Quarterly Report (10-q)

Date : 05/07/2019 @ 1:05PM
Source : Edgar (US Regulatory)
Stock : MannKind Corporation (MNKD)
Quote : 1.4  0.0 (0.00%) @ 8:59AM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

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

For the quarterly period ended March 31, 2019

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: 000-50865

 

MannKind Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

13-3607736

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

30930 Russell Ranch Road, Suite 300

Westlake Village, California

91362

(Address of principal executive offices)

(Zip Code)

(818) 661-5000

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

MNKD

 

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes       No   

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

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

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

As of April 15, 2019, there were 187,782,578 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

 

 


 

MANNKIND CORPORATION

Form 10-Q

For the Quarterly Period Ended March 31, 2019

TABLE OF CONTENTS

 

 

Page

PART I: FINANCIAL INFORMATION

2

 

 

Item 1. Financial Statements (Unaudited)

2

Condensed Consolidated Balance Sheets: March 31, 2019 and December 31, 2018

2

Condensed Consolidated Statements of Operations: Three months ended March 31, 2019 and 2018

3

Condensed Consolidated Statements of Comprehensive Loss: Three months ended March 31, 2019 and 2018

4

Condensed Consolidated Statements of Stockholders Deficit: Three months ended March 31, 2019

5

Condensed Consolidated Statements of Cash Flows: Three months ended March 31, 2019 and 2018

6

Notes to Condensed Consolidated Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3. Quantitative and Qualitative Disclosures About Market Risk

32

Item 4. Controls and Procedures

32

 

 

PART II: OTHER INFORMATION

33

 

 

Item 1. Legal Proceedings

33

Item 1A. Risk Factors

33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3. Defaults Upon Senior Securities

56

Item 4. Mine Safety Disclosures

56

Item 5. Other Information

56

Item 6. Exhibits

57

 

 

SIGNATURES

59

 

1


 

PART 1: FINANCI AL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share data)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,530

 

 

$

71,157

 

Restricted cash

 

 

527

 

 

 

527

 

Short-term investments

 

 

24,764

 

 

 

 

Accounts receivable, net

 

 

3,759

 

 

 

4,017

 

Inventory

 

 

3,720

 

 

 

3,597

 

Prepaid expenses and other current assets

 

 

2,392

 

 

 

2,556

 

Total current assets

 

 

69,692

 

 

 

81,854

 

Property and equipment, net

 

 

25,750

 

 

 

25,602

 

Right-of-use and other assets

 

 

5,519

 

 

 

249

 

Total assets

 

$

100,961

 

 

$

107,705

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,978

 

 

$

5,379

 

Accrued expenses and other current liabilities

 

 

18,064

 

 

 

15,022

 

Facility financing obligation

 

 

11,385

 

 

 

11,298

 

Deferred revenue - current

 

 

32,384

 

 

 

36,885

 

Recognized loss on purchase commitments - current

 

 

9,057

 

 

 

6,657

 

Total current liabilities

 

 

77,868

 

 

 

75,241

 

Senior convertible notes

 

 

19,065

 

 

 

19,099

 

Note payable to related party

 

 

72,036

 

 

 

72,089

 

Accrued interest - note payable to related party

 

 

7,969

 

 

 

6,835

 

Recognized loss on purchase commitments - long term

 

 

85,344

 

 

 

91,642

 

Deferred revenue - long term

 

 

15,867

 

 

 

10,680

 

Milestone rights liability

 

 

7,201

 

 

 

7,201

 

Operating lease liabilities

 

 

3,615

 

 

 

 

Total liabilities

 

 

288,965

 

 

 

282,787

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value - 280,000,000 shares authorized,

   187,778,236 and 187,029,967 shares issued and outstanding at

   March 31, 2019 and December 31, 2018, respectively

 

 

1,878

 

 

 

1,870

 

Additional paid-in capital

 

 

2,765,020

 

 

 

2,763,067

 

Accumulated other comprehensive loss

 

 

(19

)

 

 

(19

)

Accumulated deficit

 

 

(2,954,883

)

 

 

(2,940,000

)

Total stockholders' deficit

 

 

(188,004

)

 

 

(175,082

)

Total liabilities and stockholders' deficit

 

$

100,961

 

 

$

107,705

 

 

See notes to condensed consolidated financial statements.

2


 

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

Net revenue - commercial product sales

 

$

5,076

 

 

$

3,402

 

Revenue - collaborations and services

 

 

12,372

 

 

 

63

 

Total revenues

 

 

17,448

 

 

 

3,465

 

Expenses:

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

4,020

 

 

 

4,008

 

Cost of revenue - collaborations and services

 

 

1,537

 

 

 

 

Research and development

 

 

1,667

 

 

 

2,644

 

Selling, general and administrative

 

 

25,673

 

 

 

20,618

 

(Gain) loss on foreign currency translation

 

 

(1,935

)

 

 

2,984

 

Total expenses

 

 

30,962

 

 

 

30,254

 

Loss from operations

 

 

(13,514

)

 

 

(26,789

)

Other (expense) income:

 

 

 

 

 

 

 

 

Interest income

 

 

318

 

 

 

106

 

Interest expense on notes

 

 

(593

)

 

 

(1,794

)

Interest expense on note payable to related party

 

 

(1,080

)

 

 

(1,114

)

Loss on extinguishment of debt

 

 

 

 

 

(825

)

Other income (expense)

 

 

(14

)

 

 

31

 

Total other expense

 

 

(1,369

)

 

 

(3,596

)

Loss before provision for income taxes

 

 

(14,883

)

 

 

(30,385

)

Provision for income taxes

 

 

 

 

 

 

Net loss

 

$

(14,883

)

 

$

(30,385

)

Net loss per share - basic and diluted

 

$

(0.08

)

 

$

(0.25

)

Shares used to compute basic and diluted net loss per share

 

 

187,434

 

 

 

120,911

 

 

See notes to condensed consolidated financial statements.

 

3


 

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Net loss

 

$

(14,883

)

 

$

(30,385

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Cumulative translation gain

 

 

 

 

 

3

 

Comprehensive loss

 

$

(14,883

)

 

$

(30,382

)

 

See notes to condensed consolidated financial statements.

 

4


 

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S DEFICIT

(Unaudited)

(In thousands, except per share data)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

BALANCE, JANUARY 1, 2018

 

 

119,053

 

 

$

1,191

 

 

$

2,638,992

 

 

$

(18

)

 

$

(2,854,898

)

 

$

(214,733

)

Adjustment to adopt ASU 2016-09

 

 

 

 

 

 

 

 

 

 

 

 

1,873

 

 

 

1,873

 

Issuance of common shares from the

   release of restricted stock units

 

60

 

 

 

1

 

 

 

(82

)

 

 

 

 

 

 

(81

)

Issuance of common shares under

   Employee  Stock Purchase Plan

 

137

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Stock-based compensation expense

 

 

 

 

 

 

1,943

 

 

 

 

 

 

 

1,943

 

Issuance of shares pursuant to

   conversion of  Facility Financing

   Obligation

 

 

3,549

 

 

 

35

 

 

 

9,372

 

 

 

 

 

 

 

9,407

 

Issuance of shares pursuant to

   conversion of Related Party Notes

 

 

3,000

 

 

 

30

 

 

 

8,130

 

 

 

 

 

 

8,160

 

Cumulative translation gain

 

 

 

 

 

 

 

 

3

 

 

 

 

 

3

 

Amortization of shelf fees

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

(5

)

Issuance of at-the-market placement

 

214

 

 

 

2

 

 

 

632

 

 

 

 

 

 

 

634

 

Issuance costs associated with at-the-

   market placement

 

 

 

 

 

 

(25

)

 

 

 

 

 

 

(25

)

Net loss

 

 

 

 

 

 

 

 

 

 

(30,385

)

 

 

(30,385

)

BALANCE, MARCH 31, 2018

 

 

126,013

 

 

$

1,260

 

 

$

2,658,957

 

 

$

(15

)

 

$

(2,883,410

)

 

$

(223,208

)

 

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

BALANCE, JANUARY 1, 2019

 

 

187,030

 

 

$

1,870

 

 

$

2,763,067

 

 

$

(19

)

 

$

(2,940,000

)

 

$

(175,082

)

Exercise of stock options

 

3

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

3

 

Issuance of common shares from the

   release of  restricted stock units

 

63

 

 

1

 

 

 

(2

)

 

 

 

 

 

 

(1

)

Issuance of common shares under

   Employee Stock Purchase Plan

 

296

 

 

3

 

 

 

314

 

 

 

 

 

 

 

317

 

Stock-based compensation expense

 

 

 

 

 

 

999

 

 

 

 

 

 

 

999

 

Restricted stock unit award

 

 

 

 

 

 

105

 

 

 

 

 

 

 

105

 

Issuance of shares pursuant to

   conversion of Senior Convertible

   Notes

 

386

 

 

4

 

 

 

534

 

 

 

 

 

 

 

538

 

Net loss

 

 

 

 

 

 

 

 

 

 

(14,883

)

 

 

(14,883

)

BALANCE, MARCH 31, 2019

 

 

187,778

 

 

$

1,878

 

 

$

2,765,020

 

 

$

(19

)

 

$

(2,954,883

)

 

$

(188,004

)

 

See notes to condensed consolidated financial statements.  

 

5


 

MANNKIND CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(14,883

)

 

$

(30,385

)

Adjustments to reconcile net loss to net cash (used in) provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

367

 

 

 

706

 

Amortization of right-of-use assets

 

 

395

 

 

 

 

Stock-based compensation expense

 

 

999

 

 

 

1,943

 

Restricted stock unit award

 

 

105

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

 

825

 

(Gain) Loss on foreign currency translation

 

 

(1,935

)

 

 

2,984

 

Interest on note payable to related party

 

 

1,134

 

 

 

1,122

 

Write-off of inventory

 

 

 

 

 

602

 

Other, net

 

 

(1

)

 

 

110

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

258

 

 

 

1,128

 

Inventory

 

 

(123

)

 

 

(1,836

)

Prepaid expenses and other current assets

 

 

164

 

 

 

656

 

Right-of-use and other assets

 

 

(340

)

 

 

38

 

Accounts payable

 

 

1,599

 

 

 

(2,008

)

Accrued expenses and other current liabilities

 

 

2,336

 

 

 

2,675

 

Deferred revenue

 

 

686

 

 

 

(63

)

Recognized loss on purchase commitments

 

 

(1,963

)

 

 

(147

)

Operating lease payments

 

 

(395

)

 

 

 

Net cash used in operating activities

 

 

(11,597

)

 

 

(21,650

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(269

)

 

 

 

Purchase of short-term investments

 

 

(24,764

)

 

 

 

Net cash used in investing activities

 

 

(25,033

)

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payment of employment taxes related to vested restricted stock units

 

 

 

 

 

(81

)

Proceeds from issuance of common stock pursuant to at-the-market issuance

 

 

 

 

 

634

 

Issuance cost of at-the-market transactions

 

 

 

 

 

(25

)

Other

 

 

3

 

 

 

 

Net cash provided by financing activities

 

 

3

 

 

 

528

 

NET DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED

   CASH

 

 

(36,627

)

 

 

(21,122

)

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING

   OF PERIOD

 

 

71,684

 

 

 

48,355

 

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF

   PERIOD

 

$

35,057

 

 

$

27,233

 

SUPPLEMENTAL CASH FLOWS DISCLOSURES:

 

 

 

 

 

 

 

 

Interest paid in cash, net of amounts capitalized

 

$

 

 

$

1,860

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payment of note obligations through common stock issuance

 

$

 

 

$

9,407

 

Payment of note payable to related party through common stock issuance

 

$

 

 

$

8,160

 

Accrued but unpaid debt issuance costs related to note payable to related party

 

$

 

 

$

75

 

Payment of interest on senior convertible notes through common stock issuance

 

$

534

 

 

$

 

Property and equipment in progress in accounts payable

 

$

246

 

 

$

 

Common stock issuance to settle employee stock purchase plan liability

 

$

317

 

 

$

 

Addition of right-of-use assets

 

$

5,192

 

 

$

 

 

See notes to condensed consolidated financial statements.

 

6


 

MANNKIND CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Business and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of MannKind Corporation and its subsidiaries (“MannKind,” the “Company,” “we” or “us”), have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information included in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on February 26, 2019 (the “Annual Report”).

In the opinion of management, all adjustments, consisting only of normal, recurring adjustments, considered necessary for a fair presentation of the results of these interim periods have been included. The results of operations for the three months ended 

March 31, 2019 may not be indicative of the results that may be expected for the full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates or assumptions. Management considers many factors in selecting appropriate financial accounting policies, and in developing the estimates and assumptions that are used in the preparation of the financial statements. Management must apply significant judgment in this process. The more significant estimates reflected in these accompanying condensed consolidated financial statements include revenue recognition and gross-to-net adjustments, assessing long-lived assets for impairment, inventory costing and recoverability, recognized loss on purchase commitments, milestone rights liability, stock-based compensation and the determination of the provision for income taxes and corresponding deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets.

Business — The Company is a biopharmaceutical company focused on the development and commercialization of inhaled therapeutic products for diseases such as diabetes and pulmonary arterial hypertension. The Company’s only approved product, Afrezza (insulin human) Inhalation Powder, is a rapid-acting inhaled insulin that was approved by the U.S. Food and Drug Administration (the “FDA”) in June 2014 to improve glycemic control in adults with diabetes. Afrezza became available by prescription in United States retail pharmacies in February 2015. Currently, the Company promotes Afrezza to endocrinologists and certain high-prescribing primary care physicians in the United States through its specialty sales force.

Basis of Presentation - The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company is not currently profitable and has rarely generated positive net cash flow from operations. As of March 31, 2019, the Company had an accumulated deficit of $3.0 billion.

At March 31, 2019, the Company’s capital resources consisted of cash and cash equivalents of $34.5 million and short-term investments of $24.8 million. The Company expects to continue to incur significant expenditures to support commercial manufacturing, sales and marketing of Afrezza, collaboration work and the development of product candidates in the Company’s pipeline. The facility agreement (as amended, the “Facility Agreement” or “Facility Financing Obligation”) with Deerfield Private Design Fund II, L.P. and Deerfield Private Design International II, L.P. (collectively, “Deerfield”) that resulted in the issuance of 9.75% Senior Convertible Notes due 2019 (“2019 notes”) and 8.75% Senior Convertible Notes due 2019 (“Tranche B notes”) (see Note 7 — Borrowings) requires the Company to maintain at least $25.0 million in cash and cash equivalents as of the end of each fiscal quarter after December 31, 2018.

As of March 31, 2019, the Company had   $101.7 million principal amount of outstanding borrowings. The Company has entered into certain transactions related to these borrowings that are more fully described in Note 6 — Related-Party Arrangements, and Note 7 – Borrowings.

7


 

The Company’s currently available cash and financing sources will not be sufficient to continue to meet its current and anticipated cash requirements within one year from the date these financial s tatements are issued . The Company plans to raise additional capital, whether through a sale of equity or debt securities, strategic business collaboration agreements with other companies , the esta blishment of other funding facilities, licensing arrangements, asset sales or other means, in order to continue the development and commercialization of Afrezza and other product candidates and to support its other ongoing activities. The Company cannot pr ovide assurances that such additional capital will be available on acceptable terms or at all. Successful completion of these plans is dependent on factors ou tside of the Company’s control. As such, management cannot be certain that such plans will be effe ctively implemented within one year after the date that the financial statements are issued. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that migh t result from the outcome of this uncertainty.

Principles of Consolidation – The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.

Segment Information – Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and manages its business as one segment operating in the United States of America.

 

Revenue Recognition The Company adopted Accounting Standards Codification (“ASC”) Topic 606 - Revenue from Contracts with Customers (“the new revenue guidance”), on January 1, 2018. Under Topic 606, the Company recognizes revenue when its customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company expects to be entitled in exchange for those goods or services.

To determine revenue recognition for arrangements that are within the scope of Topic 606, the Company performs the following five steps: (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 arrangements that meet the definition of a contract under Topic 606, including 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.

 

At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company has two types of contracts with customers: (i) contracts for commercial product sales with wholesale distributors and, up until December 31, 2018, specialty pharmacies and (ii) collaboration arrangements.

Revenue Recognition – Net Revenue – Commercial Product Sales – The Company sells Afrezza to a limited number of wholesale distributors and specialty pharmacies in the U.S. (collectively, its “Customers”). These Customers subsequently resell the Company’s products to retail pharmacies and certain medical centers or hospitals. Specialty pharmacies sell directly to patients. In addition to distribution agreements with Customers, the Company enters into arrangements with health care providers and payors that provide for government mandated and/or privately negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s products.

The Company recognizes revenue on product sales when the Customer obtains control of the Company's product, which occurs at a point in time (based on the terms of the relevant contracts which are at delivery for wholesale distributors and at shipment for specialty pharmacies). Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances.

 

Voucher (free goods) Program – Under the voucher (free goods) program, potential new patients are offered vouchers (free goods) which they can provide to retailers for free product. The retailers provide the product to the patient for free and pay the wholesaler for the product, who pays the Company. The retailers submit the vouchers or claims to a program administrator which pays the retailer for the product. The administrator then invoices the Company for the amount of vouchers or claims paid plus a fee. Accordingly, on a net basis, it is not probable that the Company will receive the consideration to which it is entitled for these products. Therefore, the Company excludes such amounts from both gross and net revenue. The cost of product associated with the voucher (free goods) program is included in the cost of goods sold.

 

8


 

Reserves for Variable Consideration — Revenues from product sales are recorded at the net sales price (transact ion price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, provider chargebacks and discounts, government rebates, payor r ebates, and other incentives, such as voluntary patient assistance, and other allowances that are offered within contracts between the Company and its Customers, payors, and other indirect customers relating to the Company’s sale of its products. These res erves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and result in a reduction of accounts receivable or establishment of a current liability.  

 

Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in Topic 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reduce recognized revenue to the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.

 

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 the contract will not occur in a future period. The Company’s analyses also contemplates application of the constraint in accordance with the guidance, under which it determined a material reversal of revenue would not occur in a future period for the estimates detailed below as of March 31, 2019 and, therefore, the transaction price was not reduced further during the three months ended March 31, 2019. 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 revenue – commercial product sales and earnings in the period such variances become known.

 

Trade Discounts and Allowances — The Company generally provides Customers with discounts which include incentive fees, such as prompt pay discounts, that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, the Company compensates (through trade discounts and allowances) its Customers for sales order management, data, and distribution services. However, the Company has determined such services received to date are not distinct from the Company’s sale of products to the Customer and, therefore, these payments have been recorded as a reduction of revenue and a reduction to accounts receivable, net.

 

Product Returns — Consistent with industry practice, the Company generally offers Customers a right of return for unopened product that has been purchased from the Company for a period beginning six months prior to and ending 12 months after its expiration date , which lapses upon shipment to a patient. The Company estimates the amount of its product sales that may be returned by its Customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as reductions to accounts receivable, net. The Company currently estimates product returns using available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel. The Company’s current return reserve rate is estimated to be in the low single-digits.

 

Provider Chargebacks and Discounts — Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves 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 recorded in accrued expenses and other current liabilities. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by Customers, and the Company generally issues credits for such amounts within a few weeks of the Customer’s notification to the Company of the resale. Reserves for chargebacks consist of credits that the Company expects to issue for units that remain in the distribution channel inventories at each reporting period-end that the Company expects will be sold to qualified healthcare providers, and chargebacks that Customers have claimed, but for which the Company has not yet issued a credit.

 

Government Rebates — The Company is subject to discount obligations under state Medicaid programs and Medicare. These reserves 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 in accrued expenses and other current liabilities. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.

 

9


 

Payor Rebates — The Company contracts with c ertain private payor organizations, primarily insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its products. The Company estimates these rebates and records such estimates in the same period the r elated revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities.

 

Other Incentives — Other incentives which the Company offers include voluntary patient support programs, such as the Company's co-pay assistance program, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with the product that has been recognized as revenue, but remains in the distribution channel inventories 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 in accrued expenses and other current liabilities.

 

Revenue Recognition – Revenue – Collaborations and Services — The Company enters into licensing or research agreements under which the Company licenses certain rights to its product candidates to third parties or conducting research services to third parties. The terms of these arrangements may include , but are not limited to payment to the Company of one or more of the following: nonrefundable , up-front license fees; development, regulatory, and commercial milestone payments; payments for manufacturing commercial and clinical supply services the Company provides; and royalties on net sales of licensed products and sublicenses of the rights. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment such as determining the performance obligation in the contract and determining the stand-alone selling price for each performance obligation identified in the contract. If an arrangement has multiple performance obligations, the allocation of the transaction price is determined from observable market inputs, and the Company uses key assumptions to determine the stand-alone selling price, which may include development timelines, reimbursement rates for personnel costs, discount rates, and probabilities of technical and regulatory success. Revenue is recognized based on the measurement of progress as the performance obligation is satisfied and consideration received that does not meet the requirements to satisfy the revenue recognition criteria is recorded as deferred revenue. Current deferred revenue consists of amounts that are expected to be recognized as revenue in the next 12 months. Amounts that we expect will not be recognized within the next 12 months are classified as long-term deferred revenue. For further information see Note 8 — collaborations and Licensing Agreements.

The Company recognizes upfront license payments as revenue upon delivery of the license only if the license is determined to be a separate unit of accounting from the other undelivered performance obligations. The undelivered performance obligations typically include manufacturing or development services or research and/or steering committee services. If the license is not considered as a distinct performance obligation, then the license and other undelivered performance obligations would be evaluated to determine if such should be accounted for as a single unit of accounting. If concluded to be a single performance obligation, the transaction price for the single performance obligation is recognized as revenue over the estimated period of when the performance obligation is satisfied.

Whenever the Company determines that an arrangement should be accounted for over time, the Company determines the period over which the performance obligations will be performed, and revenue will be recognized over the period the Company is expected to complete its performance obligations. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the Company is expected to complete its performance obligations under an arrangement.

The Company’s collaboration agreements typically entitle the Company to additional payments upon the achievement of development, regulatory approval and sales performance-based milestones. If the achievement of a milestone is considered probable at the inception of the collaboration, the related milestone payment is included with other collaboration consideration, such as upfront fees and research funding, in the Company’s revenue calculation. If these milestones are not considered probable at the inception of the collaboration, the milestones will typically be recognized in one of two ways depending on the timing of when the milestone is achieved.  If the milestone is improbable at inception and subsequently deemed probable of achievement, such will be added to the transaction price, resulting in a cumulative adjustment to revenue.  If the milestone is achieved after the performance period has completed and all performance obligations have been delivered, the Company will recognize the milestone payment as revenue in its entirety in the period the milestone was achieved.

The Company’s collaborative agreements, for accounting purposes, represent contracts with customers and therefore are not subject to accounting literature on collaborative agreements. The Company grants to collaboration partners licenses to its intellectual property, supplies bulk fumaryl diketopiperazine (“FDKP”) and provides research and development services, all of which are outputs of the Company’s ongoing activities, in exchange for consideration. The Company does not develop assets jointly with collaboration partners, and does not share in significant risks of their development or commercialization activities. Accordingly, the Company concluded that its collaborative agreements must be accounted for pursuant to Topic 606, Revenue from Contracts with Customers.

 

10


 

For collaboration agreements that allow collaboration partners to select additional optioned products or services, the Company evaluates whether such options contain material r ights (i.e., have exercise prices that are discounted compared to what the Company would charge for a similar product or service to a new collaboration partner). The exercise price of these options includes a combination of licensing fees, event-based mile stone payments and royalties. When these amounts in aggregate are not offered at a discount that exceeds discounts ava ilable to other customers, the C ompany concludes the option does not contain a material right, and therefore is not included in the transa ction price at contract inception. Rather, the Company evaluates grants of additional licensing rights upon option exercises to determine whether such should be accounted for as separate contracts. The Company concluded there is no material right in these options.

 

The Company follows detailed accounting guidance in measuring revenue and certain judgments affect the application of its revenue policy. For example, in connection with its existing collaboration agreements, the Company has recorded on its condensed consolidated balance sheets short-term and long-term deferred revenue based on its best estimate of when such revenue will be recognized. Short-term deferred revenue consist of amounts that are expected to be recognized as revenue in the next 12 months. Amounts that the Company expects will not be recognized within the next 12 months are classified as long-term deferred revenue. However, this estimate is based on the Company’s current project development plan and, if the development plan should change in the future, the Company may recognize a different amount of deferred revenue over the next 12-month period.

 

Milestone Payments — At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the customer, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as, or when, the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company will re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration, other revenue, and earnings in the period of adjustment.

 

Cost of Goods Sold — A significant component of cost of goods sold is current period manufacturing costs in excess of costs capitalized into inventory (excess capacity costs).  These costs, in addition to the impact of the annual revaluation of inventory to standard costs, and write-offs of inventory are recorded as expenses in the period in which they are incurred, rather than as a portion of inventory costs. The cost of goods sold also excludes the write-off of the cost of insulin held in inventory at the end of 2015.

 

Restricted Cash – The Company records restricted cash when cash and cash equivalents are restricted as to withdrawal or usage. The Company presents amounts of restricted cash that will be available for use within 12 months of the reporting date as restricted cash in current assets. Restricted cash amounts that will not be available for use in the Company’s operations within 12 months of the reporting date are presented as restricted cash in long term assets.

 

Short-term Investments —The Company’s short-term investments consist of U.S. Treasury securities stated at amortized cost which the Company intends to hold until maturity. Those with maturities less than 12 months are included in short-term investments on our condensed consolidated balance sheets. Any investments with maturities in excess of twelve months will be included in long-term investments in our condensed consolidated balance sheets. The Company did not record any material gains or losses on these securities during the three months ended March 31, 2019. The estimated fair value of these investments approximated their carrying value as of March 31, 2019.  

Concentration of Credit Risk — Financial instruments which potentially subject the Company to concentration of credit risk consist of cash and cash equivalents. Cash and cash equivalents are held in high credit quality institutions. Cash equivalents consist of interest-bearing money market accounts and U.S. Treasury securities, which are regularly monitored by management.

Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable are recorded at the invoiced amount and are not interest bearing. Accounts receivable are presented net of an allowance for doubtful accounts if there are estimated losses resulting from the inability of its customers to make required payments. The Company makes ongoing assumptions relating to the collectability of its accounts receivable in its calculation of the allowance for doubtful accounts. Accounts receivable are also presented net of an allowance for product returns and trade discounts and allowances because the Company’s customers have the right of setoff for these amounts against the related accounts receivable.

11


 

Inventories — Inventories are stated at the low er of cost or net realizable value. The Company determines the cost of inventory using the first-in, first-out, or FIFO, method. The Company capitalizes inventory costs associated with the Company’s products based on management’s judgment that future econo mic benefits are expected to be realized; otherwise, such costs are expensed as incurred as cost of goods sold. The Company periodically analyzes its inventory levels to identify inventory that may expire or has a cost basis in excess of its estimated real izable value and writes down such inventories, as appropriate. In addition, the Company’s products are subject to strict quality control and monitoring which the Company performs throughout the manufacturing process. If certain batches or units of product no longer meet quality specifications or may become obsolete or are forecasted to become obsolete due to expiration, the Company will record a charge to write down such unmarketable inventory to its estimated net realizable value.

The inventory also excludes the cost of insulin which was previously written off, in association with the insulin purchase agreement.

 

The Company analyzes its inventory levels to identify inventory that may expire or has a cost basis in excess of its estimated realizable value. The Company performs an assessment of projected sales and evaluated the lower of cost or net realizable value and the potential excess inventory on hand at the end of each reporting period.

Recognized Loss on Purchase Commitments — The Company assesses whether losses on long term purchase commitments should be accrued. Losses that are expected to arise from firm, non-cancellable, commitments for the future purchases are recognized unless recoverable. When making the assessment, the Company also considers whether it is able to renegotiate with its vendors. The recognized loss on purchase commitments is reduced as inventory items are received. If, subsequent to an accrual, a purchase commitment is successfully renegotiated, the gain is recognized in the Company’s condensed consolidated statement of operations. The liability balance of the recognized loss on insulin purchase commitments is $94.4 million as of March 31, 2019. No new contracts were identified in 2019 or 2018 that required a new loss on purchase commitment accrual.

 

Fair Value of Financial Instruments — The Company applies various valuation approaches in determining the fair value of its financial assets and liabilities within a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

 

Level 1 — Quoted prices for identical instruments in active markets.

 

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

Level 3 — Significant inputs to the valuation model are unobservable.

 

Contingencies — The Company records a loss contingency for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These accruals represent management’s best estimate of probable loss. Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. On a quarterly basis, the Company reviews the status of each significant matter and assesses its potential financial exposure. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation and may revise its estimates.

 

Stock-Based Compensation — Share-based payments to employees, including grants of stock options, restricted stock units, performance-based awards and the compensatory elements of employee stock purchase plans, are recognized in the condensed consolidated statements of operations based upon the fair value of the awards at the grant date subject to an estimated forfeiture rate. The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of employee stock options and the compensatory elements of employee stock purchase plans. Restricted stock units are valued based on the market price on the grant date. The Company evaluates stock awards with performance conditions as to the probability that the performance conditions will be met and estimates the date at which the performance conditions will be met in order to properly recognize stock-based compensation expense over the requisite service period.

12


 

Clinical Trial Expenses — Clinical trial expenses, which are primarily reflecte d in research and development expenses in the accompanying condensed consolidated statements of operations, result from obligations under contracts with vendors, consultants and clinical site agreements in connection with conducting clinical trials.

Net Income (Loss) Per Share of Common Stock — Basic net income or loss per share excludes dilution for potentially dilutive securities and is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted net income or loss per share reflects the potential dilution under the treasury method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For periods where the Company has presented a net loss, potentially dilutive securities are excluded from the computation of diluted net loss per share as they would be anti-dilutive.

The computation of basic and diluted net loss per share for the three months ended March 31, 2019 and 2018 excludes the common stock equivalents of the following potentially dilutive securities because their inclusion, as the Company is in a net loss position, would be anti-dilutive:

 

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

Vesting of restricted stock units

 

 

1,314,218

 

 

 

1,073,036

 

Conversion of convertible notes into common stock

 

 

3,629,627

 

 

 

14,154,500

 

Conversion of convertible related party notes

   into common stock

 

 

21,909,541

 

 

 

18,743,500

 

Exercise of common stock warrants

 

 

31,851

 

 

 

31,856

 

Employee stock purchase plan

 

 

141,568

 

 

 

111,020

 

Exercise of common stock options

 

 

10,846,738

 

 

 

7,212,239

 

Exercise of warrants associated with public offering

 

 

26,666,667

 

 

 

 

Exercise of warrants associated with direct placement

 

 

14,000,000

 

 

 

 

 

 

 

78,540,210

 

 

 

41,326,151

 

 

Leases —The Company adopted Accounting Standards Codification (“ASC”) Topic 842 – Leases (“the new lease guidance”) on January 1, 2019. Under Topic 842, the Company is required to recognize the assets and liabilities that arise from most operating leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements.

Upon adoption of the new lease guidance, the Company recognized a lease liability to make lease payments and a right-of-use-asset representing its right to use the underlying asset for the applicable lease term and requires using the optional transition method. In doing so, the Company elected the package of three practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. The Company also elected the practical expedient that permits not separating lease and non-lease components for all classes of underlying assets. For short-tern leases, the Company has elected not to apply the recognition requirements of this guidance. The Company did not elect to use the hindsight practical expedient.  

Upon the adoption as of January 1, 2019, the impact on total assets and total liabilities were an increase of $5.2 million. The standard did not materially impact net earnings and had no net impact on cash flow. See Note 11 — Commitments and Contingencies for further information related to leases.  

Recently Issued Accounting Standards – From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s condensed consolidated financial position or results of operations upon adoption.

 

2. Accounts Receivable

Accounts receivable, net consists of the following (in thousands):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Accounts receivable, gross

 

$

4,861

 

 

$

5,198

 

Wholesaler distribution fees and prompt pay discounts

 

 

(890

)

 

 

(868

)

Reserve for returns

 

 

(212

)

 

 

(313

)

Accounts receivable, net

 

$

3,759

 

 

$

4,017

 

 

13


 

As of March 31, 2019 and December 31, 2018, the allowance for doubtful accounts was de minimis . As of March 31, 2019 and December 31, 2018, the Company had three wholesale distributors representing approximately 99 % and 89 % of gross accounts receivable, respectively .

3. Inventories

Inventories consist of the following (in thousands):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Raw materials

 

$

1,381

 

 

$

1,337

 

Work-in-process

 

 

1,585

 

 

 

1,605

 

Finished goods

 

 

754

 

 

 

655

 

Total inventory

 

$

3,720

 

 

$

3,597

 

 

Work-in-process and finished goods as of March 31, 2019 and December 31, 2018 include conversion costs but not insulin cost because the insulin used in its production was previously written off in 2015. The Company analyzed its inventory levels to identify inventory that may expire or has a cost basis in excess of its estimated realizable value.

 

The Company performed an assessment of projected sales and evaluated the lower of cost or net realizable value and the potential excess inventory on hand at March 31, 2019.   Inventory that was forecasted to become obsolete due to expiration is recorded in costs of goods sold in the accompanying condensed consolidated statements of operations. For the three months ended March 31, 2019 and March 31, 2018 the Company recorded zero and a $0.6 million charge, respectively, to write-off inventory that may expire prior to sale which was recorded as cost of goods sold.

4. Property and Equipment

Property and equipment consist of the following (in thousands):

 

 

 

Estimated Useful

 

 

 

 

 

 

 

 

 

 

 

Life (Years)

 

 

March 31, 2019

 

 

December 31, 2018

 

Land

 

 

 

 

$

875

 

 

$

875

 

Buildings

 

39-40

 

 

 

17,389

 

 

 

17,389

 

Building improvements

 

5-40

 

 

 

34,967

 

 

 

34,967

 

Machinery and equipment

 

3-15

 

 

 

61,217

 

 

 

61,217

 

Furniture, fixtures and office equipment

 

5-10

 

 

 

2,954

 

 

 

2,954

 

Computer equipment and software

 

 

3

 

 

 

8,355

 

 

 

8,355

 

Construction in progress

 

 

 

 

 

858

 

 

 

342

 

 

 

 

 

 

 

 

126,615

 

 

 

126,099

 

Less accumulated depreciation

 

 

 

 

 

 

(100,865

)

 

 

(100,497

)

Total property and equipment, net

 

 

 

 

 

$

25,750

 

 

$

25,602

 

 

Depreciation expense related to property and equipment for the three months ended March 31, 2019 and 2018 was $0.4 million.

 

 

14


 

5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities are comprised of the following (in thousands):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Salary and related expenses

 

$

9,099

 

 

$

8,110

 

Current portion of milestone rights liability

 

 

1,643

 

 

 

1,643

 

Professional fees

 

 

875

 

 

 

741

 

Discounts and allowances for commercial product sales

 

 

2,865

 

 

 

2,656

 

Sales and marketing services

 

 

560

 

 

 

88

 

Accrued interest

 

 

494

 

 

 

492

 

Deferred Lease Liability

 

 

1,545

 

 

 

257

 

Other

 

 

983

 

 

 

1,035

 

Total accrued expenses and other current liabilities

 

$

18,064

 

 

$

15,022

 

 

6. Related-Party Arrangements

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Principal amount

 

$

71,506

 

 

$

71,506

 

Unamortized premium

 

 

581

 

 

 

639

 

Unaccreted debt issuance costs

 

 

(51

)

 

 

(56

)

Net carrying amount

 

$

72,036

 

 

$

72,089

 

 

In October 2007, the Company entered into a loan agreement (the “Mann Group Loan Arrangement”) with The Mann Group LLC (“The Mann Group”), which has been amended from time to time. On March 11, 2018, the Company amended and restated the Mann Group Loan Arrangement to, among other things, (i) reflect the current outstanding principal balance of the existing loan of $71.5 million, after giving effect to the partial cancelation of principal in exchange for shares of the Company’s common stock described below; (ii) extend the maturity date of the loan to July 1, 2021; (iii) for periods beginning after April 1, 2018 require interest to compound quarterly; and (iv) permit the principal and any accrued and unpaid interest under the Mann Group Loan Arrangement to be converted, at the option of The Mann Group, at any time on or prior to close of business on the business day immediately preceding the stated maturity date, into shares of the Company’s common stock. The conversion rate of 250 shares per $1,000 principal amount of the Note, which is equal to $4.00 per share subject to adjustment under certain circumstances as described in the Mann Group Loan Arrangement.

The Company analyzed this amendment and concluded that the transaction represented an extinguishment of the related party note and recorded a $0.8 million loss on extinguishment of debt. As a result of the extinguishment the Company recorded a debt premium of $0.8 million and debt issuance costs of $0.1 million during 2018.

On March 11, 2018, the Company and The Mann Group entered into a common stock purchase agreement pursuant to which the Company agreed to issue to The Mann Group and The Mann Group agreed to purchase 3,000,000 shares of the Company’s common stock at a price per share of $2.72 which represented the closing price of the Company’s common stock on March 9, 2018. As payment for the purchase price for the shares, The Mann Group agreed to cancel $8.2 million in principal amount under the Mann Group Loan Arrangement, with the principal payment to be reflected in the amended and restated Mann Group Loan Arrangement. The purchased shares were issued in a private placement.

Interest, at a fixed rate of 5.84%, is due and payable quarterly in arrears on the first day of each calendar quarter for the preceding quarter, or at such other time as the Company and The Mann Group mutually agree. Under the agreement, accrued and unpaid interest may be paid-in-kind. The Mann Group can require the Company to prepay up to $200.0 million in advances that have been outstanding for at least 12 months, less approximately $105.0 million aggregate principal amount that has been cancelled in connection with three common stock purchase agreements. If The Mann Group exercises this right, the Company will have 90 days after The Mann Group provides written notice, or the number of days to maturity of the note if less than 90 days, to prepay such advances. However, pursuant to a letter agreement entered into on August 2010, The Mann Group has agreed to not require the Company to prepay amounts outstanding under the amended and restated promissory note if the prepayment would require the Company to use its working capital resources. In addition, The Mann Group entered into a subordination agreement with Deerfield pursuant to which The Mann Group agreed with Deerfield not to demand or accept any payment under the Mann Group Loan Arrangement until the Company’s payment obligations to Deerfield under the Facility Agreement have been satisfied in full. Subject to the foregoing, in the event of a default under The Mann Group Loan Arrangement, all unpaid principal and interest either becomes immediately due and payable or may be accelerated at The Mann Group’s option, and the interest rate will increase to the one-year LIBOR calculated on the date of the initial advance or in effect on the date of default, whichever is greater, plus 5% per annum. All borrowings under the Mann Group Loan Arrangement are unsecured. The Mann Group Loan Arrangement contains no financial covenants.

15


 

As of March 31, 2019 and December 31, 2018 , the Company had accrued unpaid interest related to the above note of $ 8.0 million and $ 6.8 million, respectively. As of March 31, 2019 there were no additional amounts available for future borrowings. Interest expense (excluding the amortization of debt premium and debt i ssuance costs) for the three months ended March 31, 2019 and 2018 was as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Interest expense on note payable to related party

 

$

1,075

 

 

$

1,122

 

 

Amortization of the premium and accretion of debt issuance costs related to the related party notes for the three months ended March 31, 2019 and 2018 are as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Amortization of debt premium

 

$

59

 

 

$

10

 

Accretion expense - debt issuance cost

 

$

6

 

 

$

2

 

 

The Company has entered into indemnification agreements with each of its directors and executive officers, in addition to the indemnification provided for in its amended and restated certificate of incorporation and amended and restated bylaws (see Note 11 —Commitments and Contingencies).

 

7. Borrowings

Borrowings consist of the following (in thousands):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Facility Financing Obligation (2019 Notes and

   Tranche B Notes)

 

 

 

 

 

 

 

 

Principal amount

 

$

11,495

 

 

$

11,495

 

Unamortized debt issuance costs and debt discount

 

 

(110

)

 

 

(197

)

Net carrying amount

 

$

11,385

 

 

$

11,298

 

Senior Convertible Notes (2021 Notes)

 

 

 

 

 

 

 

 

Principal amoun