The Company recorded the fair value of the bargain purchase price of the BELBUCA
®
acquisition
totaling $27.3 million to income during the three months ended March 31, 2017 in accordance with US GAAP (note 7).
The Company recorded
the fair value of warrants totaling $4.5 million to equity with an offsetting amount to Notes payable in connection with the CRG term loan during the three months ended March 31, 2017 in accordance with US GAAP (note 12).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
1.
|
Organization, basis of presentation and summary of significant policies:
|
Overview
BioDelivery Sciences International, Inc., together with its subsidiaries (collectively, the Company or BDSI) is a specialty
pharmaceutical company that is developing and commercializing, either on its own or in partnerships with third parties, new applications of approved therapeutics to address important unmet medical needs using both proven and new drug delivery
technologies. The Company is focusing on developing products to meet unmet patient needs in the areas of pain management and addiction.
The accompanying
unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of these financial statements. The condensed consolidated balance sheet at
December 31, 2016 has been derived from the Companys audited consolidated financial statements included in its annual report on Form
10-K
for the year ended December 31, 2016. Certain footnote
disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to the Securities and Exchange Commission
(SEC) rules and regulations. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Companys annual report on
Form 10-K
for the year ended December 31, 2016.
Operating results for the three month periods ended
March 31, 2017 are not necessarily indicative of results for the full year or any other future periods.
As used herein, the Companys common
stock, par value $.001 per share, is referred to as the Common Stock.
Principles of consolidation
The condensed consolidated financial statements include the accounts of the Company, Arius Pharmaceuticals, Inc. (Arius), Arius Two, Inc.
(Arius Two) and Bioral Nutrient Delivery, LLC (BND). For each period presented BND has been an inactive subsidiary. All significant inter-company balances and transactions have been eliminated.
Use of estimates in financial statements
The
preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Company reviews all significant estimates affecting the
consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance. Significant estimates of the Company include: revenue recognition, sales allowances such as returns of product sold,
government program rebates, customer coupon redemptions, wholesaler/pharmacy discounts, product service fees, rebates and chargebacks, sales commissions, amortization, stock-based compensation, determination of fair values of assets and liabilities
in connection with business combinations, and deferred income taxes.
Reacquisition of
BELBUCA
®
On December 7, 2016, the Company entered into an agreement (the
Termination Agreement) with Endo Pharmaceuticals, Inc. (Endo) terminating Endos licensing of rights to the Companys BELBUCA
®
(buprenorphine) buccal film
product (BELBUCA
®
)
. The closing of the Termination Agreement, and the formal termination of the BELBUCA
®
license to Endo and closing of the transactions further described below occurred on January 6, 2017 (see note 7, Business Combinations and Asset Acquisitions).
6
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
1.
|
Organization, basis of presentation and summary of significant policies (continued):
|
Inventory
Other than the inventory purchased from Endo which is stated at fair value, inventories are stated at the lower of cost or net realized value with costs
determined for each batch under the
first-in,
first-out
method and specifically allocated to remaining inventory. Inventory consists of raw materials, work in
process and finished goods. Raw materials include amounts of active pharmaceutical ingredient for a product to be manufactured, work in process includes the bulk inventory of laminate (the Companys drug delivery film) prior to being packaged
for sale, and finished goods include pharmaceutical products ready for commercial sale.
On a quarterly basis, the Company analyzes its inventory levels
and records allowances for inventory that has become obsolete, inventory that has a cost basis in excess of the expected net realizable value and inventory that is in excess of expected demand based upon projected product sales. The Company recorded
$0.2 million in inventory allowances as of March 31, 2017. There were no allowances recorded as of December 31, 2016.
Deferred
revenue
Consistent with the Companys revenue recognition policy, deferred revenue represents cash received in advance for licensing fees,
consulting, research and development services and related supply agreements. Such payments are reflected as deferred revenue until recognized under the Companys revenue recognition policy. Deferred revenue is classified as current if
management believes the Company will be able to recognize the deferred amount as revenue within twelve months of the balance sheet date.
The
Company, until January 1, 2017, deferred sales of its BUNAVAIL
®
(buprenorphine and naloxone) buccal film, Schedule 3 (CIII) product (BUNAVAIL
®
) and recognized such revenue when the product was sold through to the end user. There were no product sales of BELBUCA
®
before
January 2017.
Revenue recognition
Net
product sales
Beginning in the first quarter of 2017, the Company has determined that it has sufficient experience with BELBUCA
®
and BUNAVAIL
®
to estimate its returns at time of
ex-factory
sales. The Company recognizes revenue
when it is realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred or services have been
rendered; (c) the Companys price to the buyer is fixed or determinable; and (d) collectability is reasonably assured. The Company sells its products primarily to large national wholesalers, which have the right to return the products
they purchase. The Company recognizes revenue from sales transactions where the buyer has the right to return the product at the time of sale only if (1) the Companys price to the buyer is substantially fixed or determinable at the date
of sale, (2) the buyer has paid the Company, or the buyer is obligated to pay the Company and the obligation is not contingent on resale of the product, (3) the buyers obligation to the Company would not be changed in the event of
theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substance apart from any provided by the Company, (5) the Company does not have significant obligations for future
performance to directly bring about resale of the product by the buyer, and (6) the amount of future returns can be reasonably estimated. The Company recognizes product sales net of estimated allowances for rebates, price adjustments, returns,
chargebacks and prompt payment discounts. Given the sufficient experience with BELBUCA
®
and BUNAVAIL
®
, the Company can reasonably
estimate the amount of future product returns, and therefore, the risk of estimating product return has been substantially eliminated. The effect in income from operations and on net income is that the Company is able to recognize revenue earlier on
the sell-in method, net of a provision for estimated returns, since the Company can record revenue once sold to the wholesaler rather than waiting until the product is sold to the end user on a sell-through basis.
The Company establishes allowances for estimated rebates, chargebacks and product returns based on numerous qualitative and quantitative factors, including:
|
|
|
the number of and specific contractual terms of agreements with customers;
|
|
|
|
estimated levels of inventory in the distribution channel;
|
|
|
|
historical rebates, chargebacks and returns of products;
|
7
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
1.
|
Organization, basis of presentation and summary of significant policies (continued):
|
|
|
|
direct communication with customers;
|
|
|
|
anticipated introduction of competitive products or generics;
|
|
|
|
anticipated pricing strategy changes by the Company and/or its competitors;
|
|
|
|
analysis of prescription data gathered by a third-party prescription data provider;
|
|
|
|
the impact of changes in state and federal regulations; and
|
|
|
|
the estimated remaining shelf life of products.
|
In its analyses, the Company uses prescription data purchased
from a third-party data provider to develop estimates of historical inventory channel sell-through. The Company utilizes an internal analysis to compare historical net product shipments to estimated historical prescriptions written. Based on that
analysis, management develops an estimate of the quantity of product in the channel which may be subject to various rebate, chargeback and product return exposures. To estimate months of ending inventory in the Companys distribution channel,
the Company divides estimated ending inventory in the distribution channel by the Companys recent prescription data, not taking into account any future anticipated demand growth beyond the succeeding quarter. Monthly for each product line, the
Company prepares an internal estimate of ending inventory units in the distribution channel by adding estimated inventory in the channel at the beginning of the period, plus net product shipments for the period, less estimated prescriptions written
for the period. This is done for each product line by applying a rate of historical activity for rebates, chargebacks and product returns, adjusted for relevant quantitative and qualitative factors discussed above, to the potential exposed product
estimated to be in the distribution channel.
Product
Returns
- Consistent with industry practice, the Company offers contractual return
rights that allow its customers to return the products within an
18-month
period that begins six months prior to and ends twelve months subsequent to expiration of the products.
Rebates
- The liability for government program rebates is calculated based on historical and current rebate redemption and utilization rates
contractually submitted by each programs administrator.
Price
Adjustments
and
Chargebacks
- The Companys estimates
of price adjustments and chargebacks are based on its estimated mix of sales to various third-party payers, which are entitled either contractually or statutorily to discounts from the Companys listed prices of its products. In the event that
the sales mix to third-party payers is different from the Companys estimates, the Company may be required to pay higher or lower total price adjustments and/or chargebacks than it had estimated and such differences may be significant.
The Company, from time to time, offers certain promotional product-related incentives to its customers. These programs include certain product incentives to
pharmacy customers and other sales stocking allowances. The Company has voucher programs for BELBUCA
®
and BUNAVAIL
®
whereby the Company offers a
point-of-sale
subsidy to retail consumers. The Company estimates its liabilities for
these voucher programs based on the actual redemption rates as reported to the Company by a third-party claims processing organization and actual redemption rates for the Companys completed programs. The Company accounts for the costs of these
special promotional programs as price adjustments, which are a reduction of gross revenue.
Prompt
Payment
Discounts
- The Company
typically offers its wholesale customers a prompt payment discount of 2% as an incentive to remit payments within the first 30 to 37 days after the invoice date depending on the customer and the products purchased.
Gross
to
Net
Accruals
-A significant majority of the Companys gross to net accruals are the result of its
voucher program and Medicaid rebates, with the majority of those programs having an accrual to payment cycle of anywhere from one to three months. In addition to this relatively short accrual to payment cycle, the Company receives daily information
from the wholesalers regarding their sales of the Companys products and actual on hand inventory levels of its products. During the three months ended March 31, 2017, the three large wholesalers account for approximately 92% of the
Company voucher and Medicaid accruals. This enables the Company to execute accurate provisioning procedures. Consistent with the pharmaceutical industry, the accrual to payment cycle for returns is longer and can take several years depending on the
expiration of the related products.
8
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
1.
|
Organization, basis of presentation and summary of significant policies (continued):
|
Cost of sales
Cost of sales includes the direct costs attributable to the production of BREAKYL
(the
Companys
out-licensed
breakthrough cancer pain therapies). It includes all costs related to creating the product at the Companys contract manufacturing location in Germany. The Companys
contract manufacturer bills the Company for the final product, which includes materials, direct labor costs, and certain overhead costs as outlined in applicable supply agreements. Cost of sales also includes royalty expenses that the Company owes
to third parties.
For BELBUCA
®
and
BUNAVAIL
®
, cost of sales includes raw materials, production costs at the Companys three contract manufacturing sites, quality testing directly related to the products, and depreciation
on equipment that the Company has purchased to produce BELBUCA
®
and
BUNAVAIL
®
. It also includes any batches not meeting specifications and raw material yield losses. Yield losses and batches not meeting specifications are expensed as incurred. Prior
to January 1, 2017, cost of sales was recognized as actual product was sold through to the end user. Beginning January 1, 2017, cost of sales is recognized when sold to the wholesaler.
Recent accounting pronouncements
In May 2014, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update
2014-09,
Revenue from Contracts with Customers, which supersedes the revenue recognition requirements of
Accounting Standards Codification (ASC) Topic 605, Revenue Recognition and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles-based and provides a five step model to
determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the
Company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising
from contracts with customers. In July 2015, the FASB agreed to defer the effective date of the standard from January 1, 2017 to January 1, 2018, with an option that permits companies to adopt the standard as early as the
original effective date. Early application prior to the original effective date is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. In April 2016, the FASB issued ASU
2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU
2016-10
clarifies the implementation
guidance on identifying performance obligations. These ASUs apply to all companies that enter into contracts with customers to transfer goods or services. These two ASUs are effective for public entities for interim and annual reporting periods
beginning after December 15, 2017. Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Entities have the choice to apply these ASUs either retrospectively to each reporting
period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. The Company is currently in the process of evaluating the impact that this new ASU
will have on its condensed consolidated financial statements.
The FASBs new leases standard, ASU
2016-02
Leases (Topic 842), was issued on February 25, 2016. ASU
2016-02
is intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease
assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets referred to as Lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations
created by those leases. An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and
quantitative requirements concerning additional information about the amounts recorded in the financial statements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12
months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current
GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases (i.e. operating and capital leases) to be recognized on the balance sheet. The FASB lessee accounting model will continue to
account for both types of leases. The capital lease will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. The operating lease will be accounted for in a manner similar to operating leases
under existing GAAP, except that lessees will recognize a lease liability and a lease asset for all of those leases. The leasing standard will be
9
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
1.
|
Organization, basis of presentation and summary of significant accounting policies (continued):
|
effective for calendar
year-end
public companies beginning after December 15, 2018. Public companies will be required to adopt the new leasing
standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption will be permitted for all companies and organizations upon issuance of the standard. For calendar
year-end
public companies, this means an adoption date of January 1, 2019 and retrospective application to previously issued annual and interim financial statements for 2018 and 2017. Lessees with a large
portfolio of leases are likely to see a significant increase in balance sheet assets and liabilities. The Company is currently in the process of evaluating the impact that this new leasing ASU will have on its condensed consolidated financial
statements.
In March 2016, the FASB issued ASU
2016-09, Improvements
to Employee Share-Based Payment
Accounting, which amends ASC Topic 718, Compensation Stock Compensation. ASU
2016-09
simplifies several aspects of the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU
2016-09 is
effective for fiscal years beginning after December 15, 2016,
and interim periods within those fiscal years and early adoption is permitted. The Company has adopted this ASU in the first quarter of 2017; however, the adoption of the ASU had no significant impact on its condensed consolidated financial
statements.
In January 2017, the FASB issued ASU
2017-01, Business
Combinations (Topic 805): Clarifying the
Definition of a Business. The amendments in this update provide a screen to determine when an integrated set of assets and activities (a set) is not a business. The screen requires that when substantially all of the fair value of the
gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. The new
guidance will be effective for the Company beginning on January 1, 2018 and early adoption is permitted. The Company is evaluating the impact of the adoption of the new guidance on its condensed consolidated financial statements.
In January 2017, the FASB issued ASU Update No.
2017-04, IntangiblesGoodwill
and Other (Topic 350):
Simplifying the Test of Goodwill Impairment. This ASU simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step of the goodwill impairment test under ASC 350. Under previous
guidance, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). The implied fair value of
goodwill is calculated by deducting the fair value of all assets and liabilities of the reporting unit from the reporting units fair value as determined in Step 1. To determine the implied fair value of goodwill, entities estimate the fair
value of any unrecognized intangible assets (including
in-process
research and development) and any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair
value of the reporting unit in Step 1. Under this new guidance if a reporting units carrying value exceeds its fair value, an entity will record an impairment charge based on that difference with such impairment charge limited to the
amount of goodwill in the reporting unit. This ASU does not change the guidance on completing Step 1 of the goodwill impairment test. An entity will still be able to perform todays optional qualitative goodwill impairment assessment before
determining whether to proceed to Step 1. This ASU will be applied prospectively and is effective for annual and interim impairment test performed in periods beginning after December 15, 2019 for public business enterprises. Early adoption is
permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently in the process of evaluating the impact of adoption of the ASU on its condensed consolidated financial statements.
2.
|
Liquidity and managements plans:
|
At March 31, 2017, the Company had cash of approximately
$35.2 million. The Company generated $3.2 million of cash during the three months ended March 31, 2017 and had stockholders equity of $38.2 million, versus stockholders deficit of $17.7 million at
December 31, 2016. The Company expects that it has sufficient cash to manage the business as currently planned into the second half of 2018. This estimation assumes that the Company does not accelerate the development of existing, or acquire
other drug development opportunities or otherwise face unexpected events, costs or contingencies, any of which could affect the Companys cash requirements.
10
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
2.
|
Liquidity and managements plans (continued):
|
Additional capital will be required to support the commercialization of the Companys reacquired BELBUCA
®
product, ongoing commercialization activities for BUNAVAIL
®
, the reformulation project for and the anticipated commercial relaunch of
ONSOLIS
®
(which is
out-licensed
to Collegium Pharmaceutical, Inc. (Collegium) in the US), the continued development of Buprenorphine
Depot Injection or other products which may be acquired or licensed by the Company, and for general working capital requirements. Based on product development timelines and agreements with the Companys development partners, the ability to
scale up or reduce personnel and associated costs are factors considered throughout the product development life cycle. Available resources may be consumed more rapidly than currently anticipated, potentially resulting in the need for additional
funding. Additional funding, capital or loans (including, without limitation, milestone or other payments from commercialization agreements) may be unavailable on favorable terms, if at all.
The following table represents the components of inventory as of:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Raw materials & supplies
|
|
$
|
1,854
|
|
|
$
|
978
|
|
Work-in-process
|
|
|
2,526
|
|
|
|
1,660
|
|
Finished goods
|
|
|
3,765
|
|
|
|
730
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
8,145
|
|
|
$
|
3,368
|
|
|
|
|
|
|
|
|
|
|
4.
|
Accounts payable and accrued liabilities:
|
The following table represents the components of accounts
payable and accrued liabilities as of:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Accounts payable
|
|
$
|
12,381
|
|
|
$
|
9,397
|
|
Accrued price adjustments
|
|
|
1,420
|
|
|
|
592
|
|
Accrued returns
|
|
|
760
|
|
|
|
|
|
Accrued acquisition consideration
|
|
|
7,536
|
|
|
|
|
|
Accrued rebates
|
|
|
4,228
|
|
|
|
3,842
|
|
Accrued chargebacks
|
|
|
52
|
|
|
|
10
|
|
Accrued compensation and benefits
|
|
|
1,574
|
|
|
|
2,052
|
|
Accrued royalties
|
|
|
586
|
|
|
|
518
|
|
Accrued clinical trial costs
|
|
|
397
|
|
|
|
615
|
|
Accrued legal costs
|
|
|
1,109
|
|
|
|
490
|
|
Accrued manufacturing costs
|
|
|
200
|
|
|
|
200
|
|
Accrued sales and marketing costs
|
|
|
|
|
|
|
193
|
|
Accrued other
|
|
|
278
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses
|
|
$
|
30,521
|
|
|
$
|
18,174
|
|
|
|
|
|
|
|
|
|
|
11
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
5.
|
Property and equipment:
|
Property and equipment, summarized by major category, consist of the following
as of:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Machinery & equipment
|
|
$
|
4,907
|
|
|
$
|
4,476
|
|
Computer equipment & software
|
|
|
464
|
|
|
|
464
|
|
Office furniture & equipment
|
|
|
202
|
|
|
|
202
|
|
Leasehold improvements
|
|
|
53
|
|
|
|
53
|
|
Idle equipment
|
|
|
1,486
|
|
|
|
1,486
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,112
|
|
|
|
6,681
|
|
Less accumulated depreciation
|
|
|
(2,563
|
)
|
|
|
(2,451
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant & equipment, net
|
|
$
|
4,549
|
|
|
$
|
4,230
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was approximately $0.1 million and $0.09 million for the three month periods ended
March 31, 2017 and 2016, respectively.
6.
|
License and development agreements:
|
The Company has periodically entered into license and development
agreements to develop and commercialize certain of its products. The arrangements typically are multi-deliverable arrangements that are funded through upfront payments, milestone payments, royalties and other forms of payment to the Company. The
Companys most significant license and development agreements are as follows:
Meda license, development and supply agreements
On January 27, 2015, the Company announced that it had entered into an assignment and revenue sharing agreement with Meda to return to the Company the
marketing authorization for ONSOLIS
®
in the U.S. and the right to seek marketing authorizations for ONSOLIS
®
in Canada and Mexico.
Following the return of the U.S. marketing authorization from Meda, the Company submitted a prior approval supplement for the new formulation to the FDA in March 2015, which was approved in August 2016. In connection with the return of the U.S.
marketing authorization by Meda to the Company in January 2015, the remaining U.S.-related deferred revenue of $1.0 million was recorded as contract revenue during the year ended December 31, 2015. There was no remaining U.S.-related
contract revenue to record during the year ended December 31, 2016. On February 27, 2016, the Company entered into an extension of the assignment and revenue sharing agreement to extend the period until December 31, 2016, which
terminated on May 11, 2016 upon the signing of the Termination and Revenue Sharing Agreement (the Agreement).
Efforts to extend the
Companys supply agreement with its ONSOLIS
®
manufacturer, Aveva, which is now a subsidiary of Apotex, Inc., were unsuccessful and the agreement expired. However, the Company
identified an alternate supplier and requested guidance from the FDA on the specific requirements for obtaining approval to supply product from this new vendor. Based on the Companys current estimates, the Company will submit the necessary
documentation to the FDA for qualification of the new manufacturer in the second half of 2017.
On May 11, 2016, the Company and Collegium
executed a definitive License and Development Agreement (the License Agreement) under which the Company has granted to Collegium the exclusive rights to develop and commercialize
ONSOLIS
®
in the U.S. See Collegium License and Development Agreement below.
12
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
6.
|
License and development agreements (continued):
|
Collegium license and development agreement
On May 11, 2016, the Company and Collegium executed a License Agreement under which the Company granted Collegium the exclusive rights to develop and
commercialize ONSOLIS
®
in the U.S.
Under the terms of the License
Agreement, Collegium will be responsible for the manufacturing, distribution, marketing and sales of ONSOLIS
®
in the U.S. The Company is obligated to use commercially reasonable
efforts to continue the transfer of manufacturing to the anticipated manufacturer for ONSOLIS
®
and to submit a corresponding Prior Approval Supplement (the Supplement) to the FDA
with respect to the current NDA for ONSOLIS
®
. Following approval of the Supplement, the NDA and manufacturing responsibility for
ONSOLIS
®
(including the manufacturing relationship with the Companys manufacturer, subject to the Company entering into an appropriate agreement with such manufacturer that is acceptable
and assignable to Collegium) will be transferred to Collegium.
Financial terms of the License Agreement include:
|
|
|
a $2.5 million upfront
non-refundable
payment, payable to the Company within 30 days of execution of the License Agreement (received June 2016);
|
|
|
|
reimbursement to the Company for a
pre-determined
amount of the remaining expenses associated with the ongoing transfer of the manufacturing of ONSOLIS
®
;
|
|
|
|
$4 million payable to the Company upon first commercial sale of ONSOLIS
®
in the U.S;
|
|
|
|
$3 million payable to the Company related to ONSOLIS
®
patent milestone (earned March 2017 but payable by Collegium to the Company first half of 2018);
|
|
|
|
up to $17 million in potential payments to the Company based on achievement of certain performance and sales milestones; and
|
|
|
|
upper-teen percent royalties payable by Collegium to the Company based on various annual U.S. net sales thresholds, subject to customary adjustments and the royalty sharing arrangements described below.
|
The License Agreement also contains customary termination provisions that include a right by either party to terminate upon the other
partys uncured material breach, insolvency or bankruptcy, as well as in the event a certain commercial milestone is not met.
ONSOLIS
®
was originally licensed to, and launched in the U.S. by, Meda. In January 2015, the Company entered into an assignment and revenue sharing agreement (the ARS Agreement) with Meda
pursuant to which Meda transferred the marketing authorizations for ONSOLIS
®
in the United States back to the Company. Under the ARS Agreement, financial terms were established that enable
Meda to share a significant portion of the proceeds of milestone and royalty payments received by the Company from any new North American partnership for ONSOLIS
®
that may be executed by the
Company. The execution of the License Agreement between the Company and Collegium also required the execution of a definitive termination agreement between the Company and Meda embodying those royalty-sharing terms, returning ONSOLIS
®
-related assets and rights in the U.S., Canada, and Mexico to the Company, and including certain other provisions. In addition, the Companys royalty obligations to CDC IV, LLC
(CDC) and its assignees will remain in effect. CDC provided funding for the development of ONSOLIS
®
in the past.
Endo license and development agreement
In January
2012, the Company entered into a License and Development Agreement with Endo pursuant to which the Company granted Endo an exclusive commercial world-wide license to develop, manufacture, market and sell the Companys BELBUCA
®
product and to complete U.S. development of such product candidate for purposes of seeking FDA approval (the Endo Agreement).
BELBUCA
®
is for the management of pain severe enough to require daily,
around-the-clock,
long-term opioid
treatment and for which alternative treatment options are inadequate.
13
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
6.
|
License and development agreements (continued):
|
Endo license and development agreement
(continued)
Pursuant to the Endo Agreement, the Company has received the following payments:
|
|
|
$30 million
non-refundable
upfront license fee (earned in January 2012);
|
|
|
|
$15 million for enhancement of intellectual property rights (earned in May 2012);
|
|
|
|
$20 million for full enrollment in two clinical trials ($10 million earned in January 2014 and $10 million earned in June 2014);
|
|
|
|
$10 million upon FDA acceptance of filing NDA (earned in February 2015);
|
|
|
|
$50 million upon regulatory approval, earned in October 2015 and received in November 2015. Of the $50 million received in November 2015, $20 million related to a patent extension and was recorded as
deferred revenue because all or a portion of such $20 million was contingently refundable to Endo if a third party generic product was introduced in the U.S. during the patent extension period from 2020 to 2027. However, due to the Company and
Endo entering into a Termination Agreement on December 7, 2016 which terminated the BELBUCA
®
license to Endo effective January 6, 2017, the deferred $20 million was recognized
as revenue during the three months ended March 31, 2017 in the accompanying condensed consolidated statement of operations (see note 7).
|
7.
|
Business combination and asset acquisitions:
|
On December 7, 2016, the Company entered into an
agreement (the Termination Agreement) with Endo terminating Endos licensing of rights for BELBUCA
®
. The closing of the Termination Agreement, and the formal termination of
the BELBUCA
®
license to Endo and closing of the transactions further described below to be undertaken in connection therewith (the Endo Closing), occurred on January 6, 2017.
At the Endo Closing, the Company purchased from Endo the following assets (the Assets): (i) current BELBUCA
®
product inventory, raw material and
work-in-progress,
(ii) material manufacturing contracts related to BELBUCA
®
, (iii) BELBUCA
®
-related domain names and trademarks (including the BELBUCA
®
trademark), (iv) BELBUCA
®
-related manufacturing equipment, and (v) all
pre-approval
regulatory submissions, including any Investigational New
Drug Applications and New Drug Applications, regulatory approvals and post-approval regulatory submissions concerning BELBUCA
®
. The purchase price for the Assets (the Asset Purchase
Price) is equal to the sum of (i) the aggregate book value of the portion of the transferred product inventory forecasted to be used or sold by the Company, (ii) the aggregate book value of the raw material and
work-in-progress
inventory, and (iii) the assumption of any assumed liabilities. Upon the Endo Closing, the Company accepted transfer of the Assets and assumed and agreed
to discharge when due all applicable liabilities assumed by the Company, which consisted of post-closing obligations for liabilities and payments associated with the Assets, the assumed contracts related to the Assets and applicable taxes (with the
obligation for
pre-closing
and other certain liabilities resulting from the acts or omissions of Endo being retained by Endo).
The Asset Purchase Price, together with all other payments (including a
non-compete
covenant payment) due to Endo
under the Termination Agreement, will be paid to Endo in cash in four quarterly installments on the last calendar day of each quarter in 2017. Furthermore, the Company is not responsible for future royalties or milestone payments to Endo and Endo is
not obligated to any future milestone payments to the Company. The Termination Agreement contains customary representations and warranties and mutual releases and indemnification.
At the Endo Closing, the Company and Endo entered into a Transition Services Agreement which governed the post-closing rights and responsibilities of the
Company and Endo in connection with the license termination and the transfer of the Assets to the Company. Under this agreement, the Company and Endo agreed to the handling of transition matters such as managing customer contracts, BELBUCA
®
price reporting, payments, returns and rebates, and customer and managed care relations. In connection therewith, Endo has agreed to provide to the Company an agreed upon number of work hours to
be provided by Endo personnel during the transition for certain of these transition services and other assistance with respect to the transition of BELBUCA
®
to the Company.
14
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
7.
|
Business combination and asset acquisitions (continued):
|
The BELBUCA
®
acquisition was accounted for as a
business combination in accordance with ASC No. 805,
Business
Combinations
which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values. The purchase price
allocation is preliminary with respect to taxes and certain accruals and includes the use of estimates based on information that was available to management at the time these unaudited condensed consolidated financial statements were prepared. The
Company believes the estimates used are reasonable and the significant effects of the BELBUCA
®
acquisition are properly reflected. However, the estimates are subject to change as additional
information becomes available and is assessed by the Company.
Asset acquisition BELBUCA
®
The following table summarizes the consideration paid to acquire BELBUCA
®
and the estimated
values of assets acquired and liabilities assumed in the accompanying condensed consolidated balance sheet based on their fair values on January 6, 2017 (the date of the Endo Closing):
|
|
|
|
|
Asset purchase price:
|
|
|
|
|
Deferred cash consideration to Endo
|
|
$
|
7,536
|
|
|
|
|
|
|
Total asset purchase price
|
|
$
|
7,536
|
|
|
|
|
|
|
|
|
Estimated fair value of assets acquired:
|
|
|
|
|
Current BELBUCA
®
product inventory and
work-in
process
|
|
$
|
5,412
|
|
BELBUCA
®
-related manufacturing
equipment
|
|
|
432
|
|
License and distribution rights intangible assets
|
|
|
45,000
|
|
Deferred tax liability
|
|
|
(15,972
|
)
|
|
|
|
|
|
Amount attributable to assets acquired
|
|
$
|
34,872
|
|
|
|
|
|
|
Bargain purchase gain
|
|
$
|
(27,336
|
)
|
|
|
|
|
|
Inventories acquired included raw materials,
work-in-progress
and finished goods. The fair value of the acquired finished goods inventory was estimated by adjusting the anticipated selling price costs to sell and
an appropriate profit on selling activities. For
work-in-process,
in addition to those inputs used to estimate the fair value of finished goods, the cost and estimated
profit on completing the manufacturing are also included. The fair value of the raw materials represent cost to acquire the materials from suppliers.
The
fair value of the equipment was determined by consultations with a third-party equipment vendor, which considered replacement cost and equipment condition. The equipment will be depreciated over seven years based on its estimated remaining useful
life.
The fair value of the license and distribution intangible assets were estimated primarily using the income method, which starts with a
forecast of all expected future cash flows. Some of the more significant assumptions inherent in the development of intangible asset values, from the perspective of a market participant, include: the amount and timing of projected future cash flows
(including net revenue, cost of sales, commercial expenses, research and development costs and working capital requirements) as well as estimated contributory asset charges; the discount rate selected to measure the risks inherent in the future cash
flows; and the assessment of the assets life cycle and the competitive trends impacting the asset, among other factors. The license and distribution rights intangible assets will be amortized over ten years, which approximates the current,
remaining patent life of the BELBUCA
®
intellectual property.
As a result of the business
combination, the Company recognized a deferred tax liability of $16.0 million. This deferred tax liability was netted against its deferred tax assets as of March 31, 2017. Because a full valuation allowance has been provided against the
Companys deferred tax assets as it is considered more likely than not that they will not be utilized, the Company released a corresponding amount of its valuation allowance during the three months ended March 31, 2017 and recognized a $16.0
million tax benefit in the accompanying condensed consolidated statement of operations.
The Company recorded the asset acquisition as a bargain purchase
gain of $27.3 million in the accompanying condensed consolidated statement of operations.
Pro forma impact of acquisition
The following pro forma combined results of operations are provided for the year ended December 31, 2016, as though the BELBUCA
®
acquisition had been completed as of January 1, 2016. These supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be
indicative of the actual results that would have been achieved by the combined
15
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
7.
|
Business combination and asset acquisitions (continued):
|
company for the periods presented or that may be achieved by the combined company in the future. The pro forma results of operations do not include any cost savings or other synergies that
resulted, or may result, from the BELBUCA
®
acquisition or any estimated costs that will be incurred to integrate the BELBUCA
®
product
line, nor do they reflect the bargain purchase gain recognized. Future results may vary significantly from the results in this pro forma information because of future events and transactions, as well as other factors.
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
2016*
(unaudited)
|
|
Revenue
|
|
$
|
25,010
|
|
Net loss
|
|
$
|
(201,769
|
)
|
Pro forma net loss per common share
|
|
|
|
|
Basic
|
|
$
|
(3.76
|
)
|
Diluted
|
|
$
|
(3.76
|
)
|
The Companys historical financial information was adjusted to give effect to the pro forma events that were directly
attributable to the BELBUCA
®
acquisition and factually supportable. The unaudited pro forma consolidated results include historical revenues and expenses of assets acquired in the acquisition
with the following adjustments:
|
|
|
Adjustment to recognize incremental amortization expense based on the fair value of intangibles acquired;
|
|
|
|
Adjustment to recognize incremental depreciation expense for equipment acquired in the acquisition.
|
|
|
|
*BELBUCA
®
was launched February 22, 2016, and therefore, results as of March 31, 2016 were not readily available.
|
The Company has recognized net product sales for BELBUCA
®
subsequent to the Endo
Closing on January 7, 2017 in the amount of $4.6 million.
Non-recurring
transaction costs related to the acquisition for the year ended December 31, 2016 were minimal. These
non-recurring
transaction costs have been excluded from the pro forma results in the above table.
Evonik development and exclusive license option agreement:
On October 27, 2014, the Company entered into a definitive Development and Exclusive License Option Agreement (the Development Agreement) with
Evonik Corporation, (Evonik) to develop and commercialize an injectable, extended release, microparticle formulation of buprenorphine for the treatment of opioid dependence (the Evonik Product). Under the Development
Agreement, the Company also has the right to pursue development of the Evonik Product for pain management.
This product candidate is currently in the
pre-clinical
stage of development. An Investigational New Drug Application (IND) for the treatment of opioid dependence was filed in the fourth quarter 2016 and plans are underway to file a pain IND in
2017.
9.
|
Other license agreements and acquired product rights:
|
TTY license and supply agreement
On October 7, 2010, the Company announced a license and supply agreement with TTY Biopharm Co., Ltd. (TTY) for the exclusive
rights to develop and commercialize BEMA
®
Fentanyl in the Republic of China, Taiwan. The agreement results in potential milestone payments to the Company of up to $1.3 million, which
include an upfront payment of $0.3 million that was received in 2010. In addition, the Company will receive an ongoing royalty based on net sales. TTY will be responsible for the regulatory filing of BEMA
®
Fentanyl in Taiwan as well as future commercialization in that territory. The term of the agreement with TTY is for the period from October 4, 2010 until the date fifteen years after first
commercial sale unless the agreement is extended in writing or earlier terminated as provided for in the agreement.
On February 4, 2016, the Company
received a payment of $0.2 million from TTY, which related to royalties based on product purchased in Taiwan by TTY of PAINKYL
which is recorded in the accompanying condensed
consolidated statement of operations for the three months ended March 31, 2016. There were no payments received during the three months ended March 31, 2017.
16
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
10.
|
Note payable (MidCap loan):
|
On May 29, 2015, the Company entered into a $30 million secured
loan facility (the Loan) with MidCap Financial Trust, as agent and lender (MidCap), pursuant to the terms and conditions of that certain Amended and Restated Credit and Security Agreement, dated as of May 29, 2015 (the
Credit Agreement), between the Company and MidCap.
On February 21, 2017, the Company entered into a term loan agreement (the Term
Loan Agreement) with CRG Servicing LLC (CRG), as administrative agent and collateral agent, and the lenders named in the Term Loan Agreement (the Lenders). The Company utilized approximately $29.4 million of the
initial loan proceeds to repay all of the amounts owed by the Company under its existing Amended and Restated Loan and Security Agreement, dated May 29, 2015, with MidCap (the Prior Agreement). Upon the repayment of all amounts owed
by the Company under the Prior Agreement, all commitments under the Prior Agreement have been terminated and all security interests granted by the Company and its subsidiary guarantors (the Subsidiary Guarantors) under the Prior
Agreement have been released (see note 11). The warrants issued to MidCap in May 2016 related to the extension of the interest only period were not terminated and are outstanding as of March 31, 2017. During the three months ended March 31,
2017, $0.7 million of deferred loan costs were expensed and recorded as interest expense in the accompanying condensed consolidated statement of operations.
11.
|
Term loan agreement (CRG):
|
Pursuant to the Term Loan Agreement, the Company borrowed $45.0 million
from the Lenders as of the Closing Date, and may be eligible to borrow up to an additional $30.0 million in two tranches of $15.0 million each contingent upon achievement of certain conditions, including: (i) in the case of the first
tranche, representing the second potential draw under the Loan Agreement (the Second Draw), satisfying both (a) certain minimum net revenue thresholds on or before September 30, 2017 or December 31, 2017 and (b) a
certain minimum market capitalization threshold for a period of time prior to the funding of the Second Draw (provided, that if the Company does not achieve the minimum net revenue thresholds necessary for the Second Draw but does achieve a certain
minimum market capitalization threshold for a period of time prior to December 31, 2017, the Company would be eligible for a Second Draw funding in the amount of $5.0 million); and (ii) in the case of the second tranche, representing the
third potential draw under the Loan Agreement (the Third Draw), satisfying both (a) certain minimum net revenue thresholds on or before June 30, 2018 or September 30, 2018 and (b) a certain minimum market
capitalization threshold for a period of time prior to the funding of the Third Draw.
The Company intends to use the remainder of the initial proceeds
under the Term Loan Agreement (after deducting loan origination costs and broker and other fees) of approximately $13.7 million, plus any additional amounts that may be borrowed in the future, for general corporate purposes and working capital.
The Term Loan Agreement has
a six-year term
with three years of interest-only payments (which can be
extended to four years if the Company achieves certain net revenue and market capitalization thresholds prior to December 31, 2019), after which quarterly principal and interest payments will be due through the December 31, 2022 maturity
date. Interest on the amounts borrowed under the Term Loan Agreement accrues at an annual fixed rate of 12.50%, 3.5% of which (i.e., a resultant 9.0% rate) may be deferred during the interest-only period by adding such amount to the aggregate
principal loan amount. On each borrowing date (including the Closing Date), the Company is required to pay CRG a financing fee based on the loan drawn on that date. The Company is also required to pay the Lenders a final payment fee equivalent to 9%
of the original loan amount upon repayment of the Loans in full, in addition to prepayment amounts described below.
The Company may prepay all or a
portion of the outstanding principal and accrued unpaid interest under the Term Loan Agreement at any time upon prior notice to the Lenders subject to a certain prepayment fees during the first five years of the term (which fees are
lowered over time) and no prepayment fee thereafter. In certain circumstances, including a change of control and certain asset sales or licensing transactions,
the Company is required to prepay all or a portion of the loan, including the applicable prepayment premium of on the amount of the outstanding principal to be prepaid.
As security for its obligations under the Term Loan Agreement, on the funding date of the initial borrowing, the Company and the Subsidiary Guarantors entered
into a security agreement with CRG whereby the Company and the Subsidiary Guarantors granted to CRG, as collateral agent for the Lenders, a lien on substantially all of its assets including intellectual property (subject to certain
17
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
11.
|
Term loan agreement (CRG) (continued):
|
exceptions). The Term Loan Agreement requires the Company to maintain minimum cash and cash equivalents balance and, each year through the end of 2022, to meet a minimum net annual revenue
threshold. In the event that the Company does not meet the minimum net annual revenue threshold, then the Company can satisfy the requirement for that year by raising two (2) times the shortfall by way of raising equity or subordinated debt.
The Term Loan Agreement also contains customary affirmative and negative covenants for a credit facility of this size and type, including covenants that
limit or restrict the Companys ability to, among other things (but subject in each case to negotiated exceptions), incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into
transactions with affiliates, pay dividends or make distributions, license intellectual property rights on an exclusive basis or repurchase stock.
The
Term Loan Agreement includes customary events of default that include, among other
things, non-payment, inaccuracy
of representations and warranties, covenant breaches, a material adverse change (as
defined in the Term Loan Agreement), cross default to material indebtedness or material agreements, bankruptcy and insolvency, material judgments and a change of control. The occurrence and continuance of an event of default could result in the
acceleration of the obligations under the Term Loan Agreement. Under certain circumstances, a default interest rate of an additional 4.00% per annum will apply on all outstanding obligations during the existence of an event of default under the
Term Loan Agreement.
The amount disclosed in Notes payable, less current maturities, in the accompanying condensed consolidated balance sheets for year
ended December 31, 2016 reflects the February 21, 2017 repayment of loan obligations to MidCap Financial Trust and the simultaneous entry into a term loan agreement with CRG Servicing LLC.
The following table represents future maturities of the CRG obligation as of March 31, 2017:
|
|
|
|
|
2017
|
|
$
|
|
|
2018
|
|
|
|
|
2019
|
|
|
|
|
2020
|
|
|
15,000
|
|
2021
|
|
|
15,000
|
|
2022
|
|
|
15,162
|
|
|
|
|
|
|
Total maturities
|
|
$
|
45,162
|
|
Unamortized discount and loan costs
|
|
|
(10,362
|
)
|
|
|
|
|
|
Total CRG obligation
|
|
$
|
34,800
|
|
12.
|
Stockholders equity:
|
Stock-based compensation
During the three months ended March 31, 2017, a total of 615,155 options to purchase Common Stock, with an aggregate fair market value of approximately
$1.2 million, were granted to Company employees. The options granted have a term of 10 years from the grant date and vest ratably over a three year period. The fair value of each option is amortized as compensation expense evenly through
the vesting period.
The Companys stock-based compensation expense is allocated between research and development and selling, general and
administrative as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended,
|
|
Stock-based compensation expense
|
|
March 31,
2017
|
|
|
March 31,
2016
|
|
Research and Development
|
|
$
|
401
|
|
|
$
|
1,128
|
|
Selling, General and Administrative
|
|
$
|
2,669
|
|
|
$
|
2,983
|
|
The fair value of each option award is estimated on the grant date using the Black-Scholes valuation model that uses
assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on implied volatilities from historical volatility of the Common Stock, and other factors estimated over the
expected term of the options.
18
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
12.
|
Stockholders equity (continued):
|
Expected term of options granted is derived using the simplified method which computes expected
term as the average of the sum of the vesting term plus contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The weighted average for key assumptions used in
determining the fair value of options granted during the three months ended March 31, 2017 follows:
|
|
|
Expected price volatility
|
|
62.34% -79.88%
|
Risk-free interest rate
|
|
1.90% - 1.94%
|
Weighted average expected life in years
|
|
6 years
|
Dividend yield
|
|
|
Option activity during the three months ended March 31, 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
Per Share
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2017
|
|
|
3,468,991
|
|
|
$
|
4.14
|
|
|
|
|
|
Granted in 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
615,155
|
|
|
|
1.87
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
(186,387
|
)
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
3,897,759
|
|
|
$
|
3.73
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017, options exercisable totaled 2,612,869. There was approximately $11.9 million of unrecognized
compensation cost related to
non-vested
share-based compensation awards, including options and restricted stock units (RSUs) granted. These costs will be expensed through 2020.
Restricted stock units
During the three months
ended March 31, 2017, 2,060,000 RSUs were granted to the Companys executive officers and employees, with a fair market value of approximately $3.7 million. The fair value of restricted units is determined using quoted market prices
of the Common Stock and the number of shares expected to vest. These RSUs were issued under the Companys 2011 Equity Incentive Plan, as amended.
One-half
of such RSUs are time-based and
one-half
are performance based and all vest over a three-year period. The performance-based RSUs provide for vesting if specified predetermined net revenue and operating income goals are achieved with respect to the
annual fiscal years 2017 through 2019. These RSUs were granted over the plan allotment of our 2011 Equity Incentive Plan and will require approval during the 2017 annual stockholder meeting.
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted
Shares
|
|
|
Weighted
Average Fair
Market Value
Per RSU
|
|
Outstanding at January 1, 2017
|
|
|
4,584,297
|
|
|
$
|
7.29
|
|
Granted:
|
|
|
|
|
|
|
|
|
Executive officers
|
|
|
1,640,000
|
|
|
|
1.80
|
|
Directors
|
|
|
|
|
|
|
|
|
Employees
|
|
|
420,000
|
|
|
|
1.80
|
|
Vested
|
|
|
(1,207,952
|
)
|
|
|
2.04
|
|
Forfeitures
|
|
|
(84,000
|
)
|
|
|
3.14
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
5,352,345
|
|
|
$
|
4.69
|
|
|
|
|
|
|
|
|
|
|
19
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
12.
|
Stockholders equity (continued):
|
Warrants
The Company has granted warrants to purchase shares of Common Stock. Warrants may be granted to affiliates in connection with certain agreements.
In connection with the initial borrowing made under the Loan Agreement on February 21, 2017, the Company issued to CRG and certain of its affiliates five
separate warrants to purchase an aggregate of 1,701,583 shares of the Companys common stock (the CRG Warrants). The CRG Warrants are exercisable any time prior to February 21, 2027 at a price of $2.38 per share, with
typical provisions for cashless exercise and stock-based anti-dilution protection. The exercise of the CRG Warrants could have a dilutive effect to the Companys common stock to the extent that the market price per share of the Companys
common stock, as measured under the terms of the CRG Warrants, exceeds the exercise price of the CRG Warrants. CRG is also entitled to receive a smaller amount of similar warrants concurrently with the funding, if applicable, of the Second Draw and
the Third Draw.
The fair value of each warrant grant is estimated on the grant date using the Black-Scholes valuation model that uses assumptions for
expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on implied volatilities from historical volatility of the Common Stock, and other factors estimated over the expected term of
the warrants.
Expected term of warrants granted is derived using the simplified method which computes expected term as the average of the sum
of the vesting term plus contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The weighted average for key assumptions used in determining the fair value of
warrants granted during the three months ended March 31, 2017 follows:
|
|
|
|
|
Expected price volatility
|
|
|
78.39
|
%
|
Risk-free interest rate
|
|
|
1.92
|
%
|
Weighted average expected life in years
|
|
|
6 years
|
|
Dividend yield
|
|
|
|
|
Warrant activity during the three months ended March 31, 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
Per Share
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2017
|
|
|
84,986
|
|
|
$
|
3.53
|
|
|
|
|
|
Granted in 2017
|
|
|
1,701,583
|
|
|
|
2.38
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
1,786,569
|
|
|
$
|
2.43
|
|
|
$
|
|
|
20
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
13.
|
Earnings per common share:
|
The following table reconciles the numerators and denominators of the basic
and diluted loss per share computations (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
March 31,
2016
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
48,235
|
|
|
$
|
(18,733
|
)
|
Weighted average common shares outstanding
|
|
|
54,519,574
|
|
|
|
52,230,648
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share
|
|
$
|
0.89
|
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
48,235
|
|
|
$
|
(18,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
48,235
|
|
|
|
(18,733
|
)
|
Weighted average common shares outstanding
|
|
|
54,519,574
|
|
|
|
52,230,648
|
|
Effect of dilutive options and warrants
|
|
|
912,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
55,431,628
|
|
|
|
52,230,648
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share
|
|
$
|
0.87
|
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share is calculated using the weighted average shares of Common Stock outstanding during the period.
In addition to the weighted average shares of Common Stock outstanding, common equivalent shares from stock options, RSUs and warrants using the treasury stock method, are included in the diluted per share calculations unless the effect of inclusion
would be antidilutive. During the three months ended March 31, 2017 and 2016, outstanding stock options, RSUs and warrants of 10,124,619 and 10,113,296, respectively, were not included in the computation of diluted earnings per common share,
because to do so would have had an antidilutive effect because the outstanding exercise prices were greater than the average market price of the common shares during the relevant periods.
The following is the total outstanding options and warrants for the three months ended as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
|
Options, RSUs and warrants to purchase Common Stock
|
|
|
11,036,673
|
|
|
|
10,113,296
|
|
14.
|
Commitments and contingencies:
|
Litigation related to ONSOLIS
®
On November 2, 2010, MonoSol filed an action against the Company and its commercial
partners for ONSOLIS
®
in the Federal District Court of New Jersey (the DNJ) for alleged patent infringement and false marking. The Company was formally served in this matter on
January 19, 2011. MonoSol claimed that our manufacturing process for ONSOLIS
®
, which has never been disclosed publicly and which the Company and its partners maintain as a trade secret,
infringes its patent (United States Patent No. 7,824,588) (the 588 Patent). Of note, the BEMA
®
technology itself was not at issue in the case, nor is BELBUCA
®
or BUNAVAIL
®
, but rather only the manner in which ONSOLIS
®
, which incorporates
the BEMA
®
technology, is manufactured. Pursuant to its complaint, MonoSol was seeking an unspecified amount of damages, attorneys fees and an injunction preventing future infringement of
MonoSols patents.
21
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
14.
|
Commitments and contingencies (continued):
|
Based on the Companys original assertion that its proprietary manufacturing process for ONSOLIS
®
does not infringe on patents held by MonoSol, and the denial and subsequent narrowing of the claims on the two reissued patents MonoSol has asserted against the Company while the third has had
all claims rejected by the USPTO, the Company remains confident in its original stated position regarding this matter. Thus far, the Company has proven that the original 292 and 891 patents in light of their reissuance with
fewer and narrower claims were indeed invalid and the third and final patent, the 588 patent, was invalid as well with all its claims cancelled. Given the outcomes of the 292, 891 and 588 reexamination proceedings, at a
January 22, 2015 status meeting, the Court decided to lift the stay and grant the Companys request for the case to proceed on an expedited basis with a Motion for Summary Judgment to dismiss the action. On September 25, 2015, the
Honorable Freda L. Wolfson granted the Companys motion for summary judgment and ordered the case closed. The Company was found to be entitled to absolute intervening rights as to both patents in suit, the 292 and 891 patents and
the Companys ONSOLIS
®
product is not liable for infringing the patents prior to July 3, 2012 and August 21, 2012, respectively. In October 2015, MonoSol appealed the decision
of the court to the Federal Circuit. The Company had no reason to believe the outcome would be different and were prepared to vigorously defend the appeal. MonoSol, however, subsequently decided to withdraw the appeal. On February 25,
2016, MonoSol filed an Unopposed Motion For Voluntary Dismissal Of Appeal, which was granted by the court on February 26, 2016 and the case dismissed. Thus, the district courts grant of the Summary Judgement of Intervening Rights
stands. The possibility exists that MonoSol could file another suit alleging infringement of the 292 and 891 patents. The Company continues to believe, however, that ONSOLIS
®
and
its other products relying on the BEMA
®
technology, including BUNAVAIL
®
and
BELBUCA
®
, do not infringe any amended, reexamined claim from either patent.
Litigation
related to BUNAVAIL
®
RB and MonoSol
On October 29, 2013, Reckitt Benckiser, Inc., RB Pharmaceuticals Limited, and MonoSol (collectively, the RB Plaintiffs) filed an action against the
Company relating to its BUNAVAIL
®
product in the United States District Court for the Eastern District of North Carolina (EDNC) for alleged patent infringement. BUNAVAIL
®
is a drug approved for the maintenance treatment of opioid dependence. The RB Plaintiffs claim that the formulation for BUNAVAIL
®
, which
has never been disclosed publicly, infringes its patent (United States Patent No. 8,475,832) (the 832 Patent). On May 21, 2014, the Court granted the Companys motion to dismiss.
In doing so, the Court dismissed the case in its entirety. The RB Plaintiffs did not appeal the Court Decision by the June 21, 2014 due date and
therefore, the dismissal will stand and the RB Plaintiffs lose the ability to challenge the Court Decision in the future. The possibility exists, however, that the RB Plaintiffs could file another suit alleging infringement of the 832 Patent.
If this occurs, based on the Companys original position that its BUNAVAIL
®
product does not infringe the 832 Patent, the Company would defend the case vigorously (as the Company
has done so previously), and the company anticipates that such claims against them ultimately would be rejected.
On September 20, 2014, based upon
the Companys position and belief that its BUNAVAIL
®
product does not infringe any patents owned by the RB Plaintiffs, the Company proactively filed a declaratory judgment action in the
EDNC, requesting the Court to make a determination that its BUNAVAIL
®
product does not infringe the RB Plaintiffs 832 Patent, US Patent No. 7,897,080 (080 Patent) and US
Patent No. 8,652,378 (378 Patent). With the declaratory judgment, there is an automatic stay in proceedings. The RB Plaintiffs may request that the stay be lifted, but they have the burden of showing that the stay should be lifted. For
the 832 Patent, the January 15, 2014 IPR was instituted and in June 2015, all challenged claims were rejected for both anticipation and obviousness. In August 2015, the RB Plaintiffs filed an appeal to the Federal Circuit. The Federal
Circuit affirmed the USPTOs decision, and the RB Plaintiffs then filed a Petition for Panel Rehearing and for Rehearing En Banc, which was denied. A mandate issued on October 25, 2016, pursuant to Rule 41(a) of the Federal Rules of
Appellate Procedure, meaning that a petition for certiorari to the Supreme Court is no longer possible for the RB Plaintiffs. The 832 IPR was finally resolved with the invalidation of claims
15-19.
For
the 080 Patent, all claims have been rejected in an inter partes reexamination and the rejection of all claims as invalid over the prior art has been affirmed on appeal by the PTAB in a decision dated March 27, 2015. In May 2015, the RB
Plaintiffs filed a response after the decision to which we filed comments. In December 2015, the PTAB denied MonoSols request to reopen prosecution, but provided MonoSol an opportunity to file a corrected response. MonoSol filed the request in
December 2015 and we
22
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
14.
|
Commitments and contingencies (continued):
|
subsequently filed comments on December 23, 2015. The PTAB issued a communication on July 7, 2016 denying MonoSols request to reopen prosecution of the rejections of all claims
over the prior art. On January 31, 2017, the PTAB issued a final decision maintaining an additional new ground of rejection in addition to the previous grounds of invalidity. As such, all claims remain finally rejected on multiple grounds.
MonoSol failed to appeal the final decision and all claims were cancelled in a reexamination certificate issued May 9, 2017. For the 378 Patent, an IPR was filed on June 1, 2014, but an IPR was not instituted. However, in issuing its
November 5, 2014 decision not to institute the IPR, the PTAB construed the claims of the 378 Patent narrowly. As in prior litigation proceedings, we believe these IPR and the reexamination filings will provide support for maintaining the
stay until the IPR and reexamination proceedings conclude. Indeed, given the PTABs narrow construction of the claims of the 378 Patent, we filed a motion to withdraw the 378 Patent from the case on December 12, 2014. In
addition, we also filed a joint motion to continue the stay (with RB Plaintiffs) in the proceedings on the same day. Both the motion to withdraw the 378 Patent from the proceedings and motion to continue the stay were granted.
On September 22, 2014, the RB Plaintiffs filed an action against the Company (and its commercial partner) relating to its BUNAVAIL
®
product in the United States District Court for the District of New Jersey for alleged patent infringement. The RB Plaintiffs claim that
BUNAVAIL
®
, whose formulation and manufacturing processes have never been disclosed publicly, infringes its patent U.S. Patent No. 8,765,167 (167 Patent). As with prior actions by
the RB Plaintiffs, the Company believes this is another anticompetitive attempt by the RB Plaintiffs to distract our efforts from commercializing BUNAVAIL
®
. The Company strongly refutes as
without merit the RB Plaintiffs assertion of patent infringement and will vigorously defend the lawsuit. On December 12, 2014, The Company filed a motion to transfer the case from New Jersey to North Carolina and a motion to dismiss the
case against our commercial partner. The Court issued an opinion on July 21, 2015 granting the Companys motion to transfer the venue to the ENDC but denying its motion to dismiss the case against the Companys commercial partner
as moot. The Company has also filed a Joint Motion to Stay the case in North Carolina at the end of April 2016, which was granted by the court on May 5, 2016. Thus, the case is now stayed until a final resolution of the 167 IPRs in the
USPTO. The Company will continue to vigorously defend this case in the EDNC.
On January 13, 2017, MonoSol filed a complaint in the United States
District Court for the District of New Jersey alleging BELBUCA
®
infringes the 167 patent. In lieu of answering the complaint, the Company filed motions to dismiss the complaint and, in
the alternative, to transfer the case to the EDNC on March 1, 2017. Briefing on the motions will be completed by May 22, 2017. The Company strongly refutes as without merit MonoSols assertion of patent infringement and will
vigorously defend the lawsuit.
Teva Pharmaceuticals (formerly Actavis)
On February 8, 2016, the Company received a notice relating to a Paragraph IV certification from Actavis Laboratories UT, Inc. (Actavis)
seeking to find invalid three Orange Book listed patents (the Patents) relating specifically to BUNAVAIL
®
. The Paragraph IV certification relates to an Abbreviated New Drug
Application (the ANDA) filed by Actavis with the FDA for a generic formulation of BUNAVAIL
®
. The Patents subject to Actavis certification are U.S. Patent Nos. 7,579,019
(the 019 Patent), 8,147,866 (the 866 Patent) and 8,703,177 (the 177 Patent). Under the Food Drug and Cosmetic Act, as amended by the Drug Price Competition and Patent Term Restoration Act of
1984, as amended (the Hatch-Waxman Amendments), after receipt of a valid Paragraph IV notice, the Company may, and in this case did, bring a patent infringement suit in federal district court against Actavis within 45 days from the
date of receipt of the certification notice. On March 18, 2016, the Company filed a complaint in Delaware against Actavis, thus the Company is entitled to receive a 30 month stay on the FDAs ability to give final approval to any proposed
products that reference BUNAVAIL
®
. The 30 month stay is expected to preempt any final approval by the FDA on Actavis ANDA until at least August of 2018.
23
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS, IN THOUSANDS)
(Unaudited)
14.
|
Commitments and contingencies (continued):
|
On January 31, 2017, the Company received a notice relating to a Paragraph IV certification from Teva
Pharmaceuticals USA (Teva) relating to Tevas ANDA on additional strengths of BUNAVAIL
®
. Tevas parent company, Teva Pharmaceuticals Ltd., recently acquired Actavis
through an acquisition. The Company anticipates bringing suit against Teva and its parent company on these additional strengths within 45 days from the receipt of the notice.
A five (5) day bench trial is currently scheduled to begin on December 4, 2017.
Litigation related to BELBUCA
®
The Company received notices regarding Paragraph IV certifications from Teva on November 8, 2016, November 10, 2016, and December 22, 2016,
seeking to find invalid two Orange Book listed patents (the Patents) relating specifically to BELBUCA
®
. The Paragraph IV certifications relate to three ANDAs filed by Teva with the
FDA for a generic formulation of BELBUCA
®
. The Patents subject to Tevas certification are U.S. Patent Nos. 7,579,019 (the 019 Patent) and 8,147,866 (the 866
Patent). Under the Hatch-Waxman Amendments, after receipt of a valid Paragraph IV notice, the Company may, and in this case did, bring a patent infringement suit in federal district court against Teva within 45 days from the date of
receipt of the certification notice. The Company filed complaints in Delaware against Teva on December 22, 2016 and February 3, 2017, thus the Company is entitled to receive a 30 month stay on the FDAs ability to give final approval
to any proposed products that reference BELBUCA
®
. The 30 month stay is expected to preempt any final approval by the FDA on Tevas ANDA Nos. 209704 and 209772 until at least May of 2019
and for Tevas ANDA No. 209807 until at least June of 2019.
A five (5) day bench trial is currently scheduled to begin on
November 19, 2018.
24