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 the discovery, development and commercialization of novel therapies for the treatment of cancer. The Company’s mission is to improve the lives of cancer patients by creating more effective, safer and tolerable treatments. The Company’s current clinical pipeline is derived from Orascovery, Src Kinase Inhibition, T-cell receptor-engineered T-cells (TCR-T), and Arginine deprivation therapy research platforms. The Company has assembled a leadership team and has established global operations in the U.S. and China across the pharmaceutical value chain to execute its mission to become a global leader in bringing innovative cancer treatments to the market and improve health outcomes. The Company’s primary activities since commencement have been conducting research and development internally and through corporate collaborators, in-licensing and out-licensing pharmaceutical compounds and technology, and conducting clinical trials. The Company also conducts commercial sales of specialty products through its wholly-owned subsidiary, Athenex Pharmaceutical Division (APD), under its Commercial Platform.
Follow-On Offering
In January 2018, the Company completed an underwritten public follow-on offering of 4,300,000 shares of its common stock. The Company granted the underwriters a 30-day option to purchase up to an additional 645,000 shares of common stock. In February 2018, the underwriters partially exercised their option, purchasing an additional 465,000 shares of common stock. All shares were offered by the Company at a price of $15.25 per share. Net proceeds were $68.1 million, after deducting underwriting discounts and commissions and offering expenses of $4.6 million.
Debt and Equity Offering
On July 3, 2018, the Company closed a privately placed debt and equity financing deal with Perceptive Advisors LLC and its affiliates (“Perceptive”) for gross proceeds of $100.0 million and received aggregate net proceeds of $97.1 million, net of fees and offering expenses. The Company entered into a 5-year senior secured loan for $50.0 million of this financing and issued 2,679,528 shares of its common stock at a purchase price of $18.66 per share for the remaining $50.0 million. The loan matures on the fifth anniversary from the closing date and bears interest at a floating per annum rate equal to London Interbank Offering Rates (“LIBOR”) (with a floor of 2.0%) plus 9.0%. The Company is required to make monthly interest-only payments with a bullet payment of the principal at maturity. The loan agreement contains specified financial maintenance covenants.
In connection with the loan agreement, the Company granted Perceptive a warrant for the purchase of 425,000 shares of common stock at a purchase price of $18.66 per share. This was accounted for as a detachable warrant at its fair value and is recorded as an increase to additional paid-in-capital on the condensed consolidated statement of stockholders’ equity.
Significant Risks and Uncertainties
The Company has incurred operating losses since its inception and, as a result, as of March 31, 2019 and December 31, 2018 had an accumulated deficit of $478.9 million and $443.7 million, respectively. Operations have been funded primarily through the sale of common stock and, to a lesser extent, from convertible bond financing, senior secured loan, revenue, and grant funding. The Company will require significant additional funds to conduct clinical trials and to fund its operations. There can be no assurances, however, that additional funding will be available on favorable terms, or at all. If adequate funds are not available, the Company may be required to delay, modify, or terminate its research and development programs or reduce its planned commercialization efforts. The Company believes that it will be able to obtain additional working capital through equity financings or other arrangements to fund operations, including additional public offerings; however, there can be no assurance that such additional financing, if available, can be obtained on terms acceptable to the Company. If the Company is unable to obtain such additional financing, the Company will need to reevaluate future operating plans and might delay, modify, or terminate its research and development programs or reduce its planned commercialization efforts. Accordingly, there is substantial doubt regarding the Company’s ability to continue as a going concern.
5
These
condensed
consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of the business. The Company’s recurring losses from operations
and negative cash flows from operations have raised substantial doubt regarding its ability to continue as a going concern. The
condensed
consolidated financial statements do not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
The Company has a senior secured loan agreement which contains various covenants. A breach of any of these covenants could result in a default. If a default under this loan agreement is not cured or waived, the default could result in the acceleration of debt, which could require us to repurchase or repay the debt in full prior to the date it is otherwise due. If we default, the lender may seek repayment through our subsidiary guarantors or by executing on the security interest granted pursuant to the loan agreement.
Athenex is subject to a number of risks similar to other biopharmaceutical companies, including, but not limited to, the lack of available capital, possible failure of preclinical testing or clinical trials, inability to obtain marketing approval of product candidates, competitors developing new technological innovations, unsuccessful commercialization strategy and launch plans for our proprietary drug candidates, market acceptance of the Company’s products, and protection of proprietary technology. If the Company does not successfully commercialize any of its product candidates, it will be unable to generate sufficient product revenue and might not, if ever, achieve profitability and positive cash flow.
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270,
Interim Reporting
) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
these financial statements
do not include all of the information
necessary for a full presentation of financial position, results of operations, and cash flows in conformity with GAAP. In
the opinion of management,
the condensed consolidated financial statements
reflect all
adjustments (consisting of
normal recurring adjustments
) considered
necessary
for
a fair
presentation
of the results
of the Company
for the periods presented. These condensed consolidated financial statements reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. Intercompany transactions and balances have been
fully
eliminated
in consolidation.
Results of the operations for the three months ended March 31, 2019 are not necessarily indicative of the results expected for the full fiscal year or for any future annual or interim period. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 11, 2019.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amount of revenue and expenses during the reporting period. Such management estimates include those relating to assumptions used in clinical research accruals, chargebacks, allowance for doubtful accounts, inventory reserves, income taxes, the estimated useful life and recoverability of long-lived assets, and the valuation of stock-based awards. Actual results could differ from those estimates.
Leases
The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, the Company will evaluate whether to account for the lease as either an operating or financing lease. Operating leases are included in right-of-use assets (“ROU assets”) and operating lease liabilities on the condensed consolidated balance sheet as of March 31, 2019. The Company’s finance leases are included in property and equipment, net and long-term debt and finance lease obligations on the condensed consolidated balance sheet. A majority of the Company’s operating leases are for real estate properties used in operations located in the U.S. and Asia. The Company’s finance leases are for manufacturing equipment in the U.S.
6
ROU assets and
lease
liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement
date, less lease incentives received. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the
operating
lease liabilities as the Company’s leases generally do not provide an implicit r
ate.
The Company uses the stated rate per each lease agreement in determining the finance lease liabilities.
Lease terms may include options to extend or terminate when the Company is reasonably certain that the option will be exercised. Lease expense
f
or operating leases is
recognized on a straight-line basis over the lease term.
The Company elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for short-term leases.
Concentration of Credit Risk, Other Risks and Uncertainties
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and short-term investments. The Company deposits its cash equivalents in interest-bearing money market accounts and invests in highly liquid U.S. treasury notes, commercial paper and corporate bonds. The Company deposits its cash with multiple financial institutions. Cash balances exceed federally insured limits. The primary focus of the Company’s investment strategy is to preserve capital and meet liquidity requirements. The Company’s investment policy addresses the level of credit exposure by limiting the concentration in any one corporate issuer and establishing a minimum allowable credit rating. The Company also has significant assets and liabilities held in its overseas manufacturing facility in China, and therefore is subject to foreign currency fluctuation.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, "
Leases (Topic 842),
" which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model that requires a lessee to recognize a ROU asset representing the right to use the underlying asset over the lease term and lease liability on the balance sheet for all leases with a term longer than 12 months. Lease obligations are to be measured at the present value of lease payments and accounted for using the effective interest method. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. For finance leases, the leased asset is depreciated on a straight-line basis and recorded separately from the interest expense in the income statement resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. The ASU requires that assets and liabilities be presented or disclosed separately and classified appropriately as current and noncurrent. The ASU further requires additional disclosure of certain qualitative and quantitative information related to lease agreements. In July 2018, the FASB issued new guidance that provided for a new optional transition method that allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to opening retained earnings. Under this approach, comparative periods are not restated.
The Company adopted the new lease standard on January 1, 2019 and used the effective date as our date of initial application. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company (1) to not reassess whether any expired or existing contracts are or contain leases, (2) to not reassess the lease classification for any expired or existing leases, and (3) to not reassess initial direct costs for any existing leases. The Company also elected the single component practical expedient, which requires the Company, by class of underlying asset, not to allocate the total consideration to the lease and nonlease components based on their relative stand-alone selling prices. This single component practical expedient requires the Company to account for the lease component and nonlease component(s) associated with that lease as a single component if (i) the timing and pattern of transfer of the lease component and the nonlease component(s) associated with it are the same and (ii) the lease component would be classified as an operating lease if it were accounted for separately. In preparation for adoption of the standard, the Company implemented internal controls to enable the preparation of financial information. The standard had a material impact on our consolidated balance sheet, with no material impact on our consolidated statement of operations and comprehensive loss. On the adoption date, the Company recognized $9.8 million of operating lease ROU assets, $11.9 million of operating lease liabilities, and derecognized its existing deferred rent balance of $2.1 million.
In June 2018, the FASB issued ASU No. 2018-07, “
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
,” which expands the scope of Topic 718, “
Compensation – Stock Compensation
,” which only included share-based payments to employees, to include share-based payments issued to nonemployees for goods and services. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will only need to remeasure liability-classified awards that have not yet been settled as of the date of adoption, and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company adopted this standard on January 1, 2019 and the adoption of this ASU did not impact the Company’s condensed consolidated financial statements.
7
3. Inventories
Inventories consist of the following (in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Raw materials and purchased parts
|
|
$
|
3,962
|
|
|
$
|
4,092
|
|
Work in progress
|
|
|
3,174
|
|
|
|
3,166
|
|
Finished goods
|
|
|
18,055
|
|
|
|
21,529
|
|
Total inventories
|
|
$
|
25,191
|
|
|
$
|
28,787
|
|
4. Intangible Assets, net
The Company’s identifiable intangible assets, net, consist of the following (in thousands):
|
|
March 31, 2019
|
|
|
|
Cost/Fair
Value
|
|
|
Accumulated
Amortization
|
|
|
Impairments
|
|
|
Net
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
8,935
|
|
|
$
|
2,432
|
|
|
$
|
—
|
|
|
$
|
6,503
|
|
Polymed customer list
|
|
|
1,593
|
|
|
|
974
|
|
|
|
—
|
|
|
|
619
|
|
Polymed technology
|
|
|
3,712
|
|
|
|
1,125
|
|
|
|
—
|
|
|
|
2,587
|
|
Product rights
|
|
|
530
|
|
|
|
295
|
|
|
|
—
|
|
|
|
235
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDE in-process research and development (IPR&D)
|
|
|
728
|
|
|
|
—
|
|
|
|
—
|
|
|
|
728
|
|
Effect of currency translation adjustment
|
|
|
(311
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(311
|
)
|
Total intangible assets, net
|
|
$
|
15,187
|
|
|
$
|
4,826
|
|
|
$
|
—
|
|
|
$
|
10,361
|
|
|
|
December 31, 2018
|
|
|
|
Cost/Fair
Value
|
|
|
Accumulated
Amortization
|
|
|
Impairments
|
|
|
Net
|
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
8,935
|
|
|
$
|
2,060
|
|
|
$
|
—
|
|
|
$
|
6,875
|
|
Polymed customer list
|
|
|
1,593
|
|
|
|
938
|
|
|
|
—
|
|
|
|
655
|
|
Polymed technology
|
|
|
3,712
|
|
|
|
999
|
|
|
|
—
|
|
|
|
2,713
|
|
Product rights
|
|
|
530
|
|
|
|
263
|
|
|
|
—
|
|
|
|
267
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDE in-process research and development (IPR&D)
|
|
|
1,026
|
|
|
|
—
|
|
|
|
298
|
|
|
|
728
|
|
Effect of currency translation adjustment
|
|
|
(390
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(390
|
)
|
Total intangibles, net
|
|
$
|
15,406
|
|
|
$
|
4,260
|
|
|
$
|
298
|
|
|
$
|
10,848
|
|
As of March 31, 2019, licenses at cost include an Orascovery license of $0.4 million and licenses purchased from Gland Pharma Limited (“Gland”) of $4.3 million, and a license purchased from MAIA Pharmaceuticals, Inc. (“MAIA”) for $4.0 million. The Orascovery license with Hanmi Pharmaceuticals Co. Ltd. (“Hanmi”) was purchased directly from Hanmi and is being amortized on a straight-line basis over a period of 12.75 years, the remaining life of the license agreement at the time of purchase. The licenses purchased from Gland are being amortized on a straight-line basis over a period of 5 years, the remaining life of the license agreement at the time of purchase. The license purchased from MAIA is being amortized over a period of 7 years, the remaining life of the license agreement at the time of purchase.
The remaining intangible assets were acquired in connection with the acquisitions of Athenex Pharma Solutions (“APS” or “Athenex Pharma Solutions,” and formerly known as QuaDPharma), Polymed Therapeutics, Inc. (“Polymed”), and Comprehensive Drug Enterprises (“CDE”). Intangible assets are amortized using an economic consumption model over their useful lives. The APS customer list was being amortized on a straight-line basis over 7 years. The Polymed customer list and technology are amortized on a straight-line basis over 6 and 12 years, respectively. The CDE in-process research and development, (“IPR&D”), will not be amortized until the related projects are completed. IPR&D will be tested annually for impairment, unless conditions exist causing an earlier impairment test (e.g., abandonment of project). No impairment charges were recorded during the three months ended March 31, 2019. The weighted-average useful life for all intangible assets was 7.58 years as of March 31, 2019.
8
The Company recorded
$
0.5
million
and $0.4 million
of amortization expense for
the
three months
ended
March 31, 2019
and 201
8, respectively.
5. Fair Value Measurements
Financial instruments consist of cash and cash equivalents, short-term investments, an equity investment, accounts receivable, accounts payable, accrued liabilities, and debt. Short-term investments and the equity investment are stated at fair value. Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and debt, are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date of such amounts.
ASC 820,
Fair Value Measurements
, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the ASC 820 are described as follows:
Level 1
—Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2
—Inputs to the valuation methodology include:
|
•
|
Quoted prices for similar assets or liabilities in active markets;
|
|
•
|
Quoted prices for identical or similar assets or liabilities in inactive markets;
|
|
•
|
Inputs other than quoted prices that are observable for the asset or liability;
|
|
•
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and
|
|
•
|
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
|
Level 3
—Inputs to the valuation methodology are unobservable, supported by little or no market activity, and are significant to the fair value measurement.
Transfers between levels, if any, are recorded as of the beginning of the reporting period in which the transfer occurs. There were
no
transfers between Levels 1, 2 or 3 for any of the periods presented.
The following tables represent the fair value hierarchy for those assets and liabilities that the Company measures at fair value on a recurring basis (in thousands):
|
|
Fair Value Measurements at March 31, 2019 Using:
|
|
|
|
Total
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investment
|
|
$
|
341
|
|
|
$
|
341
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
|
$
|
341
|
|
|
$
|
341
|
|
|
$
|
—
|
|
|
$
|
—
|
|
9
|
|
Fair Value Measurements at December 31, 2018 Using:
|
|
|
|
Total
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets included within cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
25
|
|
|
|
|
$
|
25
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Short-term investments - commercial paper
|
|
|
5,396
|
|
|
|
|
|
—
|
|
|
|
|
|
5,396
|
|
|
|
|
|
—
|
|
Financial assets included within short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments - commercial paper
|
|
|
36,544
|
|
|
|
|
|
—
|
|
|
|
|
|
36,544
|
|
|
|
|
|
—
|
|
Short-term investments - corporate notes
|
|
|
16,699
|
|
|
|
|
|
—
|
|
|
|
|
|
16,699
|
|
|
|
|
|
—
|
|
Short-term investments - U.S. government bonds
|
|
|
3,998
|
|
|
|
|
|
—
|
|
|
|
|
|
3,998
|
|
|
|
|
|
—
|
|
Available-for-sale investment
|
|
|
388
|
|
|
|
|
|
388
|
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Total assets
|
|
$
|
63,050
|
|
|
|
|
$
|
413
|
|
|
|
|
$
|
62,637
|
|
|
|
|
$
|
—
|
|
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, 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, 2019 and December 31, 2018, the Company’s investment in PharmaEssentia was valued at the reported closing price. This investment is classified as a Level 1 investment.
6. Asset Acquisition
On June 29, 2018, the Company entered into a
Share Subscription Agreement (“SSA”) for Axis Therapeutics (“Axis”), a subsidiary of the Company jointly owned by Athenex and Xiangxue Life Sciences Limited (“XLifeSc”). Under the SSA, Athenex contributed $30.0 million cash for a 55% ownership interest in Axis and XLifeSc contributed a license for
IPR&D of certain immunotherapy technology for a 45% ownership interest in Axis. Also, on June 29, 2018, through a license agreement entered into between XLifeSc and Axis, XLifeSc granted Axis an exclusive, sublicensable worldwide (excluding mainland China) right and license to use its proprietary TCR-engineered T Cell therapy to develop and commercialize products for oncology indications (“TCR-T License”). Upon effectiveness of the TCR-T License and satisfaction of certain conditions of the license agreement, the Company issued 267,952 shares of its common stock equal to $5.0 million to XLifeSc as an upfront payment by Axis. On September 14, 2018, Athenex completed the $30.0 million cash injection to Axis and all the closing conditions under the SSA were fulfilled.
The Company has consolidated the financial statements of Axis into its condensed consolidated financial statements as of and for the three months ended March 31, 2019 and as of and for the year ended December 31, 2018 using the voting interest model. The nonmonetary exchange of 45% of the shares of Axis for the IPR&D from XLife has been accounted for as an asset acquisition that does not constitute a business under ASC 805. Therefore, the acquisition of IPR&D was expensed as research and development expense at its fair value. The Company determined that the fair value of the equity issued to XLifeSc was $24.5 million, considering the $30.0 million contribution made by the Company for its 55% ownership interest and the arms-length nature of the transaction. Accordingly, the Company recorded an expense of $24.5 million within research and development expenses on its consolidated statements of operations and comprehensive loss for the year ended December 31, 2018.
10
7. Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accrued wages and benefits
|
|
$
|
6,508
|
|
|
$
|
5,061
|
|
Accrued clinical expenses
|
|
|
1,888
|
|
|
|
2,653
|
|
Accrued operating expenses
|
|
|
3,646
|
|
|
|
8,128
|
|
Deferred revenue
|
|
|
131
|
|
|
|
190
|
|
Accrued R&D licensing fees
|
|
|
654
|
|
|
|
4,827
|
|
Accrued tax withholdings
|
|
|
192
|
|
|
|
—
|
|
Accrued selling fees and rebates
|
|
|
1,910
|
|
|
|
423
|
|
Accrued construction costs
|
|
|
27,642
|
|
|
|
16,436
|
|
Total accrued expenses
|
|
$
|
42,571
|
|
|
$
|
37,718
|
|
The accrued construction costs relate to the building of the manufacturing facility in Dunkirk, NY. Of this amount, the Company expects $27.1 million to be reimbursed by New York State. This amount is recorded within prepaid expenses and other current assets on the Company’s condensed consolidated balance sheet as of March 31, 2019.
8. Income Taxes
The Company did not record a provision for federal income taxes for the three months ended March 31, 2019 because it expects to generate a loss for the year ending December 31, 2019 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 recording a valuation allowance against the deferred tax asset related to foreign tax benefits on losses in the Peoples Republic of China (“PRC”).
9. Debt and Lease Obligations
Debt
The Company’s debt as of March 31, 2019 and December 31, 2018, consists of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current portion of mortgage
|
|
$
|
792
|
|
|
$
|
779
|
|
Current portion of bank loan
|
|
|
743
|
|
|
|
—
|
|
Current portion of finance and capital lease obligation
|
|
|
185
|
|
|
|
182
|
|
Long-term portion of finance and capital lease obligation
|
|
|
374
|
|
|
|
422
|
|
Senior
secured loan, net of debt discount and financing fees
of $4,362 and $4,619, respectively
|
|
|
45,638
|
|
|
|
45,381
|
|
Total
|
|
$
|
47,732
|
|
|
$
|
46,764
|
|
The mortgage payments, assumed in connection with the acquisition of CDE, extend through July 30, 2019.
During 2018, the Company issued a senior secured loan 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.
During the first quarter of 2019, the Company was issued an unsecured, subordinated bank loan to fund operations in China. This loan has a principal value of $0.7 million, a maturity date of December 11, 2019, and bears interest at a fixed rate of 5.7% annually.
11
Lease Obligation
s
The Company has operating leases for office and manufacturing facilities in several locations in the U.S. and Asia 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, 2019
|
|
Operating lease cost
|
|
$
|
781
|
|
Finance lease cost:
|
|
|
|
|
Amortization of assets
|
|
|
12
|
|
Interest on lease liabilities
|
|
|
9
|
|
Total net lease cost
|
|
$
|
802
|
|
The Company has elected to exclude short-term leases from its operating lease 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, 2019. Variable lease costs for the three months ended March 31, 2019 were not material to the financial statements.
Supplemental balance sheet information related to leases is as follows (in thousands, except lease term and discount rate):
|
|
March 31, 2019
|
|
Operating leases:
|
|
|
|
|
Operating lease ROU assets, net
|
|
$
|
9,428
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
$
|
3,067
|
|
Long-term operating lease liabilities
|
|
|
8,362
|
|
Total operating lease liabilities
|
|
$
|
11,429
|
|
|
|
|
|
|
Finance leases:
|
|
|
|
|
Property and equipment, at cost
|
|
$
|
688
|
|
Accumulated amortization, net
|
|
|
(40
|
)
|
Property and equipment, net
|
|
$
|
648
|
|
|
|
|
|
|
Current obligations of finance leases
|
|
$
|
185
|
|
Long-term portion of finance leases
|
|
|
374
|
|
Total finance lease obligations
|
|
$
|
559
|
|
|
|
|
|
|
Weighted average remaining lease term (in years):
|
|
|
|
|
Operating leases
|
|
|
5.83
|
|
Finance leases
|
|
|
2.86
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
|
|
13.0
|
%
|
Finance leases
|
|
|
5.9
|
%
|
12
Supplemental cash flow information related to leases
is
as follows (in thousands):
|
|
Three
Months Ended
March 31, 2019
|
|
Cash paid for amount included in the measurements of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
803
|
|
Operating cash flows from finance leases
|
|
|
9
|
|
Financing cash flows from finance leases
|
|
|
45
|
|
|
|
|
|
|
ROU assets recognized in exchange for new operating lease
obligations
|
|
$
|
583
|
|
Future minimum payments and maturities of leases is as follows (in thousands):
Year ending December 31:
|
|
Operating Leases
|
|
Finance Leases
|
|
2019 (remaining nine months)
|
|
$
|
2,551
|
|
$
|
161
|
|
2020
|
|
|
2,968
|
|
|
214
|
|
2021
|
|
|
2,535
|
|
|
214
|
|
2022
|
|
|
2,356
|
|
|
20
|
|
2023
|
|
|
2,096
|
|
|
—
|
|
Thereafter
|
|
|
3,952
|
|
|
—
|
|
Total lease payments
|
|
|
16,458
|
|
|
609
|
|
Less: Imputed interest
|
|
|
(5,029
|
)
|
|
(50
|
)
|
Total lease obligations
|
|
|
11,429
|
|
|
559
|
|
Less: Current obligations
|
|
|
(3,067
|
)
|
|
(185
|
)
|
Long-term lease obligations
|
|
$
|
8,362
|
|
$
|
374
|
|
10. Related Party Transactions
During the three months ended March 31, 2019 and 2018, the Company entered into transactions with individuals and companies that have financial interests in the Company. Related party transactions included the following:
a.
|
In 2015, CDE signed an agreement with Avalon BioMedical (Management) Limited and its subsidiaries (“Avalon”) under which Avalon would receive certain administrative services and would occupy space at CDE’s research location. Avalon would reimburse CDE for these administrative services as incurred and pay CDE a percentage of the total rent payment based on its staff headcount occupying the Hong Kong research and development facility (See Note 15—
Commitments and Contingencies
). 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, 2019 and December 31, 2018, 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 2018, the Company entered into two in-licensing agreements with Avalon wherein the Company obtained certain intellectual property from Avalon in an effort 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, 2018, the Company recorded $5.5 million of upfront fees, consisting of $3.5 million in cash and $2.0 million in equity, as research and development expense on its condensed consolidated statement of operations and comprehensive loss.
During the three months ended March 31, 2019 and 2018, no fees were paid to Avalon in connection with the license agreements.
b.
|
The Company receives consulting and licensing revenue from PharmaEssentia, a company in which Athenex has an investment classified as available-for-sale (see Note 5—
Fair Value Measurements
). Revenue recorded and cost-sharing funds received from PharmaEssentia amounted to
$0.3 million and $0.1 million for the three months ended March 31, 2019 and 2018, respectively.
|
13
c.
|
The Company receives certain clinical development services from ZenRx Limited and its s
ubsidiaries (“ZenRx”), a company for which one of our executive officers serves on the board of directors. In connection with such services, the Company made payments to ZenR
x of
$
0.3
million
and $0.
1
million for
the
three months ended
March 31, 2019
and
201
8
, 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 our intellectual property to develop and commercialize Oratecan and Orax
ol in Australia and New Zealand, and a non-exclusive license to manufacture a certain compound, but only for use in Oratecan and Oraxol. ZenRx is responsible for all development, manufacturing and commercialization, and the related costs and expenses, of a
ny 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 to 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 authorize the grant of up to 16,000,000 shares of common stock to employees, directors, and consultants. 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.
Stock Options
The total fair value of stock options vested and recorded as compensation expense during the three months ended March 31, 2019 and 2018
was $1.7 million and $2.2
million, respectively. As of March 31, 2019, $14.8 million
of unrecognized cost related to non-vested stock options was expected to be recognized over a weighted-average period of approximately 1.7 years.
T
he total intrinsic value of options exercised was approximately $0.4 million and $3.4 million for the three months ended March 31, 2019 and 2018, respectively.
The following table summarizes the status of the Company’s stock option activity granted under the Plans to employees, directors, and consultants (in thousands, except stock option amounts and exercise price):
|
|
Stock
Options
|
|
|
Weighted-
Average
Exercise price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at December 31, 2018
|
|
|
10,687,650
|
|
|
$
|
8.51
|
|
|
|
6.87
|
|
|
$
|
44,688
|
|
Granted
|
|
|
760,000
|
|
|
|
13.17
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(49,632
|
)
|
|
|
5.60
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited and expired
|
|
|
(122,985
|
)
|
|
|
13.86
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at March 31, 2019
|
|
|
11,275,033
|
|
|
$
|
8.78
|
|
|
|
6.36
|
|
|
$
|
39,154
|
|
Vested and exercisable at March 31, 2019
|
|
|
8,153,661
|
|
|
$
|
6.88
|
|
|
|
5.45
|
|
|
$
|
43,787
|
|
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 a number of 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,
2019
|
|
|
March 31,
2018
|
|
Weighted average grant date fair value
|
|
$
|
8.03
|
|
|
$
|
9.43
|
|
Expected dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Expected stock price volatility
|
|
|
64
|
%
|
|
|
59
|
%
|
Risk-free interest rate
|
|
|
2.63
|
%
|
|
|
2.57
|
%
|
Expected life of options (in years)
|
|
|
6.3
|
|
|
|
5.6
|
|
14
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, 2018 to June 30, 2019. The Company expects to offer 6-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 and $0 for the three months ended March 31, 2019 and 2018, respectively.
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, 2019 and 2018 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
$
|
1,693
|
|
|
$
|
2,161
|
|
Restricted stock expense
|
|
|
—
|
|
|
|
540
|
|
Employee stock purchase plan
|
|
|
85
|
|
|
|
—
|
|
Total stock-based compensation expense
|
|
$
|
1,778
|
|
|
$
|
2,701
|
|
Cost of sales
|
|
$
|
64
|
|
|
$
|
44
|
|
Research and development expenses
|
|
|
591
|
|
|
|
513
|
|
Selling, general, and administrative expenses
|
|
|
1,123
|
|
|
|
2,144
|
|
Total stock-based compensation expense
|
|
$
|
1,778
|
|
|
$
|
2,701
|
|
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 share and common shares 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,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options and other common stock equivalents
|
|
|
11,219,839
|
|
|
|
9,931,020
|
|
Unvested restricted shares
|
|
|
—
|
|
|
|
240,000
|
|
Total potential dilutive shares
|
|
|
11,219,839
|
|
|
|
10,171,020
|
|
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. This segment focuses specifically on Orascovery and Src Kinase Inhibition research platforms, and TCR-T Immunotherapy and Arginine Deprivation Therapy. This segment performs research in the United States, Taiwan, Hong Kong, and mainland China.
15
Global Supply Chain Platform
—This operating segment includes A
PS
and Polym
ed. A
PS
is a contract manufacturing company that provides small to mid-scale
Current Good Manufacturing Practices (“
cGMP
”)
manufacturing of clinical and commercial products for pharmaceutical and biotech companies
and for the internal supplies to the clini
cal studies and commercial development of our proprietary drugs
.
APS
also performs microbiological and analytical testing for raw material and form
ulated products and has expanded and begun
to manufacture and sell pharmaceutical products under
Section
503B
of the Compounding Quality Act within the Federal Food, Drug & Cosmetic Act.
Polymed markets and sells
active pharmaceutical ingredient (“
API
”)
and medical devices in North America, Europe, and Asia from its locations in Texas and China. Polymed also deve
lops new compounds
and
processing techniques, and manufactures API at Taihao, a cGMP facility in Chongqing, China.
Commercial Platform
—This operating segment includes Athenex Pharmaceutical Division, which focuses on the manufacturing, distribution, and sales of specialty pharmaceuticals. 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, and mainland China. 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,
|
|
|
|
2019
|
|
|
2018
|
|
Total revenue:
|
|
|
|
|
|
|
|
|
Oncology Innovation Platform
|
|
$
|
144
|
|
|
$
|
25,231
|
|
Global Supply Chain Platform
|
|
|
11,339
|
|
|
|
5,127
|
|
Commercial Platform
|
|
|
14,675
|
|
|
|
8,694
|
|
Total revenue for reportable segments
|
|
|
26,158
|
|
|
|
39,052
|
|
Intersegment revenue
|
|
|
(851
|
)
|
|
|
(1,216
|
)
|
Total consolidated revenue
|
|
$
|
25,307
|
|
|
$
|
37,836
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
Total revenue by product group:
|
|
|
|
|
|
|
|
|
API sales
|
|
$
|
4,831
|
|
|
$
|
2,642
|
|
Medical device sales
|
|
|
—
|
|
|
|
585
|
|
Contract manufacturing revenue
|
|
|
251
|
|
|
|
241
|
|
Commercial product sales
|
|
|
20,081
|
|
|
|
9,137
|
|
License fees
|
|
|
—
|
|
|
|
25,091
|
|
Consulting revenue
|
|
|
105
|
|
|
|
—
|
|
Grant revenue
|
|
|
39
|
|
|
|
140
|
|
Total consolidated revenue
|
|
$
|
25,307
|
|
|
$
|
37,836
|
|
Intersegment revenue is recorded by the selling segment when it is realized or realizable and all revenue recognition criteria are met. Upon consolidation, all intersegment revenue and related cost of sales are eliminated from the selling segment’s ledger.
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net (loss) income attributable to Athenex, Inc.:
|
|
|
|
|
|
|
|
|
Oncology Innovation Platform
|
|
$
|
(27,603
|
)
|
|
$
|
1,509
|
|
Global Supply Chain Platform
|
|
|
(767
|
)
|
|
|
(6,569
|
)
|
Commercial Platform
|
|
|
(6,863
|
)
|
|
|
(2,238
|
)
|
Total consolidated net loss attributable to Athenex, Inc.
|
|
$
|
(35,233
|
)
|
|
$
|
(7,298
|
)
|
16
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Total depreciation and amortization:
|
|
|
|
|
|
|
|
|
Oncology Innovation Platform
|
|
$
|
189
|
|
|
$
|
156
|
|
Global Supply Chain Platform
|
|
|
311
|
|
|
|
467
|
|
Commercial Platform
|
|
|
379
|
|
|
|
245
|
|
Total consolidated depreciation and amortization
|
|
$
|
879
|
|
|
$
|
868
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Oncology Innovation Platform
|
|
$
|
113,808
|
|
|
$
|
135,878
|
|
Global Supply Chain Platform
|
|
|
65,488
|
|
|
|
58,816
|
|
Commercial Platform
|
|
|
41,011
|
|
|
|
36,401
|
|
Total consolidated assets
|
|
$
|
220,307
|
|
|
$
|
231,095
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Total revenue:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
20,335
|
|
|
$
|
9,901
|
|
Spain
|
|
|
—
|
|
|
|
25,000
|
|
India
|
|
|
777
|
|
|
|
962
|
|
Austria
|
|
|
2,173
|
|
|
|
1,243
|
|
China
|
|
|
386
|
|
|
|
648
|
|
United Kingdom
|
|
|
1,023
|
|
|
|
—
|
|
Other foreign countries
|
|
|
613
|
|
|
|
82
|
|
Total consolidated revenue
|
|
$
|
25,307
|
|
|
$
|
37,836
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Total property and equipment, net:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7,283
|
|
|
$
|
6,549
|
|
China
|
|
|
4,966
|
|
|
|
4,898
|
|
Total consolidated property and equipment, net
|
|
$
|
12,249
|
|
|
$
|
11,447
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
Percentage of total revenue by customer:
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
22
|
%
|
|
|
10
|
%
|
Customer B
|
|
|
21
|
%
|
|
|
4
|
%
|
Customer C
|
|
|
21
|
%
|
|
|
7
|
%
|
Customer D
|
|
|
—
|
|
|
|
66
|
%
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Percentage of total accounts receivable by customer:
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
32
|
%
|
|
|
18
|
%
|
Customer B
|
|
|
19
|
%
|
|
|
16
|
%
|
Customer C
|
|
|
10
|
%
|
|
|
—
|
|
Customer D
|
|
|
7
|
%
|
|
|
12
|
%
|
17
1
4
. 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. Following is a description of principal activities – separated by reportable segments – from which the Company generates its revenue (See Note 13
–
Business Segment, Geographic, and Concentration Risk Information
).
|
1.
|
Oncology Innovation Platform
|
License fees and consulting revenue
The Company out-licenses certain of its intellectual property (“IP”) and provides related consulting services to 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 each of its out-licensing contracts with customers to identify each of the performance obligations within the contract. Each out-license contains multiple performance obligations. The Company has determined that each of its out-license agreements with customers are classified as functional licenses and are capable of being distinct, because the IP that is licensed carries standalone value and is not expected to be altered through the life of the agreement. Therefore, for each of its out-licensing agreements, the Company has determined that the execution of the license and delivery of the IP to the licensee is a distinct performance obligation. As such, the Company records revenue at a point-in-time for its out-licensing if any of the transaction price is allocated to the obligation, including up-front licensing fee payments. The Company’s classification of each out-license as such requires significant judgment to be used by management. The Company considers the economic and regulatory characteristics of the licensed IP to determine if it has standalone value on the date of the licensing, which would make the licensing distinct and dictate that the Company recognizes any transaction price allocated to the license performance obligation at a point-in-time. Revenue recognized at a point-in-time for the execution of a distinct licensing of IP amounted to $0 and $25.0 million for the three months ended March 31, 2019 and 2018, respectively.
Other performance obligations included in the Company’s out-licensing agreements include reaching milestone development and regulatory events by performing research and development activities over the licensed IP. The Company did not reach any milestone events during the three months ended March 31, 2019 or 2018.
If the Company reaches any further milestone payments, the Company plans to record the associated milestone payment as revenue at a point-in-time. Certain out-licensing agreements include performance obligations to manufacture and provide drug product in the future when the licensed product is approved for commercial sale. To date, the Company has not satisfied any of these performance obligations as none of its drugs have been approved by the regulatory agencies in any of the licensed territories.
In addition to the multiple performance obligations, the Company’s out-licensing agreements include variable pricing. After the performance obligations are identified, the Company determines each portion of the transaction price, which generally includes upfront fees, milestone payments, and royalty payments. The Company begins by allocating the payments set forth in the agreement to the performance obligation to which the consideration is related. Then, the Company considers whether or not that transaction price is fixed, variable, or subject to return. If any portion of the transaction price is constrained by more than one performance obligation, the Company allocated that portion of the transaction price to the performance obligation that will be satisfied later and will not recognize revenue until it is fully satisfied and the constraint on the transaction price no longer exists. There are no other significant methods employed to allocate the transaction price to performance obligations in a contract. The Company exercises significant judgment when allocating the variable transaction prices to the proper performance obligations, considering if any of those payments are refundable or are contingent on any future events.
The Company did not use any other significant judgments related to out-licensing revenue during the three months ended March 31, 2019 and 2018.
Grant revenue
The Company receives grant award funding to support its continuing research and development efforts. The Company considers these grants to be operating revenue as they support the Company’s primary operating activities. Revenue is recognized when the underlying performance obligation is satisfied, which is generally when all grant eligibility criteria are met at a point-in-time. Grant revenue is not significant to the condensed consolidated financial statements.
18
|
2.
|
Global Supply Chain Platform
|
The Company’s Global Supply Chain Platform manufactures API for use internally in its research and development and clinical studies and for sale to pharmaceutical customers globally. The Company also generates 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. Sales are initially recorded at the list price sold to the wholesaler. Because these prices will be reduced for the end-user, the Company records a contra asset in accounts receivable and a reduction to revenue at the time of the sale, using the difference between the list price and the estimated end-user contract price. 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 and such chargeback is offset against the initial estimated contra asset. The significant estimates inherent in the initial chargeback provision relate to wholesale units pending chargeback and to the ultimate end-user contract selling price. The Company bases the estimate for these factors on product-specific sales and internal chargeback processing experience, as well as estimated wholesaler inventory stocking levels. As of March 31, 2019 and December 31, 2018, the Company’s total provision for chargebacks and other deductions totaled $9.0 million and $11.8 million, respectively, included as a reduction of accounts receivable.
The Company’s total expense for chargebacks and other deductions was $17.5 million and $5.0 million for the three months ended March 31, 2019 and 2018, respectively.
The Company offers cash discounts, which approximate 2.0% 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. The Company expects that its wholesale customers will make prompt payments to take advantage of the cash discounts, and expects customers to use their right of return. Therefore, at the time of sale, product revenue and accounts receivable are reduced by the full amount of the discount offered and the return expected. The Company considers payment performance and historical return rates and adjusts the accrual to reflect actual experience. As of March 31, 2019 and December 31, 2018, the Company’s accrual for cash discounts and return accrual included as a reduction of accounts receivable were not material to the condensed consolidated financial statements.
The Company also 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. Settlement of rebates and fees may generally occur from one to five months from date of sale. The Company provides a provision for contractual allowances at the time of sale based on the historical relationship between sales and such allowances. Contractual allowances are reflected in the condensed consolidated financial statements as a reduction of revenue and accounts receivable or as accrued expenses.
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.
19
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, 2019
|
|
|
|
(In Thousands)
|
|
|
|
Oncology
Innovation
Platform
|
|
|
Global Supply
Chain Platform
|
|
|
Commercial
Platform
|
|
|
Consolidated
Total
|
|
United States
|
|
$
|
—
|
|
|
$
|
5,660
|
|
|
$
|
14,675
|
|
|
$
|
20,335
|
|
India
|
|
|
—
|
|
|
|
777
|
|
|
|
—
|
|
|
|
777
|
|
Austria
|
|
|
—
|
|
|
|
2,173
|
|
|
|
—
|
|
|
|
2,173
|
|
China
|
|
|
144
|
|
|
|
242
|
|
|
|
—
|
|
|
|
386
|
|
United Kingdom
|
|
|
—
|
|
|
|
1,023
|
|
|
|
—
|
|
|
|
1,023
|
|
Other foreign countries
|
|
|
—
|
|
|
|
613
|
|
|
|
—
|
|
|
|
613
|
|
Total revenue
|
|
$
|
144
|
|
|
$
|
10,488
|
|
|
$
|
14,675
|
|
|
$
|
25,307
|
|
|
|
For the Three Months Ended March 31, 2018
|
|
|
|
(In Thousands)
|
|
|
|
Oncology
Innovation
Platform
|
|
|
Global Supply
Chain Platform
|
|
|
Commercial
Platform
|
|
|
Consolidated
Total
|
|
United States
|
|
$
|
—
|
|
|
$
|
1,208
|
|
|
$
|
8,694
|
|
|
$
|
9,901
|
|
India
|
|
|
—
|
|
|
|
962
|
|
|
|
—
|
|
|
|
962
|
|
Austria
|
|
|
—
|
|
|
|
1,243
|
|
|
|
—
|
|
|
|
1,243
|
|
China
|
|
|
231
|
|
|
|
417
|
|
|
|
—
|
|
|
|
648
|
|
Spain
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000
|
|
Other foreign countries
|
|
|
—
|
|
|
|
82
|
|
|
|
—
|
|
|
|
82
|
|
Total revenue
|
|
$
|
25,231
|
|
|
$
|
3,911
|
|
|
$
|
8,694
|
|
|
$
|
37,836
|
|
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,
2019
|
|
|
December 31,
2018
|
|
|
|
(In Thousands)
|
|
Accounts receivable, gross
|
|
$
|
31,032
|
|
|
$
|
26,061
|
|
Chargebacks and other deductions
|
|
|
(10,448
|
)
|
|
|
(13,101
|
)
|
Allowance for doubtful accounts
|
|
|
(8
|
)
|
|
|
(9
|
)
|
Accounts receivable, net
|
|
$
|
20,576
|
|
|
$
|
12,951
|
|
Deferred revenue
|
|
|
131
|
|
|
|
190
|
|
Total contract liabilities
|
|
$
|
131
|
|
|
$
|
190
|
|
The following tables illustrate accounts receivable balances by reportable segments.
|
|
March 31, 2019
|
|
|
|
(In Thousands)
|
|
|
|
Oncology
Innovation
Platform
|
|
|
Global Supply
Chain
Platform
|
|
|
Commercial
Platform
|
|
|
Consolidated
Total
|
|
Accounts receivable, gross
|
|
$
|
—
|
|
|
$
|
7,876
|
|
|
$
|
23,156
|
|
|
$
|
31,032
|
|
Allowance for doubtful accounts, chargebacks, and
other deductions
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
(10,443
|
)
|
|
|
(10,456
|
)
|
Accounts receivable, net
|
|
$
|
—
|
|
|
$
|
7,863
|
|
|
$
|
12,713
|
|
|
$
|
20,576
|
|
20
|
|
December 31, 2018
|
|
|
|
(In Thousands)
|
|
|
|
Oncology
Innovation
Platform
|
|
|
Global Supply
Chain Platform
|
|
|
Commercial
Platform
|
|
|
Consolidated
Total
|
|
Accounts receivable, gross
|
|
$
|
—
|
|
|
$
|
7,814
|
|
|
$
|
18,247
|
|
|
$
|
26,061
|
|
Allowance for doubtful accounts, chargebacks, and
other deductions
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
(13,101
|
)
|
|
|
(13,110
|
)
|
Accounts receivable, net
|
|
$
|
—
|
|
|
$
|
7,805
|
|
|
$
|
5,146
|
|
|
$
|
12,951
|
|
As of March 31, 2019, $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.
As of December 31, 2018, the $0.2 million contract liability related to customer deposits made by customers of the Global Supply Chain Platform. The Company satisfied its performance obligations allocated to these contract liabilities during the three months ended March 31, 2019.
There were no other material changes to contract balances during the three months ended March 31, 2019.
Practical expedients used
During the adoption of ASC 606, the Company applied the practical expedient in paragraph 606-10-10-4, the
Portfolio Approach
. This allowed the Company to apply the new revenue standard to a portfolio of contracts with similar characteristics because it reasonably expected that the effects on the financial statements of applying the guidance to the portfolio would not differ materially from applying the guidance to the individual contracts within that portfolio. The Company used this to determine the cumulative catch-up required under the modified retrospective transaction method. The Company used the portfolio approach for product sales under the Global Supply Chain Platform and product sales under the Commercial Platform. The Company did not use this approach for its out-licensing contracts, because each of those contracts have unique economic characteristics.
The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations related to the license of intellectual property (“IP”). This practical expedient is applied because the out-licensing agreements include sales-based royalties in exchange for the license of IP accounted for in accordance with Topic 606 and there is significant uncertainty surrounding the future variable consideration that could be received.
15. Commitments and Contingencies
Future minimum payments under the non-cancelable operating lease consists of the following as of December 31, 2018 (in thousands):
Year ending December 31:
|
|
Minimum payments
|
|
2019
|
|
$
|
2,943
|
|
2020
|
|
|
2,466
|
|
2021
|
|
|
2,040
|
|
2022
|
|
|
1,902
|
|
2023
|
|
|
1,675
|
|
Thereafter
|
|
|
3,099
|
|
|
|
$
|
14,125
|
|
Legal Proceedings
From time to time, the Company may be subject to claims and litigation arising in the ordinary course of business. These claims could include assertions that the Company’s products infringe existing patents or claims that the use of its products has caused personal injuries. The Company intends to vigorously defend any such litigation that may arise under all defenses that would be available. Regardless of the outcome, litigation can have an adverse impact on us because of prosecution, defense and settlement costs, unfavorable awards, diversion of management resources and other factors.
21
Vas
o
pressin
(Generic version of
Vasostrict®
)
On August 13, 2018, Athenex Pharma Solutions and Athenex Pharmaceutical Division, LLC, our wholly-owned subsidiaries, filed a complaint for declaratory judgment against Par Pharmaceuticals, Inc., Par Sterile Products, LLC and Endo Par Innovation Company, LLC (together, Par) in the United States District Court for the Western District of New York (the Court), seeking a declaratory judgment from the Court that our compounded vasopressin drug products in ready-to-use form do not infringe on patents that Par has with respect to its Vasostrict® product and that Par’s patents are invalid. On October 22, 2018, Par filed a motion to dismiss the complaint on the basis that the Court does not have subject matter jurisdiction. Athenex has opposed Par’s motion and that motion is fully briefed and currently pending. Par has not filed a claim for infringement of its patents in this suit but if Par’s motion to dismiss Athenex’s patent suit is denied and the declaratory action proceeds, Par could proceed to lodge a counterclaim for patent infringement. If such an infringement claim were brought and the Court ruled for Par, Athenex could be enjoined from further production of compounded vasopressin within in the United States and sale of compounded vasopressin in or from the United States and for payment of damages to Par for U.S. manufacture or sale of compounded vasopressin that has already taken place, which could have a material adverse effect on our business.
In addition, on August 13, 2018, Athenex Pharma Solutions, LLC and Athenex Pharmaceutical Division, LLC filed a motion to intervene and seek the dismissal of Par’s complaint against the FDA and certain governmental officials in the United States District Court for the District of Columbia. Par has sought declaratory and injunctive relief against the FDA and certain governmental officials that: (i) vasopressin be delisted from Category 1 of the FDA’s list of bulk drug substances under evaluation pursuant to Section 503B of the Federal Food, Drug and Cosmetic Act (FDCA), (ii) the expansion of the FDA’s enforcement discretion to Category 1 substances, be enjoined; and (iii) that the FDA be enjoined from authorizing the compounding of vasopressin under Section 503B of the FDCA. Our motion to intervene was granted. Par filed a preliminary injunction motion and we and the FDA filed motions for judgment on the pleadings. This action is currently stayed. On March 4, 2019, the FDA published in the Federal Register its final decision not to include vasopressin on the list of bulk drug substances for which there is a clinical need. Also, on March 4, 2019, Athenex, Inc., APS, and APD filed a complaint against the FDA seeking to vacate its decision. In this case, the FDA has represented to the Court that “until the Court issues a decision on the merits of this action, the FDA will not initiate enforcement action against Athenex based solely on Athenex’s use of the bulk drug substance vasopressin to compound drugs and distribute those drugs” and the Court has incorporated the FDA’s representation into its published order. Because of the Court’s order, Athenex will continue to produce and distribute compounded vasopressin during the period that the case is pending and will reevaluate its position after the Court issues its decision on the merits of Athenex’s lawsuit. The Court is expected to issue its opinion during the second or third quarter of 2019. On August 14, 2018, the Company began selling compounded vasopressin injection in ready-to-use premix IV bags. If the Company is unsuccessful in obtaining the relief it seeks in its lawsuit against the FDA, or there is an adverse final determination that Par’s patent is valid and infringed, the Company would have to abandon this revenue-generating line of business; such events could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
16. Subsequent Events
On May 3, 2019, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) with Perceptive Life Sciences Master Fund, Ltd., venBio Select Fund LLC, OrbiMed Partners Master Fund Limited, and The Biotech Growth Trust PLC (collectively, the “Investors”), pursuant to which the Company agreed to sell an aggregate of 10 million shares of its common stock to the Investors at a purchase price of $10.00 per share for aggregate gross proceeds of $100 million (the “Private Placement”). The Private Placement closed on May 7, 2019.
Pursuant to the Share Purchase Agreement, the Company agreed to enter into a registration rights agreement (the “Registration Rights Agreement”) with the Investors at the closing of the Private Placement. Under the Registration Rights Agreement, the Company agreed to register for resale the shares of common stock the Investors purchased in the offering under the Securities Act of 1933, as amended (the “Securities Act”). Pursuant to the Registration Rights Agreement, the Company will prepare and file a registration statement with the Securities and Exchange Commission within 90 days of the closing date of the Private Placement and agreed to use its best efforts to have the registration statement declared effective as soon as practicable. For each month the Company is unable to meet its obligations to have the registration statement declared effective, it will be obligated to pay each Investor an amount in cash equal to one percent of the aggregate purchase price paid by that Investor pursuant to the Share Purchase Agreement, provided that in no event will the total payment to that Investor exceed 25% of its aggregate purchase price. In addition, subject to certain limitations, following the signing of the Registration Rights Agreement, the Investors will have piggyback registration rights if no registration statement registering the shares sold in the Private Placement is effective and the Company is otherwise filing a registration statement under the Securities Act for the sale of its securities for its own account or for the account of any of its stockholders.
22