10-Q 1 atnx-10q_20180630.htm 10-Q atnx-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2018

OR

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

For the transition period from              to             

Commission File Number: 001-38112

 

ATHENEX, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

43-1985966

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

1001 Main Street, Suite 600

Buffalo, NY

14203

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code:

(716) 427-2950

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of August 7, 2018, the registrant had 66,342,968 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


Table of Contents

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

1

Item 1.

 

Financial Statements

 

1

 

 

Condensed Consolidated Balance Sheets (Unaudited)

 

1

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

 

2

 

 

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)

 

3

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

4

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

5

Item 2.

 

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

 

20

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

Item 4.

 

Controls and Procedures

 

30

PART II.

 

OTHER INFORMATION

 

32

Item 1.

 

Legal Proceedings

 

32

Item 1A.

 

Risk Factors

 

32

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

Item 3.

 

Defaults Upon Senior Securities

 

33

Item 4.

 

Mine Safety Disclosures

 

33

Item 5.

 

Other Information

 

33

Item 6.

 

Exhibits

 

34

Exhibit Index

 

34

Signatures

 

36

 

 

 

 


 

i


PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

(In thousands, except share and per share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,068

 

 

$

39,284

 

Short-term investments

 

 

66,593

 

 

 

11,753

 

Accounts receivable, net of chargebacks and other deductions of $7,416

   and $3,711, respectively, and allowance for doubtful accounts

   of $26 and $84, respectively

 

 

5,138

 

 

 

8,468

 

Inventories

 

 

21,803

 

 

 

16,561

 

Prepaid expenses and other current assets

 

 

11,951

 

 

 

7,692

 

Total current assets

 

 

119,553

 

 

 

83,758

 

Property and equipment, net

 

 

10,404

 

 

 

9,651

 

Investment

 

 

447

 

 

 

328

 

Goodwill

 

 

37,665

 

 

 

37,795

 

Intangible assets, net

 

 

7,736

 

 

 

8,572

 

Deferred income tax asset

 

 

416

 

 

 

121

 

Other long-term assets

 

 

1,067

 

 

 

188

 

Total assets

 

$

177,288

 

 

$

140,413

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,342

 

 

$

16,659

 

Accrued expenses

 

 

26,833

 

 

 

25,776

 

Deferred revenue

 

 

5,526

 

 

 

1,202

 

Current portion of long-term debt - related parties

 

 

 

 

 

491

 

Current portion of long-term debt

 

 

1,050

 

 

 

1,015

 

Total current liabilities

 

 

47,751

 

 

 

45,143

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Deferred compensation

 

 

2,598

 

 

 

2,313

 

Deferred rent

 

 

2,082

 

 

 

1,760

 

Capital lease obligations

 

 

449

 

 

 

475

 

Total liabilities

 

 

52,880

 

 

 

49,691

 

Commitments and contingencies (See Note 12)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   June 30, 2018 and December 31, 2017; 65,293,660 and 59,894,362 shares

   issued at June 30, 2018 and December 31, 2017, respectively; 63,620,740 and

   58,221,442 shares outstanding at June 30, 2018 and December 31, 2017,

   respectively

 

 

65

 

 

 

60

 

Additional paid-in capital

 

 

501,658

 

 

 

423,805

 

Accumulated other comprehensive income (loss)

 

 

(29

)

 

 

(146

)

Accumulated deficit

 

 

(370,433

)

 

 

(326,276

)

Less: treasury stock, at cost; 1,672,920 shares at June 30, 2018 and

   December 31, 2017

 

 

(7,406

)

 

 

(7,406

)

Total Athenex, Inc. stockholders' equity

 

 

123,855

 

 

 

90,037

 

Non-controlling interests

 

 

553

 

 

 

685

 

Total stockholders' equity

 

 

124,408

 

 

 

90,722

 

Total liabilities and stockholders' equity

 

$

177,288

 

 

$

140,413

 

 

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

1


ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales, net

 

$

11,471

 

 

$

4,416

 

 

$

24,076

 

 

$

8,316

 

License fees and consulting revenue

 

 

91

 

 

 

98

 

 

 

25,182

 

 

 

696

 

Grant revenue

 

 

3

 

 

 

81

 

 

 

143

 

 

 

164

 

Total revenue

 

 

11,565

 

 

 

4,595

 

 

 

49,401

 

 

 

9,176

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

9,443

 

 

 

4,137

 

 

 

20,769

 

 

 

6,976

 

Research and development expenses

 

 

26,572

 

 

 

17,597

 

 

 

47,875

 

 

 

44,005

 

Selling, general, and administrative expenses

 

 

12,817

 

 

 

13,632

 

 

 

25,897

 

 

 

23,431

 

Total costs and operating expenses

 

 

48,832

 

 

 

35,366

 

 

 

94,541

 

 

 

74,412

 

Operating loss

 

 

(37,267

)

 

 

(30,771

)

 

 

(45,140

)

 

 

(65,236

)

Interest (income) expense

 

 

(368

)

 

 

3,281

 

 

 

(595

)

 

 

5,657

 

Loss on derivative liability

 

 

 

 

 

4,587

 

 

 

 

 

 

8,863

 

Loss before income tax benefit

 

 

(36,899

)

 

 

(38,639

)

 

 

(44,545

)

 

 

(79,756

)

Income tax expense (benefit)

 

 

51

 

 

 

29

 

 

 

(256

)

 

 

(63

)

Net loss

 

 

(36,950

)

 

 

(38,668

)

 

 

(44,289

)

 

 

(79,693

)

Less: net loss attributable to non-controlling interests

 

 

(91

)

 

 

(43

)

 

 

(132

)

 

 

(80

)

Net loss attributable to Athenex, Inc.

 

$

(36,859

)

 

$

(38,625

)

 

$

(44,157

)

 

$

(79,613

)

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

 

 

75

 

 

 

(37

)

 

 

40

 

 

 

(34

)

Foreign currency translation adjustment, net of income taxes

 

 

(641

)

 

 

181

 

 

 

77

 

 

 

680

 

Comprehensive loss

 

$

(37,425

)

 

$

(38,481

)

 

$

(44,040

)

 

$

(78,967

)

Net loss per share attributable to Athenex, Inc. common stockholders, basic

   and diluted (See Note 9)

 

$

(0.58

)

 

$

(0.88

)

 

$

(0.71

)

 

$

(1.89

)

Weighted-average shares used in computing net loss per share attributable to

   Athenex, Inc. common stockholders, basic and diluted (See Note 9)

 

 

63,310,219

 

 

 

43,741,096

 

 

 

62,487,328

 

 

 

42,208,612

 

 

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

.

2


ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(In thousands, except share data)

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

other

 

 

Treasury Stock

 

 

Total Athenex,

Inc.

 

 

Non-

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

paid-in

capital

 

 

Accumulated

deficit

 

 

comprehensive

income (loss)

 

 

Shares

 

 

Amount

 

 

stockholders'

equity

 

 

controlling

interests

 

 

stockholders'

equity

 

Balance at December 31, 2016

 

 

42,342,706

 

 

$

42

 

 

$

237,581

 

 

$

(195,106

)

 

$

(1,304

)

 

 

(1,656,920

)

 

$

(7,406

)

 

$

33,807

 

 

$

862

 

 

$

34,669

 

Sale of common stock, net of costs and discounts of $11,706

 

 

6,900,000

 

 

 

7

 

 

 

64,187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64,194

 

 

 

 

 

 

64,194

 

Conversion of bonds

 

 

7,727,273

 

 

 

8

 

 

 

84,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

85,000

 

 

 

 

 

 

85,000

 

Stock-based compensation cost

 

 

400,000

 

 

 

 

 

 

7,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,740

 

 

 

 

 

 

7,740

 

Research and development licensing fee satisfied with stock

 

 

568,182

 

 

 

1

 

 

 

6,249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,250

 

 

 

 

 

 

6,250

 

Vesting of restricted stock

 

 

391,982

 

 

 

1

 

 

 

1,079

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,080

 

 

 

 

 

 

1,080

 

Stock options and warrants exercised

 

 

406,386

 

 

 

 

 

 

439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

439

 

 

 

 

 

 

439

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,000

)

 

 

 

 

 

 

 

 

 

 

 

 

Non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49

 

 

 

49

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(79,613

)

 

 

 

 

 

 

 

 

 

 

 

(79,613

)

 

 

(80

)

 

 

(79,693

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

646

 

 

 

 

 

 

 

 

 

646

 

 

 

 

 

 

646

 

Balance at June 30, 2017 (unaudited)

 

 

58,736,529

 

 

$

59

 

 

$

402,267

 

 

$

(274,719

)

 

$

(658

)

 

 

(1,672,920

)

 

$

(7,406

)

 

$

119,543

 

 

$

831

 

 

$

120,374

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

other

 

 

Treasury Stock

 

 

Total Athenex,

Inc.

 

 

Non-

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

paid-in

capital

 

 

Accumulated

deficit

 

 

comprehensive

income (loss)

 

 

Shares

 

 

Amount

 

 

stockholders'

equity

 

 

controlling

interests

 

 

stockholders'

equity

 

Balance at December 31, 2017

 

 

59,894,362

 

 

$

60

 

 

$

423,805

 

 

$

(326,276

)

 

$

(146

)

 

 

(1,672,920

)

 

$

(7,406

)

 

$

90,037

 

 

$

685

 

 

$

90,722

 

Sale of common stock, net of costs and discounts of

   $4,611

 

 

4,765,000

 

 

 

4

 

 

 

68,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

68,055

 

 

 

 

 

 

68,055

 

Stock-based compensation cost

 

 

 

 

 

 

 

 

5,242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,242

 

 

 

 

 

 

5,242

 

Vesting of restricted stock

 

 

210,000

 

 

 

 

 

 

1,002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,002

 

 

 

 

 

 

1,002

 

Stock options and warrants exercised

 

 

317,117

 

 

 

1

 

 

 

1,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,559

 

 

 

 

 

 

1,559

 

Research and development licensing fee satisfied with stock

 

 

107,181

 

 

 

 

 

 

2,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,000

 

 

 

 

 

 

2,000

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(44,157

)

 

 

 

 

 

 

 

 

 

 

 

(44,157

)

 

 

(132

)

 

 

(44,289

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

117

 

 

 

 

 

 

 

 

 

117

 

 

 

 

 

 

117

 

Balance at June 30, 2018 (unaudited)

 

$

65,293,660

 

 

$

65

 

 

$

501,658

 

 

$

(370,433

)

 

$

(29

)

 

$

(1,672,920

)

 

$

(7,406

)

 

$

123,855

 

 

$

553

 

 

$

124,408

 

 

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

 

 

3


 

ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(44,289

)

 

$

(79,693

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,665

 

 

 

1,664

 

Stock-based compensation expense

 

 

6,244

 

 

 

8,820

 

Change in fair value of derivative liability

 

 

 

 

 

8,863

 

Amortization of debt discount

 

 

 

 

 

3,040

 

Deferred rent expense

 

 

322

 

 

 

424

 

(Gain) loss on disposal of assets and impairment charges

 

 

(62

)

 

 

80

 

Research and development license fees settled with convertible bond

   and stock

 

 

2,000

 

 

 

13,250

 

Interest incurred on converted bonds

 

 

 

 

 

3,350

 

Deferred income taxes

 

 

(295

)

 

 

(108

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables, net

 

 

3,330

 

 

 

(1,006

)

Prepaid expenses and other assets

 

 

(4,259

)

 

 

(824

)

Inventories

 

 

(5,242

)

 

 

(5,020

)

Accounts payable and accrued expenses

 

 

2,557

 

 

 

(1,643

)

Net cash used in operating activities

 

 

(38,029

)

 

 

(48,803

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,635

)

 

 

(3,442

)

Payments for licenses

 

 

-

 

 

 

(1,550

)

Purchases of short-term investments

 

 

(71,090

)

 

 

(33,202

)

Sale of short-term investments

 

 

16,172

 

 

 

11,657

 

Net cash used in investing activities

 

 

(56,553

)

 

 

(26,537

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of stock

 

 

72,666

 

 

 

75,900

 

Proceeds from issuance of convertible bonds

 

 

 

 

 

30,000

 

Costs incurred related to the sale of stock

 

 

(4,611

)

 

 

(9,044

)

Proceeds from exercise of stock options

 

 

1,559

 

 

 

439

 

Investment from non-controlling interest

 

 

 

 

 

49

 

Repayment of capital lease obligations and long-term debt

 

 

(515

)

 

 

(553

)

Net cash provided by financing activities

 

 

69,099

 

 

 

96,791

 

Net (decrease) increase in cash and cash equivalents

 

 

(25,483

)

 

 

21,451

 

Cash and cash equivalents, beginning of period

 

 

39,284

 

 

 

33,125

 

Effect of exchange rate changes on cash and cash equivalents

 

 

267

 

 

 

574

 

Cash and cash equivalents, end of period

 

$

14,068

 

 

$

55,150

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued purchases of property and equipment

 

$

133

 

 

$

80

 

Cost of equity raise in accounts payable and accrued expenses

 

$

1,067

 

 

$

1,124

 

Convertible bond issued in lieu of licensing cash payment

 

$

 

 

$

7,000

 

Common stock issued in lieu of licensing cash payment

 

$

2,000

 

 

$

6,250

 

Common stock issued upon the conversion of bonds

 

$

 

 

$

85,000

 

Property and equipment financed under capital lease

 

$

 

 

$

234

 

 

 

 

 

 

 

 

 

 

 

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

 

4


 

Athenex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Company and Nature of Business

Organization and Description of Business

Athenex, Inc. (the “Company” or “Athenex”) is a global biopharmaceutical company dedicated to the discovery, development and commercialization of novel therapies for the treatment of cancer through its Orascovery and Src Kinase Inhibition research platforms. The Company originally formed under the name Kinex Pharmaceuticals LLC (“Kinex”) 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.

The Company’s primary activities since inception have been conducting research and development activities internally and through corporate collaborators, in-licensing and out-licensing pharmaceutical compounds and technology, and conducting preclinical and clinical testing, identifying and evaluating additional drug candidates for potential in-licensing or acquisition, and raising capital to support development activities. In addition to licensing and consulting revenue, the Company also generates revenue from its commercial and global supply chain platforms. See Note 11 – Revenue Recognition.

Initial Public Offering

In June 2017, the Company completed its initial public offering (“IPO”) on the NASDAQ Global Select Market. An aggregate of 6,900,000 shares of its common stock were sold at $11.00 per share for cash proceeds of $64.2 million, net of underwriting discounts and commissions of $6.1 million and offering costs of $5.6 million.

In connection with the IPO, convertible bonds with an aggregate principal value of $68.0 million, and a carrying value of $55.8 million, were converted into 7,727,273 shares of common stock. In September 2017, the remaining convertible bond with a principal value of $7.0 million was converted into 795,455 shares of common stock, at a 20% discount from the IPO price.

Follow-On Offering

In January 2018, the Company completed an underwritten public 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.

Significant Risks and Uncertainties

The Company has incurred operating losses since its inception and, as a result, as of June 30, 2018 and December 31, 2017 had an accumulated deficit of $370.4 million and $326.3 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.

These 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 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.

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, market acceptance of the Company’s products, and protection of proprietary

5


 

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.

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 and six months ended June 30, 2018 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, 2017, filed with the SEC on March 26, 2018.

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.

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 papers 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.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” which requires that lessees distinguish between finance and operating leases and recognize the assets and liabilities that arise from the leases on the balance sheet. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is required to be applied on a modified retrospective basis. The Company is evaluating the effect of this standard on its consolidated financial statements.

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 is evaluating the effect of this standard on its consolidated financial statements.

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Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU has replaced most historical revenue recognition guidance in U.S. GAAP when it became effective. The Company adopted this standard on January 1, 2018 using the modified retrospective transition method. The Company did not record a cumulative catch-up adjustment upon adoption, as there was no effect on the timing or amount of revenue recognized for existing contracts that were not completed as of the implementation date. Refer to Note 11 – Revenue Recognition for more information on the effect of this ASU.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash. The primary purpose of this ASU is to reduce the diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. This ASU will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017. This ASU is required to be applied retrospectively. The Company adopted this standard on January 1, 2018 and the adoption of this ASU did not impact the Company’s condensed consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Stock Compensation—Scope of Modification Accounting,” which provides guidance as to when a modification of a share-based award must be accounted for. In general, if a modification of the terms and conditions of an award does not change the fair value of the award (or calculated value or intrinsic value, if used instead of fair value), does not change the vesting conditions of the award, and does not change the classification of the award as an equity instrument or a liability instrument, then an entity need not account for the modification. This guidance is effective in the first quarter of fiscal year 2018. The new rules are applied prospectively to awards modified after the adoption date. The Company adopted this standard on January 1, 2018 and the adoption of this ASU did not impact the Company’s condensed consolidated financial statements.

3. Inventories

Inventories consist of the following (in thousands):

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Raw materials and purchased parts

 

$

2,441

 

 

$

1,471

 

Work in progress

 

 

2,756

 

 

 

1,877

 

Finished goods

 

 

16,606

 

 

 

13,213

 

Total inventories

 

$

21,803

 

 

$

16,561

 

 

4. Intangible Assets, net

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

 

 

 

June 30, 2018

 

 

 

Cost/Fair

Value

 

 

Accumulated

Amortization

 

 

Impairments

 

 

Net

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

4,650

 

 

$

1,615

 

 

$

 

 

$

3,035

 

Polymed customer list

 

 

1,593

 

 

 

808

 

 

 

 

 

 

785

 

Polymed technology

 

 

3,712

 

 

 

893

 

 

 

 

 

 

2,819

 

Product rights

 

 

530

 

 

 

198

 

 

 

 

 

 

332

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

1,025

 

 

 

 

 

 

 

 

 

1,025

 

Effect of currency translation adjustment

 

 

(260

)

 

 

 

 

 

 

 

 

(260

)

Total intangible assets, net

 

$

11,250

 

 

$

3,514

 

 

$

-

 

 

$

7,736

 

 

7


 

 

 

December 31, 2017

 

 

 

Cost/Fair

Value

 

 

Accumulated

Amortization