| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Revenue Recognition
The Company sells ELZONRIS in the U.S. to one customer and one customer internationally through a title distribution channel. The U.S. customer subsequently resells ELZONRIS to a limited number of specialty distributors who, in turn, distribute ELZONRIS to specialty hospitals and the international customer subsequently resells and distributes ELZONRIS outside of the U.S. directly to hospitals in certain countries that participate in the early access program (EAP) in place as of December 31, 2019.
The Company recognizes revenue for each separately identifiable performance obligation in a contract representing a promise to transfer a distinct good or service to a customer. The Company performs the following five steps to determine the amount of revenue to be recognized for each separately identifiable performance obligation: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize 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 Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract, the Company assesses the goods or services promised within each contract, determines which goods and services are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied, which is at point in time or upon delivery. The Company determined that the delivery of its product to its customer constitutes a single performance obligation as there are no other promises to deliver goods or services.
The Company records revenue at the product's wholesale acquisition costs and adjusted for applicable government contract fees, product returns, commercial co-payment assistance program transactions, and distribution service fees that are offered within contracts between the Company and its customer, payors, and other indirect customers relating to the sale of its product.
Reserves are recorded at the time of sale to the customer to reflect the Company’s best estimates of the amount of consideration expected to be received based on the historical amounts earned, or expected to be claimed, and are classified as reductions of accounts receivable (if the amount is payable to the Customer and right of offset exists) or a current liability (if the amount is payable to a party other than a Customer) on its consolidated balance sheet. The reserves are based on the expected value method and a range of outcomes and are probability weighted in accordance with ASC 606. The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under contracts will not occur in a future period. The Company's analyses contemplate the application of the constraint in accordance with ASC 606. Actual amounts of consideration ultimately received may differ from the Company's estimates. If actual results in the future vary from the Company's estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Shipping and handling are considered to be fulfillment activities and are not considered separate performance obligations. The Company has assessed the existence of a significant financing component in the agreement with its customer. The payment terms with its customer do not exceed one year and therefore, no amount of consideration has been allocated as a financing component. Taxes collected related to product sales are remitted to governmental authorities and are excluded from revenue.
Government Contracts
The Company has entered into contracts (i) to participate in the Medicaid Drug Rebate Program and the Medicare Part D program, and (ii) to sell to the U.S. Department of Veterans Affairs, 340b entities and other government agencies ("Government Payors") so that ELZONRIS will be eligible for purchase by, in partial or full reimbursement from, such Government Payors.
The Company estimates the rebates that it will provide to Government Payors for these programs that require rebates. These rebate estimates are based upon (i) the government-mandated discounts applicable to government-funded programs, (ii) information obtained from its customers and (iii) information obtained from other third parties regarding the payor mix for ELZONRIS. The liability for these rebates consists of estimates of claims for the current year and estimated future claims that will be made for product shipments that have been recognized as revenue but remain in the distribution channel inventories at the end of each reporting period. These reserves are recorded in the same period the revenue is recognized, resulting in a reduction of product revenue and accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than a Customer), which is included in accounts payable and accrued expenses. For Medicare Part D, the Company estimates the number of patients in the prescription drug coverage gap for whom it will owe an additional discount under the Medicare Part D program.
Product Returns
Consistent with industry practice, the Company offers a limited right of return for product that has been purchased. The Company estimates, on a quarterly basis, the number of vials that are held in inventory throughout the distribution channel which may be returned by its customers. Amounts for estimated product returns are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as a component of accounts payable and accrued expenses in the consolidated balance sheet.
Commercial Co-payment Assistance Program
The Company offers a co-payment assistance program where permitted by law and which is intended to provide financial assistance to qualified commercially-insured patients who are required to pay prescription drug copayments based on the terms of their prescription drug insurance plans. The calculation of the accrual for co-payment assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as a component of accrued expenses and other current liabilities.
Distribution Fees
Distribution fees include fees paid to the Company's distributors for the distribution of ELZONRIS based on contractual rates. In addition, the Company compensates for data and other administrative activities. Therefore, estimates for these costs are recorded as a reduction of revenue, based on contractual terms and included as a component of accrued expenses and other current liabilities.
Grant Income Recognition
In October 2013, the Company entered into a contract with the Leukemia and Lymphoma Society, or LLS, whereby LLS agreed to provide funding to the Company not to exceed $3.5 million. LLS is a national voluntary health organization that, among other activities, encourages and sponsors research relating to blood cancers to develop therapies to cure or mitigate these diseases. This research grant was awarded to the Company to support funding some of the costs for the ongoing ELZONRIS clinical trials. Grant payments received prior to the Company's performance of work required by the terms of the research grant are recorded as deferred income and recognized as grant income once work is performed and qualifying costs are incurred. The Company has recognized approximately $0, $0.5 million, and $0.9 million of income related to the LLS grant for the years ended December 31, 2019, 2018 and 2017, respectively, which reflect twelve months of income recognized, respectively, on a straight-line basis, based on the Company's best estimates of the timing of work to be performed and qualifying costs incurred. The Company has received $3.5 million from LLS to date.
Accounts Receivable, Net
Accounts receivable, net primarily relates to amounts due from the Company's customer. The Company analyzes accounts that are past due for collectability and provides an allowance for receivables when collection becomes doubtful. No reserve has been recorded relating to an allowance for doubtful accounts at December 31, 2019.
Cost of Goods Sold
Cost of goods sold consists of all costs related to manufacturing ELZONRIS finished drug product for sale to the Company's customer. These costs include expenses incurred by the Company's contract manufacturing organizations ("CMOs") to manufacture drug substance and drug product. Cost of goods sold also includes expenses related to labeling and packaging of drug product, indirect manufacturing overhead and stability testing. Royalty costs due to the licensor of ELZONRIS are also recorded in cost of goods sold as a period cost.
Cash Equivalents
Cash equivalents consist of highly liquid instruments purchased with an original maturity of three months or less. The Company primarily invests in highly liquid cash equivalents, investments in U.S. Treasury and Agency securities and related money market funds and FDIC-insured bank certificates of deposit, with the balance in commercial bank operating accounts. At December 31, 2019 and 2018, cash equivalents consisted of deposits in financial institutions and money market mutual funds invested in U.S. treasury securities. The Company maintains its cash deposits and cash equivalents with well-known and stable financial institutions.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents. The Company primarily invests cash, cash equivalents and short-term investments in US Treasury and Agency securities and related money market funds and FDIC-insured bank certificates of deposits with the balance in commercial bank operating accounts.
The Company has not experienced any losses from credit risks.
Foreign Currency
The functional currency of the Company’s international subsidiaries is generally the Euro. The Company translates the financial statements of its international subsidiaries to U.S. dollars using month-end exchange rates for assets and liabilities, and average exchange rates for revenue, costs and expenses. The Company records translation gains and losses in accumulated other comprehensive income (loss) as a component of stockholders’ equity. Foreign currency transaction gains and losses are included within other expense, net in the consolidated statements of operations.
Inventory
The Company capitalizes inventory costs associated with the manufacturing of ELZONRIS after regulatory approval or when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. Otherwise, such costs are expensed as research and development. A significant amount of manufacturing costs for ELZONRIS recognized as revenue during the year ended December 31, 2019 were expensed to research and development prior to FDA approval of ELZONRIS on December 21, 2018.
The Company values its inventories at the lower of cost or estimated realizable value. The Company determines the cost of inventories, which includes amounts related to materials and manufacturing overhead, on a first-in, first-out, or FIFO, method. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and it writes down any excess and obsolete inventories to their estimated realizable value in the period in which the impairment is first identified. Such impairment charges, should they occur, are recorded within cost of goods sold. The determination of whether inventory costs will be realizable requires estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required which would be recorded as a cost of goods sold in the statement of operations.
Investments
The Company’s investments are considered to be available-for-sale and are carried at fair value. Unrealized gains and losses, if any, are reported as a separate component of stockholders’ equity and are not reflected in the statements of operations until a sale transaction occurs or when declines in fair value are deemed to be other-than-temporary (“OTT”). The cost of investments classified as available-for-sale are adjusted for the amortization of premiums and accretion of discounts to maturity and recorded in other expense and other income, respectively. Realized gains and losses, if any, are determined using the specific identification method and are included in other income and other expense, respectively. Investments with original maturities beyond 90 days at the date of purchase and which mature at, or less than twelve months from, the balance sheet date are classified as current. Investments with a maturity beyond twelve months from the balance sheet date are classified as long-term.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, investments, other current assets, accounts payable and accrued liabilities. Cash and cash equivalents, and short-term investments are carried at fair value (see Note 9). Financial instruments including other current assets, accounts payable and accrued liabilities are carried at cost, which approximate fair value given their short-term nature.
Other-Than-Temporary Impairment Losses on Investments
The Company regularly monitors its available-for-sale investments portfolio to evaluate the necessity of recording impairment losses for OTT declines in the fair value of investments. Management makes this determination through the consideration of various factors such as management’s intent and ability to retain an investment for a period of time sufficient to allow for any anticipated recovery in market value. OTT impairment losses result in a permanent reduction of the cost basis of an investment. For the years ended December 31, 2019 and 2018, the Company did not realize any investment losses due to OTT declines in fair value.
Property and Equipment
Property and Equipment are stated at cost and depreciated on a straight-line basis over the shorter of their estimated useful lives or related contract terms beginning in the year the asset was placed into service. Normal repair and maintenance costs are expensed as incurred. The useful lives by asset category are as follows:
Furniture and Fixtures
3-5 years
Computer Equipment
5 years
Manufacturing Equipment
7 years
Leasehold improvements are amortized over the lesser of the lease terms or the estimated useful life of the improvements and such amortization is included in depreciation expense.
Leases
The Company leases office space and certain equipment. Under ASC 842, at contract inception, the Company determines whether a contract is or contains a lease and whether the lease should be classified as an operating or finance lease. The Company recognizes operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses incremental borrowing rate based on the information available at commencement date to determine the present value of future payments and the appropriate lease classification. The Company defines initial lease term to include renewal options determined to be reasonably certain. In adoption of ASC 842, the Company elected not to recognize a right-of-use asset and a lease liability for leases with an initial term of 12 months or less; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For tenant improvement incentives, determined to be a leasehold improvement owned by the Company, it generally records a deferred rent liability and amortizes the deferred rent over the term of the lease as a reduction to rent expense. For rent holidays and rent escalation clauses during the lease term, the company records rental expense on a straight-line basis over the term of the lease. For these lease incentives, the company uses the date of initial possession as the commencement date, which is generally when the Company is given the right of access to the space and begins to make improvements in preparation for intended use.
Finance leases are not material to its consolidated financial statements and the Company is not a lessor in any of its lease arrangements. The Company does not have any material restrictions, covenants or residual value guarantees in its lease agreements.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, the furniture and fixtures, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. The Company purchased fixed assets during 2019, 2018 and 2017. For the years ended December 31, 2019, 2018 and 2017, the Company did not realize any impairment losses.
Accrued Clinical Development Costs
Outside research costs are a component of research and development expense. These expenses include fees paid to contract research organizations (“CROs”) and other service providers that conduct certain clinical and product development activities on behalf of the Company. Depending upon the timing of payments to the service providers, the Company recognizes prepaid expenses or accrued expenses related to these costs. These accrued or prepaid expenses are based on management’s estimates of the work performed under service agreements, milestones achieved and experience with similar contracts. The Company monitors each of these factors and adjusts estimates accordingly.
Research and Development Costs
Research and development costs are comprised primarily of costs for personnel, including salaries and benefits; clinical studies administered by third-party investigators and managed by Stemline personnel; materials and supplies to support the Company’s clinical programs; contracted research; manufacturing; related consulting arrangements; costs related to upfront and milestone payments under license agreements; and other expenses incurred to sustain the Company’s overall research and development programs. Where milestone payments are due to third parties under research and development collaboration arrangements or other contractual agreements, the milestone payment obligations are expensed when the milestone conditions are met and the amount of payment is reasonably estimable. Internal research and development costs are expensed as incurred. Third-party research and development costs are expensed as the contracted work is performed. In certain circumstances, the Company is required to make advance payments to vendors for goods or services that will be received in the future for use in research and development activities. In such circumstances, the advance payments are deferred and are expensed when activities have been performed or when the goods have been received.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expenses. Advertising expenses were $0.6 million, $0, and $0 for the fiscal years ended December 31, 2019, 2018, and 2017, respectively.
Income Taxes
The Company use the liability method of accounting for income tax as set forth in the authoritative guidance for income taxes. Under this method, the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the respective carrying amounts and tax bases of its assets and liabilities.
The Company continues to assess the ability to realize deferred tax assets, which primarily consist of net operating losses, or NOL, carry-forwards. In assessing the ability to realize these deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The Company establishes valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized. The factors used to assess the likelihood of realization includes the latest forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. As of December 31, 2019, 2018 and 2017, the Company’s deferred tax assets had full valuation allowances on them as it did not have sufficient positive evidence to recognize such deferred tax assets.
The Internal Revenue Code of 1986, as amended (the “Code”), provides for a limitation of the annual use of net operating losses and other tax attributes (such as research and development tax credit carryforwards) following certain ownership changes (as defined by the Code) that could limit its ability to utilize these carryforwards. At this time, the Company has not completed a study to assess whether an ownership change under section 382 of the Code has occurred, or whether there have been multiple ownership changes since its formation, due to the costs and complexities associated with such a study. The Company may have experienced various ownership changes, as defined by the Code, as a result of past financing transactions. Accordingly, the Company’s ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes. Therefore, the Company may not be able to take full advantage of these carryforwards for federal or state income tax purposes.
If any of the Company’s products are approved for commercial sale and it starts to realize profitability, it may determine that there is sufficient positive evidence to support a reversal of, or decrease in, the valuation allowance on its deferred tax assets. If the Company was to reverse all or some part of its valuation allowance, the consolidated financial statements in the period of reversal would likely reflect an increase in assets on its balance sheet and a corresponding tax benefit to the statement of operations in the amount of the reversal.
As of December 31, 2019, the Company had net operating losses of $284.7 million for federal and $288.5 million for state purposes and research and development credits of $39.0 million which expire in 2023 through 2038.
The Company has applied Accounting Standards Codification (ASC) 740-10, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109, on January 1, 2007. The Company analyzed its tax position in all jurisdictions where it is required to file an income tax return and concluded that it does not have any material unrecognized tax benefits. The Company files U.S. income tax returns as well as tax returns for any state jurisdiction in which it is authorized to conduct business. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefit within the provision for income taxes on the statement of operations. The Company has no interest or penalties accrued for any unrecognized tax benefits for any periods presented.
The Company’s annual provision for income taxes and the determination of the resulting deferred tax assets and liabilities involve a significant amount of management judgment. Management’s judgments, assumptions and estimates relative to the current provision for income taxes take into account current tax laws, its interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. The Company operates within federal, state and international taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve.
Tax Loss Carryforwards
As of December 31, 2019, the Company had net operating losses of $284.7 million for federal and $288.5 million state purposes, which are available to reduce future taxable income. The Company also had federal tax credits of approximately $39.0 million, which may be used to offset future tax liabilities. The net operating loss and tax credit carryforwards will expire at various dates through 2038. Net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities and may become subject to an annual utilization limitation pursuant to the change in ownership rules of Internal Revenue Code Section 382 and 383. The amount of the annual limitation is determined based on the value of the company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. At December 31, 2019, the Company recorded a 100% valuation allowance against its net operating loss and tax credit carryforwards, as the Company believes it is more likely than not that the tax benefits will not be fully realized.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the provisions of ASC 718, Compensation—Stock Compensation . Accordingly, compensation costs related to equity instruments granted are recognized over the requisite service periods of the awards on a straight-line basis at the grant-date fair value calculated using a Black-Scholes option pricing model for stock options and the closing stock price on date of grant for restricted stock.
The Company’s policy upon exercise of stock options is that shares will be issued as new shares drawing on the Company’s 2016 Stock Equity Incentive Plan (the “2016 Plan”) share pool that was adopted by the board of directors and approved by the stockholders in May 2016. During June 2017, an amendment was approved by the stockholders to increase the authorized shares under the 2016 plan by 1,200,000 shares. An amendment was approved by the stockholders at the 2018 Annual Meeting of Stockholders on June 21, 2018, to increase the authorized shares under the 2016 plan by 2,900,000 shares. An amendment was approved by the stockholders at the 2019 Annual Meeting of Stockholders on June 25, 2019, to increase the authorized shares under the 2016 plan by 2,500,000 shares. Under the provisions of the 2016 Plan, no option will have a term in excess of 10 years.
In the event a modification is made to an equity award after the grant date, the Company records a change in stock- based compensation expense equal to the incremental fair value of the equity award immediately subsequent to the modification as compared to the fair value of the equity award immediately preceding the modification. During 2018, the Company modified certain outstanding equity award held by employees and certain Directors. These modifications resulted in incremental compensation cost of $1.1 million for the year ended December 31, 2018.
Segment Information
The Company reports segment information in accordance with applicable guidance on segment disclosures. The Company has one reportable segment.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU Topic 842 supersedes existing lease accounting guidance, including ASC 840, leases. Among other things, ASC 2016-02 requires recognition of a right-of-use ("ROU") asset and liability for future lease payments for contracts that meet the definition of a lease and requires disclosure of certain information about leasing arrangements. On July 30, 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which, among other things, allows companies to elect an optional transition method to apply the new lease standard through a cumulative-effect adjustment in the period of adoption. The Company adopted the standard as of January 1, 2019, using the optional transition method, and as a result, did not recast prior period financial statements. All prior period amounts are presented under ASC 840.
The Company elected the package of practical expedients permitted under the optional transition method, which among other things, allows us to carryforward the prior lease classifications under ASC 840. The Company did not elect to adopt the hindsight practical expedient and are therefore, maintaining the lease terms it previously determined under ASC 840. In addition, the Company elected to combine the lease and non-lease components for the asset categories comprising its leases and to exclude from balance sheet reporting those leases with initial terms of 12 months or less.
Adoption of the new standard resulted in the recognition of lease assets and lease liabilities of approximately $2 million on the Company's consolidated balance sheet.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses . ASU 2018-19 will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope of this amendment that represent the contractual right to receive cash. ASU 2016-13 and ASU 2018-19 are effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2016-13 on the Company's financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes , which simplifies the accounting for income taxes, eliminates certain exceptions within ASC Topic 740, Income Taxes , and clarifies certain aspects of the current guidance to promote consistency among reporting entities. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. ASU 2019-12 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.The Company plans to adopt this standard on January 1, 2021 and is currently evaluating the effect on the Company's consolidated financial statements.
Other accounting standards updates adopted and/or issued, but not effective until after December 31, 2019, are not expected to have a material effect on the company's consolidated financial position, annual results of operations and/or cash flows. |
