| Organization and Summary of Significant Accounting Policies | 1. Organization and Summary of Significant Accounting
Policies
Business Activities and Organization
Pfenex Inc. (“Company” or “Pfenex”) was
incorporated in the state of Delaware in 2009. Pfenex is a
clinical-stage biotechnology company engaged in the development of
biosimilar and therapeutic equivalents to branded therapeutics and
other high-value and difficult to manufacture proteins. The
Company’s lead product candidate is PF582, a biosimilar
candidate to Lucentis (ranibizumab). Lucentis is marketed by
Genentech, Inc., a wholly-owned member of the Roche Group and
Novartis AG, for the treatment of patients with retinal diseases.
The Company is conducting a Phase 1b/2a trial in patients with wet
age-related macular degeneration, or wet AMD, with its
collaboration partner, Hospira, Inc. (“Hospira”), a
subsidiary of Pfizer Inc. (collectively with Hospira,
“Pfizer”). Pfizer is responsible for manufacturing,
clinical studies and commercialization of PF582 globally upon
successful receipt of marketing approval. The Company’s next
most advanced product candidates are PF530 and PF708. PF530 is a
biosimilar candidate to Betaseron (Interferon beta-1b), marketed by
Bayer AG for the treatment of multiple sclerosis. The pilot Phase 1
study for PF530 was completed in 2015. PF708 is a therapeutic
equivalent candidate to Forteo (teriparatide), marketed by Eli
Lilly and Company, or Eli Lilly, for the treatment of osteoporosis.
PF708 entered into a bioequivalence study at the end of 2015 and
completed our top-line analysis in the second quarter of 2016. In
addition to the Company’s three lead product candidates, its
pipeline includes five other biosimilar candidates as well as
vaccines and next generation biologic candidates. The Company filed
the Investigational New Drug (“IND”) application for
its recombinant anthrax vaccine at the end of 2014 and initiated a
phase 1a study at the end of 2015.
The Company’s revenue in the near term is primarily related
to monetizing its protein production platform through collaboration
agreements, service agreements, government contracts and reagent
protein product sales which may provide for various types of
payments, including upfront payments, funding of research and
development, milestone payments, intellectual property access fees
and licensing fees.
Follow-on Public Offering
In April 2015, the Company completed a follow-on public offering
pursuant to which it sold 2,610,000 shares of its common stock at a
price to the public of $15.50 per share. In addition, certain
existing stockholders sold 4,140,000 shares of common stock in the
underwritten public offering at the same per-share price. The total
proceeds the Company received from the offering were approximately
$38.0 million, net of underwriting discounts and commissions of
approximately $2.4 million. After deducting estimated offering
expenses of approximately $0.6 million, net proceeds to the Company
were $37.4 million.
Subsidiary – Pfenex Limited
The UK subsidiary was formed in December 2013 to assist with the
Company’s international strategy at that time. In May 2015,
the Company initiated the process to dissolve the subsidiary and
finalized the dissolution in September 2015. Since its
incorporation, there had been no activity in the subsidiary and
therefore no intercompany relationship requiring inclusion in the
accompanying unaudited condensed consolidated financial
statements.
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements, which include the Company’s wholly-owned
subsidiary, have been prepared in accordance with United States
generally accepted accounting principles (“U.S. GAAP”)
for interim financial information and with the instructions of the
Securities and Exchange Commission (“SEC”) on Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and disclosures required by U.S.
GAAP for complete financial statements. In the opinion of
management, the accompanying unaudited condensed consolidated
financial statements include all adjustments necessary, which are
of a normal and recurring nature, for the fair presentation of the
Company’s financial position and of the results of operations
and cash flows for the periods presented. These condensed
consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto included in
the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015, as filed with the SEC. The results of
operations for the interim period shown in this report are not
necessarily indicative of the results that may be expected for any
other interim period or for the full year.
Certain reclassifications of 2015 amounts have been made to conform
with the 2016 presentation.
Segments
The Company operates in one segment. Management uses one
measurement of profitability and does not segregate its business
for internal reporting. With the exception of $0.1 million of
long-lived assets held by a third-party vendor in India for
manufacturing purposes, as of March 31, 2016, all of our
long-lived assets were located within the United States.
Use of Estimates
The preparation of the accompanying unaudited condensed
consolidated financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying
notes. Estimates have been prepared on the basis of the most
current and best available information. However, actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments that are
readily convertible into cash and have an original maturity of
three months or less at the time of purchase to be cash
equivalents.
Restricted Cash
As discussed in Note 6, the Company had a line of credit with Wells
Fargo Bank, National Association (“Wells Fargo”) under
which the Company could borrow up to $3.9 million. The line of
credit was secured by a security interest of first priority in
favor of Wells Fargo in all funds deposited into the
Company’s money market account held at Wells Fargo. In
February 2016, the Company terminated the credit facility and
repaid the amount outstanding using its restricted cash.
Concentrations
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents, investments and accounts and unbilled receivables. The
Company has established guidelines intended to limit its exposure
to credit risk by placing investments with high credit quality
financial institutions, diversifying its investment portfolio and
placing investments with maturities that help maintain safety and
liquidity. All cash and cash equivalents were held at three major
financial institutions as of March 31, 2016 and
December 31, 2015. For the Company’s cash position of
$96.5 million as of March 31, 2016, the Company has exposure
to credit loss for amounts in excess of insured limits in the event
of non-performance by the institutions; however, the Company does
not anticipate non-performance.
Additional credit risk is related to the Company’s
concentration of receivables. As of March 31, 2016 and
December 31, 2015, receivables were concentrated among one
customer representing 87% and 88% of total net receivables,
respectively. For the three month period ended March 31, 2016,
revenue was concentrated among two customers, including the
Company’s collaborative partner, representing 87% of total
revenues and three customers representing 67% for the three months
ended March 31, 2015. There were no supplier
concentrations.
A portion of revenue is earned from sales outside the United
States. Non-U.S. revenue is denominated in U.S. dollars. A
breakdown of the Company’s net revenue from U.S. and non-U.S.
sources for the three months ended March 31, 2016 and 2015 is
as follows:
Three Months Ended
(in thousands) 2016 2015
US Revenue $ 2,724 $ 1,608
Non-US Revenue 40 367
$ 2,764 $ 1,975
During the three months ended March 31, 2016, no single
country accounted for more than 10% of the Company’s revenue.
During the three months ended March 31, 2015, revenue earned
from non-recurring sales in Japan accounted for 10% of the
Company’s revenue.
Revenue
The Company’s revenue is related to the monetization of its
protein production platform through collaboration agreements,
service agreements, license agreements, government contracts and
sales of reagent protein products which may provide for various
types of payments, including upfront payments, funding of research
and development, milestone payments, intellectual property access
fees and licensing fees. The Company’s revenue generating
agreements also include potential revenues for achieving milestones
and for product royalties.
The Company considers a variety of factors in determining the
appropriate method of accounting for its collaboration agreements,
including whether multiple deliverables can be separated and
accounted for individually as separate units of accounting. Where
there are multiple deliverables within a collaboration agreement
that cannot be separated and therefore are combined into a single
unit of accounting, revenues are deferred and recognized using the
relevant guidance over the estimated period of performance. If the
deliverables can be separated, the Company applies the relevant
revenue recognition guidance to each individual deliverable. The
specific methodology for the recognition of the underlying revenue
is determined on a case-by-case basis according to the facts and
circumstances applicable to each agreement.
Upfront, non-refundable licensing payments are assessed to
determine whether or not the licensee is able to obtain standalone
value from the license. Where the license does not have
standalone value, non-refundable license fees are recorded as
deferred revenue and recognized as revenue as the Company performs
under the applicable agreement. Where the level of effort is
relatively consistent over the performance period, the Company
recognizes fixed or determined revenue on a straight-line basis
over the estimated period of performance. Where the license
has standalone value, the Company recognizes total license revenue
at the time all revenue recognition criteria have been met.
Nonrefundable payments for research funding are generally
recognized as revenue over the period the underlying research
activities are performed.
Revenues under service agreements are recorded as services are
performed. These agreements do not require scientific achievement
as a performance obligation and provide for payment when services
are rendered. All such revenue is nonrefundable. Upfront,
nonrefundable payments for license fees, exclusivity and
feasibility services received in excess of amounts earned are
classified as deferred revenue and recognized as income over the
contract term or period of performance based on the nature of the
related agreement.
The Company recognizes revenue for its cost plus fixed fee
government contracts in accordance with the authoritative guidance
for revenue recognition including the authoritative guidance
specific to federal government contractors. Reimbursable costs
under its government contracts primarily include direct labor,
materials, subcontracts, accountable property and indirect costs.
In addition, the Company receives a fixed fee under its government
contracts, which is unconditionally earned as allowable costs are
incurred and is not contingent on success factors. Reimbursable
costs under the Company’s government contracts, including the
fixed fee, are generally recognized as revenue in the period the
reimbursable costs are incurred and become billable.
The Company assesses milestone payments on an individual basis and
recognizes revenue from nonrefundable milestone payments when the
earnings process is complete and the payment is reasonably assured.
Nonrefundable milestone payments related to arrangements under
which the Company has continuing performance obligations are
recognized as revenue upon achievement of the associated milestone,
provided that (i) the milestone event is substantive and its
achievability was not reasonably assured at the inception of the
agreement and (ii) the amount of the milestone payment is
reasonable in relation to the effort expended or the risk
associated with the milestone event. Where separate milestone
payments do not meet these criteria, the Company recognizes revenue
using a contingency-adjusted performance model over the period of
performance. For the three months ended March 31, 2016 and
2015, no revenue in connection with the achievement of milestones
has been recognized.
The Company’s reagent protein products are comprised of
internally developed reagent protein products and those purchased
from original manufacturers for resale. Revenues for reagent
product sales are reflected net of attributable sales tax. The
Company generally offers a 30 day return policy. The Company
recognizes reagent product revenue from product sales when it is
realized or realizable and earned. Revenue is realized or
realizable and earned when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists,
(2) delivery has occurred or services have been rendered,
(3) the Company’s price to the buyer is fixed or
determinable, and (4) collectability is reasonably assured.
Revenue from sales transactions where the buyer has the right to
return the product is recognized at the time of sale only if:
(1) the Company’s price to the buyer is substantially
fixed or determinable at the date of sale, (2) the buyer has
paid the Company, or the buyer is obligated to pay the Company and
the obligation is not contingent on resale of the product,
(3) the buyer’s obligation to the Company would not be
changed in the event of theft or physical destruction or damage of
the product, (4) the buyer acquiring the product for resale
has economic substance apart from that provided by the Company,
(5) the Company does not have significant obligations for
future performance to directly bring about resale of the product by
the buyer, and (6) the amount of future returns can be
reasonably estimated. As of March 31, 2016, the Company has
had minimal product returns related to reagent protein product
sales. However, given the nature of the products, the Company has
recorded reserves of $2 thousand and $1 thousand for warranty and
return rights at March 31, 2016 and December 31, 2015,
respectively. The reserve is a component of accounts and unbilled
receivables, net in the accompanying unaudited condensed
consolidated balance sheets. Revenue under arrangements where the
Company outsources the cost of fulfillment to third parties is
evaluated as to whether the related amounts should be recorded
gross or net. The Company records amounts collected from the
customer as revenue, and the amounts paid to suppliers as cost of
revenue when it holds all or substantially all of the risks and
benefits related to the product or service. For transactions where
the Company does not hold all or substantially all the risk, the
Company uses net reporting and therefore records the transaction as
if the end-user made a purchase from the supplier with the Company
acting as a sales agent.
Recently Issued 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 supersedes the revenue recognition
requirements in ASC 605, Revenue Recognition. This ASU is based on
the principle that revenue is recognized to depict the transfer of
goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. The ASU also requires
additional disclosure about the nature, amount, timing and
uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments
and assets recognized from costs incurred to obtain or fulfill a
contract. The effective date will be the first quarter of fiscal
year 2019 using one of two retrospective application methods. The
Company is currently evaluating the impact of the adoption of this
accounting standard update on its financial statements.
In November 2015, the FASB issued ASU No. 2015-17 Income Taxes
(Topic 740) Balance Sheet Classification of Deferred Taxes, which
requires all deferred tax assets and liabilities to be classified
as noncurrent on the balance sheet. The new accounting
guidance is effective for annual reporting periods beginning after
December 31, 2016 and interim periods therein. Early adoption
is permitted as of the beginning of interim or annual reporting
periods. The Company has adopted the standard prospectively in
2015 and no adjustment was made to prior periods.
In February 2016, the FASB issued ASU No. 2016-02 Leases
(Topic 842), which requires lessees to recognize “right of
use” assets and liabilities for all leases with lease terms
of more than 12 months. The ASU requires additional
quantitative and qualitative financial statement footnote
disclosures about the leases, significant judgments made in
accounting for those leases and amounts recognized in the financial
statements about those leases. The effective date will be the first
quarter of fiscal year 2020. The Company is currently evaluating
the impact of the adoption of this accounting standard update on
its financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting. ASU 2016-09 requires among other things that
all excess tax benefits and tax deficiencies (including tax
benefits of dividends on share-based payment awards) to be
recognized as income tax expense or benefit in the income
statement. The tax effects of exercised or vested awards should be
treated as discrete items in the reporting period in which they
occur. An entity also should recognize excess tax benefits, and
assess the need for a valuation allowance, regardless of whether
the benefit reduces taxes payable in the current period. The ASU
also requires excess tax benefits to be classified along with other
income tax cash flows as an operating activity in the statement of
cash flows. This new guidance is effective for annual reporting
periods beginning after December 15, 2017, including interim
periods within those fiscal years. Early adoption is permitted. The
Company is currently assessing the impact of the adoption of ASU
2016-09 on its financial statements. |
