benefit from the good or service either on its own or together with other resources that are readily available, and each performance obligation is separately identifiable from other promises within the contract. The performance obligations have not changed under the amendment.

As noted above, in 2016, the Company received a $5.0 million upfront fee related to the PF743 and PF745 licenses and a $10 million upfront fee related to the Pegaspargase Data Package in connection with the original Jazz agreement. These payments were concluded to be fixed consideration as they were non-refundable, and therefore included in the transaction price at the inception of the original agreement. At contract inception of the original agreement, the first development milestone for $0.4 million was likely to occur at the inception of the agreement, so the payment was included in the transaction price at the inception of the agreement, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

19


 

In 2017, the Company received a $5.0 million upfront license fee in connection with the amended Jazz agreement. This upfront payment was concluded to be fixed consideration as it was non-refundable, and therefore included in the transaction price at the inception of the amended agreement.  At contract inception of the amended agreement, the first development milestone for $0.4 million was likely to occur at the inception of the amendment, so the payment was included in the transaction price at the inception of the amendment, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

The remaining milestone payments within the original and amended agreements include a level of production/manufacturing that is unprecedented in the Company’s history at contract inception, the development milestones were highly uncertain and the Company determined that they should not be included in the transaction price until the milestones are reached, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.  In addition, the future royalties related to licensed intellectual property were also excluded from the estimated total transaction price under the royalty exception in ASC 606.  Between 2016 and 2018, the Company achieved multiple development milestones totaling $15.3 million in connection with the original agreement and amended agreement.

The $20 million received in upfront payments was allocated between satisfied and unsatisfied performance obligations based on the relative standalone selling price of the identified performance obligations.  The Company uses an adjusted market assessment approach and an expected cost plus margin approach to estimate the standalone selling price for all three performance obligations. The Company allocated the $20 million transaction price of the upfront payments as such: $10 million to the Pegaspargase Data Package, $7.5 million to the license and research and development activities of the PF745 product, and $2.5 million to the license and research and development activities of the PF743 product.  The milestone payments related to the PF743 product license and development services performance obligation and the PF745 product license and development services are allocated to each of those performance obligations because those performance obligations are each a series of distinct services.

The upfront payments allocated to the three performance obligations meet the criteria under ASC 606 to be recognized over time using an input method based on estimated costs.  The Company concluded that this is the best method for measuring progress because the costs incurred by the Company enhances the assets over time.  As of the Adoption Date, the Company recognized license and service revenue for all of the $2.5 million allocated to the PF743 product license and research and development activities performance obligation, $5.7 million of the $7.5 million allocated to the PF745 product license and research and development activities performance obligation, and $9.1 million of the $10 million allocated to the Pegaspargase Data Package performance obligation.  As of January 1, 2019, deferred revenue associated with the upfront payments of the Jazz collaboration was $2.7 million.

In 2019, the Company recognized the remaining $2.7 million of the upfront payments.  In addition, the Company achieved two development milestones during 2019, and recognized $26 million in license and service revenue for successful achievement of process development milestones for the PF743 product and the PF745 product.

During the three months ended March 31, 2020, no revenue was recorded related to the Jazz agreement. During the same period in 2019, $1.8 million of revenue related to the Jazz agreement was recognized. As of March 31, 2020, the Company had no deferred revenue balance related to the Jazz agreement. As of March 31, 2019, the Company had a deferred revenue balance of $0.9 million related to the Jazz agreement.

Funding Agreements

The U.S. Department of Health and Human Services

In August 2015, the Company completed a development contract with the BARDA within the Office of the Assistant Secretary for Preparedness and Response in the U.S. Department of Health and Human Services for Px563L and RPA563 as a novel vaccine candidate for the prevention of anthrax infection. The Company entered into a follow-on contract with BARDA in August 2015 for the advanced development of Px563L and RPA563. This agreement is a cost-plus fixed fee development contract valued at up to approximately $143.5 million, including a 30-month base period of performance of approximately $15.9 million, and eight option periods valued at a total of approximately $127.6 million. The base period of performance was initially from August 2015 through February 2018 and later extended through September 2018. BARDA exercised additional phases of the development contract effective January 2017, totaling $4.9 million and allowing for the continuing development of Px563L and RPA563. The period of performance for the two option periods was extended through September 2018 and December 2019. In May 2018, BARDA increased the funding for one of the option periods by approximately $1.7 million. On March 29, 2019, the Company received notice from BARDA advising the Company of its decision not to exercise development options for cGMP manufacturing and potential Phase 1/2b study readiness for Px563L and RPA563. Following the receipt of the notice from BARDA and pursuant to discussions with BARDA, the Company deprioritized this program in its portfolio. This agreement is subject to early termination and stop-work order in conformance with Federal Acquisition Regulations 52.249-6 and 52.242-15 whereupon BARDA may immediately terminate the agreement early for convenience or request the Company to stop all or any part of the work for a period of at least 90 days. If BARDA is not adequately funded, there is a potential that some or all of the follow-on options could be delayed or never elected.

20


 

The Company assessed this arrangement in accordance with ASC 606 and identified one performance obligation, research and development services. The performance obligations have not changed under the amendments.  The Company is receiving fees from BARDA based on the costs the Company incurs with either a percentage markup or no markup, and reimbursable expenses, so the Company concluded that all of the consideration is variable.  The Company also concluded that the contract with BARDA is a month-to-month contract and that it satisfies its performance obligation over time, and therefore, the Company includes the variable fees in the transaction price when the services are complete at the end of each month and the variable fees are known.  The Company concluded that recognizing revenue over time is the best method for measuring progress because the costs incurred by the Company in providing the development service reflect the pattern of the Company’s performance in transferring control to BARDA.  

During the three months ended March 31, 2020 and 2019, revenue related to the BARDA agreement was $0.2 million and $0.7 million, respectively.

CRM197

The Company has several development and commercial partnerships in place for CRM197, which is a non-toxic mutant of diphtheria toxin. It is a well-characterized protein and functions as a carrier for polysaccharides and haptens, making them immunogenic. The Company developed a unique CRM197 production strain based on its Pseudomonas fluorescens platform and sells non-GMP and cGMP CRM197 to vaccine development-focused pharmaceutical partners. As a result of those efforts, the Company previously entered into commercial licenses for production strains capable of producing CRM197 with both Merck and SIIPL. These commercial license agreements with Merck and SIIPL contemplate potential maintenance and milestone fees as well as royalties on net sales. Merck and SIIPL are currently using the Company’s CRM197 in multiple Phase 3 clinical trials for such diseases as pneumococcal and meningitis bacterial infections.

The Company generates revenue by selling bulk CRM197 product. If a customer purchases reagent grade CRM197, the Company can ship the product from its facilities to the customer from reagent stock that is ordered and received from SIIPL and kept in the Company’s lab freezers. Any unsold reagent grade product is counted and included in inventory each quarter and has historically been immaterial. If a customer purchases GMP/human grade CRM197, SIIPL dropships the product directly to the Company’s customers.

The Company assessed the purchase order arrangements in accordance with ASC 606. As the purchases are received for a specific quantity and type of CRM197 product, there is deemed to be just one performance obligation, delivery of such product. The transaction price is clearly identified on the purchase order and product quote information and allocated to the single performance obligation. The customer control and risk of loss is transferred upon shipment which results in the Company recognizing revenue at a point in time.

During the three months ended March 31, 2020 and 2019, CRM197 product sales were $0.2 million and $1.3 million, respectively.

 

8. Commitments and Contingencies

Clinical Study and Development Activity Commitments

The Company has entered into agreements with subcontractors to further develop its product candidates. These contracts can be cancelled at any time, with some having certain cancellation fees associated with the termination of the contract, and others that only obligate the Company through the termination date.

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9. Stock-Based Compensation

Summary Stock-Based Compensation Information

The following table summarizes stock-based compensation expense:

 

 

 

Three Months Ended

March 31,

 

(in thousands)

 

2020

 

 

2019

 

Cost of revenue

 

$

26

 

 

$

33

 

Research and development

 

 

413

 

 

 

382

 

Selling, general and administrative

 

 

439

 

 

 

362

 

Total

 

$

878

 

 

$

777

 

Stock-based compensation from:

 

 

 

 

 

 

 

 

Stock options

 

$

836

 

 

$

762

 

Employee stock purchase plan

 

 

42

 

 

 

15

 

Total

 

$

878

 

 

$

777

 

 

The following table summarizes the Company’s stock option activity during the three months ended March 31, 2020:

 

 

 

 

Number of

Options

(in thousands)

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average

Remaining

Contractual

Term (in years)

 

 

Aggregate

Intrinsic Value

(in thousands)

 

Outstanding at December 31, 2019

 

 

4,003

 

 

$

5.55

 

 

 

 

 

 

 

 

 

Granted

 

 

871

 

 

 

10.91

 

 

 

 

 

 

 

 

 

Exercised

 

 

(225

)

 

 

5.49

 

 

 

 

 

 

 

 

 

Cancelled (forfeited)

 

 

(132

)

 

 

5.18

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2020

 

 

4,517

 

 

$

6.59

 

 

 

8.06

 

 

$

13,352

 

Vested and expected to vest at March 31, 2020

 

 

3,763

 

 

$

6.40

 

 

 

7.83

 

 

$

11,668

 

Vested and exercisable at March 31, 2020

 

 

1,982

 

 

$

6.28

 

 

 

6.90

 

 

$