We have audited the accompanying consolidated balance sheets of MannKind Corporation and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2018 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with the accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2019 expressed an unqualified opinion on the Company's internal control over financial reporting.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s available cash resources and continuing cash needs raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Business
— MannKind Corporation and its Subsidiaries (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 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 December 31, 2018, the Company had an accumulated deficit of $2.9 billion.
At December 31, 2018, the Company’s capital resources consisted of cash and cash equivalents of $71.2 million and $0.5 million of restricted cash. 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”) 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 $20.0 million in cash and cash equivalents as of October 31, 2018 and December 31, 2018 and $25.0 million in cash and cash equivalents as of the end of each fiscal quarter after December 31, 2018.
As of December 31, 2018, the Company had $101.7 million principal amount of outstanding borrowings. The Company has entered into certain transaction related to these borrowings during 2017 and 2018 that are more fully described in Note 6 - Related Party Agreements and Note 7 – Borrowings.
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 statements were 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 establishment 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 provide assurances that such additional capital will be available on acceptable terms or at all. Successful completion of these plans is dependent on factors outside of the Company’s control. As such, management cannot be certain that such plans will be effectively 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 might result from the outcome of this uncertainty.
Principles of Consolidation
— The 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.
2. Summary of Significant Accounting Policies
Financial Statement Estimates
— The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (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. 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 consolidated financial statements include revenue recognition and gross-to-net adjustments, assessing long-lived assets for impairment, clinical trial expenses, inventory costing and recoverability, recognized loss on purchase commitment, 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.
68
Revenue Recognition
—
The Company adopted Accounting Standards Codification (“ASC”) Topic 606 -
Revenue from Contracts with Customers
(“the new revenue guidance”), on January 1, 2018. Un
der 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. See below for more
information about the impact of adoption of the new revenue guidance.
Upon adoption of the new revenue guidance, the Company moved from the sell-through model to a sell-to model for revenue related to commercial sales of Afrezza to wholesalers and now rec
ords revenue when its customers take control of the product along with an estimate of potential returns as variable consideration. For sales of Afrezza to specialty pharmacies, the Company previously recognized revenue at the time of shipment because speci
alty pharmacies generally purchase on demand and estimated returns are minimal. Therefore, there was no impact upon adoption for sales to specialty pharmacies.
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 three types of contracts with customers: contracts with wholesale distributors and specialty pharmacies for commercial product sales, collaboration arrangements, and arrangements with parties to whom it has sold intellectual property.
Prior to Janaury 1, 2018, we invoiced our customers upon shipment of Afrezza to them and recorded an accounts receivable, with a corresponding liability for deferred revenue equal to the gross invoice price net of estimated gross-to-net adjustments. We were required to reliably estimate returns in a very narrow range in order to recognize revenue upon shipment. While we were able to estimate returns within a range, it was not sufficiently precise to meet the accounting requirements for the Income Statement upon shipment. Accordingly, we deferred recognition of revenue and the related estimated discounts and allowances on Afrezza product shipments until the right of return no longer existed, which occurs at the earlier of the time Afrezza is dispensed through patient prescriptions or expiration of the right of return. Through December 31, 2017, we recognized revenue based on Afrezza prescriptions dispensed, as estimated by syndicated data provided by a third party. We also analyzed additional data points to ensure that such third-party data was reasonable, including data related to inventory movements within the channel and ongoing prescription demand. In addition, the costs of Afrezza associated with the deferred revenue were recorded as deferred costs until such time as the related deferred revenue is recognized.
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 product to retail pharmacies and certain medical centers or hospitals or in the case of 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 product.
For the years ended December 31, 2018 and 2017, Afrezza net revenue from commercial product sales consisted of $17.3 million and $9.2 million, respectively. As of December 31, 2018, there was zero net deferred revenue due to the adoption of Topic 606. At December 31, 2017, the balance of net deferred revenue was $3.0 million on the Company’s consolidated balance sheet.
For the year ended December 31, 2018 and 2017, shipments to three wholesale distributors represented 89% of total shipments. For the year ended December 31, 2016, the Company sold directly to ICS and Sanofi.
The Company, beginning January 1, 2018, 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 Program –
Under the voucher program, potential new patients are given vouchers 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 to a program administrator who pays the retailer for the product. The administrator then invoices the Company for the amount of vouchers 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 from the sale of product under the voucher program. Therefore, the Company excludes such amounts from both gross and net revenue. The cost of product associated with the voucher program is included in cost of goods sold.
69
Reserves for Variable Consideration
— Revenues
from product sales are recorded at the transaction price, which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, provider chargeb
acks and discounts, government rebates, payor rebates, 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 t
o the Company’s sale of its product. These reserves, 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 that is included in the transaction price is 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 December 31, 2018 and, therefore, the transaction price was not reduced further during the year ended December 31, 2018. 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 product to the Customers and, therefore, these payments have been recorded as a reduction of revenue and a reduction to accounts receivable, net.
Product Returns
— As of January 1, 2018, as a part of the adoption of Topic 606, 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. Such right of return 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 a low single-digit return rate.
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.
Payor Rebates
— The Company contracts with certain 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 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.
70
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 t
he Company expects to receive associated with 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 recog
nized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities.
Deferred Costs from Commercial Product Sales —
Deferred costs from commercial product sales represents the cost of product (including labor, overhead and shipping costs to third party logistics providers) shipped to wholesale distributors, but not dispensed by pharmacies to patients. If the Company estimates that inventory that has been shipped to wholesale distributors will be returned for credit because there is a risk of product expiry, deferred costs of commercial product sales is reduced and cost of goods sold is increased for the cost of such inventory. The Company had deferred costs from commercial products sales of $0.4 million as of December 31, 2017. On January 1, 2018, the Company adjusted its deferred costs from commercial products to zero as a result of the adoption of Topic 606.
Revenue Recognition — Net 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 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. 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. Given the significant estimates depend on the development plan, these estimates could change and impact the revenue recognition. 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 the years ended December 31, 2018 and 2017 net revenue - collaborations and services consisted of $10.6 million and $0.3 million, respectively. For further information see Note 8
—
Collaboration 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 accounted for as a single unit of accounting. In this case, the license payments and payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed.
Whenever the Company determines that an arrangement should be accounted for over time as a single performance obligation, 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. If the Company determines that an arrangement has multiple performance obligations, the allocation of the transaction price is determined from observable market inputs and revenue is recognized based on the measurement of progress as the performance obligation is satisfied.
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 achieved during the performance period, the Company will only recognize revenue to the extent of the proportional performance achieved at that date, or the proportion of the ratable method achieved at that date, and the remainder will be recorded as deferred revenue to be amortized over the remaining performance period. 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.
For collaborative agreements, the Company has concluded for accounting purposes they represent contracts with customers, and are not subject to accounting literature on collaborative arrangements. This is because the Company grants to collaboration partners licenses to its intellectual property, supplies bulk 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.
71
For collaboration agreements that allow collaboration partners to select additional optioned products, the Company evaluates whether such op
tions contain material rights, (i.e. have exercise prices that are discounted compared to what the company would charge for a similar license to a new collaboration partner). The exercise price of these options includes a combination licensing fees, event-
based milestone payments and royalties. When these amounts in aggregate are not offered at a discount that exceeds discounts available to other customers, the company concludes the option does not contain a material right, and considers grants of additiona
l licensing rights upon option exercises to be separate contracts. The Company concluded there is no material right in these options.
The Company follows detailed accounting guideance 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 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 consists 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. At December 31, 2018 and 2017, the Company had current deferred payment from collaborations of $36.9 million and $0.2 million, respectively and long-term deferred payment from collaborations of $10.7 million and $0.5 million, respectively, related to the Company’s collaborations.
Revenue Recognition — Revenue — Other —
In 2017, other revenue consisted of $1.7 million of revenue from bulk insulin sales and $0.6 million related to the sale of intellectual property to Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd (“Fosun”), which is accounted for under the multiple-deliverable revenue recognition guidance and more fully described in Note 9 – Sale of Intellectual Property. Revenue from bulk insulin sales are recognized after delivery and customer acceptance of the bulk insulin.
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 the annual revaluation of deferred costs of commercial sales to standard costs in 2017 and 2016), and write-offs of inventory (and write-offs of deferred costs of commercial sales in 2017 and 2016) are recorded as expenses in the period in which they are incurred, rather than as a portion of inventory costs. Cost of goods sold also includes the standard cost related to Afrezza sold during the period and related variances and realized currency gain or loss in connection with the Amphastar insulin contract. The cost of goods sold also excludes the write-off of the cost of insulin held in inventory at the end of 2015.
Cash and Cash Equivalents
— The Company considers all highly liquid investments with original or remaining maturities of 90 days or less at the time of purchase, that are readily convertible into cash to be cash equivalents. As of December 31, 2018 and 2017, cash equivalents were comprised of money market accounts with maturities less than 90 days from the date of purchase.
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.
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.
Inventories
—
Inventories are stated at the lower 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 economic 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 realizable 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.
72
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 th
e lower of cost or net realizable value and the potential excess invent
ory on hand at December 31, 2018 and 2017
. As a result of these assessments, the Company recorded a
$2.2 million and
$3.0 million charge for the year
s ended December 31, 2018 and 2017
,
respectively,
to write-off inventory that may expire prior to sale. For the year ended December 31, 2016 there were no
write-
offs to inventory.
Leases
– The Company records rent expense for leases that contain scheduled rent increases on a straight-line basis over the lease term which begins with the point at which the Company obtains control and possession of the leased property.
Prepaid Expenses and Other Current Assets —
As of December 31, 2018 and 2017, prepaid expenses and other current assets primarily consist of prepaid expenses for goods and services to be received and includes a certificate of deposit for $0.4 million as collateral as required by an agreement with the bank.
Assets Held for Sale —
The Company classifies long-lived assets anticipated to be sold within one year as held for sale at the lower of their carrying value or fair value less estimated selling costs.
Property and Equipment
— Property and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets. Building improvements are amortized over the estimated useful life of the improvements. Maintenance and repairs are expensed as incurred. Assets under construction are not depreciated until placed into service.
Impairment of Long-Lived Assets
— The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Assets are considered to be impaired if the carrying value may not be recoverable.
If the Company believes an asset to be impaired, the impairment recognized is the amount by which the carrying value of the asset exceeds the fair value of the asset. Fair value is determined using the market, income or cost approaches as appropriate for the asset. Any write-downs are treated as permanent reductions in the carrying amount of the asset and recognized as an operating loss.
The Company recorded asset impairments of $0.2 million and $1.3 million for the years ended December 31, 2017 and 2016, respectively (see Note 4 — Property and Equipment).
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 consolidated statement of operations.
The balance of the recognized loss on insulin purchase commitments as of December 31 2018 and 2017 was $98.3 million and $109.3 million, respectively.
Milestone Rights Liability
— On July 1, 2013, in conjunction with the execution of the Facility Agreement, the Company issued Milestone Rights to the Milestone Purchasers. The Milestone Rights provide the Milestone Purchasers certain rights to receive payments of up to $90.0 million, of which $75.0 million remain payable as of December 31, 2018, upon the occurrence of specified strategic and sales milestones, including the achievement of specified net sales figures.
The Company analyzed the Milestone Rights and determined that the Milestone Agreement does not meet the definition of a freestanding derivative. Since the Company has not elected to apply the fair value option to the Milestone Agreement, the Company recorded the Milestone Rights at their estimated initial fair value and accounted for the Milestone Rights as a liability.
The initial fair value estimate of the Milestone Rights was calculated using the income approach in which the cash flows associated with the specified contractual payments were adjusted for both the expected timing and the probability of achieving the milestones and discounted to present value using a selected market discount rate. The expected timing and probability of achieving the milestones was developed with consideration given to both internal data, such as progress made to date and assessment of criteria required for achievement, and external data, such as market research studies. The discount rate was selected based on an estimation of required rate of returns for similar investment opportunities using available market data. The Milestone Rights liability will be remeasured as the specified milestone events are achieved. Specifically, as each milestone event is achieved, the portion of the initially recorded Milestone Rights liability that pertains to the milestone event being achieved, will be remeasured to the amount of the specified related milestone payment. The resulting change in the balance of the Milestone Rights liability due to remeasurement will be recorded in the Company’s consolidated statements of operations as interest expense. Furthermore, the Milestone Rights liability will be reduced upon the settlement of each milestone payment. As a result, each milestone payment would be effectively allocated between a reduction of the recorded Milestone Rights liability and an expense representing a return on a portion of the Milestone Rights liability paid to the investor for the achievement of the related milestone event (see Note 7 — Borrowings). As of December 31, 2018 and 2017, the remaining liability balance was $8.9 million.
73
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 in
puts 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 indep
endent 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 circumstance
s. 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.
Income Taxes
— The provisions for federal, foreign, state and local income taxes are calculated on pre-tax income based on current tax law and include the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce net deferred income tax assets to amounts that are more likely than not to be realized.
Income tax positions are considered for uncertainty. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no liabilities for uncertain income tax positions have been recorded. If a tax position does not meet the minimum statutory threshold to avoid payment of penalties, the Company recognizes an expense for the amount of the penalty in the period the tax position is claimed in the tax return of the Company. The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense, if any. Penalties, if probable and reasonably estimable, are recognized as a component of income tax expense.
Significant management judgment is involved in determining the provision for income taxes, deferred tax assets, deferred tax liabilities, and any valuation allowance recorded against deferred tax assets. Due to uncertainties related to the realization of the Company’s deferred tax assets as a result of its history of operating losses, a full valuation allowance has been established against the total deferred tax asset balance. The valuation allowance is based on management’s estimates of taxable income by jurisdiction in which the Company operates and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, a change in the valuation allowance may be needed. See Note 16 – Income Taxes for disclosure on the tax laws enacted in December 2017.
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 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.
Warrants
— The Company accounts for its warrants as either equity or liabilities based upon the characteristics and provisions of each instrument and evaluation of sufficient authorized shares available to satisfy the obligations. Warrants classified as derivative liabilities are recorded on the Company’s consolidated balance sheets at their fair value on the date of issuance and are revalued at each subsequent balance sheet date, with fair value changes recognized in the consolidated statements of operations.
Comprehensive Income (Loss)
— Other comprehensive income (loss) requires that all components of comprehensive income (loss) to be reported in the financial statements in the period in which they are recognized. Other comprehensive income (loss) includes certain changes in stockholders’ equity that are excluded from net income (loss). Specifically, the Company includes unrealized gains and losses on foreign exchange translation gains and losses resulting from translating cash and cash accounts in foreign currencies in accumulated other comprehensive loss on the consolidated balance sheets.
74
Research and Development Expenses
— Research and development expenses consist of costs associated with the clinical trials of the Company’s product candidates, development supplies and other development materials, compensation and other expenses for research and development personnel, cos
ts for consultants and related contract research, facility costs, and depreciation. Research and development costs, which are net of any tax credit exchange recognized for the Connecticut state research and development credit exchange program, are expensed
as incurred.
Clinical Trial Expenses
— Clinical trial expenses, which are reflected in research and development expenses in the accompanying consolidated statements of operations, result from obligations under contracts with vendors, consultants and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company under such contracts. The appropriate level of trial expenses are reflected in the Company’s consolidated financial statements by matching period expenses with period services and efforts expended. These expenses are recorded according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. Clinical trial accrual estimates are determined through discussions with internal clinical personnel and outside service providers as to the progress or state of completion of trials, or the services completed. Service provider status is then compared to the contractually obligated fee to be paid for such services. During the course of a clinical trial, the Company may adjust the rate of clinical expense recognized if actual results differ from management’s estimates.
Interest Expense
— Interest costs are expensed as incurred, except to the extent such interest is related to construction in progress, in which case interest is capitalized. There were no capitalized interest costs for the years ended December 31, 2018 and 2017.
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.
In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The standard requires a company to recognize revenue to depict the transfer of goods or services when transferred to customers in an amount that reflects the consideration it expects to be entitled to receive in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued additional ASUs which clarified certain aspects of the new guidance. The new guidance also requires disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments.
The Company applied the new revenue guidance using the modified retrospective approach to all contracts with the cumulative effect of initial application recognized as of January 1, 2018. Revenue amounts and comparative information prior to this adoption date have not been retrospectively adjusted and continue to be accounted for under the previous accounting guidance.
The previous accounting guidance required the Company to reliably estimate returns in order to recognize revenue upon shipment. While the Company could estimate returns within a range, it was not sufficiently precise to meet those requirements. Accordingly, under the previous guidance, the Company deferred recognition of revenue on Afrezza product deliveries to wholesalers until the right of return no longer existed, which occurred at the earlier of the time Afrezza was dispensed from pharmacies to patients or expiration of the right of return. Therefore, for deliveries to wholesalers, the Company recognized revenue based on estimated Afrezza patient prescriptions dispensed, a sell-through model.
Upon adoption of the new revenue guidance, the Company moved from the sell-through model to a sell-to model for revenue related to commercial sales of Afrezza to wholesalers and now records revenue when its customers take control of the product along with an estimate of potential returns as variable consideration. For sales of Afrezza to specialty pharmacies, the Company previously recognized revenue at the time of shipment because specialty pharmacies generally purchase on demand and estimated returns are minimal. Therefore, there was no impact upon adoption for sales to specialty pharmacies.
Additionally, the Company has historically entered into collaborative agreements and sales of intellectual property to third parties under which periodic payments have been received. In February 2017, the FASB issued ASU 2017-05
Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets to ASC Subtopic 610-20, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets
which further clarified the new revenue recognition guidance under Topic 606. The Company adopted the guidance on January 1, 2018 using the modified retrospective method. There was no impact upon adoption related to these arrangements. These transactions are more fully described in Note 8 – Collaboration Arrangements and Note 9 - Sale of Intellectual Property.
75
The cumulative effect of the changes made to th
e
consolidated January 1, 2018 balance sheet for the adoption of the new revenue guidance was as follows (in thousands):
|
|
Balance at
December 31, 2017
|
|
|
Adjustments
due to new
revenue
guidance
|
|
|
|
Balance at
January 1, 2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
2,789
|
|
|
$
|
(111
|
)
|
(1)
|
|
$
|
2,678
|
|
Deferred costs from commercial product
sales
|
|
|
405
|
|
|
|
(405
|
)
|
(2)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current
liabilities
|
|
$
|
12,449
|
|
|
$
|
649
|
|
(3)
|
|
$
|
13,098
|
|
Deferred revenue, net
|
|
|
3,038
|
|
|
|
(3,038
|
)
|
(4)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(2,854,898
|
)
|
|
$
|
1,873
|
|
(5)
|
|
$
|
(2,853,025
|
)
|
(1)
|
To establish a reserve for product returns
|
(2)
|
To eliminate deferred costs from commercial product sales previously required by the sell-through method
|
(3)
|
To record additional accrual for estimated voucher payments related to inventory remaining in the distribution channel at January 1, 2018
|
(4)
|
To eliminate deferred revenue previously required by the sell-through method
|
(5)
|
To record the net impact of (1)-(4) in opening accumulated deficit
|
76
In accordance with the new revenue guidance, the disclosure of the impac
t of adoption on the
consolidated balance
sheet
consolidated statement of operations and cash flows was as follows (in thousands):
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year December 31, 2018
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balances without
adoption of Topic
606
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
4,017
|
|
|
$
|
314
|
|
|
$
|
4,331
|
|
Deferred costs from commercial product
sales
|
|
|
—
|
|
|
|
875
|
|
|
|
875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current
liabilities
|
|
$
|
15,022
|
|
|
$
|
(751
|
)
|
|
$
|
14,271
|
|
Deferred revenue, net
|
|
|
—
|
|
|
|
3,937
|
|
|
|
3,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(2,940,000
|
)
|
|
$
|
(1,997
|
)
|
|
$
|
(2,941,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year December 31, 2018
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balances without
adoption of Topic
606
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue - commercial product sales
|
|
$
|
17,276
|
|
|
$
|
(486
|
)
|
|
$
|
16,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
19,402
|
|
|
$
|
(754
|
)
|
|
$
|
18,648
|
|
Net loss
|
|
|
(86,975
|
)
|
|
|
(267
|
)
|
|
|
(87,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2018
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Balances without
adoption of Topic
606
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(86,975
|
)
|
|
$
|
(267
|
)
|
|
$
|
(87,242
|
)
|
Change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(1,339
|
)
|
|
|
2,567
|
|
|
|
1,228
|
|
Deferred costs from commercial product
sales
|
|
|
—
|
|
|
|
470
|
|
|
|
470
|
|
Accrued expenses and other current
liabilities
|
|
|
2,249
|
|
|
|
(751
|
)
|
|
|
1,498
|
|
Deferred revenue, net
|
|
|
—
|
|
|
|
(899
|
)
|
|
|
(899
|
)
|
Cash (used in) provided by operating
activities
|
|
|
(37,731
|
)
|
|
|
1,120
|
|
|
|
(36,611
|
)
|
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 consolidated financial position or results of operations upon adoption.
77
In February of 201
6, the FASB issued ASU 2016-02, “Leases (Topic 842)” and in July of 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements.” The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating lea
ses. In addition, the updated guidance provides lessors with an election to combine the lease and non-lease components of a contract, if certain conditions are met, and account for the combined component in accordance with the new revenue guidance in ASU 2
014-09 if the non-lease component is the prominent component of the contract. The updated guidance is effective for interim and annual periods beginning after December 15, 2018 and requires using a modified retrospective transition method. However, the Com
pany has elected to apply a practical expedient offered in the updated guidance which allows entities to apply the guidance on January 1, 2019 and comparative periods are not restated.
In transition, lessees and lessors are required to recognize and measur
e leases
starting at the effective date u
sing an optional approach. The new standard will be effective on January 1, 2019 and will result in an increase of assets and liabilities of approximately $5.0 million.
In July 2017, the FASB issued ASU No. 2017-11,
Earnings per Share (Topic 260) and Derivatives and Hedging (Topic 815)
: Accounting for Certain Financial Instruments with Down Round Provisions. This ASU addresses the complexity and cost of accounting for certain financial instruments with down round features that require fair value measurement of the entire instrument or conversion option and requires entities that present earnings per share in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. ASU 2017-11 is effective for fiscal years beginning January 1, 2019, including interim periods within those periods. The adoption of this standard is not expected to materially impact the Company’s consolidated financial statements.
3. Inventories
Inventories consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
1,337
|
|
|
$
|
572
|
|
Work-in-process
|
|
|
1,605
|
|
|
|
1,273
|
|
Finished goods
|
|
|
655
|
|
|
|
812
|
|
Total inventory
|
|
$
|
3,597
|
|
|
$
|
2,657
|
|
Work-in-process and finished goods as of December 31, 2018 and 2017 include conversion costs but not insulin cost because the insulin used in its production was previously written off. 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 December 31, 2018. During the year ended December 31, 2018 and 2017, the Company recorded a write-down of inventory of approximately $2.2 million and $3.0 million, respectively. Inventory that was forecasted to become obsolete due to expiration is recorded in costs of goods sold in the accompanying consolidated statements of operations. There was no write-down of inventory for the year ended December 31, 2016.
4. Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
Estimated Useful
|
|
|
December 31,
|
|
|
|
Life (Years)
|
|
|
2018
|
|
|
2017
|
|
Land
|
|
|
—
|
|
|
$
|
875
|
|
|
$
|
875
|
|
Buildings
|
|
39-40
|
|
|
|
17,389
|
|
|
|
17,389
|
|
Building improvements
|
|
5-40
|
|
|
|
34,967
|
|
|
|
34,957
|
|
Machinery and equipment
|
|
3-15
|
|
|
|
61,217
|
|
|
|
62,681
|
|
Furniture, fixtures and office equipment
|
|
5-10
|
|
|
|
2,954
|
|
|
|
3,556
|
|
Computer equipment and software
|
|
|
3
|
|
|
|
8,355
|
|
|
|
8,416
|
|
Construction in progress
|
|
|
—
|
|
|
|
342
|
|
|
|
—
|
|
|
|
|
|
|
|
|
126,099
|
|
|
|
127,874
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(100,497
|
)
|
|
|
(100,952
|
)
|
Total property and equipment, net
|
|
|
|
|
|
$
|
25,602
|
|
|
$
|
26,922
|
|
78
Depreciation expense related to property and equipment for t
he years ended December 31, 2018, 2017 and 2016
, was
$
1.7 million
,
$1.8
million and
$2.4
million
, respectively.
The Company disposed of $2.1 million of furniture and fixtures, manuf
acturing equipment and
laboratory
equipment as it was no longer in service. The net book value was de minimis.
On January 6, 2017, the Company and Rexford Industrial Realty, L.P. (“Rexford”) entered into an Agreement of Purchase and Sale and Joint Escrow Instructions (the “Purchase Agreement”), pursuant to which the Company agreed to sell and Rexford agreed to purchase certain parcels of real estate owned by the Company in Valencia, California and certain related improvements, personal property, equipment, supplies and fixtures (collectively, the “Property”) for $17.3 million. This asset in the amount of $16.7 million was classified as held for sale as of December 31, 2016. The sale and purchase of the Property for $17.3 million pursuant to the terms of the Purchase Agreement, as amended, was completed on February 17, 2017. Net proceeds were $16.7 million after deducting broker’s commission and other fees of approximately $0.6 million paid by the Company. Net proceeds received approximated the carrying value of the asset held for sale.
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Salary and related expenses
|
|
$
|
8,110
|
|
|
$
|
7,260
|
|
Current portion of milestone rights liability
|
|
|
1,643
|
|
|
|
1,643
|
|
Professional fees
|
|
|
741
|
|
|
|
1,007
|
|
Discounts and allowances for commercial product sales
|
|
|
2,656
|
|
|
|
873
|
|
Sales and marketing services
|
|
|
88
|
|
|
|
147
|
|
Restructuring
|
|
|
—
|
|
|
|
362
|
|
Accrued interest
|
|
|
492
|
|
|
|
567
|
|
Deferred Lease Liability
|
|
|
257
|
|
|
|
118
|
|
Other
|
|
|
1,035
|
|
|
|
472
|
|
Accrued expenses and other current liabilities
|
|
$
|
15,022
|
|
|
$
|
12,449
|
|
6. Related-Party Arrangements
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Principal amount
|
|
$
|
71,506
|
|
|
$
|
79,666
|
|
Unamortized premium
|
|
|
639
|
|
|
|
—
|
|
Unaccreted debt issuance costs
|
|
|
(56
|
)
|
|
|
—
|
|
Net carrying amount
|
|
$
|
72,089
|
|
|
$
|
79,666
|
|
In October 2007, the Company entered into The Mann Group Loan Arrangement, which has been amended from time to time. On October 31, 2013, the promissory note underlying The Mann Group Loan Arrangement, described in the Company’s consolidated balance sheets as Note Payable
to Related Party,
was amended to, among other things, extend the maturity date of the loan to January 5, 2020, extend the date through which the Company can borrow under The Mann Group Loan Arrangement to December 31, 2019, increase the aggregate borrowing amount under The Mann Group Loan Arrangement from $350.0 million to $370.0 million and provide that repayments or cancellations of principal under The Mann Group Loan Arrangement will not be available for reborrowing. At various times over the years that the Mann Group Loan Arrangement has been outstanding, the Company and The Mann Group have agreed to exchange portions of the outstanding principal for shares of the Company’s common stock.
On June 27, 2017, the Company entered into an agreement with The Mann Group, pursuant to which the parties agreed to, among other things, (i) capitalize $10.7 million of accrued and unpaid interest as of June 30, 2017, resulting in such amount being classified as outstanding principal under The Mann Group Loan Arrangement; (ii) advance to the Company approximately $19.4 million of cash, the remaining amount available for borrowing by the Company under The Mann Group Loan Arrangement after the foregoing capitalization of accrued and unpaid interest; and (iii) defer all interest payable on the outstanding principal until July 1, 2018, unless such payments are otherwise permitted under the subordination agreement with Deerfield, and subject to further deferral pursuant to the terms of the subordination agreement with Deerfield which terms are more fully disclosed below.
79
On March 11, 2018, the Company amended and restated the Mann Group Loan Arrangement with The Mann Group to, among other things, (i) reflect the current outstanding principal balance of the e
xisting loan of $71.5 million, after giving effect to the partial cancellation 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 A
pril 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 t
he 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 circ
umstances 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. 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 in 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.
As of December 31, 2018 and 2017, the Company had accrued unpaid interest related to the above note of $6.8 million and $2.3 million, respectively. As of December 31, 2018 and 2017, there was no additional amount available for future borrowings. Interest expense (excluding the amortization of debt premium and debt issuance costs) for the years ended December 31, 2018 and 2017 are as follows (in thousands):
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Interest expense on note payable to related party
|
|
$
|
4,304
|
|
|
$
|
3,782
|
|
Amortization of the premium and accretion of debt issuance costs related to the related party notes for the years ended December 31, 2018 and 2017 are as follows (in thousands):
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Amortization of debt premium
|
|
$
|
185
|
|
|
$
|
—
|
|
Accretion expense - debt issuance cost
|
|
$
|
19
|
|
|
$
|
—
|
|
In May 2015, the Company entered into a sublease agreement with the Alfred Mann Foundation for Scientific Research (the “Mann Foundation”), a California not for-profit corporation. The lease was for approximately 12,500 square feet of office space in Valencia, California, which expired in April 2017 and was renewed on a month-to-month basis at a rate of $20,000 per month until August 31, 2017 when the Company moved into its new corporate headquarters (see Note 14 — Commitments and Contingencies).There was no lease payment made to the Mann Foundation for the year ended December 31, 2018. Lease payments to the Mann Foundation for the years ended December 31, 2017 and 2016 were $0.2 million, and $0.3 million, respectively.
80
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 14
— Commitments and Contingencies).
On October 10, 2017, the Company entered into securities purchase agreements (the “Purchase Agreements”) with certain institutional investors and a charitable foundation (collectively, the “Purchasers”). Included in this offering were 166,600 shares issued to a charitable foundation associated with the Chairman of the Company’s board of directors.
7. Borrowings
Borrowings consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Facility Financing Obligation (2019 Notes and
Tranche B Notes)
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
11,495
|
|
|
$
|
54,407
|
|
Unamortized debt issuance costs and debt discount
|
|
|
(197
|
)
|
|
|
(1,662
|
)
|
Net carrying amount
|
|
$
|
11,298
|
|
|
$
|
52,745
|
|
Senior Convertible Notes (2021 Notes)
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
18,690
|
|
|
$
|
23,690
|
|
Unamortized premium
|
|
|
409
|
|
|
|
721
|
|
Net carrying amount
|
|
$
|
19,099
|
|
|
$
|
24,411
|
|
Note payable to related party - net carrying
amount
|
|
$
|
72,089
|
|
|
$
|
79,666
|
|
In addition to the Mann Group Loan Arrangement described in Note 6, as of December 31, 2018, the Company’s outstanding borrowings consisted of $18.7 million principal amount of the Senior Convertible Notes due 2021 bearing interest at 5.75% per annum and maturing on October 23, 2021, as well as $11.5 million principal amount of the Facility Financing Obligation, which is comprised of the following:
|
•
|
A principal amount of $9.0 million of 2019 notes due and payable in July 2019 and bearing interest at 9.75% per annum. Interest is payable in cash quarterly in arrears in the last business day of March, June, September and December of each year; and
|
|
•
|
A principal amount of $2.5 million of Tranche B notes due and payable in May 2019 and bearing interest at 8.75% per annum. Interest is payable in cash quarterly in arrears on the last business day of March, June, September and December of each year.
|
These borrowings are further described below:
Facility Financing Obligation (2019 Notes and Tranche B Notes)
– As of December 31, 2018, there were $9.0 million principal amount of 2019 notes and $2.5 million principal amount of Tranche B notes outstanding. As of December 31, 2017, there were $39.4 million principal amount of 2019 notes and $15.0 million principal amount of Tranche B notes outstanding.
The 2019 notes accrue interest at annual rate of 9.75% and the Tranche B notes accrue interest at an annual rate of 8.75%. Interest is paid quarterly in arrears on the last day of each March, June, September and December.
The Facility Financing Obligation principal repayment schedule is comprised of payments which began on July 1, 2016 and end in July 2019. As of December 31, 2018, the future payment for the year ending December 31, 2019 is $11.5 million.
On April 18, 2017, the Company entered into an Exchange Agreement with Deerfield pursuant to which the Company agreed to, among other things, (i) repay $4.0 million principal amount under the Tranche B notes; (ii) exchange $1.0 million principal amount under the Tranche B notes for 869,565 shares of the Company’s common stock (the “Tranche B Exchange Shares”); and (iii) exchange $5.0 million principal amount under the 2019 notes for 4,347,826 shares of the Company’s common stock (together with the “Tranche B Exchange Shares,” the “April Exchange Shares”). The exchange price for the April Exchange Shares was $1.15 per share.
81
The Company determined that, since the principal amount repaid and exchanged under the Tranche B notes and the principal amount exchanged under the 2019 notes
represented the principal amount that would have otherwise become due and payable in May and July of 2017 under the Tranche B notes and 2019 notes, respectively, the extinguishment of the May and July 2017 payments was not considered to be a troubled debt
restructuring. Accordingly, the Company accounted for the transaction by recording a loss on extinguishment of debt of $0.3 million at April 18, 2017 which was calculated as the difference between the reacquisition price and the net carrying value of the r
elated debt. The reacquisition price was calculated using the $4.0 million cash repayment and the fair value of the April Exchange Shares on April 18, 2017. The fair value of the April Exchange Shares was determined to be $1.22 per share representing the c
losing trading price of the Company’s common stock on The
Nasdaq
Global Market on April 18, 2017.
On June 29, 2017, the Company entered into the Third Amendment to the Facility Agreement with Deerfield, pursuant to which the Company agreed to, among other things, (i) exchange $5.0 million principal amount under the Company’s 2019 notes for 3,584,230 shares of the Company’s common stock (the “June Exchange Shares”) at an exchange price of $1.395 per share and (ii) amend the Facility Agreement with Deerfield, to (A) defer the payment of $10.0 million in principal amount of the 2019 notes from the original July 18, 2017 due date to August 31, 2017, which was further deferred to October 31, 2017 upon the Company’s delivery on August 31, 2017 and October 30, 2017 of a written certification to Deerfield that certain conditions had been met, including that no event of default under the Facility Agreement had occurred, Michael E. Castagna remains the Company’s Chief Executive Officer, the Company received the advance from The Mann Group (see Note 6 — Related-Party Arrangements), the Company had at least $10.0 million in cash and cash equivalents on hand, no material adverse effect on the Company had occurred, the engagement letter between the Company and Greenhill & Co., Inc. (“Greenhill”) remained in full force and effect and Greenhill had remained actively engaged in exploring capital structure and financial alternatives on behalf of the Company in accordance with such engagement letter (collectively, the “Extension Conditions”), and (B) amend the Company’s financial covenant under the Facility Agreement to provide that, if the Extension Conditions remain satisfied, the obligation under the Facility Agreement to maintain at least $25.0 million in cash and cash equivalents as of the end of each quarter, was reduced to $10.0 million as of August 31, 2017, September 30, 2017, October 31, 2017 and December 31, 2017 if certain conditions were met. We met the conditions at each of these month-ends.
The Company determined that since the principal amount repaid and exchanged under the 2019 notes represented the principal amount that would have otherwise become due and payable under the 2019 notes, the $5.0 million prepayment was not considered to be a troubled debt restructuring. Accordingly, the Company accounted for the transaction by recording a loss on extinguishment of debt of $0.5 million on June 29, 2017 which was calculated as the difference between the reacquisition price and the net carrying value of the related debt. The net carrying value of the related debt includes the acceleration of the debt discount and issuance costs amounting to approximately $0.3 million as a result of the transaction. The reacquisition price was calculated using the fair value of the June Exchange Shares on June 29, 2017. The fair value of the June Exchange Shares was determined to be $1.45 per share representing the closing trading price of the Company’s common stock on The Nasdaq Global Market on June 29, 2017.
On October 23, 2017, the Company entered into a Fourth Amendment to the Facility Agreement with Deerfield, pursuant to which the parties (i) deferred the payment of $10.0 million in principal amount (the “October Payment”) of the Facility Financing Obligation from October 31, 2017 to January 15, 2018, with the Company depositing an amount of cash equal to the October Payment into an escrow account until the October Payment has been satisfied in full (subject to early release to the extent that portions of the October Payment are satisfied through the exchange of principal for shares of the Company’s common stock), and (ii) amended and restated the Facility Financing Obligation and the Tranche B notes to provide that Deerfield may convert the principal amount under such notes from time to time into an aggregate of up to 4,000,000 shares of the Company’s common stock after the effective date of the Fourth Amendment. The conversion price will be the greater of (i) the average of the volume weighted average price per share of the Company’s common stock for the three trading day period immediately preceding the date of any election by Deerfield to convert principal amounts of such notes and (ii) $3.25 per share, subject to adjustment under certain circumstances. Any conversions of principal by Deerfield under such notes will be applied first to reduce the October Payment, and after the October Payment has been satisfied, to reduce other principal payments due.
The Company determined that the Fourth Amendment did not include any concessions and that the addition of the conversion option was not substantive and therefore it was not considered to be a troubled debt restructuring. Accordingly, the Company accounted for the transaction as a modification.
On November 6, 2017 Deerfield converted 1,720,846 shares under the conversion feature at a price of $3.25 per share, redeeming $5,592,750 of principal.
On January 15, 2018, the Company entered into a Fifth Amendment to the Facility Agreement with Deerfield, pursuant to which the parties deferred the payment date for the $4.4 million remaining October 2017 Tranche 4 Principal Payment from January 15, 2018 to January 19, 2018. Concurrent with this amendment the Company entered into a First Amendment to Escrow Agreement to extend the escrow period to January 19, 2018 to align with the amended payment date under the Fifth Amendment.
On January 18, 2018, the Company entered into an Exchange and Sixth Amendment to Facility Agreement with Deerfield, pursuant to which, among other things, the Company agreed to issue to Deerfield an aggregate of 1,267,972 shares of its common stock, in exchange for $3.2 million of the 2019 notes, an exchange rate of $2.49 per share. In addition, the parties deferred the payment date for the $1.3 million remaining principal amount of the 2019 notes (the “Remaining Payment”) from January 19, 2018 to May 6, 2018.
82
The Company and Deerfield also amended the outstanding
Facility Financing Obligatio
n
to provide that Deerfield may, subject to the terms of the Sixth Amendment, convert principal amounts of the
Facility Financing Obligation
from time to time into an aggregate of up to 10,000,000 shares of the Company’s common stock (excluding the exchang
e shares issued to Deerfield on January 18, 2018). The conversion price was set at the greater of (i) the average of the volume weighted average price per share of the Company’s common stock for the three trading day period immediately preceding the date o
f any election by Deerfield to convert principal amounts and (ii) $2.75 per share, subject to adjustment under certain circumstances described in the
Facility Financing Obligation
. Any conversions of principal will be applied first to reduce the Remaining
Payment, and thereafter to reduce other principal payments.
In connection with the Sixth Amendment, the Company also entered into a Second Amendment to Escrow Agreement, dated January 18, 2018, with Deerfield and US Bank, pursuant to which the parties extended the period of the escrow established thereunder to May 6, 2018, corresponding to the extended payment date.
The Company determined that the Fifth and Sixth Amendments did not include any concessions and that the change of the conversion option was not substantive and therefore it was not considered to be a troubled debt restructuring. Accordingly, the Company accounted for the transaction as a modification.
On March 6, 2018 Deerfield converted the remaining $1.3 million of principal amount due under the 2019 notes for 441,618 shares of the Company’s common stock. The fair value of these exchange shares was determined to be $2.83 per share representing the average of the volume weighted average price per share of the Company’s common stock for the three trading day period immediately preceding the date of the election by Deerfield to convert as reported on the Nasdaq Global Market. The Escrow Agreement with Deerfield and US Bank, was terminated as the required payment was satisfied in full as of March 12, 2018.
On March 12, 2018 the Company entered into an Exchange Agreement with Deerfield pursuant to which the Company agreed to, among other things, exchange $5.0 million of principal amount of the Tranche B notes for 1,838,236 shares of the Company’s common stock. The fair value of these exchange shares was determined to be $2.72 per share representing the closing price of the Company’s common stock on March 9, 2018 as reported on the Nasdaq Global Market. The principal amount being exchanged under the Tranche B notes represents the principal amount that would have otherwise become due and payable in May 2018.
On June 8, 2018, the Company entered into an Exchange and Seventh Amendment to Facility Agreement with Deerfield, pursuant to which, among other things, (i) the Company issued to Deerfield 3,061,224 shares of the Company’s common stock in exchange for the cancellation of (a) $3.0 million of $5.0 million principal amount of 2019 notes that was due and payable on July 1, 2018 and (b) $3.0 million of $5
million principal amount of Tranche B notes that was due and payable on December 31, 2019, (ii) the Company’s obligation under the Facility Agreement to maintain at least $25.0 million in cash as of the end of each quarter was reduced to $20
million through December 31, 2018, (iii) the minimum price at which the Facility Financing Obligation may be converted into shares of the Company’s common stock was reduced from $2.75 to $2.01 per share and (iv) the parties agreed that, on or after June 8, 2018, the Facility Financing Obligation may be converted into a maximum of 9,558,382 shares of the Company’s common stock. The fair value of the exchange shares issued to Deerfield on June 8, 2018 was determined to be $1.96 per share, representing the closing price of the Company’s common stock on June 8, 2018 as reported on the Nasdaq Global Market.
On July 12, 2018, the Company entered into an Exchange and Eighth Amendment to Facility Agreement with Deerfield, pursuant to which the parties amended the Facility Agreement to, among other things, (i) issue to Deerfield 7,367,839 shares of the Company’s common stock in exchange for the cancellation of (a) $7.0 million of $10.0 million principal amount
of 2019 notes that was due and payable on July 18, 2018, (b) $3.0 million of $5.0 million principal amount of 2019 notes that was due and payable on December 31, 2019 and (c) $2.0 million of $2.0 million principal amount of Tranche B notes that was due and payable on December 31, 2019, (ii) defer the payment of $3.0 million in principal amount of 2019 notes from July 18, 2018 to August 31, 2018, (iii) reduce the minimum price at which the remaining notes issued under the Facility Agreement may be converted into shares of the Company’s common stock from $2.01 to $1.80 per share and (iv) provide that, on or after July 12, 2018, such remaining notes may be converted into a maximum of 5,750,000 shares of the Company’s common stock. The fair value of the exchanged shares on July 12, 2018 was determined to be $1.80 per share, representing the closing price of the Company’s common stock on July 12, 2018 with de minimis price differences and no extinguishment gain or loss was recognized.
On September 5, 2018, the Company entered into a Ninth Amendment to Facility Agreement (the “Ninth Deerfield Amendment”) with Deerfield, pursuant to which the parties amended the Facility Agreement to, among other things, further defer the payment of $3.0 million in principal amount of 2019 notes from August 31, 2018 to September 30, 2018, which was amended in the tenth amendment and such payment was made to Deerfield on October 18, 2018.
83
Following the Ninth Deerfield Amendment, in September 2018 Deerfield converted $8.0 milli
on in principal amount of 2019 notes and $2.5 million in principal amount of Tranche B notes into an aggregate of 5,749,500 shares of the Company’s common stock in two transactions on September 6 and September 7, 2018. Accordingly, the Company accounted fo
r the transactions by recording a loss on extinguishment of debt of $0.7 million which was calculated as the difference between the reacquisition price and the net carrying value of the related debt. The net carrying value of the related debt includes the
acceleration of the debt discount and issuance costs amounting to approximately $0.3 million as a result of the transaction. The fair value of the Exchange Shares was determined to be $2.04 and $1.78 per share representing the closing trading price of the
Company’s common stock on The
Nasdaq
Global Market on September 6 and September 7, 2018, respectively.
On September 26, 2018, the Company entered into a Tenth Amendment to Facility Agreement with Deerfield, pursuant to which the parties amended the Facility Agreement, to, among other things, (i) further defer the payment of $3.0 million in principal amount of 2019 notes from September 30, 2018 until the earlier of October 31, 2018 or the first business day following the date the Company receives an upfront payment of $45.0 million from UT (See Note 8 – Collaboration Arrangements), and (ii) provide that the Company shall be obligated to maintain at least $20.0 million in cash and cash equivalents as of October 31, 2018 and December 31, 2018 and $25.0 million in cash and cash equivalents as of the end of each fiscal quarter after December 31, 2018. Subsequently, such payment was made to Deerfield on October 18, 2018.
On July 1, 2013, in conjunction with the execution of the Facility Agreement, the Company issued Milestone Rights to the Milestone Purchasers.
As of December 31, 2018 and 2017, the remaining Milestone Rights liability balance was $8.9 million. The Company currently estimates that it will reach the next milestone in the second quarter of 2019, at which point the Company will be required to make a $5.0 million payment. The carrying value of the Milestone Rights liability related to this $5 million payment is $1.6 million, which represents the fair value related to this payment that was determined in 2013 (the most recent measurement date). Accordingly, $1.6 million in value related to the next milestone payment was recorded in accrued expenses and other current liabilities as of December 31, 2018. Furthermore, $7.2 million was recorded in Milestone Rights liability and other liabilities, which is non-current, in the accompanying consolidated balance sheets as of December 31, 2018 and 2017, respectively.
Accretion of debt issuance cost and debt discount in connection with the Facility Agreement does not include the acceleration of the debt discount and issuance costs related to the transactions disclosed above as the amounts were included in the loss on extinguishment of debt in the consolidated statement of operations. Accretion of debt issuance cost and debt discount during the years ended December 31, 2018, 2017 and 2016 were as follows (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Accretion expense - debt issuance cost
|
|
$
|
46
|
|
|
$
|
31
|
|
|
|
35
|
|
Accretion expense - debt discount
|
|
$
|
1,155
|
|
|
$
|
1,700
|
|
|
|
1,722
|
|
The Facility Agreement includes customary representations, warranties and covenants, including a restriction on the incurrence of additional indebtedness. As discussed in Note 1 – Description of Business, the Company will need to raise additional capital to support its current operating plans. In the event of non-compliance, Deerfield may declare all or any portion of the Facility Financing Obligation to be immediately due and payable.
The Milestone Agreement includes customary representations and warranties and covenants by the Company, including restrictions on transfers of intellectual property related to Afrezza. The Milestone Rights are subject to acceleration in the event the Company transfers its intellectual property related to Afrezza in violation of the terms of the Milestone Agreement. The Company initially recorded the Milestone Rights at their estimated fair value.
In connection with the Facility Agreement and Milestone Agreement, the Company and its subsidiary, MannKind LLC, entered into a Guaranty and Security Agreement (the “Security Agreement”) with Deerfield and Horizon Santé FLML SÁRL (collectively, the “Purchasers”), pursuant to which the Company and MannKind LLC each granted the Purchasers a security interest in substantially all of their respective assets, including respective intellectual property, accounts receivables, equipment, general intangibles, inventory and investment property, and all of the proceeds and products of the foregoing. The Security Agreement includes customary covenants by the Company and MannKind LLC, remedies of the Purchasers and representations and warranties by the Company and MannKind LLC. The security interests granted by the Company and MannKind LLC will terminate upon repayment of the Facility Financing Obligation in full, if applicable.
The Company identified and evaluated a number of embedded features in the notes issued under the Facility Agreement to determine if they represented embedded derivatives that are required to be separated from the notes and accounted for as freestanding instruments. The Company analyzed the Tranche B notes and identified embedded derivatives which required separate accounting. All of the embedded derivatives were determined to have a
de minimis
value as of December 31, 2018 and 2017.
84
Senior Convertible Notes Due 2021
— On October 23, 2017, the Company entered into exchange agreements with the holders of the Company’s 5.75% Senior Convertible Notes due 2018 (the “2018 notes”), pursuant to which the Company agreed to exc
hange all of the outstanding 2018 notes in the aggregate principal amount of $
27.7 million
for (i)
$
23.7 million
aggregate principal amount of
new 5.75%
Senior Convertible notes due 2021 (the “2021 notes”) and (ii) an aggregate of 973,236
shares of its common stock. In addition, the conversion rate was adjusted from $34 per share to $5.15 per share. The
senior convertible notes
were issued at the closing of the exchange on October 23, 2017. The Company analyzed this exchange and concluded
that the exchange represents an extinguishment of the 2018 notes and recorded a $0.8
million
loss on extinguishment of debt
during 2017
. In addition unamortized debt issuance costs of $0.3 million and unamortized debt premium of $0.2 million were also writ
ten-off during the last quarter of fiscal year 2017.
On May 25, 2018, the Company entered into a privately-negotiated exchange agreement (the “Exchange Agreement”) with certain holders of its senior convertible notes, pursuant to which the Company agreed to issue 2,250,000 shares of its common stock in exchange for the cancellation of $5.0 million principal amount of the senior convertible notes and unpaid accrued interest thereon. The exchange price for these exchange shares was $2.2567 per share. The exchange was completed on May 31, 2018. As a result, the Company recognized approximately $0.8 million as extinguishment gain which was calculated based on the difference between the reacquisition price and the net carrying amount of the payment on the debt.
As of December 31, 2018 and 2017, there was $18.7 million and $23.7 million principal amount of senior convertible notes outstanding, respectively. The senior convertible notes are the Company’s general, unsecured, senior obligations, except that they are subordinated in right of payment to the Facility Financing Obligation. The senior convertible notes rank equally in right of payment with the Company’s other unsecured senior debt. The senior convertible notes bear interest at the rate of 5.75% per year on the principal amount, payable semiannually in arrears in cash or, at the option of the Company if certain conditions are met, in shares of the Company’s common stock (the “Interest Shares”), on February 15 and August 15 of each year, beginning February 15, 2018, with interest accruing from August 15, 2017. To date, the interest on the Company’s senior convertible notes have been paid in cash and in converted shares. The Company converted $0.5 million accrued interest for 475,520 shares and the fair value of the exchange was $1.13 per share, representing the closing price of the Company’s common stock on August 14, 2018 per the Nasdaq Global Market. The aggregate number of Interest Shares that the Company may issue may not exceed 13,648,300, unless the Company receives stockholder approval to issue Interest Shares in excess of such a number in accordance with the listing standards of the Nasdaq Global Market. Accrued interest related to these notes is recorded in accrued expenses and other current liabilities on the accompanying consolidated balance sheets.
The senior convertible notes are convertible, at the option of the holder, at any time on or prior to the close of business on the business day immediately preceding the stated maturity date, into shares of the Company’s common stock at an initial conversion rate of 194.1748 shares per $1,000 principal amount of senior convertible notes, which is equal to the initial conversion price of approximately $5.15 per share. The conversion rate is subject to adjustment under certain circumstances described in an indenture governing the senior convertible notes.
If the Company undergoes certain fundamental changes, except in certain circumstances, each holder of senior convertible notes will have the option to require the Company to repurchase all or any portion of that holder’s senior convertible notes. The fundamental change repurchase price will be 100% of the principal amount of the senior convertible notes to be repurchased plus accrued and unpaid interest, if any.
The Company may elect at its option to cause all or any portion of the senior convertible notes to be mandatorily converted in whole or in part at any time prior to the close of business on the business day immediately preceding the maturity date, if the last reported sale price of its common stock exceeds 120% of the conversion price then in effect for at least 10 trading days in any 20 consecutive trading day period, ending within five business days prior to the date of the mandatory conversion notice. The redemption price is equal the sum of 100% of the principal amount of the senior convertible notes to be redeemed, plus accrued and unpaid interest. Under the terms of the indenture, the conversion option can be net-share settled and the maximum number of shares that could be required to be delivered under the indenture is fixed and less than the number of authorized and unissued shares less the maximum number of shares that could be required to be delivered during the term of the senior convertible notes under existing commitments. Applying the Company’s sequencing policy, the Company performed an analysis at the time of the offering of the senior convertible notes and each reporting date since and has concluded that the number of available authorized shares at the time of the offering and each reporting date since was sufficient to deliver the number of shares that could be required to be delivered during the term of the senior convertible notes under existing commitments.
The senior convertible notes provide that upon an acceleration of certain indebtedness, including the Facility Financing Obligation issued to Deerfield pursuant to the Facility Agreement, the holders may elect to accelerate the Company’s repayment obligations under the notes if such acceleration is not cured, waived, rescinded or annulled.
As a result of the exchange of the senior convertible notes during the last quarter of 2017,
the Company recorded approximately $0.8 million in debt premium, which is recorded with the senior convertible notes, in the accompanying consolidated balance sheets. The premium is being accreted to interest expense using the effective interest method over the term of the senior convertible notes.
85
Amortization of the premium and accretion of debt issuance cos
ts relat
ed to the 2021
notes for the years ended December 31, 2018
,
2017
and 2016
are as follows
(in thousands)
:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Amortization of debt premium
|
|
$
|
154
|
|
|
$
|
232
|
|
|
|
234
|
|
Accretion expense - debt issuance cost
|
|
$
|
4
|
|
|
$
|
227
|
|
|
|
257
|
|
Refer to Note 6 — Related-Party Arrangements for information regarding the Note payable to related party.
8. Collaboration and Licensing Arrangements
Revenue from collaborations and services for the years ended December 31, 2018, 2017 and 2016 are as follows (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
United Therapeutics Agreement
|
|
$
|
6,386
|
|
|
$
|
—
|
|
|
$
|
—
|
|
United Therapeutics Research Agreement
|
|
|
3,758
|
|
|
|
—
|
|
|
|
—
|
|
Receptor Collaboration and License Agreement
|
|
|
341
|
|
|
|
250
|
|
|
|
—
|
|
Cipla Distribution Agreement
|
|
|
98
|
|
|
|
—
|
|
|
|
—
|
|
Sanofi License Agreement and Supply Agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
171,965
|
|
|
|
$
|
10,583
|
|
|
$
|
250
|
|
|
$
|
171,965
|
|
United Therapeutics License Agreement
– In September 2018, the Company and UT entered into an exclusive global license and collaboration agreement for the rights to the Company’s dry powder formulation of treprostinil and associated inhalation delivery devices. Under the UT License Agreement, UT will be responsible for global development, regulatory and commercial activities with respect to TreT. The Company will manufacture clinical supplies and initial commercial supplies of TreT, and long-term commercial supplies may be manufactured by UT.
The UT License Agreement became effective on October 15, 2018 and under the terms of the agreement, the Company received an upfront payment of $45.0 million on October 16, 2018 and may receive potential milestone payments of up to $50.0 million upon the achievement of specified development targets. The Company will also be entitled to receive low double-digit royalties on net sales of TreT. UT, at its option, may expand the scope of the products covered by the UT License Agreement to include products with certain other active ingredients for the treatment of pulmonary arterial hypertension. Each such optioned product would be subject to UT’s payment to the Company of up to $40.0 million in additional option exercise and development milestone payments, as well as a low double-digit royalty on net sales of any such product. The Company, in accordance with the new revenue recognition requirements that become effective for the Company on January 1, 2018, recognized revenue on a ratable basis from October 16, 2018 through the estimated date when its performance obligation under UT License Agreement will be substantially completed December 31, 2021. During the year ended December 31, 2018, the Company recognized $6.4 million as revenue - collaborations and services. The $38.6 million balance of the upfront payment was deferred as follows: $30.5 million as deferred payments from collaborations – current and $8.1 million as deferred payment from collaboration – long term. Deferred revenue is classified as part of current or long-term liability in the accompanying consolidated balance sheets based on the Company’s estimate of the portion of the performance obligation regarding that revenue will be completed within the next 12 months.
The Company has evaluated the agreement in accordance with the new revenue recognition requirements that became effective for the Company on January 1, 2018:
At the inception of the agreement, the Company identified one distinct, performance obligation. The Company determined that the key deliverables include the license and certain research services upon achievement of specified development targets. Due to the specialized and unique nature of these services and their direct relationship with the license, the Company has determined that these deliverables represent one distinct bundle and thus, one performance obligation. The Company also determined that UT’s option to expand the scope of the products covered to include products with other active ingredients is not a material right, and thus, not a performance obligation at the onset of the agreement. The consideration for the option will be accounted for if and when they are exercised.
The Company expected UT to complete development plan and the remaining milestone events totaling approximately $97.5 million which includes an upfront payment, four milestone event payments based on the achievement of development targets, and various pass-through costs. The Company has allocated the total $97.5 million transaction price to its one distinct, stand ready, performance obligation for the license and the associated services. Future commercial supply remains at UT’s option, is valued at a stand-alone selling price and is therefore not accounted for the current arrangement. The Company believes that this method best reflects the measure of progress toward complete satisfaction of the performance obligation.
86
United Therapeutics Research Agreement
–
In September 2018, the Company and
UT
also entered into a Research A
gre
ement
for the conduct of research
and consulting services
in connection with multiple potential products, including evaluating the feasibility of preparing a dry powder formulation of a
compound for the treatment of pulmonary hypertension outside the scope of the UT License Agreement. In addition,
UT
, at its option, may obtain a license to develop, manufacture and commercialize products based on specified compounds within the drug classe
s covered by the Research Agreement. Each specified compound advanced into development and commercialization under such a license would be subject to the payment to the Company of additional milestone payments of up to $30.0 million and a low double-digit
royalty on net sales of such products. The Company received an upfront payment of $10.0 million, which it wil
l recognize as revenue
as the performance obligations under the Research Agreement are satisfied.
During the year ended December 31, 2018, the Comp
any recognized $3.8 million as r
evenue
-
colla
boration
s
and services; the $10.0 million payment received
was deferred
with
$6.0 million as deferred payments from collaborations – current and $0.2 million as deferred
payment
from collaboration – long term.
The Company has evaluated the agreement in accordance with the new revenue recognition requirements that became effective for the Company on January 1, 2018:
At the inception of the agreement, the Company identified two distinct performance obligations. The Company determined that the key deliverables of each performance obligation include (i) the development of a product prototype (including a technical feasibility report); (ii) engineering consulting services. Due to the separately identifiable nature of these obligations, the Company has determined that these deliverables represent two distinct performance obligations. The Company also determined that UT’s option to expand the scope to include specific drug classes covered by the agreement is not a material right, and thus, not a performance obligation at the onset of the agreement. The consideration for the option will be accounted for if and when they are exercised.
The Company determined a total transaction price of $10.0 million which includes an upfront, one-time non-refundable payment. The Company allocated the total $10.0 million transaction price to its two distinct performance obligations based on available observable market inputs, a transaction price of $9.0 million was allocated to the product prototype and a transaction price of $1.0 million was allocated to engineering consulting services. The revenue for the product prototype is recognized using a proportional performance method (based on an estimated percentage of the Company’s efforts required in relation toward overall satisfaction of the obligation). The Company believes that this method best reflects the measure of progress toward complete satisfaction of the performance obligation. The revenue for the engineering consulting services is recognized using a ratable method until the obligation is satisfied and the Company believes that this method best reflects the measure of progress toward complete satisfaction of the performance obligation.
Receptor Collaboration and License Agreement
— In 2016, the Company entered into a Collaboration and License Agreement (the “CLA”) with Receptor pursuant to which the Company performed initial formulation studies on compounds identified by Receptor and Receptor obtained the option to acquire an exclusive license to develop, manufacture and commercialize certain products that use the Company’s technology to deliver the compounds via oral inhalation.
On December 30, 2016 Receptor exercised its option and paid the Company a $1.0 million nonrefundable option exercise and license fee. Under the Receptor License, the Company may also receive nonrefundable milestone payments upon the completion of certain technology transfer activities and the achievement of specified sales targets as well as royalties upon Receptor’s and its sublicensees’ sale of products.
The $1.0 million license fee received in 2016 was recorded in deferred revenue from collaboration as of December 31, 2016 and is being recognized in net revenue — collaborations over four years, the estimated period over which the Company was required to satisfy the remaining performance obligations. The remaining performance obligations are to provide certain technology transfer activities and to maintain certain patents. Deferred payments from collaboration related to this contract was $0.5 million at December 31, 2018 of which $0.3 million was recorded in current liabilities.
The additional payments referred to above represent variable consideration for which the Company has not recognized any revenue because it is uncertain that Receptor will be able to successfully develop, manufacture or sell product related to this license. Therefore, the receipt of such payments is highly susceptible to factors outside of the Company’s influence, the uncertainty regarding the receipt of these payments is not expected to be resolved for years, and the Company has limited experience with similar contracts. There was no change to the accounting for this contract as a result of the initial application of the new revenue guidance. See Note 1 – Description of Business and Summary of Significant Accounting Policies for additional information on the Company’s revenue recognition accounting policy.
In 2017, the Company entered into a manufacturing and supply agreement with Receptor pursuant to which the Company will provide certain raw materials to Receptor and agreed to provide certain additional research and formulation consulting services to Receptor. For the year ended December 31, 2018 and 2017 the additional research and formulation services provided to Receptor were
de minimis
.
Cipla Distribution Agreement
— In May 2018, the Company and Cipla Ltd. (“Cipla”) entered into an exclusive agreement for the marketing and distribution of Afrezza in India and the Company received a $2.2 million nonrefundable license fee. Under the terms of the agreement, Cipla will be responsible for obtaining regulatory approvals to distribute Afrezza in India and for all marketing and sales activities of Afrezza in India. The Company is responsible for supplying Afrezza to Cipla. The Company has the potential to receive certain additional regulatory milestone payments,
minimum purchase commitment revenue and royalties on Afrezza sales in India once cumulative gross sales have reached a specified threshold.
87
The nonrefundable licensing fee was recorded in deferred revenue and is being recognized in net revenue – collaborations over
15 years
, representing the estimated period to satisfy the performance obligation. The additional potential
milestone payments represent variable consideration for which the Company has not recognized any revenue because of the uncertainly of obtaining market approval. The Company also recognized $0.2 million as income tax expense for a payment made to the India
tax authority.
Deferred payments from collaboration related to this contract was $2.1 million at December 31, 2018 of which $0.1 million was recorded in current liabilities.
Biomm Supply and Distribution Agreement
– In May 2017, the Company and Biomm S.A. entered into a supply and distribution agreement for the commercialization of Afrezza in Brazil. Under this agreement, Biomm is responsible for preparing and filing the necessary applications for regulatory approval of Afrezza in Brazil, including from the Agência Nacional de Vigilância Sanitária and, with respect to pricing matters, from the Camara de Regulação de Mercado de Medicamentos. Upon satisfactory approval from these regulatory bodies, the parties will finalize the economic terms of the collaboration; thereafter, the Company will manufacture and supply Afrezza to Biomm, and Biomm will be responsible for promoting and distributing Afrezza within Brazil.
The Company assessed the adoption of the new revenue guidance (Topic 606) compared to Topic 605 for all collaborations and services revenue as listed above and determined the impact to be de minimis.
In 2016, the Company entered into a settlement agreement with Sanofi. The settlement was accounted for in 2016, except for a $30.6 million cash payment received under an insulin put option agreement which reduced the receivable from Sanofi in the first quarter of 2017. The amount of revenue recognized was the upfront payment of $150.0 million and two milestone payments of $25.0 million each, offset by $64.9 million of net loss share with Sanofi, as well as $17.5 million in sales of Afrezza and $19.4 million in sales of bulk insulin, both to Sanofi.
9. Sale of Intellectual Property
In
April,
2017
the Company
entered
into
an
agreement
to
sell certain oncology assets and patents to Fosun. Fosun
paid
the Company a
one-time
nonrefundable
payment
of $0.6 million net of taxes in June 2017 and is required to pay royalties on net sales of products by Fosun
and its affiliates and other consideration based on revenues from any licensees. The Company accounted for the transaction as a sale of assets. The Company recorded the $0.6 million in payments received in revenue – other during the second quarter of 2017 as the Company had performed substantially all of its obligations as of June 30, 2017. The royalties and other consideration referred to above represent variable consideration for which the Company has not recognized any revenue because it is uncertain whether and in what period Fosun will be able to sublicense this technology or have the ability to develop, manufacture or sell product utilizing this technology. Therefore receipt of such payments is highly susceptible to factors outside the Company’s influence, the uncertainty regarding the receipt of these payments is not expected to be resolved for years, and the Company has limited experience with similar contracts.
10. Fair Value of Financial Instruments
The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level input that is significant to the overall fair value measurement. The Company uses the exit price method for estimating the fair value of loans for disclosure purposes.
The carrying amounts reported in the accompanying consolidated financial statements for cash, accounts receivable, accounts payable, and accrued expenses and other current liabilities (excluding the milestone rights liability) approximate their fair value due to their relatively short maturities. The fair value of the cash equivalents, note payable to principal stockholder (also referred to as The Mann Group Loan Arrangement), senior convertible notes, the Facility Financing Obligation, the milestone rights liability and the warrant liability are disclosed below.
Cash Equivalents and Restricted Cash
— Cash equivalents and restricted cash consist of highly liquid investments with original or remaining maturities of 90 days or less at the time of purchase that are readily convertible into cash. As of December 31, 2018 and December 31, 2017, the Company held $71.7 million and $48.4 million, respectively, of cash equivalents. For the year ended December 31, 2018, restricted cash was held in an escrow account as well as used to collateralize a letter of credit. The Company held $0.5 million and $4.4 million in restricted cash as of December 31, 2018 and December 31, 2017, respectively. Both are comprised of money market funds. The fair value of these money market funds was determined by using quoted prices for identical investments in an active market (Level 1 in the fair value hierarchy).
88
Note Payable to Related Party —
As of December 31, 2017, prior to the adoption of ASC 2016-01, the fair value of the note payable to related party could not be reasonably estimated as the Com
pany was not able to obtain a similar credit arrangement in the current economic environment. Therefore the fair value is based upon carrying value as of December 31, 2017.
The fair value measurement of the note payable
as of December 31, 2018
is
based on
discounted cash flow model and it is
sensitive to the change in yield. If the yield changes by approximately
2
%, the fair value of the note payable with the conversion feature would change
approximately
3.8
%. Similarly, if the yield changes by approximatel
y
6
%, the fair value of the note payable with the conversion feature would change
approximately
11.1
%. If the yield changes by approximately
8
%, the fair value of the note payable with the conversion feature would change
approximately
15.0
%
.
Financial Liabilities
— The following tables set forth the fair value of the Company’s financial instruments as of December 31, 2018 and 2017 (in millions):
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Carrying Amount
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
Total Fair Value
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible notes (2021 notes)
|
|
$
|
19.1
|
|
|
$
|
17.5
|
|
|
$
|
17.5
|
|
Facility Financing Obligation
|
|
|
11.3
|
|
|
|
11.4
|
|
|
|
11.4
|
|
Note payable to related party
|
|
|
72.1
|
|
|
|
55.0
|
|
|
|
55.0
|
|
Milestone rights
|
|
|
8.9
|
|
|
|
18.1
|
|
|
|
18.1
|
|
Total financial liabilities
|
|
$
|
111.4
|
|
|
$
|
102.0
|
|
|
$
|
102.0
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Carrying Value
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible notes (2021 notes)
|
|
$
|
24.4
|
|
|
$
|
19.8
|
|
|
$
|
19.8
|
|
Facility Financing Obligation
|
|
|
52.7
|
|
|
|
54.6
|
|
|
$
|
54.6
|
|
Milestone rights
|
|
|
8.9
|
|
|
|
19.1
|
|
|
$
|
19.1
|
|
Total financial liabilities
|
|
$
|
86.0
|
|
|
$
|
93.5
|
|
|
$
|
93.5
|
|
Milestone Rights Liability
— The fair value measurement of the liability is sensitive to the discount rate and the timing and probability of making milestone payments. If the achievement of each of the milestones which require payments were to be six months later than in the current forecast, the fair value of the liability would decrease by 6%. If the probabilities of meeting the $50.0 million to $200.0 million milestones were to decrease by 5% or 10%, the fair value of the liability would decrease by 13% and 25%, respectively. Over the long term, these inputs are interrelated because if the Company’s performance improves, the timing of meeting the milestones would likely be earlier, the probability of making payments on the milestones would likely be higher and the discount rate would likely decrease, all of which would increase the fair value of the liability. The inverse is also true.
Embedded Derivatives
— The Company identified and evaluated a number of embedded features in the notes issued under the Facility Agreement to determine if they represented embedded derivatives that are required to be separated from the notes and accounted for as freestanding instruments. The Company analyzed the Tranche B notes and identified embedded derivatives, which required separate accounting. However, all of the embedded derivatives were determined to have a
de minimis
value at December 31, 2018 and 2017.
11. Common and Preferred Stock
On March 1, 2017, the Company effected a 1-for-5 reverse stock split of the Company’s outstanding common stock. As a result, prior to March 1, 2017, all common stock share amounts included in these consolidated financial statements have been retroactively reduced by a factor of five, and all common stock per share amounts have been increased by a factor of five, with the exception of the Company’s common stock par value. See Note 1 — Description of Business.
89
On December 13, 2017, the Company amend
ed
it
s Amended and Restated Certifica
te of Incorporation to increase the authorized number of shares of the Company’s common stock from 140,000,000 to 280,000,000 shares. The Company is authorized to issue 280,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of
undesignated preferred stock, par value $0.01 per share, issuable in one or more series as designated by the Company’s board of directors. No other class of capital stock is aut
horized. As of December 31, 2018 and 2017
,
187,029,
967
and
119,053,414
shares of common stock, respectively, were issued and outstanding and no shares of preferred stock were outstanding.
On October 10, 2017, the Company entered into securities purchase agreements with certain institutional investors and a charitable foundation. Pursuant to the terms of the purchase agreements, the Company sold to the purchasers in a registered offering an aggregate of 10,166,600 shares of the Company’s common stock at a purchase price of $6.00 per share. Included in this offering was 166,600 shares issued to a charitable foundation associated with the Chairman of the Company’s board of directors. The net proceeds to the Company from the offering were approximately $57.7 million, after deducting placement agent fees equal to 5.0% of the aggregate gross proceeds from the offering (except for the proceeds received from the sale of 166,600 shares issued to the charitable foundation) and offering expenses payable by the Company . The offering closed on October 13, 2017. The Company’s stock was delisted from the TASE in November of 2017.
In the fourth quarter of 2017, the Company sold an aggregate of 173,327 shares of the Company’s common stock at a purchase price of $3.15 per share pursuant to the Company’s at market issuance sales agreement with FBR agreement. The aggregate gross proceeds from the sales were approximately $0.5 million.
On February 28, 2018, the Company entered in a controlled equity offering Sales Agreement with Cantor Fitzgerald (the “Sales Agreement”), as sales agent, pursuant to which the Company may offer and sell, from time to time, through Cantor Fitzgerald, shares of the Company’s common stock having an aggregate offering price of up to $50.0 million or such other amount as may be permitted by the Sales Agreement. Under the Sales Agreement, Cantor Fitzgerald may sell shares by any method deemed to be an
“
at the market offering
”
as defined in Rule 415 under the Securities Act of 1933, as amended. For the year ended December 31, 2018, the Company sold an aggregate of 1,028,432 shares of the Company’s common stock at an average purchase price of $2.03 per share for an aggregate gross proceeds of approximately $2.1 million pursuant to the Sales Agreement with Cantor Fitzgerald.
On April 5, 2018, the Company entered into securities purchase agreements with certain institutional investors. Pursuant to the terms of the purchase agreements, the Company sold to the purchasers in a registered offering an aggregate of 14,000,000 shares of the Company’s common stock and warrants to purchase up to an aggregate of 14,000,000 shares of the Company’s common stock at a combined purchase price of $2.00 per share and accompanying warrant. The shares of common stock and the warrants were immediately separable. The warrants became exercisable at a price of $2.38 per share beginning on October 9, 2018 and will expire April 9, 2019. The net proceeds to the Company from the offering were approximately $26.4 million. The offering closed on April 9, 2018.
On December 19, 2018, the Company entered into an underwriting agreement with Leerink Partners LLC relating to the issuance and sale in a public offering of 26,666,667 shares of the Company’s common stock and warrants to purchase up to an aggregate of 26,666,667 shares of the Company’s common stock at a combined purchase price of $1.50 per share and accompanying warrant. The shares of common stock and the warrants were immediately separable. The warrants were immediately exercisable at issuance at a price of $1.60 per share and will expire on December 26, 2019. The net proceeds to the Company from the offering were approximately $37.3 million. The offering closed on December 26, 2018.
For the year ended December 31, 2018, the Company received $0.4 million from the market price stock purchase plan for 230,445 shares.
90
12. Net Income (Loss) per Common Share
Basic net income (loss) per share excludes dilution for potentially dilutive securities and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (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 antidilutive.
The following tables summarize the components of the basic and diluted net income (loss) per common share computations (in thousands, except per share amounts):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income (numerator)
|
|
$
|
(86,975
|
)
|
|
$
|
(117,333
|
)
|
|
$
|
125,664
|
|
Weighted average common shares (denominator)
|
|
|
144,136
|
|
|
|
104,245
|
|
|
|
92,053
|
|
Net (loss) income per share
|
|
$
|
(0.60
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
1.37
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income (numerator)
|
|
$
|
(86,975
|
)
|
|
$
|
(117,333
|
)
|
|
$
|
125,664
|
|
Weighted average common shares
|
|
|
144,136
|
|
|
|
104,245
|
|
|
|
92,053
|
|
Effect of dilutive securities - common shares issuable
|
|
|
—
|
|
|
|
—
|
|
|
|
32
|
|
Adjusted weighted average common shares (denominator)
|
|
|
144,136
|
|
|
|
104,245
|
|
|
|
92,085
|
|
Net (loss) income per share
|
|
$
|
(0.60
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
1.36
|
|
Common shares issuable represents incremental shares of common stock which consist of stock options, restricted stock units, warrants, and shares that could be issued upon conversion of the senior convertible notes and the Mann Group Loan Arrangement.
Potentially dilutive securities outstanding that are considered antidilutive, in the periods noted below, are summarized as follows (in shares):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
2016
|
|
Vesting of restricted stock units
|
|
|
691,266
|
|
|
|
1,135,216
|
|
|
|
|
|
702,867
|
|
Employee stock purchase plan
|
|
|
307,395
|
|
|
|
136,660
|
|
|
|
|
|
43,672
|
|
Exercise of common stock options
|
|
|
10,976,118
|
|
|
|
7,089,440
|
|
|
|
|
|
5,530,256
|
|
Conversion of convertible notes into common stock
|
|
|
3,629,627
|
|
|
|
6,875,272
|
|
|
|
|
|
814,561
|
|
Conversion of convertible notes payable to related party into
common stock
|
|
|
21,909,541
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Exercise of common stock warrants
|
|
|
31,851
|
|
|
|
31,856
|
|
|
|
|
|
9,740,597
|
|
Exercise of warrants associated with public offering
|
|
|
26,666,667
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Exercise of warrants associated with direct placement
|
|
|
14,000,000
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
78,212,465
|
|
|
|
15,268,444
|
|
|
|
|
|
16,831,953
|
|
13. Stock Award Plans
On May 16, 2018, the Company adopted the 2018 Equity Incentive Plan (the “2018 Plan”) as the successor to and continuation of the 2013 Equity Incentive Plan (the “2013 Plan”) and the 2004 Equity Incentive Plan (the “2004 Plan”). The 2018 Plan consists of 12.0 million additional shares and the number of unallocated shares remaining available for grant for new awards under the 2013 Plan and the 2004 Plan. The 2018 Plan provides for the granting of stock awards including stock options and restricted stock units to employees, directors and consultants. No additional awards will be granted under the 2013 Plan, the 2004 Plan or the 2004 Non-Employee Directors’ Stock Option Plan (the “NED Plan”) as all future awards will be made out of the 2018 Plan.
The Company’s board of directors determines eligibility, vesting schedules and criteria and exercise prices for stock awards granted under the 2018 Plan. Options and restricted stock unit awards under the 2018 Plan, the 2013 Plan and the 2004 Plan expire not more than ten years from the date of the grant and are exercisable upon vesting. Stock options that vest over time generally vest over four years. Current time-based vesting stock option grants vest and become exercisable at the rate of 25% after one year and ratably on a monthly basis over a period of 36 months thereafter. Restricted stock units with time-based vesting generally vest at a rate of 25% per year over four years with consideration satisfied by service to the Company. The Company also issues stock awards with performance conditions.
91
The following table summarizes information about the Company’s stock-based award plans as of December 31,
2018
:
|
|
Outstanding
Options
|
|
|
Outstanding
Restricted
Stock Units
|
|
|
Shares Available
for Future
Issuance
|
|
2004 Equity Incentive Plan
|
|
|
933,402
|
|
|
|
—
|
|
|
|
—
|
|
2013 Equity Incentive Plan
|
|
|
5,766,448
|
|
|
|
691,266
|
|
|
|
—
|
|
2018 Equity Incentive Plan
|
|
|
4,225,603
|
|
|
|
—
|
|
|
|
9,211,379
|
|
2004 Non-Employee Directors’ Stock Option Plan
|
|
|
50,665
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
10,976,118
|
|
|
|
691,266
|
|
|
|
9,211,379
|
|
Share-based payment transactions are recognized as compensation cost based on the fair value of the instrument on the date of grant. The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of employee stock options. The expected term of an option granted is based on combining historical exercise data with expected weighted time outstanding. Expected weighted time outstanding is calculated by assuming the settlement of outstanding awards is at the midpoint between the remaining weighted average vesting date and the expiration date.
During the years ended December 31, 2018, 2017 and 2016, the Company recorded stock-based compensation expense of $6.9 million, $4.8 million and $5.1 million, respectively.
Total stock-based compensation expense recognized in the accompanying consolidated statements of operations is included in the following categories (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Cost of goods sold
|
|
$
|
379
|
|
|
$
|
460
|
|
|
$
|
695
|
|
Research and development
|
|
|
1,203
|
|
|
|
1,010
|
|
|
|
1,309
|
|
Selling, general and administrative
|
|
|
5,275
|
|
|
|
3,377
|
|
|
|
3,131
|
|
Total
|
|
$
|
6,857
|
|
|
$
|
4,847
|
|
|
$
|
5,135
|
|
The expected volatility assumption used in the Company’s Black-Sholes option valuation model is based on an assessment of the historical volatility, with consideration of implied volatility, derived from an analysis of historical trade activity. The Company has selected risk-free interest rates based on U.S. Treasury securities with an equivalent expected term in effect on the date the options were granted. Additionally, the Company uses historical data and management judgment to estimate stock option exercise behavior and employee turnover rates to estimate the number of stock option awards that will eventually vest. The Company calculated the fair value of employee stock options granted during the years ended December 31, 2018, 2017 and 2016 using the following assumptions:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Risk-free interest rate
|
|
2.63% — 3.11%
|
|
|
1.83% — 2.13%
|
|
|
1.18% — 1.80%
|
|
Expected lives
|
|
5.90 — 7.19 years
|
|
|
5.41 — 5.78 years
|
|
|
5.13 — 5.82 years
|
|
Volatility
|
|
92.68% — 93.62%
|
|
|
83.32% — 90.39%
|
|
|
77.57% — 82.75%
|
|
Dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
The following table summarizes information about stock options outstanding:
|
|
Number of
Shares
|
|
|
Weighted
Average Exercise
Price per Share
|
|
|
Aggregate
Intrinsic
Value ($000)
|
|
Outstanding at January 1, 2018
|
|
|
7,089,440
|
|
|
$
|
9.33
|
|
|
|
|
|
Granted
|
|
|
5,158,648
|
|
|
$
|
1.94
|
|
|
|
|
|
Exercised
|
|
|
(6,880
|
)
|
|
$
|
1.10
|
|
|
|
|
|
Forfeited
|
|
|
(733,536
|
)
|
|
|
2.87
|
|
|
|
|
|
Expired
|
|
|
(531,554
|
)
|
|
$
|
20.56
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
10,976,118
|
|
|
$
|
5.75
|
|
|
$
|
—
|
|
Exercisable at December 31, 2018
|
|
|
3,672,480
|
|
|
$
|
13.03
|
|
|
$
|
—
|
|
92
The weighted average grant date fair value of the stock options granted during the years ended December 31, 201
8
, 201
7
and 201
6
was $
1.51
, $
1.19 and
$
3.05
per option, respectively. The total intrinsic value of options exercised during the year ended
December 31, 2018 and
December 31, 2017 was d
e
minim
i
s
. The total intrinsic value of options exercised during the year ended December 31, 2016
was
$0.1
million
.
Intrinsic value is measured using the fair market value at the date of exercise for options exercised or at December 31 for outstanding options, less the applicable exercise price.
Cash received from the exercise of options during the years ended December 31, 2017 and 2016 was approximately $0.01 million and $0.5 million, respectively and for the year ended December 31, 2018 the cash received was de minimis. The weighted-average remaining contractual terms for options outstanding that were vested and expected to vest, options outstanding that were vested and options exercisable at December 31, 2018 was 7.81 years, 5.62 years and 5.57 years, respectively.
As of December 31, 2018, 2017 and 2016, the Company recognized $1.9 million, $0.9 million and $0.3 million of compensation costs related to the performance-based stock options, respectively. As of December 31, 2018, there was $1.3 million of unrecognized compensation costs related to performance-based stock options subject to performance conditions.
A summary of restricted stock unit activity for the year ended December 31, 2018 is presented below:
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
Outstanding at January 1, 2018
|
|
|
1,135,216
|
|
|
$
|
4.08
|
|
Granted
|
|
|
448,600
|
|
|
|
2.02
|
|
Vested
|
|
|
(694,831
|
)
|
|
|
3.47
|
|
Forfeited
|
|
|
(197,719
|
)
|
|
|
2.84
|
|
Outstanding at December 31, 2018
|
|
|
691,266
|
|
|
$
|
3.71
|
|
Total intrinsic value of restricted stock units vested during the years ended December 31, 2018, 2017 and 2016 was $1.4 million, $0.4 million and $0.6 million, respectively. Intrinsic value of restricted stock units vested is measured using the closing share price on the day prior to the vest date. The total grant date fair value of restricted stock units vested during the years ended December 31, 2018, 2017 and 2016 was $2.4 million, $1.9 million, and $2.6 million, respectively.
As of December 31, 2018, there was $8.5 million of unrecognized compensation expense related to options and performance-based options and $1.5 million of unrecognized compensation expense related to restricted stock units, respectively, which is expected to be recognized over the weighted average vesting period of 1.7 to 2.9 years. The Company evaluates stock awards with performance conditions as to the probability that the performance conditions will be met and uses that information to estimate the date at which those performance conditions will be met in order to properly recognize stock-based compensation expense over the requisite service period.
14. Commitments and Contingencies
Guarantees and Indemnifications
— In the ordinary course of its business, the Company makes certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. The Company, as permitted under Delaware law and in accordance with its Bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that may enable it to recover a portion of any future amounts paid. The Company believes the fair value of these indemnification agreements is minimal. The Company has not recorded any liability for these indemnities in the accompanying consolidated balance sheets. However, the Company accrues for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and the amount can be reasonably estimated. No such losses have been recorded to date.
Litigation
— The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. As of December 31, 2018, the Company believes that the final disposition of such matters will not have a material adverse effect on the financial position, results of operations or cash flows of the Company and no accrual has been recorded. The Company maintains liability insurance coverage to protect the Company’s assets from losses arising out of or involving activities associated with ongoing and normal business operations. The Company records a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company’s policy in recording legal expenses in connection with legal proceedings and claims is to record expenses as they are incurred.
93
Following the public announcement of Sanofi's election to terminate the Sanofi License Agreement and the subsequent decline in
the Company’s
stock price, two motions were submitted to the district court at Tel Aviv, Economic Department fo
r the certification of a class action against
the Company
and certain of
its
officers and directors. In general, the complaints allege that
the Company
and certain of
its
officers and directors violated Israeli and U.S. securities laws by making materially
false and misleading statements regarding the prospects for Afrezza, thereby artificially inflating the price of its common stock. The plaintiffs are seeking monetary damages. In November 2016, the district court dismissed one of the actions without preju
dice. In the remaining action, the district court ruled in October 2017 that U.S. law will apply to this case. The plaintiff has appealed this ruling, and following an oral hearing before the Supreme Court of Israel, has decided to withdraw his appeal. Sub
sequently, in November 2018,
the Company
filed a motion to dismiss the certification motion in limine. In December 2018, the district court ordered that the motion to dismiss will be heard during a pretrial hearing set for February 201
9
. The Court also gra
nted
the Company
's motion to postpone its response to the merits of the certification motion until after the resolution of the motion to dismiss.
The Company
will continue to vigorously defend against the claims advanced.
Contingencies
— In connection with the Facility Agreement, on July 1, 2013, the Company also entered into a the Milestone Agreement with the Milestone Purchasers, pursuant to which the Company sold the Milestone Purchasers the Milestone Rights to receive payments up to $90.0 million upon the occurrence of specified strategic and sales milestones, including the first commercial sale of an Afrezza product in the United States and the achievement of specified net sales figures (see Note 7 – Borrowings).
Commitments
— On July 31, 2014, the Company entered into a supply agreement (the “Insulin Supply Agreement”) with Amphastar France Pharmaceuticals S.A.S., a French corporation (“Amphastar”), pursuant to which Amphastar manufactures for and supplies to the Company certain quantities of recombinant human insulin for use in Afrezza. Under the terms of the Insulin Supply Agreement, Amphastar is responsible for manufacturing the insulin in accordance with the Company’s specifications and agreed-upon quality standards.
In December 2018, the supply agreement with Amphastar was amended to extend the term over which the Company is required to purchase insulin, without reducing the total amount of insulin to be purchased. Under the amendment, annual minimum quantities of insulin to be purchased for calendar years 2018 through 2024 total an aggregate purchase price of €90.3 million. As of December 31, 2018, the remaining purchase amount is €85.8 million. In addition, an amendment fee of $2.0 million paid in the forth quarter of 2018 and was recorded in cost of goods sold as a period cost.
The annual purchase requirements under the contract are as follows:
2019
|
|
€
|
5.8 million
|
2020
|
|
€
|
15.9 million
|
2021
|
|
€
|
15.9 million
|
2022
|
|
€
|
19.8 million
|
2023
|
|
€
|
19.8 million
|
2024
|
|
€
|
8.6 million
|
Unless terminated earlier, the term of the Insulin Supply Agreement with Amphastar expires on December 31, 2024 and can be renewed for additional, successive two year terms upon 12 months’ written notice given prior to the end of the initial term or any additional two year term. The Company and Amphastar each have normal and customary termination rights, including termination for material breach that is not cured within a specific time frame or in the event of liquidation, bankruptcy or insolvency of the other party. In addition, the Company may terminate the Insulin Supply Agreement upon two years’ prior written notice to Amphastar without cause or upon 30 days’ prior written notice to Amphastar if a controlling regulatory authority withdraws approval for Afrezza, provided, however, in the event of a termination pursuant to either of the latter two scenarios, the provisions of the Insulin Supply Agreement require the Company to pay the full amount of all unpaid purchase commitments due over the initial term within 60 calendar days of the effective date of such termination. On April 2, 2018, the Company entered into a foreign currency hedging transaction to mitigate its exposure to foreign currency exchange risks. The hedging transaction hedges against short-term currency fluctuations for the remaining current year purchase requirement amount of €4.4 million and is renewable every 90 days. In 2018, the Company realized a currency loss of approximately $0.6 million during 2018. This amount is recorded in other income and expense.
94
Warrants -
On April 5, 2018
, the Company entered into securities purchase agreements with certain institutional investors. Pursuant to the terms of the purchase agreements, the Company sold to the purchasers in a registered offering an aggregate of 14,000,000 shares of its common st
ock and warrants to purchase up to an aggregate of 14,000,000 shares of its common stock at a combined purchase price of $2.00 per share and accompanying warrant. The shares of the common stock and the warrants were immediately separable. The warrants
are
exercisable at a price of $2.38 per share beginning six months following the date of issuance and will expire six months thereafter. The net proceeds to the Company from the offering were approximately $26.4 million. The offering closed on April 9, 2018.
A
dditionally, o
n December 19, 2018, the Company entered into an underwriting agreement with Leerink Partners LLC relating to the issuance and sale in a public offering of 26,666,667 shares of the Company’s common stock and warrants to purchase up to an aggr
egate of 26,666,667 shares of the Company’s common stock at a combined purchase price of $1.50 per share and accompanying warrant. The shares of common stock and the warrants were immediately separable. The warrants were immediately exercisable at issuanc
e at a price of $1.60 per share and will expire on December 26, 2019. The net proceeds to the Company from the offering were approximately $37.3 million. The offering closed on December 26, 2018.
The Company determined that these warrants met the criteria
for equity classification and accounted for such warrants in additional paid in capital.
Vehicle Leases –
During the second quarter of 2018, the Company entered into a lease agreement with Enterprise for the lease of approximately 100 vehicles. The lease requires monthly payments of approximately $83,000 per month including the cost of maintaining the vehicles, taxes and insurance. The leases commenced when the Company took possession of the majority of the vehicles in the second quarter of 2018. The leases expire 48 months after the delivery date.
On March 8, 2018, the Company entered into a standby letter of credit for a total of $0.5 million in connection with the Company’s sales force vehicle lease program. The letter of credit is collateralized by a restricted cash account in the amount of $0.5 million. There were no amounts drawn down on this letter of credit as of December 31, 2018.
Office Lease
— On May 5, 2017, the Company executed an office lease with Russell Ranch Road II LLC for the Company’s corporate headquarters in Westlake Village, California. The office lease commenced in August 2017. The lease requires monthly payments of $40,951, increased by 3% annually, plus the estimated cost of maintaining the property by the landlord with a five month concession from October 2017 through February 2018. The lease expires January 2023 and provides the Company with a five year renewal option.
On November 29, 2017, the Company executed an office lease with Russell Ranch Road II LLC to expand the office space for the Company’s corporate headquarters in Westlake Village, California. The office lease commenced in October 2018. The lease requires monthly payments of $35,969, increased by 3% annually, plus the estimated cost of maintaining the property by the landlord. In addition, the Company will be entitled to reimbursement from the landlord of up to $56,325 for tenant improvements. The lease expires in January 2023 and provides the Company with a five year renewal option.
Rent expense under all operating leases including office space and equipment was approximately $0.5 million for the year ended December 31, 2018, and $0.4 million for the years ended December 31, 2017 and 2016, respectively.
Future minimum lease payments are as follows:
2019
|
|
$
|
947,162
|
|
2020
|
|
|
975,577
|
|
2021
|
|
|
1,004,844
|
|
2022
|
|
|
1,034,989
|
|
2023
|
|
|
87,957
|
|
|
|
$
|
4,050,529
|
|
15. Employee Benefit Plans
The Company administers a 401(k) savings retirement plan for its employees. The Company contributed $1.0 million for the year ended December 31, 2018, and $0.4 million for the years ended December 31, 2017 and 2016, respectively.
95
16. Income Taxes
Loss from continuing operations before provision for income tax for the Company’s domestic and international operations was as follows (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
US
|
|
$
|
(84,207
|
)
|
|
$
|
(113,679
|
)
|
|
$
|
129,361
|
|
Foreign
|
|
|
(2,528
|
)
|
|
|
(3,603
|
)
|
|
|
(3,697
|
)
|
Loss before provision for income taxes
|
|
$
|
(86,735
|
)
|
|
$
|
(117,282
|
)
|
|
$
|
125,664
|
|
At December 31, 2018, the Company has concluded that it is more likely than not that the Company may not realize the benefit of its deferred tax assets due to its history of losses. The provision for income taxes for the years ended December 31, 2018 and 2017 was $0.2 million and $0.1 million, respectively. There was no provision for income tax recorded for the year ended December 31, 2016. The provision for income taxes relates only to foreign withholding taxes for the years ended December 31, 2018 and 2017 because the Company has incurred operating losses since inception. Accordingly, the net deferred tax assets have been fully reserved.
The provision for income taxes consists of the following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. state
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-U.S.
|
|
|
240
|
|
|
|
51
|
|
|
|
—
|
|
Total current
|
|
|
240
|
|
|
|
51
|
|
|
|
—
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(9,164
|
)
|
|
|
244,801
|
|
|
|
(43,814
|
)
|
U.S. state
|
|
|
(1,903
|
)
|
|
|
15,398
|
|
|
|
(4,311
|
)
|
Non-U.S.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total deferred
|
|
|
(11,067
|
)
|
|
|
260,199
|
|
|
|
(48,125
|
)
|
Valuation allowance
|
|
|
11,067
|
|
|
|
(260,199
|
)
|
|
|
48,125
|
|
Total
|
|
$
|
240
|
|
|
$
|
51
|
|
|
$
|
—
|
|
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when uncertainty exists as to whether all or a portion of the net deferred tax assets will be realized. Components of the net deferred tax assets as of December 31, 2018 and 2017, are as follows (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
524,377
|
|
|
$
|
507,235
|
|
Research and development credits
|
|
|
81,583
|
|
|
|
83,461
|
|
Capitalized research
|
|
|
557
|
|
|
|
1,016
|
|
Milestone Rights
|
|
|
3,521
|
|
|
|
1,908
|
|
Accrued expenses
|
|
|
1,156
|
|
|
|
211
|
|
Loss on purchase commitment
|
|
|
23,194
|
|
|
|
23,654
|
|
Non-qualified stock option expense
|
|
|
2,551
|
|
|
|
7,004
|
|
Capitalized patent costs
|
|
|
5,090
|
|
|
|
5,194
|
|
Other
|
|
|
669
|
|
|
|
795
|
|
Depreciation
|
|
|
22,560
|
|
|
|
23,820
|
|
Deferred Product Revenue & Costs
|
|
|
107
|
|
|
|
|
|
Total net deferred tax assets
|
|
|
665,365
|
|
|
|
654,298
|
|
Valuation allowance
|
|
|
(665,365
|
)
|
|
|
(654,298
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
96
The Company’s effective income tax rate differs
from the statutory federal income tax rate as follows for t
he years ended December 31, 2018, 2017 and 2016
:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Federal tax benefit rate
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Permanent items
|
|
|
1.0
|
|
|
|
6.2
|
|
|
|
(1.9
|
)
|
Intercompany transfer of intellectual property
|
|
|
—
|
|
|
|
—
|
|
|
|
0.9
|
|
Tax law changes
|
|
|
(0.7
|
)
|
|
|
(265
|
)
|
|
|
—
|
|
Stock based compensation
|
|
|
(6.5
|
)
|
|
|
(5.0
|
)
|
|
|
—
|
|
Tax attribute expirations
|
|
|
(1.6
|
)
|
|
|
(2.8
|
)
|
|
|
—
|
|
Foreign withholding tax
|
|
|
(0.3
|
)
|
|
|
—
|
|
|
|
—
|
|
Valuation allowance
|
|
|
(13.2
|
)
|
|
|
231.6
|
|
|
|
(34.0
|
)
|
Effective income tax rate
|
|
|
-0.3
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
As of December 31, 2018 and 2017, management assessed the realizability of deferred tax assets. Management evaluated the need for an amount of any valuation allowance for deferred tax assets on a jurisdictional basis. This evaluation utilizes the framework contained in ASC 740,
Income Taxes
, wherein management analyzes all positive and negative evidence available at the balance sheet date to determine whether all or some portion of the Company’s deferred tax assets will not be realized. Under this guidance, a valuation allowance must be established for deferred tax assets when it is more likely than not (a probability level of more than 50 percent) that the Company may not realize the benefit of its deferred tax assets. In assessing the realization of the Company’s deferred tax assets, the Company considers all available evidence, both positive and negative.
In concluding on the evaluation, management placed significant emphasis on guidance in ASC 740, which states that “a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.” Based upon available evidence, it was concluded on a more-likely-than-not basis that all deferred tax assets were not realizable as of December 31, 2018. Accordingly, a valuation allowance of $665.4 million has been recorded to offset this deferred tax asset. During the years ended December 31, 2018 and 2017, the change in the valuation allowance was $11.1 million and $(260.2) million, respectively.
The Company adopted Topic 606, 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. Upon adoption, no change in retained earnings was recorded related to income taxes as the Company maintains a full valuation allowance. An adjustment of $0.4 million was recorded as a deferred tax liability and a corresponding reduction to the valuation allowance. See above for more information about the non-income tax impact of adoption of the new revenue guidance.
At December 31, 2018, the Company had federal and state net operating loss carryforwards of approximately $2.1 billion and $2.4 billion available, respectively, to reduce future taxable income. $77.0 million of the federal losses do not expire and the remaining federal and state losses have started expiring, beginning in the current year through various future dates.
Pursuant to Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of the Company’s federal and California net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. As a result of the Company's initial public offering, an ownership change within the meaning of Internal Revenue Code Section 382 occurred in August 2004. As a result, federal net operating loss and credit carryforwards of approximately $216.0 million are subject to an annual use limitation of approximately $13.0 million. The annual limitation is cumulative and therefore, if not fully utilized in a year can be utilized in future years in addition to the Section 382 limitation for those years. There is a risk that changes in ownership have occurred since Company's initial public offering. If a change in ownership were to have occurred after the initial public offering, net operating loss carryforwards and other tax attributes could be further limited or restricted. If limited, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, related to the Company’s operations in the U.S. will not impact the Company’s effective tax rate.
At December 31, 2018, the Company had $54.2 million of U.S. federal research and development credits which expire beginning in 2024, and $27.4 million of state research and development credits which for California do not expire and expire through various future dates for Connecticut and New Jersey.
97
The Company files U.S. federal and state income tax retu
rns in jurisdictions with varying statutes of limitations. In the normal course of business the Company is subject to examination by taxing authorities throughout the country. These audits could include examining the timing and amount of deductions, the al
location of income among various tax jurisdictions and compliance with federal, state and local laws. The Company’s tax years since 201
5
remain subject to examination by federal, state and foreign tax authorities.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2018, the interest and penalties recognized were not material. During the years ended December 31, 2017 and 2016 the Company recognized and accrued an insignificant amount of interest or penalties related to unrecognized tax benefits.
The Company considers its undistributed earnings of foreign subsidiaries to be permanently reinvested in foreign operations and has not provided for U.S. income taxes on such earnings. As of December 31, 2018 the Company had no undistributed earnings from its foreign subsidiaries.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code of 1986, as amended. The changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017, and expanded limits on employee remuneration. In 2017, the Company recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118 because it had not yet completed our enactment-date accounting for these effects. In 2018 and 2017, the Company did not record tax expense related to the enactment-date effects of the Act as the Company maintained a full valuation allowance and the Company estimated a deficit in post-1986 earnings and profits from its foreign subsidiaries. The impact of this Act was a decrease of deferred tax assets of $301.0 million, offset by a decrease in a valuation allowance of $301.0 million, resulting in no additional income tax expense or benefit.
The Company applied the guidance in SAB 118 when accounting for the enactment-date effects of the Act in 2017. At December 31, 2017, the Company had not completed its accounting for all of the enactment-date income tax effects of the Act under ASC 740, Income Taxes, for the following aspects: remeasurement of deferred tax assets and liabilities, one-time transition tax, and tax on global intangible low-taxed income. As of December 31, 2018, the Company had completed the accounting for all of the enactment-date income tax effects of the Act. As further discussed below, during 2018, the Company did not recognize adjustments to the provisional amounts recorded at December 31, 2017 as all changes were off-set by the valuation allowance.
The one-time transition tax is based on the total post-1986 earnings and profits, the tax on which we previously deferred from US income taxes under US law. The Company had estimated a deficit in post 1986 earnings and profits with no income tax expense recorded. Upon further analyses of the Act and notices and regulations issued and proposed by the US Department of the Treasury and the Internal Revenue Service, the Company finalized the calculations of the transition tax liability during 2018. The provisional amount did not change; therefore, there was no adjustment to tax expense or valuation allowance.
As of December 31, 2017, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future (which was generally 21%), by recording a provisional amount of $301.0 million, which was fully offset by a valuation allowance of the same amount. Upon further analysis of certain aspects of the Act and refinement of the calculations during the year ended December 31, 2018, the Company found no other adjustments were necessary.
The Act subjects a US shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only.
The Company has elected to account for GILTI in the year the tax is incurred.
98
17. Selected quarterly financial data (unaudited)
Summarized quarterly financial data for the years ended December 31, 2018 and 2017, are set forth in the following tables:
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands, except per share data)
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,465
|
|
|
$
|
3,893
|
|
|
$
|
4,469
|
|
|
$
|
16,031
|
|
Net (loss)
|
|
$
|
(30,385
|
)
|
|
$
|
(22,675
|
)
|
|
$
|
(24,168
|
)
|
|
|
(9,747
|
)
|
Net (loss) per share — basic
|
|
$
|
(0.25
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.06
|
)
|
Net (loss) per share — diluted
|
|
$
|
(0.25
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.06
|
)
|
Weighted average common shares used to compute basic
net (loss) per share
|
|
|
120,911
|
|
|
|
140,054
|
|
|
|
153,597
|
|
|
|
161,397
|
|
Weighted average common shares used to compute
diluted net (loss) per share
|
|
|
120,911
|
|
|
|
140,054
|
|
|
|
153,597
|
|
|
|
161,397
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,009
|
|
|
$
|
2,163
|
|
|
$
|
2,043
|
|
|
$
|
4,530
|
|
Net income (loss)
|
|
$
|
(16,324
|
)
|
|
$
|
(35,339
|
)
|
|
$
|
(32,886
|
)
|
|
$
|
(32,784
|
)
|
Net income (loss) per share — basic
|
|
$
|
(0.17
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.28
|
)
|
Net income (loss) per share — diluted
|
|
|
(0.17
|
)
|
|
$
|
(0.35
|
)
|
|
|
(0.31
|
)
|
|
|
(0.28
|
)
|
Weighted average common shares used to compute basic net
income (loss) per share
|
|
|
95,744
|
|
|
|
99,864
|
|
|
|
104,703
|
|
|
|
116,451
|
|
Weighted average common shares used to compute diluted net
income (loss) per share
|
|
|
95,744
|
|
|
|
99,864
|
|
|
|
104,703
|
|
|
|
116,451
|
|
99