NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
1. Organization and Business
Throughout our history, the Company’s mission has been to improve the lives of patients by aiding in the successful development of innovative therapeutics and healthcare technologies. PDL BioPharma was founded in 1986 as Protein Design Labs, Inc. when it pioneered the humanization of monoclonal antibodies, enabling the discovery of a new generation of targeted treatments that have had a profound impact on patients living with different cancers as well as a variety of other debilitating diseases. In 2006, the Company changed its name to PDL BioPharma, Inc.
Historically, the Company generated a substantial portion of its revenues through the license agreements related to patents covering the humanization of antibodies, which it refers to as the Queen et al. patents. In 2012, the Company began providing alternative sources of capital through royalty monetization and debt facilities, and, in 2016, the Company began acquiring commercial-stage products and launching specialized companies dedicated to the commercialization of these products. In 2019, and as a further evolution of the Company’s strategy, it began to enter into strategic transactions involving innovative late clinical-stage or early commercial-stage therapeutics. Consistent with this strategy, on April 10, 2019, the Company entered into a securities purchase agreement with Evofem Biosciences, Inc. (“Evofem”), pursuant to which it invested $60.0 million in a private placement of securities structured in two tranches.
In September 2019, the Company engaged financial and legal advisors and initiated a review of its strategy. This review was completed in December 2019 at which time the Company announced that it decided to halt the execution of its growth strategy, cease additional strategic transactions and investments and instead pursue a formal process to unlock value by monetizing its assets and returning net proceeds to stockholders (the “monetization strategy”). Pursuant to the Company’s monetization strategy, the Company does not expect to enter into any additional strategic investments. The Company further announced in December 2019 that it would explore a variety of potential transactions in connection with the monetization strategy, including a whole Company sale, divestiture of assets, spin-offs of operating entities, merger opportunities or a combination thereof. Over the subsequent months, the Company’s Board of Directors (the “Board”) and management analyzed, together with outside financial and legal advisors, how to best capture value pursuant to the monetization strategy and best return the value of the assets in its portfolio to its stockholders.
During the first quarter of 2020, the Board approved a plan of complete liquidation (the “Plan of Liquidation”) and passed a resolution to seek stockholder approval to dissolve the Company as permitted by the General Corporation Law of the State of Delaware (the “DGCL”). The proposal was approved by stockholders on August 19, 2020 at the Company’s 2020 Annual Meeting of Stockholders. On November 5, 2020, our Board approved filing a Certificate of Dissolution with the Secretary of State of Delaware on January 4, 2021 (the “Final Record Date”) and proceeding to complete the dissolution process for the Company in accordance with the DGCL. The liquidation and dissolution process will take a minimum of three years. However, the timing may be extended due to circumstances such as pending litigation or other factors that may affect the ability of the Company to wind down its business. Upon filing the Certificate of Dissolution on the Final Record Date, the Company closed its stock transfer books, meaning it will not record any further transfers of its common stock after the Final Record Date, except pursuant to the provisions of a deceased stockholder’s will, intestate succession, or by operation of law and the Company will not issue any new stock certificates, other than replacement certificates. In addition, after the Final Record Date, the Company will not issue any shares of its common stock for outstanding stock options. As a result of the closing of our transfer books, it is anticipated that distributions, if any, made in connection with the dissolution will be made pro rata to the stockholders of record as of the Final Record Date. On January 7, 2021 the Company was formally delisted from the Nasdaq Stock Market exchange, and it does not anticipate participating in Over-The-Counter (“OTC”) trading. On January 8, 2021, the Company filed a Form 15 notifying the SEC of deregistration of its common stock under Section 12(g) of the Exchange Act and suspension of its duty to file reports under Sections 13 and 15(d) of the Exchange Act.
Pursuant to the Company’s monetization strategy, the Company explored a variety of potential transactions, including a whole Company sale, divestiture of assets, spin-offs of operating entities, merger opportunities or a combination. During the year ended December 31, 2020, the Company’s Pharmaceutical and Strategic Positions segments and the royalty right assets within the Income Generating Assets segment met the criteria to be classified as held for sale. Those investments are reported as discontinued operations on the Consolidated Statements of Operations for the eight months ended August 31, 2020 and for the years ended December 31, 2019, and 2018 and as Assets and Liabilities held for sale on the Consolidated Balance Sheet as of December 31, 2019.
Based on the composition of its investment portfolio, under the Going Concern Basis, the Company historically operated in four segments designated as Medical Devices, Strategic Positions, Pharmaceutical and Income Generating Assets. Those investments are reported as discontinued operations on the Consolidated Statements of Operations for the eight months ended August 31, 2020 and for the years ended December 31, 2019, and 2018. Following is a summary of the Company’s segments including those that have been classified as discontinued operations.
The Medical Devices segment consisted of revenue derived from the sale and lease of the LENSAR® Laser System made by the Company’s majority-owned subsidiary, LENSAR, Inc. (“LENSAR”), which may include equipment, Patient Interface Devices (“PIDs”), procedure licenses, training, installation, warranty and maintenance agreements. On October 1, 2020, the Company completed the previously announced spin-off of LENSAR into a new, independent publicly traded company, through a distribution in the form of a liquidation distribution of all outstanding shares of LENSAR common stock owned by the Company to holders of the Company’s common stock on a pro rata basis (the “Distribution”). The Distribution was made to the Company’s stockholders of record as of the close of business on September 22, 2020 (the “LENSAR Record Date”) and such stockholders received 0.075879 shares of LENSAR common stock for every one share of the Company’s common stock held as of close of business on the LENSAR Record Date. Prior to the Distribution, the Company owned approximately 81.5% of LENSAR common stock. Following the completion of the distribution, PDL does not own any equity interest in LENSAR. LENSAR became an independent public company whose stock is listed and trading under the symbol “LNSR” on the Nasdaq Stock Market.
The Strategic Positions segment consisted of an investment in Evofem. Evofem is a publicly-traded (NASDAQ: EVFM) clinical-stage biopharmaceutical company committed to developing and commercializing innovative products to address unmet needs in women's sexual and reproductive health. Evofem is leveraging its proprietary Multipurpose Vaginal pH Regulator (MVP-R™) platform to develop Phexxi® (L-lactic acid, citric acid and potassium bitartrate) for hormone-free birth control. On May 21, 2020 the Evofem common stock held within the Strategic Positions segment was distributed in the form of a liquidation distribution to the Company’s stockholders on a pro rata basis. As of December 31, 2020, the Company held warrants to purchase up to 3,333,334 shares of Evofem common stock at an exercise price of $6.38 per share.
Our Pharmaceutical segment consisted of revenue derived from branded prescription medicine products sold under the name Tekturna® and Tekturna HCT® in the United States and Rasilez® and Rasilez HCT® in the rest of the world and revenue generated from the sale of an authorized generic form of Tekturna in the United States (collectively, the “Noden Products”). The branded prescription Noden Products were acquired from Novartis AG, Novartis Pharma AG and Speedel Holding AG (collectively, “Novartis”) in July 2016 (the “Noden Transaction”) by the Company’s wholly-owned subsidiary, Noden Pharma DAC (“Noden DAC”). The Company, through its wholly-owned subsidiary, Noden Pharma USA Inc. (“Noden USA”) launched its authorized generic form of Tekturna in the United States in March 2019. In September 2020, the Company sold the Noden business, including its Noden Pharma USA, Inc. subsidiary (“Noden USA” and, together with Noden DAC, “Noden”) to a third-party.
Our Income Generating Assets segment consisted of revenue derived from (i) notes and other long-term receivables, (ii) royalty rights and hybrid notes/royalty receivables, (iii) equity investments and (iv) royalties from issued patents in the United States and elsewhere covering the humanization of antibodies, which we refer to as the Queen et al. patents.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements of PDL Biopharma, Inc. and its subsidiaries (collectively, the “Company” or “PDL”) have been prepared in accordance with Generally Accepted Accounting Principles (United States) (“GAAP”).
Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
Liquidation Basis of Accounting
As a result of the August 19, 2020 approval by the Company’s stockholders to file for dissolution pursuant to a plan of dissolution, it was determined that liquidation was imminent and the Company’s basis of accounting transitioned, effective September 1, 2020, the beginning of the fiscal month following the approval (“Convenience Date”), from the going concern basis of accounting (“Going Concern Basis”) to the liquidation basis of accounting (“Liquidation Basis”) in accordance with GAAP. Under the Liquidation Basis, the remeasurement of the Company's assets and liabilities includes management's estimates and assumptions of: (i) income to be generated from the remaining assets until the anticipated date of sale; (ii) sales proceeds to be received for these assets at the time of sale; (iii) operating expenses to be incurred; and (iv) amounts required to settle liabilities.
The estimated liquidation values for assets derived from future revenue streams and asset sales and the settlement of liabilities are reflected on the Consolidated Statement of Net Assets in Liquidation. The actual amounts realized could differ materially from the estimated amounts.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries up to their date of sale or distribution. All significant intercompany balances and transactions have been eliminated upon consolidation.
A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting power; has the power to appoint or remove the majority of the members of the board of directors; to cast a majority of votes at the meeting of the board of directors; or to govern the financial and operating policies of the investee under a statute or agreement among the stockholders or equity holders.
The Company applies the guidance codified in ASC 810, Consolidations, which requires certain variable interest entities to be consolidated by the primary beneficiary of the entity in which it has a controlling financial interest. The Company identifies an entity as a variable interest entity if either: (1) the entity does not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) the entity’s equity investors lack the essential characteristics of a controlling financial interest. The Company performs ongoing qualitative assessments of its variable interest entities to determine whether the Company has a controlling financial interest in any variable interest entity and therefore is the primary beneficiary, and if it has the power to direct activities that impact the activities of the entity.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements. While such estimates and assumptions are not always unique to the basis of accounting being followed under GAAP, some are more applicable to the accounting basis being followed.
Under the Liquidation Basis, the accounting estimates that require management’s most significant, difficult and subjective judgments include: the determination that the liquidation was imminent; the estimated sales proceeds of our assets; estimated settlement amounts of our liabilities, the estimated revenue and operating expenses that are projected during dissolution and discount rates.
Significant estimates under the Going Concern Basis include: the valuation of royalty rights; product revenue recognition and allowances for customer rebates; the valuation of notes receivable and inventory; the assessment of recoverability of intangible assets and their estimated useful lives; the valuation and recognition of stock-based compensation; the valuation of warrants to acquire shares of common stock and the discount rates used in fair value measurements.
Additional significant estimates under both the Liquidation Basis and Going Concern Basis include the recognition and measurement of current and deferred income tax assets and liabilities, including amounts recoverable under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and the amount of uncertain tax positions.
Furthermore, the impact on accounting estimates and judgments on the Company’s financial condition and results of operations due to the 2019 coronavirus (“COVID-19”) has introduced additional uncertainties. Actual results could differ materially from those estimates.
Segment Reporting
Under ASC 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the entity’s chief operating decision maker, in deciding how to allocate resources and in assessing performance. Under the Going Concern Basis, the Company evaluated its operating segments in accordance with ASC 280, and had identified four reportable segments: Medical Devices, Strategic Positions, Pharmaceutical and Income Generating Assets.
Severance and retention
After the Company announced its monetization strategy, it recognized that its ability to execute on its plan and optimize returns to its stockholders depended to a large extent on its ability to retain the necessary expertise to effectively transact with respect to its assets. On December 21, 2019, the Compensation Committee of the Board adopted a Wind Down Retention Plan in which the Company’s executive officers and other employees who were participants in the Company’s Severance Plan were eligible to participate. Under the Wind Down Retention Plan, participants have been eligible to earn a retention benefit in consideration for their continued employment with the Company. The Wind Down Retention benefits are equivalent to previously disclosed compensation payments contemplated in connection with a change in control under the Company’s existing Severance Plan. Under the Wind Down Retention Plan, the Company has been obligated to pay a retention benefit to each participant upon termination of the participant’s employment with the Company either by the Company without cause or by the participant for good reason. The retention benefits are in lieu of (and not in addition to) any other severance compensation that were payable to the participant under the Company’s Severance Plan. In connection with the adoption of the Wind Down Retention Plan, a severance liability was being recorded over the remaining service period for the participating employees under the Going Concern Basis. Upon the adoption of the Liquidation Basis on September 1, 2020, all remaining estimated severance and retention costs were accrued. As of December 31, 2020, the Company has a remaining severance liability of $0.3 million, which is included in Compensation and benefit costs on the Company’s Consolidated Statement of Net Assets. Expenses associated with severance payments and accruals under the Going Concern Basis are reflected in Severance and retention on the Company’s Consolidated Statements of Operations for the eight months ended August 31, 2020.
The Wind Down Retention Plan also provides that, consistent with the existing terms of the Company’s Amended and Restated 2005 Equity Incentive Plan (the “Equity Plan”), the vesting of all outstanding equity awards held by participants as of the date the Wind Down Retention Plan was adopted are accelerated upon the earlier of: (i) a termination of the participant’s employment with the Company either by the Company without cause or by the participant for good reason or (ii) the consummation of a change in control (as defined in the Equity Plan) of the Company. In addition, the post-termination exercise period for all outstanding stock options are extended until their expiration date. In connection with the Board adopting the Plan of Liquidation in the first quarter of 2020, all of the outstanding and unvested stock options and restricted stock granted to the Company’s employees and executive officers, with the exception of certain outstanding awards under the 2016/20 Long-Term Incentive Plan, accelerated and vested under the change in control definition in the Equity Plan. The expense associated with the accelerated vesting, totaling $15.7 million, is reported as Severance and retention on the Company’s Consolidated Statements of Operations for the eight months ended August 31, 2020 under the Going Concern Basis.
Assets Held for Sale
Under the Going Concern Basis, assets and liabilities are classified as held for sale when all of the following criteria for a plan of sale have been met: (1) management, having the authority to approve the action, commits to a plan to sell the assets; (2) the assets are available for immediate sale, in their present condition, subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated; (4) the sale of the assets is probable and is expected to be completed within one year; (5) the assets are being actively marketed for a price that is reasonable in relation to their current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. When all of these criteria have been met, the assets and liabilities are classified as held for sale in the balance sheet. Assets classified as held for sale are reported at the lower of their carrying value or fair value less costs to sell. Depreciation and amortization of assets ceases upon designation as held for sale. The assets and liabilities held for sale are recorded on the Company’s Consolidated Balance Sheet as of December 31, 2019 as Assets held for sale and Liabilities held for sale, respectively.
Discontinued Operations
Under the Going Concern Basis, discontinued operations comprise those activities that were disposed of during the period or which were classified as held for sale at the end of the period, represent a separate major line of business or geographical area that can be clearly distinguished for operational and financial reporting purposes and represent a strategic shift that has or will have a major effect on the Company’s operations and financial results. The profits and losses are presented on the Consolidated Statements of Operations as discontinued operations. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
Cash Equivalents
The Company considers all highly liquid investments with initial maturities of three months or less at the date of purchase to be cash equivalents. The Company places its cash and cash equivalents with high credit quality financial institutions and, by policy, limits the amount of credit exposure in any one financial instrument.
Accounts Receivable
Under the Going Concern Basis the Company concluded that an allowance for doubtful accounts was not required as of December 31, 2019. On January 1, 2020 the Company adopted ASU No. 2016-13 on. See “Adopted Accounting Pronouncements” below for additional information.
Investments
As of December 31, 2020, the Company had an investment in a privately held company AEON BioPharma, Inc., including its ownership of Alphaeon 1, LLC, (formerly collectively referred to as “Alphaeon” and currently and collectively referred to as “AEON”). As of December 31, 2019, the Company’s investments were comprised of an investment in a privately held company and a publicly traded company, Evofem.
Under the Going Concern Basis, the Company’s investment in Evofem qualified for equity method accounting given its prior percentage ownership in Evofem and the ability to exercise significant influence. The Company elected the fair value method to account for its investment in Evofem as it believed it better reflected economic reality, the financial reporting of the investment and the current value of the asset. Changes in fair value of the Evofem equity investment are presented in the Consolidated Statements of Operations as discontinued operations. All shares of common stock of Evofem owned by PDL were distributed to the Company’s stockholders in May 2020. As of December 31, 2020, the Company held 3.3 million warrants convertible into Evofem common stock at an exercise price of $6.38 per share. Under the Going Concern Basis, the fair value of the warrants was estimated using recently quoted market prices of the underlying equity security and the Black-Scholes option pricing model. In addition to these inputs, under the Liquidation Basis, a discount is applied to the resulting value to reflect limited liquidity.
The Company’s equity security investment in AEON qualified to be measured at fair value under the Going Concern Basis, although the fair value of the investment was not readily determinable as AEON’s shares are not publicly traded. The Company evaluated the fair value of this investment by performing a qualitative assessment each reporting period. If the results of this qualitative assessment indicated that the fair value was less than the carrying value, the investment was written down to its fair value. This investment is included in Other assets on the Consolidated Statement of Net Assets as of December 31, 2020 and on the Company’s Consolidated Balance Sheet as Other long-term assets as of December 31, 2019.
Fair Value Measurements
The fair value of the Company’s financial instruments are estimates of the amounts that would be received if the Company were to sell an asset or the Company paid to transfer a liability in an orderly transaction between market participants at the measurement date or exit price. Under the Going Concern Basis, the assets and liabilities are categorized and disclosed in one of the following three categories:
Level 1 – based on quoted market prices in active markets for identical assets and liabilities;
Level 2 – based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are or can be corroborated by observable market data for substantially the full term of the assets or liabilities, and
Level 3 – based on unobservable inputs using management’s best estimate and assumptions when inputs are unavailable.
Notes Receivable and Other Long-Term Receivables
Under the Going Concern Basis, the Company accounted for its notes receivable at amortized cost, net of unamortized origination fees, if any, and adjusted for any impairment losses. Interest was accreted or accrued to “Interest revenue” using the effective interest method. When and if supplemental payments were received from certain of these notes and other long-term receivables, an adjustment to the estimated effective interest rate was affected prospectively.
The Company evaluated the collectability of both interest and principal for each note receivable and loan to determine whether it is impaired. A note receivable or loan was considered to be impaired when, based on current information and events, the Company determines it is probable that it will be unable to collect amounts due according to the existing contractual terms. When a note receivable or loan was considered to be impaired, the amount of loss was calculated by comparing the carrying value of the financial asset to the value determined by discounting the expected future cash flows at the loan’s effective interest rate or to the estimated fair value of the underlying collateral, less costs to sell, if the loan was collateralized and the Company expected repayment to be provided solely by the collateral. Impairment assessments required significant judgments and were based on significant assumptions related to the borrower’s credit risk, financial performance, expected sales, and estimated fair value of the collateral.
The Company recorded interest on an accrual basis and recognized it was earned in accordance with the contractual terms of the credit agreement, to the extent that such amounts were expected to be collected. When a note receivable or loan became past due, or if management otherwise did not expect that principal, interest, and other obligations due would be collected in full, the Company generally placed the note receivable or loan on an impaired status and ceased recognizing interest income on that note receivable or loan. Any interest payments received for notes receivable or loans on an impaired status were recognized as interest income on a cash basis.
The Company did not recognized any interest revenue for the CareView Communications, Inc. (“CareView”) note receivable while on impaired status. The last interest payments were received during the year ended December 31, 2018, when the Company recognized $2.3 million of interest revenue for the CareView note receivable as a result of cash interest payments made during the year.
As of December 31, 2020, the Company had one note receivable investment with a Liquidation Basis value of approximately $0.7 million. At December 31, 2019, under the Going Concern Basis, the Company had two note receivable investments, which were determined to be impaired, with a cumulative investment cost and fair value of approximately $52.1 million and $57.3 million, respectively, as of this date. During the eight months ended August 31, 2020 and the years ended December 31, 2019, and 2018, the Company did not recognize any losses on extinguishment of notes receivable.
There were no impairment losses on notes receivable for the eight months ended August 31, 2020. During the years ended December 31, 2019 and 2018, the Company recorded an impairment loss of $10.8 million and $8.2 million, respectively, related to the CareView note receivable. For additional information about the impairment loss recorded on the CareView note receivable, see Note 9, Notes and Other Long-Term Receivables.
Inventory
Under the Going Concern Basis, Inventory, which consisted of raw materials, work-in-process and finished goods, was stated at the lower of cost or net realizable value. The Company determined cost using the first-in, first-out method. Inventory levels were analyzed periodically and written down to their net realizable value if they had become obsolete, had a cost basis in excess of its expected net realizable value or were in excess of expected requirements. The Company analyzed current and future product demand relative to the remaining product shelf life to identify potential excess inventory. The Company built demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. The Company classified inventory as current on the Consolidated Balance Sheet when the Company expected inventory to be consumed for commercial use within the next twelve months.
Intangible Assets
Under the Going Concern Basis, intangible assets with finite useful lives consisted primarily of customer relationships, acquired technology and trademarks. They were amortized on a straight-line basis over their estimated useful lives, ranging from five years to 20 years, which was consistent with the estimated lives of the associated products. Such assets were reviewed for impairment when events or circumstances indicated that the carrying value of an asset was not recoverable. An impairment loss was recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition were less than its carrying amount. The amount of any impairment was measured as the difference between the carrying amount and the fair value of the impaired asset.
Property and Equipment
Under the Going Concern Basis, Property and equipment are stated at cost less accumulated depreciation. Depreciation was computed using the straight-line method over the following estimated useful lives:
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Leasehold improvements
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Lesser of useful life or term of lease
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Manufacturing equipment
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3-5 years
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Computer and office equipment
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3 years
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Transportation equipment
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3 years
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Furniture and fixtures
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7 years
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Equipment under lease
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Greater of lease term or 5-10 years
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Convertible Notes
The Company has previously issued convertible notes with settlement features that allow the Company to settle the notes by paying or delivering, as applicable, cash, shares of the Company’s common stock or a combination of cash and shares of its common stock, at the Company’s election. In accordance with accounting guidance under the Going Concern Basis for convertible debt instruments that may be settled in cash or other assets on conversion, the Company separated the principal balance between the fair value of the liability component and the common stock conversion feature using a market interest rate for a similar nonconvertible instrument at the date of issuance.
Financing Costs Related to Long-term Debt
Under the Going Concern Basis, costs associated with obtaining long-term debt were deferred and amortized over the term of the related debt using the effective interest method. Such costs are presented as reductions from the carrying amount of the long-term debt liability, consistent with debt discounts, on the Company’s Consolidated Balance Sheet.
Revenue Recognition
The reported results under the Going Concern Basis reflected the application of ASC 606, Revenue from Contracts with Customers (“ASC 606”).
Policy Elections and Practical Expedients Taken
Upon the Company’s adoption of ASC 606, it elected the following practical expedients:
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of product revenue.
The Company elected to apply the practical expedient that allows an entity to not adjust the promised amount of consideration in customer contracts for the effect of a significant financing component when the period between the transfer of product and services and payment of the related consideration is less than one year.
General
In accordance with ASC 606, revenue was recognized from the sale of products when a customer obtained control of promised products and services. The amount of revenue recognized reflects the consideration to which the Company expected to be entitled to receive in exchange for products and services. A five-step model was utilized to achieve the core principle and included the following steps: (1) identify the customer contract; (2) identify the contract’s performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when the performance obligations are satisfied.
The following is a description of principal activities - separated by reportable segments - from which the Company generated its revenue. For more detailed information about reportable segments, see Note 21, Segment Information.
Pharmaceutical
The Company’s Pharmaceutical segment consisted of revenue derived from sales of the Noden Products. Noden’s revenue is included in Loss from discontinued operations.
The agreement between Novartis and Noden DAC provided for various transition periods for development and commercialization activities relating to the Noden Products. For the period from July 1, 2016 through October 4, 2016, all of the Noden Products were distributed by Novartis under the terms of the Noden Purchase Agreement while transfers of the marketing authorization rights were pending. During this time, the Company presented revenue under the Novartis transition arrangement on a “net” basis and established a reserve for retroactive adjustment to the profit transfer with Novartis. As of the third quarter of 2018, Noden Pharma DAC completed the marketing authorization transfers for all territories.
In the United States, the duration of the profit transfer ran from July 1, 2016 through October 4, 2016. Beginning on October 5, 2016, Noden Pharma USA, Inc. distributed the Noden Products in the United States. At such time, the Company presented revenue for all sales in the United States on a “gross” basis, meaning product costs were reported separately and there was no fee to Novartis, and established a reserve for discounts and allowances further described below.
Initially, Novartis distributed the Noden Products on behalf of Noden DAC worldwide and Noden DAC received a profit transfer on such sales. Generally, the profit transfer to Noden DAC was defined as gross revenues less product cost and a low single-digit percentage fee to Novartis. The profit transfer terminated upon the transfer of the marketing authorization from Novartis to Noden DAC in each country. For the period from October 5, 2016 to August 31, 2017, Novartis continued to distribute the Noden Products outside of the United States. Beginning on September 1, 2017, Noden Pharma DAC began distributing the Noden Products to select countries outside the United States. Outside the United States, the profit transfer ended in the first quarter of 2018.
Except for the sales in certain countries outside of the United States preceding the final profit transfer that occurred in the first quarter of 2018, revenues of the Noden Products for the periods herein were recognized on a gross basis.
Noden USA launched an authorized generic of Tekturna in the United States in March 2019.
The Pharmaceutical segment principally generated revenue from products sold to wholesalers and distributors. Customer orders were generally fulfilled within a few days of receipt resulting in minimal order backlog. Contractual performance obligations were usually limited to transfer of the product to the customer. The transfer occurred either upon shipment or upon receipt of the product in certain countries outside the United States after considering when the customer obtained control of the product. In addition, in some countries outside of the United States, the Company sold product on a consignment basis where control was not transferred until the customer resold the product to an end user. At these points, customers were able to direct the use of and obtain substantially all of the remaining benefits of the product.
Sales to customers were initially invoiced at contractual list prices. Payment terms were typically 30 to 90 days based on customary practice in each country. Revenue was reduced from the list price at the time of recognition for expected chargebacks, discounts, rebates, sales allowances and product returns, which were collectively referred to as gross-to-net adjustments. These reductions were attributed to various commercial agreements, managed healthcare organizations and government programs such as Medicare, Medicaid, and the 340B Drug Pricing Program containing various pricing implications such as mandatory discounts, pricing protection below wholesaler list price and other discounts when Medicare Part D beneficiaries were in the coverage gap. These various reductions in the transaction price were estimated using either a most likely amount, in the case of prompt pay discounts, or expected value method for all other variable consideration and were reflected as liabilities and was settled through cash payments, typically within time periods ranging from a few months to one year. Significant judgment is required in estimating gross-to-net adjustments considering legal interpretations of applicable laws and regulations, historical experience, payer channel mix, current contract prices under applicable programs, unbilled claims, processing time lags and inventory levels in the distribution channel.
Customer Credits: The Company’s customers were offered various forms of consideration, including allowances, service fees and prompt payment discounts. The Company expected customers would earn prompt payment discounts and, therefore, the Company deducted the full amount of these discounts from total product sales when revenues were recognized. Service fees were also deducted from total product sales as they were earned.
Rebates and Discounts: Allowances for rebates included mandated discounts under the Medicaid Drug Rebate Program in the United States and mandated discounts in the European Union (“EU”) in markets where government-sponsored healthcare systems are the primary payers for healthcare. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or legal requirements with public sector benefit providers. The accrual for rebates was based on negotiated discount rates and expected utilization as well as historical data. Estimates for expected utilization of rebates were based on data received from the customers. Rebates were generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters’ unpaid rebates.
Chargebacks: Chargebacks are discounts that occur when certain contracted customers, which currently consist primarily of group purchasing organizations, Public Health Service institutions, non-profit clinics, and Federal government entities purchasing via the Federal Supply Schedule, purchased directly from the Company’s wholesalers. Contracted customers generally purchased the product at a discounted price. The wholesalers, in turn, charged back to the Company the difference between the price initially paid by the wholesalers to the Company and the discounted price paid by the contracted customers. In addition to actual chargebacks received, the Company maintained an accrual for chargebacks based on the estimated contractual discounts on products sold for which the chargeback had not been billed.
Medicare Part D Coverage Gap: Medicare Part D prescription drug benefit mandates manufacturers to fund 70% in 2020 and 2019 and 50% in 2018 of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Estimates for the expected Medicare Part D coverage gap were based on historical invoices received and in part from data received from the Company’s customers. Funding of the coverage gap was generally invoiced and paid in arrears.
Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The Company accrues a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.
Returns: Returns were generally estimated and recorded based on historical sales and returns information. Products that exhibited unusual sales or return patterns due to dating, competition or other marketing matters were specifically investigated and analyzed as part of the accounting for sales returns.
Reserves for chargebacks, discounts, rebates, sales allowances and product returns are included within Liabilities held for sale in the Company’s Consolidated Balance Sheet as of December 31, 2019.
For licenses that were bundled with other promises, the Company utilized judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front license fees. The Company evaluated the measure of progress each reporting period and, if necessary, adjusted the measure of performance and related revenue recognition.
Medical Devices
The Medical Devices segment principally generated revenue from the sale and lease of the LENSAR® Laser System and the sale of other related products and services prior to the spin-off of LENSAR in October 2020.
For bundled packages, which included the sale or lease of a LENSAR® Laser System and provision of other products and services, the Company accounted for individual products and services separately if they were distinct—i.e. if a product or service was separately identifiable from other items in the bundled package and if the customer could benefit from it on its own or with other resources that are readily available to the customer. The LENSAR Laser System, training and installation services were one performance obligation. The other products and services, including PIDs, procedure licenses, and extended warranty services, which were either sold together with the LENSAR Laser System or on a standalone basis, were all accounted for as separate performance obligations. The transaction price of bundled packages was allocated to each performance obligation on a relative standalone selling price basis. Standalone selling prices were based on observable prices at which the Company separately sold the products or services. If a standalone selling price was not directly observable, the Company estimated the selling price using available observable information.
The Company recognized revenue as the performance obligations are satisfied by transferring control of the product or service to a customer, as described below.
Product Revenue. The Company recognized revenue for the sale of the following products at a point in time:
Equipment. The Company’s LENSAR Laser System sales were recognized as Product revenue when the Company transferred control of the system. This usually occurred after the customer signed a contract, LENSAR installed the system, and LENSAR performed the requisite training for use of the system for direct customers. LENSAR Laser System sales to distributors were recognized as revenue upon shipment as they did not require training and installation.
PID and Procedure Licenses. The LENSAR Laser System requires both a PID and a procedure license to perform each procedure. The Company recognized Product revenue for PIDs when the Company transferred control of the PID. The Company recognized Product revenue for procedure licenses at the point in time when control of the procedure license was transferred to the customer. A procedure license represents a one-time right to utilize the LENSAR Laser System surgical application in connection with a surgery procedure. For the sale of PIDs and procedure licenses, the Company had the option to offer volume discounts to certain customers. To determine the amount of revenue that should be recognized at the time control over these products transferred to the customer, the Company estimated the average per unit price, net of discounts.
Service Revenue. The Company offered an extended warranty that provided additional maintenance services beyond the standard limited warranty. The Company recognized Service revenue from the sale of extended warranties over the warranty period on a ratable basis as the Company stood ready to provide services as needed. Customers had the option of renewing the warranty period, which was considered a new and separate contract.
Lease Revenue. For LENSAR Laser System operating leases, the Company recognized lease revenue over the length of the lease in accordance with ASC Topic 840, Leases, through December 31, 2018 and recognized lease revenue in accordance with ASC Topic 842, Leases, after January 1, 2019. For additional information regarding accounting for leases, see the Leases section within this footnote below and Note 10, Leases.
Contract Costs
The Company offered a variety of commission plans to the Company’s salesforce. Certain compensation under these plans was earned by sales representatives solely as a result of obtaining a customer contract. These are considered incremental costs of obtaining a contract and were eligible for capitalization under ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers, to the extent they were recoverable. For goods or services that were to be delivered over a period that was longer than one year, incremental costs of obtaining a contract were capitalized and expensed over the period the related revenue was recognized. The Company elected not to defer costs related to goods or services that were to be delivered over a period that was one year or less.
Significant Financing Component
The Company provided extended payment terms to certain customers that represented a significant financing component. The Company adjusted the amount of promised consideration for the time value of money using its discount rate and recognized interest income separate from the revenue recognized on contracts with customers.
Limited Warranty Obligations
The Company offered limited warranties on the Company’s products which provided the customer assurance that the product would function as the parties intended because it complied with agreed-upon specifications; therefore, these assurance-type warranties were not treated as a separate revenue performance obligation and were accounted for as guarantees under U.S. GAAP. The Company regularly reviewed its warranty liability and updated those balances based on historical warranty cost trends.
Income Generating Assets
Under the Going Concern Basis, for licenses of intellectual property, if the license to the Company’s intellectual property was determined to be distinct from the other performance obligations identified in the arrangement, the Company recognized revenues from non-refundable, up-front fees allocated to the license when the license was transferred to the customer and the customer was able to use and benefit from the license.
In January 2018, DFM, LLC, a wholly-owned subsidiary of the Company, granted an exclusive license related to certain Direct Flow Medical, Inc. assets in exchange for $0.5 million in cash and up to $2.0 million in royalty payments. The $0.5 million
payment was accounted for in accordance with ASC 606 under which the full cash payment was recognized as revenue in the first quarter of 2018 as DFM, LLC had fulfilled its performance obligation under the agreement. In September 2019, the remaining assets of DFM, LLC were sold for $5.0 million.
Queen et al. Royalty Revenues
Under the Company’s license agreements related to the Queen et al. patents, the Company received royalty payments based upon its licensees’ net sales of covered products. Under the Going Concern Basis, royalties qualify for the sales-and-usage exemption under ASC 606 as (i) royalties are based strictly on the sales-and-usage by the licensee; and (ii) a license of intellectual property is the sole or predominant item to which such royalties relate. Based on this exemption, these royalties were earned under the terms of a license agreement in the period the products were sold by the Company's partner and the Company had a present right to payment. Generally, under these agreements, the Company received royalty reports from its licensees approximately one quarter in arrears; that is, generally in the second month of the quarter after the licensee has sold the royalty-bearing product. The Company recognized royalty revenues when it could reliably estimate such amounts and collectability was reasonably assured. Under this accounting policy, the royalty revenues the Company reported were not based upon estimates, and such royalty revenues were typically reported in the same period in which the Company received payment from its licensees.
Although the last of the Queen et al. patents expired in December 2014, the Company has received royalties beyond expiration based on the terms of its licenses and its legal settlement. Under the terms of the legal settlement between Genentech, Inc. (“Genentech”) and the Company, the first quarter of 2016 was the last period for which Genentech paid royalties to the Company for Avastin®, Herceptin®, Xolair®, Perjeta® and Kadcyla®. Other products from the Queen et al. patent licenses, such as Tysabri®, entitled the Company to royalties following the expiration of its patents with respect to sales of licensed product manufactured prior to patent expiry in jurisdictions providing patent protection licenses. In November 2017, the Company was notified by Biogen, Inc. that product supply for Tysabri® that was manufactured prior to patent expiry and for which the Company would receive royalties, had been extinguished in the United States and was rapidly being reduced in other countries. As a result, royalties from product sales of Tysabri were consecutively lower in 2018 and 2019 during which time they ceased.
Royalty Rights - At Fair Value
Under the Going Concern Basis, the Company accounted for its investments in royalty rights at fair value with changes in fair value presented in earnings. The fair value of the investments in royalty rights was determined by using a discounted cash flow analysis related to the expected future cash flows to be received. These assets were classified as Level 3 assets within the fair value hierarchy, as the Company’s valuation estimates utilized significant unobservable inputs, including estimates as to the probability and timing of future sales of the related products. Transaction-related fees and costs were expensed as incurred.
Under the Going Concern Basis, the changes in the estimated fair value from investments in royalty rights along with cash receipts in each reporting period were presented together on the Company’s Consolidated Statements of Operations as Loss from discontinued operations before income taxes.
Under the Going Concern Basis, realized gains and losses on royalty rights were recognized as they were earned and when collection was reasonably assured. Royalty Rights revenue was recognized over the respective contractual arrangement period. Critical estimates included product demand and market growth assumptions, inventory target levels, product approval, pricing assumptions and the impact of competition from other branded or generic products. Factors that could cause a change in estimates of future cash flows included a change in estimated market size, a change in pricing strategy or reimbursement coverage, a delay in obtaining regulatory approval, a change in dosage of the product a change in the number of treatments and the entrants of new competitors or generic products.
For each arrangement, the Company is entitled to royalty payments based on revenue generated by the net sales of the product.
Research and Development
Under the Going Concern Basis, the Company expensed research and development costs as incurred. Research and development expenses consisted primarily of engineering, product development, clinical studies to develop and support the Company’s products, regulatory expenses, and other costs associated with products and technologies that were in development. Research and development expenses included employee compensation, including stock-based compensation, supplies, consulting, prototyping, testing, materials, travel expenses, and depreciation.
Foreign Currency Translation
Under the Going Concern Basis, the Company used the U.S. dollar predominately as the functional currency of its foreign subsidiaries. For foreign subsidiaries where the U.S. dollar was the functional currency, gains and losses from remeasurement of foreign currency balances into U.S. dollars are included in the Consolidated Statements of Operations. The aggregate net (losses) gains resulting from foreign currency transactions and remeasurement of foreign currency balances into U.S. dollars that were included in the Consolidated Statements of Operations amounted to a gain of $0.2 million and a loss of $0.5 million and $0.7 million for the eight months ended August 31, 2020 and the years ended December 31, 2019 and 2018, respectively.
Comprehensive Loss
Under the Going Concern Basis, comprehensive loss was comprised of net loss adjusted for other comprehensive loss, using the specific identification method, which included unrealized gains and losses on the Company’s investments in available-for-sale securities, net of tax, which are excluded from the Company’s net loss.
Income Taxes
The provision for income taxes is determined using the asset and liability approach. Tax laws require items to be included in tax filings at different times than the items are reflected in the Consolidated Financial Statements. A current liability is recognized for the estimated taxes payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are adjusted for enacted changes in tax rates and tax laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Any interest and penalties on uncertain tax positions are included within the tax provision.
Leases
General
In February 2016, the FASB issued ASU No. 2016-02, Leases, that supersedes ASC 840, Leases. Subsequently, the FASB issued several updates to ASU No. 2016-02, codified in ASC Topic 842 (“ASC 842”). The Company adopted ASC 842, Leases, on January 1, 2019 using the modified retrospective method for all leases not substantially completed as of the date of adoption. The reported results for the eight months ended August 31, 2020 and the year ended December 31, 2019 reflect the application of ASC 842 guidance while the reported results for the year ended December 31, 2018 was prepared under the guidance of ASC 840, which is also referred to herein as “legacy GAAP” or the “previous guidance”. The cumulative impact of the adoption of ASC 842 was not material, therefore, the Company did not record any adjustments to retained earnings. As a result of adopting ASC 842, the Company recorded operating lease right-of-use (“ROU”) assets of $2.1 million and operating lease liabilities of $2.1 million, primarily related to corporate office leases, based on the present value of the future lease payments on the date of adoption. Changes to lessor accounting focused on conforming with certain changes made to lessee accounting and the recently adopted revenue recognition guidance. The adoption of ASC 842 did not materially change how the Company accounted for lessor arrangements.
Under the Going Concern Basis, the Company determined if an arrangement was a lease or contained an embedded lease at inception if it contained the right to control the use of an identified asset under a leasing arrangement with an initial term greater than 12 months. The Company determined whether a contract conveyed the right to control the use of an identified asset for a period of time if the contract contained both the right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. The Company has lease arrangements with lease and non-lease components, which were accounted for separately.
Policy Elections and Practical Expedients Taken
For leases that commenced before the effective date of ASC 842, the Company elected the practical expedients to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases.
The Company adopted a policy of expensing short-term leases, defined as 12 months or less, as incurred.
The Company’s policy was to exclude from the consideration in a lessor contract all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific lease revenue-producing transaction and collected by the Company from a lessee.
Lessee arrangements
Under the Going Concern Basis, lessee operating leases are included in Other assets, Accrued liabilities, and Other long-term liabilities in the Company’s Consolidated Balance Sheet. The Company does not have lessee financing leases.
Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Under the Going Concern Basis, operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company used the implicit rate when readily determinable at lease inception. As most of the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company’s remaining lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments was recognized on a straight-line basis as operating expense in the Consolidated Statements of Operations over the lease term.
For lease arrangements with lease and non-lease components where the Company is the lessee, the Company separately accounted for lease and non-lease components, which consists primarily of taxes and common area maintenance costs. Non-lease components were expensed as incurred.
Lessor arrangements
The Company leased medical device equipment to customers in operating lease arrangements generated from its Medical Devices segment.
For lease arrangements with lease and non-lease components where the Company was the lessor, the Company allocated the contract’s transaction price (including discounts) to the lease and non-lease components on a relative standalone selling price basis using the Company’s best estimate of the standalone selling price of each distinct product or service in the contract. Lease elements generally included a LENSAR Laser System, while non-lease elements generally included extended warranty services, PIDs and procedure licenses. The stand-alone selling prices for the extended warranty services, PIDs and procedure licenses were determined based on the prices at which the Company separately sold such products and services. The LENSAR Laser System stand-alone selling prices were determined using the expected cost plus a margin approach. Allocation of the transaction price was determined at the inception of the lease arrangement. The Company’s leases primarily consisted of leases with fixed lease payments. For those leases with variable lease payments, the variable lease payment was typically based upon use of the leased equipment or the purchase of procedure licenses and PIDs used with the leased equipment. Non-lease components were accounted for under ASC 606. For additional information regarding ASC 606, see Note 20, Revenue from Contracts with Customers.
Some leases included options to extend the leases on a month-to-month basis if the customer does not notify the Company of the intention to return the equipment at the end of the lease term. The Company typically did not offer options to terminate the leases before the end of the lease term. A new contract was generated if a customer intended to continue using the equipment under the initial term and the new contract term was not included in the initial lease term.
In determining whether a transaction should be classified as a sales-type or operating lease, the Company considered the following criteria at lease commencement: (1) whether title of the system transfers automatically or for a nominal fee by the end of the lease term, (2) whether the present value of the minimum lease payments equals or exceeds substantially all of the fair value of the leased system, (3) whether the lease term is for the major part of the remaining economic life of the leased system, (4) whether the lease grants the lessee an option to purchase the leased system that the lessee is reasonably certain to exercise, and (5)
whether the underlying system is of such a specialized nature that it is expected to have no alternative use to the Company at the end of the lease term. If any of these criteria were met, the lease was classified as a sales-type lease. If none of these criteria are met the lease was classified as an operating lease. The Company does not have any sales-type leases.
For operating leases, rental income was recognized on a straight-line basis over the lease term. The cost of customer-leased equipment was recorded within Property and equipment, net in the accompanying Consolidated Balance Sheet and depreciated over the equipment’s estimated useful life. Depreciation expense associated with the leased equipment under operating lease arrangements was reflected in Cost of product revenue in the accompanying Consolidated Statements of Operations for the eight months ended August 31, 2020 and the year ended December 31, 2019. Some of the Company’s operating leases included a purchase option for the customer to purchase the leased asset at the end of the lease arrangement. The purchase price did not qualify as a bargain purchase option. The Company managed its risk on its investment in the equipment through pricing and the term of the leases. Lessees did not provide residual value guarantees on leased equipment. Equipment returned to the Company could be leased or sold to other customers. Initial direct costs were deferred and recognized over the lease term.
Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The guidance amended the impairment model to utilize an expected loss methodology in place of the incurred loss methodology, resulting in more timely recognition of losses. The Company adopted ASU No. 2016-13 on January 1, 2020 using a modified retrospective approach. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. As a consequence of adopting ASU 2016-13, the Company’s accounts receivable accounting policy under the Going Concern Basis was updated, as follows:
Accounts and Notes Receivable
The Company makes estimates of the collectability of accounts receivable. In doing so, the Company analyzes historical bad debt trends, customer credit worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for credit losses. Amounts are charged off against the allowance for credit losses when the Company determines that recovery is unlikely and the Company ceases collection efforts. The Company applies the practical expedient for its collateral-dependent notes receivable. Estimated credit losses are based on the fair value of the collateral (less costs to sell, as applicable).
In April 2020, the FASB issued a staff question-and-answer document, “Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic” (the “COVID-19 Q&A”), to address certain frequently asked questions pertaining to lease concessions arising from the effects of the COVID-19 pandemic. Existing lease guidance requires entities to determine if a lease concession was a result of a new arrangement reached with the lessee (which would be addressed under the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (which would not fall under the lease modification framework). The COVID-19 Q&A clarifies that entities may elect to not evaluate whether lease-related relief granted in light of the effects of COVID-19 is a lease or obligations of the lease. This election is available for concessions that result in the total payments required by the modified contract being substantially the same or less than the total payments required by the original contract.
As a result of the COVID-19 pandemic, LENSAR entered into agreements with 23 customers through which LENSAR agreed to waive monthly rental and minimum monthly license fees ranging from one to four months for an aggregate of $0.9 million of revenue for the eight months ended August 31, 2020, consisting of $0.5 million in Product revenue, $0.3 million in Lease revenue and $0.1 million in Service revenue. In return for these concessions the related contracts were extended by the same number of months waived. No accounts receivable or notes receivable amounts were deemed uncollectible due to COVID-19 during the 2020 periods presented herein; however, the Company considered the effects of COVID-19 in estimating its credit losses for the period.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement. The new guidance modifies disclosure requirements related to fair value measurement. The Company adopted ASU No. 2018-13 on January 1, 2020. The adoption did not have an effect on the Consolidated Financial Statements on the adoption date and no adjustment to prior year Consolidated Financial Statements was required.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software. The new guidance reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the
requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The Company adopted ASU No. 2018-15 on January 1, 2020 using the prospective transition option. The adoption did not have an effect on the Consolidated Financial Statements on the adoption date and no adjustment to prior year Consolidated Financial Statements was required.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU will be effective for public companies for fiscal years, and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings/(deficit) in the period of adoption. The Company does not expect this guidance to have a significant impact on its financial statements.
3. Net Assets in Liquidation
Upon adoption of the Liquidation Basis on September 1, 2020, the Company estimated the net assets in liquidation, which represents the expected future cash flows related to its remaining assets, liabilities and operating costs through dissolution. The actual cash inflows and outflows may differ materially from the estimated amounts.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Consolidated Net Equity, as of August 31, 2020
|
|
$
|
425,214
|
|
|
|
|
Effect of adopting the liquidation basis of accounting:
|
|
|
Change in the estimated value of royalty rights (1)
|
|
13,770
|
|
Change in the receivable from the sale of Noden (2)
|
|
9,056
|
|
Increase in intangible assets (3)
|
|
28,702
|
|
Change in the estimated value of other assets (4)
|
|
(4,813)
|
|
Estimated liquidation and future operating costs (5)
|
|
(25,376)
|
|
Total effect of adopting the liquidation basis of accounting
|
|
21,339
|
|
|
|
|
Net assets in liquidation, as of September 1, 2020
|
|
$
|
446,553
|
|
_______________
(1) The royalty rights consist of Assertio and University of Michigan (“U-M”). The Assertio royalties are valued using undiscounted estimated cash receipts until the estimated date of sale of June 30, 2021, plus a discounted value of the remaining estimated cash flows as an estimate of the expected cash consideration from the sale of these royalty rights at this time. The Company expects it will retain the royalty rights for the U-M royalty asset until its expiration in September 2022. As such, it is valued as the sum of its undiscounted cash receipts until the end of the agreement. Previously, under the Going Concern Basis, royalty rights were valued using discounted cash flow models, see Note 8, Fair Value Measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
August 31, 2020
|
|
September 1, 2020
|
|
Change
|
|
|
(Going Concern Basis)
|
|
(Liquidation Basis)
|
|
|
|
|
|
|
|
|
|
Assertio
|
|
$
|
200,463
|
|
|
$
|
211,626
|
|
|
$
|
11,163
|
|
U-M
|
|
17,450
|
|
|
20,057
|
|
|
2,607
|
|
Total
|
|
$
|
217,913
|
|
|
$
|
231,683
|
|
|
$
|
13,770
|
|
(2) Adjustments reflect Liquidation Basis which does not discount future estimated cash receipts. Previously, under the Going Concern Basis we had estimated the fair value of Noden, as an asset held for sale, using a discounted cash flow model, see Note 8, Fair Value Measurements.
(3) The increase in intangible assets represents the difference between the existing assets and liabilities of LENSAR upon adoption of Liquidation Basis and its enterprise value that was distributed to PDL shareholders in the spin-off of LENSAR on October 1, 2020. The enterprise value was determined through an analysis of comparable public companies combined with cash flow forecasts.
(4) Adjustments to other assets include a liquidity discount for the Evofem warrants and the write-off of certain assets that will not be converted to cash such as prepaid expenses, fixed assets and right of use assets.
(5) Represents estimated future expenses related to operating the business through dissolution and settlement of future liabilities. Amounts include estimated compensation, legal and other professional fees, insurance, taxes, estimated costs to dispose of our assets and other miscellaneous expenses. Certain of the estimated costs to dispose of our assets had already been accrued under the Going Concern Basis and were presented net within our assets held for sale.
4. Discontinued Operations Classified as Assets Held for Sale
As a result of the above-described monetization strategy and subsequent efforts to monetize the Company’s key assets, representing a strategic shift in the operations of the Company, the assets held for sale and discontinued operations criteria were met for the Company’s royalty assets (included in the Income Generating Assets segment) and its Noden subsidiaries (Pharmaceutical segment) during the first quarter of 2020. The discontinued operations criteria were met for the Company’s investment in Evofem (Strategic Positions segment) during the second quarter of 2020 after the Company distributed all of its shares of common stock of Evofem to the Company’s stockholders. The historical financial results of the investment in Evofem, royalty assets and Noden are reflected in the Company’s consolidated financial statements as discontinued operations for all Going Concern Basis periods presented herein, and assets and liabilities were retrospectively reclassified as assets and liabilities held for sale.
On July 30, 2020, the Company signed a definitive agreement for the sale of the Company’s interest in Noden DAC and Noden USA to CAT Capital Bidco Limited (“Stanley Capital”). In accordance with the terms of the agreement, the Company expects to receive consideration of up to $52.8 million. Stanley Capital made an initial cash payment to the Company of $12.2 million on September 9, 2020, the closing date of the transaction. The Company is also entitled to recover $0.5 million related to value-added tax (“VAT”) for inventory purchases from Novartis. The agreement provides for an additional $33.0 million to be paid to the Company in twelve equal quarterly installments from January 2021 to October 2023. An additional $3.9 million will be paid in four equal quarterly installments from January 2023 to October 2023. The agreement also provides for the potential for additional contingent payments to the Company. The Company is entitled to receive $2.5 million upon Stanley Capital or any of its affiliates entering into a binding agreement for a specified transaction within one year of the closing date. The Company is also entitled to 50% of a license fee from a third party distributor within 10 days of receipt by Noden. Upon closing, the Company recorded a gain of $0.2 million. In connection with the closing of the transaction, the guaranty agreement between Novartis and the Company, which guaranteed certain payments owed to Novartis by Noden, was terminated. As of December 31, 2020, under the Liquidation Basis, the remaining receivable from the sale of Noden was $39.4 million and is included in “Receivables from asset sales” in the Statement of Net Assets in Liquidation. Refer to Note 3, Net Assets in Liquidation, for a discussion of the valuation of the Noden asset sale receivable under the Liquidation Basis.
On August 31, 2020, the Company announced the signing and closing of a definitive agreement for the sale of its royalty interests for Kybella®, Zalviso®, and Coflex® to SWK Funding, LLC, a wholly owned subsidiary of SWK Holdings Corporation, for $4.35 million in cash.
Components of amounts reflected in Loss from discontinued operations are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended August 31,
|
|
Year Ended December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
|
|
Product revenue, net
|
|
$
|
29,479
|
|
|
$
|
55,093
|
|
|
$
|
80,796
|
|
Royalty rights - change in fair value
|
|
(8,804)
|
|
|
(31,042)
|
|
|
85,287
|
|
Total revenues
|
|
20,675
|
|
|
24,051
|
|
|
166,083
|
|
Operating expenses
|
|
|
|
|
|
|
Cost of product revenue (excluding intangible asset amortization and impairment)
|
|
17,576
|
|
|
36,343
|
|
|
34,906
|
|
Amortization of intangible assets
|
|
389
|
|
|
5,016
|
|
|
14,536
|
|
General and administrative
|
|
6,105
|
|
|
7,264
|
|
|
11,720
|
|
Sales and marketing
|
|
257
|
|
|
1,675
|
|
|
10,800
|
|
Research and development
|
|
—
|
|
|
(41)
|
|
|
196
|
|
Impairment of intangible assets
|
|
—
|
|
|
22,490
|
|
|
152,330
|
|
Change in fair value of anniversary payment and contingent consideration
|
|
—
|
|
|
—
|
|
|
(42,000)
|
|
Total operating expenses
|
|
24,327
|
|
|
72,747
|
|
|
182,488
|
|
Operating loss from discontinued operations
|
|
(3,652)
|
|
|
(48,696)
|
|
|
(16,405)
|
|
Non-operating (expense) income, net
|
|
|
|
|
|
|
Equity affiliate - change in fair value
|
|
(25,365)
|
|
|
36,402
|
|
|
—
|
|
Loss on classification as held for sale
|
|
(28,904)
|
|
|
—
|
|
|
—
|
|
Total non-operating (expense) income, net
|
|
(54,269)
|
|
|
36,402
|
|
|
—
|
|
Loss from discontinued operations before income taxes
|
|
(57,921)
|
|
|
(12,294)
|
|
|
(16,405)
|
|
Income tax (benefit) expense from discontinued operations
|
|
(23,006)
|
|
|
1,303
|
|
|
19,689
|
|
Loss from discontinued operations
|
|
$
|
(34,915)
|
|
|
$
|
(13,597)
|
|
|
$
|
(36,094)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying amounts of the major classes of assets reported as “Assets held for sale” on the Company’s Consolidated Balance Sheet consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$
|
24,469
|
|
Accounts receivable, net
|
|
|
|
6,993
|
|
Inventory
|
|
|
|
31,712
|
|
Prepaid and other current assets
|
|
|
|
7,192
|
|
Property and equipment, net
|
|
|
|
2,960
|
|
Royalty rights - at fair value
|
|
|
|
266,196
|
|
Investment in equity affiliate
|
|
|
|
82,267
|
|
Intangible assets, net
|
|
|
|
10,112
|
|
Other assets
|
|
|
|
15,956
|
|
Total assets held for sale
|
|
|
|
$
|
447,857
|
|
The carrying amounts of the major classes of liabilities reported as “Liabilities held for sale” on the Company’s Consolidated Balance Sheet consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Accounts payable
|
|
|
|
$
|
14,695
|
|
Accrued liabilities
|
|
|
|
16,400
|
|
Other long-term liabilities
|
|
|
|
120
|
|
Total liabilities held for sale
|
|
|
|
$
|
31,215
|
|
5. Investment in Evofem Biosciences, Inc.
On April 10, 2019, the Company entered into a securities purchase agreement with Evofem and two other purchasers, pursuant to which the Company purchased $60.0 million of Evofem securities in a private placement. The transaction was structured in two tranches.
The first tranche closed on April 11, 2019, pursuant to which the Company invested $30.0 million to purchase 6,666,667 shares of Evofem common stock at $4.50 per share and was also issued warrants to purchase up to 1,666,667 shares of Evofem common stock. The warrants are exercisable beginning six months after the issuance date for a period of seven years from the issuance date at an exercise price of $6.38 per share.
The second tranche closed on June 10, 2019, pursuant to which the Company invested an additional $30.0 million to purchase an additional 6,666,667 shares of Evofem common stock at $4.50 per share and was also issued warrants to purchase up to an additional 1,666,667 shares of Evofem common stock with the same terms as the warrants issued in the first tranche.
On May 21, 2020, the Company announced that, pursuant to its Plan of Liquidation, it had completed a liquidation distribution of all 13,333,334 shares of common stock of Evofem it owned to the Company’s stockholders, which represented approximately 26.7% of the outstanding shares of Evofem common stock as of the close of business on May 15, 2020. The distribution was recorded as a noncash distribution of $64.4 million, reducing retained earnings.
Following the distribution, the Company continues to hold warrants to purchase up to 3,333,334 shares of Evofem common stock. As of December 31, 2020, the Evofem warrants were valued under the Liquidation Basis at $1.8 million and are classified as “Other assets” on the Company’s Consolidated Statement of Net Assets. The Evofem common stock and the Evofem warrants are included in “Long-term assets held for sale” on the Company’s December 31, 2019 Consolidated Balance Sheet. See to Note 3, Net Assets in Liquidation and Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
For the eight months ended August 31, 2020, the Company recorded a loss of $25.4 million on its investment in Evofem included in Loss from discontinued operations before income taxes on the Company’s Consolidated Statement of Operations, of which $17.9 million was related to the realized loss from the change in fair value of the Evofem common stock and $7.5 million was related to the unrealized loss from the change in fair value of the Evofem warrants.
For the year ended December 31, 2019, the Company had an unrealized gain of $36.4 million on its investment in Evofem, of which $31.6 million was related to the change in fair value of the Evofem common stock and $4.8 million was related to the change in fair value of the Evofem warrants.
6. Cash and Cash Equivalents
As of December 31, 2020 and 2019, the Company had invested its excess cash balances primarily in cash and money market funds. The fair values of cash equivalents approximate their carrying values due to the short-term nature of such financial instruments.
The following table summarizes the Company’s cash and cash equivalents by significant investment category reported as cash and cash equivalents on the Consolidated Statement of Net Assets and the Consolidated Balance Sheet as of December 31, 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019 (1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Liquidation Basis)
|
|
(Going Concern Basis)
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
$
|
75,681
|
|
|
$
|
37,718
|
|
|
|
|
|
|
|
Money market funds
|
|
|
|
|
|
|
|
|
|
51,161
|
|
|
131,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
126,842
|
|
|
$
|
168,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________
(1) The amounts exclude $24.5 million of cash at Noden classified as held for sale as of December 31, 2019. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
(2) The table above includes amounts held by LENSAR as of December 31, 2019. LENSAR was spun-off on October 1, 2020.
The Company recognized approximately $0.8 million of gains on sales of available-for-sale securities in the year ended December 31, 2018. As of December 31, 2020 and 2019, the Company did not have any available-for-sale securities.
7. Inventories
Inventories under the Going Concern Basis consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Raw materials
|
|
|
|
$
|
3,739
|
|
Work in process
|
|
|
|
1,170
|
|
Finished goods
|
|
|
|
3,152
|
|
Total inventories (1) (2)
|
|
|
|
$
|
8,061
|
|
________________
(1) The amounts exclude $31.7 million of inventory at Noden classified as held for sale as of December 31, 2019. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information. Noden was sold in September 2020.
(2) The table above includes amounts held by LENSAR as of December 31, 2019. LENSAR was spun-off on October 1, 2020.
8. Fair Value Measurements
The fair value of the Company’s financial instruments under the Going Concern Basis are estimates of the amounts that would be received if the Company were to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The assets and liabilities are categorized and disclosed in one of the following three categories:
Level 1 – based on quoted market prices in active markets for identical assets and liabilities;
Level 2 – based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 – based on unobservable inputs using management’s best estimate and assumptions when inputs are unavailable.
Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The following table presents the fair value of the Company’s financial instruments measured at fair value on a recurring basis by level within the valuation hierarchy under the Going Concern Basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
|
|
|
|
|
|
|
$
|
131,264
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
131,264
|
|
Corporate securities (1)
|
|
|
|
|
|
|
|
|
|
82,267
|
|
|
—
|
|
|
—
|
|
|
82,267
|
|
Warrants (2)
|
|
|
|
|
|
|
|
|
|
—
|
|
|
14,152
|
|
|
—
|
|
|
14,152
|
|
Royalty rights - at fair value (3)
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
266,196
|
|
|
266,196
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
213,531
|
|
|
$
|
14,152
|
|
|
$
|
266,196
|
|
|
$
|
493,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
___________________
(1) Corporate securities are classified as “Long-term assets held for sale” on the December 31, 2019 Consolidated Balance Sheet.
(2) Warrants consist of Evofem warrants, which are classified as “Long-term assets held for sale” and CareView Communications, Inc. (“CareView”) warrants, classified as “Other assets” on the Consolidated Balance Sheet as of December 31, 2019.
(3) Royalty rights are classified as “Long-term assets held for sale” on the Consolidated Balance Sheet as of December 31, 2019.
Money Market Funds - The fair values of cash equivalents approximate their carrying values due to the short-term nature of such financial instruments.
Corporate Securities - Corporate securities consisted of common stock shares of Evofem. For additional information, see Note 4, Discontinued Operations Classified as Assets Held for Sale, and Note 5, Investment in Evofem Biosciences, Inc.
Warrants - Warrants consist of rights to purchase shares of common stock in Evofem and CareView, see Note 4, Discontinued Operations Classified as Assets Held for Sale, Note 5, Investment in Evofem Biosciences, Inc., and Note 9, Notes and Other Long-Term Receivables. The fair value of the warrants is based upon recently quoted market prices of the underlying equity security and the Black-Scholes option pricing model and adjusted by an estimated discount to sell.
Royalty Rights - At Fair Value
During the quarter ended March 31, 2020, it was determined that the Company’s royalty rights assets met the criteria as an asset held for sale, see Note 4, Discontinued Operations Classified as Assets Held for Sale. Assets classified as held for sale are reported at the lower of their carrying value or fair value less costs to sale under the Going Concern Basis. The Company historically accounted for such royalty rights assets at fair value, which, as discussed below, primarily reflected the expected future cash to be received but did not consider the expected costs to sell the assets. The Company’s royalty rights assets are comprised of several separate and distinct royalty rights.
Assertio (Depomed) Royalty Agreement
On October 18, 2013, the Company entered into the Royalty Purchase and Sale Agreement (the “Assertio Royalty Agreement”) with Assertio Therapeutics, Inc. (formerly known as Depomed, Inc.), and Depo DR Sub, LLC (together, “Assertio”), whereby the Company acquired the rights to receive royalties and milestones payable on sales of five Type 2 diabetes products licensed by Assertio in exchange for a $240.5 million cash payment. Total consideration was $241.3 million, which was comprised of the $240.5 million cash payment to Assertio and $0.8 million in transaction costs.
The rights acquired included Assertio’s royalty and milestone payments accruing from and after October 1, 2013: (a) from Santarus, Inc., which was subsequently acquired by Salix Pharmaceuticals, Inc., which itself was acquired by Valeant Pharmaceuticals International, Inc. (“Valeant”), which, in July 2018, changed its name to Bausch Health Companies Inc. (“Bausch Health”) with respect to sales of Glumetza (metformin HCL extended-release tablets) in the United States; (b) from Merck & Co., Inc. with respect to sales of Janumet® XR (sitagliptin and metformin HCL extended-release tablets); (c) from Janssen Pharmaceutica N.V. with respect to potential future development milestones and sales of its approved fixed-dose combination of Invokana® (canagliflozin, a sodium glucose cotransporter 2 (SGLT2) inhibitor) and extended-release metformin tablets, marketed as Invokamet XR®; (d) from Boehringer Ingelheim and Eli Lilly (“Lilly”) and Company with respect to
potential future development milestones and sales of the investigational fixed-dose combinations of drugs and extended-release metformin subject to Assertio’s license agreement with Boehringer Ingelheim, including its approved products, Jentadueto XR® and Synjardy XR®; and (e) from LG Chem, Ltd. and Bausch Health for sales of extended-release metformin tablets in Korea and Canada, respectively.
The Company determined that its royalty purchase interest in Depo DR Sub, LLC represented a variable interest in a variable interest entity. However, the Company did not have the power to direct the activities of Depo DR Sub, LLC that most significantly impact Depo DR Sub, LLC’s economic performance and was not the primary beneficiary of Depo DR Sub, LLC; therefore, Depo DR Sub, LLC was not subject to consolidation by the Company.
On August 2, 2018, PDL Investment Holding, LLC (“PDLIH”), a wholly-owned subsidiary of the Company and assignee from the Company under the Assertio Royalty Agreement, entered into an amendment to the Assertio Royalty Agreement with Assertio. Pursuant to the amendment, PDLIH purchased all of Assertio’s remaining interests in royalty and milestone payments payable on sales of Type 2 diabetes products licensed by Assertio for $20.0 million. Prior to the amendment, the Assertio Royalty Agreement provided that the Company would have received all royalty and milestone payments due under license agreements between Assertio and its licensees until the Company received payments equal to two times the cash payment it made to Assertio, or approximately $481.0 million, after which all net payments received by Assertio would have been shared equally between the Company and Assertio. Following the amendment, the Assertio Royalty Agreement provides that the Company will receive all royalty and milestone payments due under the license agreements between Assertio and its licensees. After the amendment, the Company elected to continue to follow the fair value option and carry the financial asset at fair value.
The Assertio Royalty Agreement terminates on the third anniversary following the date upon which the later of the following occurs: (a) October 25, 2021, or (b) at such time as no royalty payments remain payable under any license agreement and each of the license agreements has expired by its terms.
As of December 31, 2018, in conjunction with the amendment described above, the Company was provided the power to direct the activities of Depo DR Sub, LLC and is the primary beneficiary of Depo DR Sub, LLC; therefore, Depo DR Sub, LLC is subject to consolidation by the Company. As of December 31, 2020, Depo DR Sub, LLC did not have any assets or liabilities of value for consolidation with the Company.
The financial asset acquired represents a single unit of accounting. Under the Going Concern Basis, this financial asset is classified as a Level 3 asset as of December 31, 2019 within the fair value hierarchy, as the Company’s valuation utilized significant unobservable inputs, including estimates as to the probability and timing of future commercialization for products not yet approved by regulatory agencies outside of the United States. The estimated fair value was determined by using a discounted cash flow analysis related to the expected amount and timing of future cash flows to be generated by each licensed product. The discounted cash flows were based upon expected royalties from sales of licensed products over approximately a nine-year period. Significant judgment is required in selecting appropriate discount rates. The discount rates utilized range from 10% to 24%.
As of December 31, 2020, under the Liquidation Basis, the expected cash realizable value of the Assertio royalty asset was $204.5 million and included in the “Royalty assets” in the Statement of Net Assets in Liquidation. Refer to Note 3, Net Assets in Liquidation, for a discussion of the valuation of Assertio under the Liquidation Basis.
Viscogliosi Brothers Royalty Agreement
On June 26, 2014, the Company entered into a Royalty Purchase and Sale Agreement (the “VB Royalty Agreement”) with Viscogliosi Brothers, LLC (“VB”) whereby VB conveyed to the Company the right to receive royalties payable on sales of a spinal implant that received pre-market approval from the FDA held by VB and commercialized by Paradigm Spine, LLC (“Paradigm Spine”) in exchange for a $15.5 million cash payment, less fees. Paradigm Spine was acquired in March 2019 by RTI Surgical Holdings, Inc.
The royalty rights acquired included royalties accruing from and after April 1, 2014. Under the terms of the VB Royalty Agreement, the Company was eligible to receive all royalty payments due to VB pursuant to certain technology transfer agreements between VB and Paradigm Spine until the Company received payments equal to 2.3 times the cash payment made to VB, after which all rights to receive royalties would be returned to VB. VB’s ability to repurchase the royalty right for a specified amount expired on June 26, 2018.
In August 2020, the Company sold the royalty rights to a third-party for $4.2 million. No gain or loss was recognized on the date of sale due to an adjustment to the royalty rights fair value in the prior quarter that was informed by bids received.
University of Michigan Royalty Agreement
On November 6, 2014, the Company acquired a portion of all royalty payments of the U-M worldwide royalty interest in Cerdelga® (eliglustat) for $65.6 million pursuant to the Royalty Purchase and Sale Agreement with U-M (the “U-M Royalty Agreement”). Under the terms of the U-M Royalty Agreement, the Company receives 75% of all royalty payments due under the U-M license agreement with Genzyme Corporation, a Sanofi company (“Genzyme”) until expiration of the licensed patents, excluding any patent term extension. Cerdelga, an oral therapy for adult patients with Gaucher disease type 1, was developed by Genzyme. Cerdelga was approved in the United States in August 2014, in the European Union (“EU”) in January 2015, and in Japan in March 2015. In addition, marketing applications for Cerdelga are under review by other regulatory authorities. While marketing applications have been approved in the United States, the EU and Japan, national pricing and reimbursement decisions are delayed in some countries.
The estimated fair value of the royalty right at December 31, 2019, was determined by using a discounted cash flow analysis related to the expected future cash flows to be received. Under the Going Concern Basis, this asset was classified as a Level 3 asset as the Company’s valuation utilized significant unobservable inputs, including estimates as to the probability and timing of future sales of the licensed product. The estimated fair value of the financial asset acquired was determined by using a discounted cash flow analysis related to the expected amount and timing of future cash flows. The discounted cash flow was based upon expected royalties from sales of licensed product over approximately a three-year period. Significant judgment is required in selecting the appropriate discount rate. The discount rate utilized was approximately 12.8%.
As of December 31, 2020, under the Liquidation Basis, the expected cash realizable value of the Cerdelga royalty asset was $15.5 million and included in the “Royalty assets” in the Statement of Net Assets in Liquidation. Refer to Note 3, Net Assets in Liquidation, for a discussion of the valuation of the U-M Royalty Agreement under the Liquidation Basis.
AcelRx Royalty Agreement
On September 18, 2015, the Company entered into a royalty interest assignment agreement (the “AcelRx Royalty Agreement”) with ARPI LLC, a wholly-owned subsidiary of AcelRx Pharmaceuticals, Inc. (“AcelRx”), whereby the Company acquired the rights to receive a portion of the royalties and certain milestone payments on sales of Zalviso® (sufentanil sublingual tablet system) in the EU, Switzerland and Australia by AcelRx’s commercial partner, Grünenthal, in exchange for a $65.0 million cash payment. Under the terms of the AcelRx Royalty Agreement, the Company was eligible to receive 75% of all royalty payments and 80% of the first four commercial milestone payments due under AcelRx’s license agreement with Grünenthal until the earlier to occur of (i) receipt by the Company of payments equal to three times the cash payments made to AcelRx and (ii) the expiration of the licensed patents. Zalviso received marketing approval by the European Commission in September 2015. Grünenthal launched Zalviso in the second quarter of 2016 and the Company started to receive royalties in the third quarter of 2016. On May 15, 2020, AcelRx received notice that the product marketer of Zalviso, Grünenthal GmbH, would exercise its right to terminate the license agreement with AcelRx, effective as of 180 days from the date of the notice. AcelRx is obligated to use commercially reasonable efforts to find a new license agreement under the terms no less favorable than those in the license with Grünenthal.
In August 2020, the Company sold the asset to a third-party for zero consideration. No gain or loss was recognized on the date of sale, due to an adjustment to the royalty rights fair value in the prior quarter that resulted from the notification that the license agreement was terminated by the marketer of the product.
Kybella Royalty Agreement
On July 8, 2016, the Company entered into a royalty purchase and sales agreement with an individual, whereby the Company acquired that individual’s rights to receive certain royalties on sales of KYBELLA® by Allergan plc in exchange for a $9.5 million cash payment and up to $1.0 million in future milestone payments based upon product sales targets. The Company started to receive royalty payments during the third quarter of 2016.
In August 2020, the Company sold the asset to a third-party for $0.2 million. No gain or loss was recognized on the date of sale, due to an adjustment to the royalty rights fair value in the prior quarter that was informed by bids received.
The following tables summarize the changes in Level 3 Royalty Right Assets and the gains and losses included in earnings for the eight months ended August 31, 2020 under the Going Concern Basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) - Royalty Right Assets
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Royalty Rights
- At Fair Value
|
Fair value as of December 31, 2019
|
|
|
$
|
266,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net change in fair value for the period
|
|
|
|
|
|
Change in fair value of royalty rights - at fair value
|
|
(8,804)
|
|
|
|
|
Cash received from royalty rights
|
|
(35,129)
|
|
|
|
|
|
Total net change in fair value for the period
|
|
|
(43,933)
|
|
|
Sale of royalty rights
|
|
|
(4,350)
|
|
|
|
|
|
|
|
|
Fair value as of August 31, 2020
|
|
|
$
|
217,913
|
|
The table above does not include the aggregate remaining estimated cost to sell the royalty right assets of $4.6 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) - Royalty Right Assets
|
|
|
Fair Value as of
|
|
Sale of
|
|
Royalty Rights -
|
|
Fair Value as of
|
(in thousands)
|
|
December 31, 2019
|
|
Royalty Rights (1)
|
|
Change in Fair Value
|
|
August 31, 2020 (2)
|
Assertio
|
|
$
|
218,672
|
|
|
$
|
—
|
|
|
$
|
(18,209)
|
|
|
$
|
200,463
|
|
VB
|
|
13,590
|
|
|
(4,182)
|
|
|
(9,408)
|
|
|
—
|
|
U-M
|
|
20,398
|
|
|
—
|
|
|
(2,948)
|
|
|
17,450
|
|
|
|
|
|
|
|
|
|
|
AcelRx
|
|
12,952
|
|
|
—
|
|
|
(12,952)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
KYBELLA
|
|
584
|
|
|
(168)
|
|
|
(416)
|
|
|
—
|
|
|
|
$
|
266,196
|
|
|
$
|
(4,350)
|
|
|
$
|
(43,933)
|
|
|
$
|
217,913
|
|
_______________
(1) In August 2020 the Company sold the royalty rights to VB, AcelRx, and KYBELLA to a third-party.
(2) Excludes the aggregate remaining estimated costs to sell of $4.6 million.
Gains and losses from changes in Level 3 assets are included in earnings under the Going Concern Basis and are presented as “Royalty rights - change in fair value” as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended August 31,
|
|
Year Ended December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Total change in fair value for the period included in earnings for royalty right assets held at the end of the reporting period
|
|
$
|
(8,804)
|
|
|
$
|
(31,042)
|
|
|
|
|
|
|
|
|
|
|
|
Assets/Liabilities Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company remeasures the fair value of certain assets and liabilities upon the occurrence of certain events. Such assets consist of long-lived assets, including property and equipment and intangible assets and the shares of AEON common stock, received in connection with the loans made to LENSAR by the Company prior to its acquisition of LENSAR.
The Company’s carrying value of the 1.7 million shares of AEON common stock as of December 31, 2019 under the Going Concern Basis was $6.6 million based on an estimated per share value of $3.84, which was established by a valuation performed when the shares were acquired. The value of the Company’s investment in AEON is not readily determinable as AEON’s shares are not publicly traded. Under the Going Concern Basis, the Company evaluated the fair value of this investment by performing a qualitative assessment each reporting period. If the results of this qualitative assessment indicate that the fair value was less than
the carrying value, the investment is written down to its fair value. Based on additional financial information received from AEON, the Company performed an analysis on August 31, 2020 and concluded the investment was impaired and wrote it down to $1.0 million. The loss is reported as Loss on investment on the Company’s Consolidated Statement of Operations for the eight months ended August 31, 2020. This investment is included in Other Assets on the Company’s Consolidated Statement of Net Assets as of September 30, 2020 and as Other long-term assets on the December 31, 2019 Consolidated Balance Sheet. For additional information on the AEON investment, see Note 9, Notes and Other Long-Term Receivables. As of December 31, 2020, under the Liquidation Basis, the expected cash realizable value of the AEON asset was $1.0 million and included in “Other assets” on the Statement of Net Assets in Liquidation. Refer to Note 3, Net Assets in Liquidation, for a discussion of the valuation of AEON under the Liquidation Basis.
During the quarter ended March 31, 2020, it was determined that Noden met the criteria as an asset held for sale. As a result of the Company’s analysis of the fair value of Noden, the Company recorded a loss on classification as held for sale of $6.7 million during the quarter ended March 31, 2020 of which $1.8 million related to the estimated costs to sell Noden and $4.9 million related to the difference in carrying value versus fair value. The fair value calculation was made using a discounted cash flow model, utilizing a discount rate of approximately 19%, and included level 3 inputs. During the quarter ended June 30, 2020, the Company recorded an additional loss of $16.8 million related primarily to the difference in carrying value and fair value. The reduction in fair value reflected lower estimated sales proceeds as informed by the Company’s sales process. At June 30, 2020, the fair value calculation was made using a discounted cash flow model, utilizing a discount rate of approximately 17%, and included level 3 inputs. For information on the sale of the business in September 2020, see Note 4, Discontinued Operations Classified as Assets Held for Sale.
Assets/Liabilities Not Subject to Fair Value Recognition
The following tables present the fair value of assets and liabilities not subject to fair value recognition by level within the valuation hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(in thousands)
|
|
|
|
|
|
|
|
Carrying Value
|
|
Fair Value
Level 2
|
|
Fair Value
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellstat Diagnostics note receivable
|
|
|
|
|
|
|
|
$
|
50,191
|
|
|
$
|
—
|
|
|
$
|
55,389
|
|
Hyperion note receivable
|
|
|
|
|
|
|
|
1,200
|
|
|
—
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CareView note receivable
|
|
|
|
|
|
|
|
690
|
|
|
—
|
|
|
690
|
|
Total
|
|
|
|
|
|
|
|
$
|
52,081
|
|
|
$
|
—
|
|
|
$
|
57,279
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2021 Notes
|
|
|
|
|
|
|
|
$
|
16,950
|
|
|
$
|
20,978
|
|
|
$
|
—
|
|
December 2024 Notes
|
|
|
|
|
|
|
|
10,300
|
|
|
12,953
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
27,250
|
|
|
$
|
33,931
|
|
|
$
|
—
|
|
There were no impairment losses on notes receivable in the eight months ended August 31, 2020. During the years ended December 31, 2019 and 2018 the Company recorded impairment losses of $10.8 million and $8.2 million, respectively, for the note receivable with CareView.
The Company had two notes receivable assets as of December 31, 2019 under the Going Concern Basis. The notes receivable were classified under the Going Concern Basis as Level 3 in the fair value hierarchy as the Company’s valuations utilized significant unobservable inputs, including estimates of future revenues, discount rates, expectations about settlement, terminal values, required yield and the value of underlying collateral. The Company engages third-party valuation experts when deemed necessary to assist in evaluating its investments and the related inputs needed to estimate the fair value of certain investments.
As of December 31, 2019 under the Going Concern Basis, the estimated fair value of the CareView note receivable was determined using a liquidation analysis. A liquidation analysis considers the asset side of the balance sheet and adjusts the value in accordance with the relative risk associated with the asset and the probable liquidation value. The asset recovery rates varied by asset. As of December 31, 2019 under the Going Concern Basis, the estimated fair value of the Wellstat Diagnostics note receivable was determined by using an asset approach and discounted cash flow model related to the underlying collateral and adjusted to consider estimated costs to sell the asset.
The Company’s liabilities not subject to fair value recognition under the Going Concern Basis consist of its 2021 and 2024 convertible notes. The fair values of the Company’s convertible senior notes were determined using quoted market pricing and were classified as Level 2 in the fair value hierarchy.
The following table represents significant unobservable inputs used in determining the estimated fair value of the Wellstat Diagnostics note receivable investment under the Going Concern Basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
Wellstat Diagnostics
|
|
|
|
|
|
|
|
|
Wellstat Guarantors intellectual property
|
|
Income Approach
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
12%
|
|
|
|
|
|
|
Undiscounted royalty amount
|
|
$21 million
|
|
|
Settlement Amount
|
|
Income Approach
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
15%
|
|
|
|
|
|
|
Undiscounted settlement amount
|
|
$28 million
|
|
|
Real Estate Property
|
|
Market Approach
|
|
|
|
|
|
|
|
|
|
|
Annual appreciation rate
|
|
—%
|
|
|
|
|
|
|
Estimated realtor fee
|
|
6%
|
|
|
|
|
|
|
Undiscounted market value
|
|
$16 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Notes and Other Long-Term Receivables
Notes and other long-term receivables included the following significant agreements:
Wellstat Diagnostics Note Receivable and Credit Agreement and Related Litigation
On November 2, 2012, the Company and Wellstat Diagnostics entered into a $40.0 million credit agreement pursuant to which the Company was to accrue quarterly interest payments at the rate of 5% per annum (payable in cash or in kind). In addition, the Company was to receive quarterly royalty payments based on a low double-digit royalty rate of Wellstat Diagnostics’ net revenues, generated by the sale, distribution or other use of Wellstat Diagnostics’ products, if any, commencing upon the commercialization of its products. A portion of the proceeds of the $40.0 million credit agreement were used to repay certain notes receivable which Wellstat Diagnostics entered into in March 2012.
In January 2013, the Company was informed that, as of December 31, 2012, Wellstat Diagnostics had used funds contrary to the terms of the credit agreement and breached Sections 2.1.2 and 7 of the credit agreement. The Company sent Wellstat Diagnostics a notice of default on January 22, 2013, and accelerated the amounts owed under the credit agreement. In connection with the notice of default, the Company exercised one of its available remedies and transferred approximately $8.1 million of available cash from a bank account of Wellstat Diagnostics to the Company and applied the funds to amounts due under the credit agreement. On February 28, 2013, the parties entered into a forbearance agreement whereby the Company agreed to refrain from exercising additional remedies for 120 days. During such forbearance period, the Company provided approximately $1.3 million to Wellstat Diagnostics to fund ongoing operations of the business. During the year ended December 31, 2013, approximately $8.7 million was advanced pursuant to the forbearance agreement.
On August 15, 2013, the Company entered into an amended and restated credit agreement with Wellstat Diagnostics. The Company determined that the new agreement should be accounted for as a modification of the existing agreement.
Except as otherwise described herein, the material terms of the amended and restated credit agreement were substantially the same as those of the original credit agreement, including quarterly interest payments at the rate of 5% per annum (payable in cash or in kind). In addition, the Company was to continue to receive quarterly royalty payments based on a low double-digit royalty rate of Wellstat Diagnostics’ net revenues. However, pursuant to the amended and restated credit agreement: (i) the principal amount was reset to approximately $44.1 million, which was comprised of approximately $33.7 million original loan principal and interest, $1.3 million term loan principal and interest and $9.1 million forbearance principal and interest; (ii) the specified internal rates of return increased; (iii) the default interest rate was increased; (iv) Wellstat Diagnostics’ obligation to provide certain financial
information increased in frequency to monthly; (v) internal financial controls were strengthened by requiring Wellstat Diagnostics to maintain an independent, third-party financial professional with control over fund disbursements; (vi) the Company waived the existing events of default; and (vii) the owners and affiliates of Wellstat Diagnostics were required to contribute additional capital to Wellstat Diagnostics upon the sale of an affiliate entity. The amended and restated credit agreement had an ultimate maturity date of December 31, 2021 (but has subsequently been accelerated as described below).
In June 2014, the Company received information from Wellstat Diagnostics showing that it was generally unable to pay its debts as they became due, constituting an event of default under the amended and restated credit agreement.
On August 5, 2014, the Company delivered a notice of default to Wellstat Diagnostics, which accelerated all obligations under the amended and restated credit agreement and demanded immediate payment in full in an amount equal to approximately $53.9 million, (which amount, in accordance with the terms of the amended and restated credit agreement, included an amount that, together with interest and royalty payments already made to the Company, would generate a specified internal rate of return to the Company), plus accruing fees, costs and interest, and demanded that Wellstat Diagnostics protect and preserve all collateral securing its obligations.
On August 7, 2014, the Company delivered a notice to each of the guarantors of Wellstat Diagnostics’ obligations to the Company (collectively, the “Wellstat Diagnostics Guarantors”) under the credit agreement, which included a demand that the guarantors remit payment to the Company in the amount of the outstanding obligations. The guarantors include certain affiliates and related companies of Wellstat Diagnostics, including Wellstat Therapeutics and Wellstat Diagnostics’ stockholders.
On September 24, 2014, the Company filed an ex-parte petition for appointment of a receiver with the Circuit Court of Montgomery County, Maryland, which was granted on the same day. Wellstat Diagnostics remained in operation during the period of the receivership with incremental additional funding from the Company. On May 24, 2017, Wellstat Diagnostics transferred substantially all of its assets to the Company pursuant to a credit bid. The credit bid reduced the outstanding balance of the loan by an immaterial amount.
On September 4, 2015, the Company filed in the Supreme Court of New York a motion for summary judgment in lieu of complaint which requested that the court enter judgment against certain of the Wellstat Diagnostics Guarantors for the total amount due on the Wellstat Diagnostics debt, plus all costs and expenses including lawyers’ fees incurred by the Company in enforcement of the related guarantees. On September 23, 2015, the Company filed in the same court an ex parte application for a temporary restraining order and order of attachment of the Wellstat Diagnostics Guarantor defendants’ assets. Although the court denied the Company’s request for a temporary restraining order at a hearing on September 24, 2015, it ordered that assets of the Wellstat Diagnostics Guarantor defendants should be held in status quo ante and only used in the normal course of business.
On July 29, 2016, the Supreme Court of New York granted the Company’s motion for summary judgment and held that the Wellstat Diagnostics Guarantor defendants are liable for all “Obligations” owed by Wellstat Diagnostics to the Company.
After appeal by the Wellstat Diagnostics Guarantor defendants on February 14, 2017, the Appellate Division of the Supreme Court of New York reversed on procedural grounds a portion of the Memorandum of Decision granting the Company summary judgment in lieu of complaint, but affirmed the portion of the Memorandum of Decision denying the Wellstat Diagnostics Guarantor defendants’ motion for summary judgment in which they sought a determination that the guarantees had been released. As a result, the proceeding was remanded to the Supreme Court of New York to proceed on the Company’s claims as a plenary action. On June 21, 2017, the Supreme Court of New York ordered the Company to file a Complaint, which was filed by the Company on July 20, 2017. The Wellstat Diagnostics Guarantors filed their answer on August 9, 2017, including counterclaims against the Company alleging breach of contract, breach of fiduciary duty, and tortious interference with prospective economic advantage.
On October 14, 2016, the Company sent a notice of default and reference to foreclosure proceedings to certain of the Wellstat Diagnostics Guarantors which were not defendants in the New York action, but which are owners of real estate assets over which a deed of trust in favor of the Company securing the guarantee of the loan to Wellstat Diagnostics had been executed. On March 2, 2017, the Company sent a second notice to foreclose on the real estate assets, and noticed the sale for March 29, 2017. The sale was taken off the calendar by the trustee under the deed of trust and was not re-scheduled. On March 6, 2017, the Company sent a letter to the Wellstat Diagnostics Guarantors seeking information in preparation for a UCC Article 9 sale of some or all of the intellectual property-related collateral of the Wellstat Diagnostics Guarantors. The Wellstat Diagnostics Guarantors did not respond to the Company’s letter, but on March 17, 2017, filed an order to show cause with the Supreme Court of New York to enjoin the Company’s sale of the real estate or enforcing its security interests in the Wellstat Diagnostics Guarantors’ intellectual property during the pendency of any action involving the guarantees at issue. On February 6, 2018, the Supreme Court of New
York issued an order from the bench which enjoins the Wellstat Diagnostics Guarantors from selling, encumbering, removing, transferring or altering the collateral pending the outcome of the proceedings before it. The Supreme Court of New York also issued an order precluding the Company from foreclosing on certain of the Wellstat Diagnostics Guarantors’ collateral pending the outcome of the proceedings before it. In September of 2018, discovery in the New York action was completed. Summary judgment motions were filed by Wellstat Diagnostics and the Company in 2018 and a hearing was held on May 22, 2019. On September 11, 2019, the Supreme Court of New York granted the Company’s summary judgment motion, the court holding that the guarantees executed by the Wellstat Diagnostics Guarantors are valid and enforceable, and that the Wellstat Diagnostics Guarantors are liable for the amount owed under the loan agreement. The court ordered a damages inquest before a special referee to calculate the amount owed under the loan agreement between Wellstat Diagnostics and the Company. On September 12, 2019, the Wellstat Diagnostics Guarantors filed a notice of appeal in relation to the court’s decision. On September 17, 2019, the Wellstat Diagnostics Guarantors requested a stay of the enforcement of the New York Supreme Court’s decision pending their appeal of the decision, which was denied on November 21, 2019. A damages hearing was scheduled to begin before a judicial hearing officer on December 17, 2019. At the request of the judicial hearing officer, the parties agreed to mediate their dispute prior to the commencement of the damages hearing. As a result, no decision was made by the hearing officer with respect to the amount of damages owed to the Company.
In an unrelated litigation, Wellstat Therapeutics filed a lawsuit against BTG International, Inc. for breach of contract (the “BTG Litigation”). In September 2017, the Delaware Chancery Court found in favor of Wellstat Therapeutics and awarded a judgment of $55.8 million in damages, plus interest. In October 2017, the Company filed a motion with the Supreme Court of New York requesting a pre-judgement attachment of the award. In June 2018, the Delaware Supreme Court largely affirmed the September 2017 decision of the Delaware Chancery Court, including the $55.8 million awarded in judgment. In August of 2018, in a letter to the Company’s counsel, Wellstat Diagnostics Guarantors’ counsel confirmed that the Wellstat Diagnostics Guarantors would preserve the BTG Litigation judgment award proceeds consistent with the New York Court’s prior directions.
On October 22, 2015, certain of the Wellstat Diagnostics Guarantors filed a separate complaint against the Company in the Supreme Court of New York seeking a declaratory judgment that certain contractual arrangements entered into between the parties subsequent to Wellstat Diagnostics’ default, and which relate to a split of proceeds in the event that the Wellstat Diagnostics Guarantors voluntarily monetize any assets that are the Company’s collateral, is of no force or effect. This case was joined for all purposes, including discovery and trial, and consolidated with the then pending case filed by the Company. The Wellstat Diagnostic Guarantors filed a summary judgment motion with regard to this case, which was also heard by the court at the hearing on May 22, 2019. The court, in its September 11, 2019 decision, denied in its entirety the Wellstat Diagnostics Guarantors’ motion for summary judgment.
Effective April 1, 2014, and as a result of the event of default, the Company determined the loan to be impaired and it ceased to accrue interest revenue. At that time and under previous Going Concern reporting periods, it was determined that an allowance on the carrying value of the note was not necessary, as the Company believed the value of the collateral securing Wellstat Diagnostics’ obligations exceeded the carrying value of the asset and was sufficient to enable the Company to recover the carrying value.
In August 2020, the Company entered into a settlement agreement (the “Settlement Agreement”) with Samuel J. Wohlstadter, Nadine H. Wohlstadter, Hyperion Catalysis International, Wellstat Vaccines, LLC, Wellstat ImmunoTherapeutics, LLC, Wellstat BioCatalysis, LLC, Wellstat AVT Investment, LLC, Wellstat Biologics Corporation, Wellstat Management Company, LLC, Wellstat Ophthalmics Corporation, Wellstat Therapeutics Corporation, Wellstat Therapeutics EU Limited, Duck Farm, Inc., Hebron Valley Farms, Inc., HVF, Inc., Hyperion Catalysis EU Limited, NHW, LLC, and SJW Properties, Inc., together with their respective successors and assigns, (collectively the “Wellstat Parties”), and Defined Diagnostics, LLC (f/k/a Wellstat Diagnostics, LLC) resolving all claims in litigation relating to loans made to Wellstat Diagnostics by the Company. Wellstat paid the company an amount of $7.5 million upon the signing of the Settlement Agreement and must pay either (1) $5.0 million by February 10, 2021 and $55.0 million by July 26, 2021; or (2) $67.5 million by July 26, 2021. If the Wellstat Parties fail to make payment in full by July 26, 2021 as required under the terms of the Settlement Agreement, the Company is authorized to record and confess judgment against the Wellstat Parties for an amount of $92.5 million or such lesser amount as may be owed under the Settlement Agreement as of that date. The $7.5 million initial signing payment was received by the Company in August 2020. The Company’s Settlement Agreement with the Wellstat Parties also settled its disputes with Hyperion (a Wellstat Diagnostics Guarantor).
On December 11, 2020, the Company sold its rights in the Settlement Agreement to Epps Investments LLC (“Epps”). Under the terms of the Agreement, Epps paid the Company approximately $51.4 million in exchange for 100% of the awards, damages, recoveries, judgments or other property or value awarded to or received by the Company on or after the date of the Agreement pursuant to or as a result of (i) the Settlement Agreement, and (ii) the underlying claims resolved by the Settlement Agreement.
The Company agreed to reimburse Epps for certain expenses related to the Agreement. Pursuant to the agreement, the Company granted Epps a security interest in the Company’s interest in certain collateral, as further described in the Agreement, including the Settlement Agreement and the underlying claims resolved by the Settlement Agreement, as security for the prompt payment of the Company’s obligations under the Agreement.
Avinger Credit and Royalty Agreement
On April 18, 2013, the Company entered into a credit agreement with Avinger, Inc. (the “Avinger Credit and Royalty Agreement”). Under the terms of the Avinger Credit and Royalty Agreement, the Company received a low, single-digit royalty on Avinger’s net revenues until April 2018. Commencing in October 2015, after Avinger repaid $21.4 million pursuant to its note payable to the Company prior to its maturity date, the royalty on Avinger’s net revenues was reduced by 50%, subject to certain minimum payments from the prepayment date until April 18, 2018. The Company accounted for the royalty rights in accordance with the fair value option. As of April 18, 2018, there were no further obligations owed to the Company.
Direct Flow Medical Credit Agreement
On November 5, 2013, the Company entered into a credit agreement with Direct Flow Medical, Inc. (“Direct Flow Medical”) under which the Company agreed to provide up to $50.0 million to Direct Flow Medical. Of the $50.0 million available to Direct Flow Medical, the first tranche of $35.0 million, net of fees, was funded by the Company at the close of the transaction.
On November 10, 2014, the Company and Direct Flow Medical agreed to an amendment to the credit agreement to permit Direct Flow Medical to borrow an additional $15.0 million (in a second tranche) upon receipt by Direct Flow Medical of a specified minimum amount of proceeds from an equity offering prior to December 31, 2014. In exchange, the parties amended the credit agreement to provide for additional fees associated with certain liquidity events, such as a change of control or the consummation of an initial public offering, and granted the Company certain board of director observation rights. On November 19, 2014, upon Direct Flow Medical satisfying the amended tranche two milestone, the Company funded the $15.0 million second tranche to Direct Flow Medical, net of fees.
Outstanding borrowings under tranche one bore interest at the rate of 15.5% per annum, payable quarterly in arrears, until the occurrence of the second tranche. Upon occurrence of the borrowing of this second tranche, the interest rate applicable to all loans under the credit agreement was decreased to 13.5% per annum, payable quarterly in arrears.
Under the terms of the credit agreement, Direct Flow Medical’s obligation to repay loan principal commenced on the twelfth interest payment date, September 30, 2016. The principal amount outstanding at commencement of repayment was required to be repaid in equal installments until final maturity of the loans. The loans were scheduled to mature on November 5, 2018. The obligations under the credit agreement were secured by a pledge of substantially all of the assets of Direct Flow Medical and any of its subsidiaries.
On December 21, 2015, Direct Flow Medical and the Company entered into a waiver to the credit agreement in anticipation of Direct Flow Medical being unable to comply with the liquidity covenant and make interest payments due under the credit agreement, which was subsequently extended on January 14, 2016, and further delayed the timing of the interest payments through the period ending September 30, 2016 while Direct Flow Medical sought additional financing to operate its business.
On January 28, 2016, the Company funded an additional $5.0 million to Direct Flow Medical in the form of a short-term secured promissory note.
On February 26, 2016, the Company and Direct Flow Medical entered into the fourth amendment to the credit agreement that, among other things, (i) converted the $5.0 million short-term secured promissory note into a loan under the credit agreement with substantially the same interest and payment terms as the existing loans, (ii) added a conversion feature whereby the $5.0 million loan would convert into equity of Direct Flow Medical upon the occurrence of certain events and (iii) provided for a second $5.0 million convertible loan tranche commitment, to be funded at the option of the Company. The commitment for the second tranche was not funded and has since expired. In addition, (i) the Company agreed to waive the liquidity covenant and delay the timing of the unpaid interest payments until September 30, 2016 and (ii) Direct Flow Medical agreed to issue to the Company a specified amount of warrants to purchase shares of convertible preferred stock on the first day of each month for the duration of the waiver period at an exercise price of $0.01 per share.
On July 15, 2016, the Company and Direct Flow Medical entered into the fifth amendment and limited waiver to the credit agreement. The Company funded an additional $1.5 million to Direct Flow Medical in the form of a note with substantially the
same interest and payment terms as the existing loans and a conversion feature whereby the $1.5 million loan would convert into equity of Direct Flow Medical upon the occurrence of certain events. In addition, Direct Flow Medical agreed to issue to the Company warrants to purchase shares of convertible preferred stock at an exercise price of $0.01 per share.
On September 12, 2016, the Company and Direct Flow Medical entered into the sixth amendment and limited waiver to the credit agreement under which the Company funded an additional $1.5 million to Direct Flow Medical in the form of a note with substantially the same interest and payment terms as the existing loans. In addition, Direct Flow Medical agreed to issue to the Company a specified amount of warrants to purchase shares of convertible preferred stock at an exercise price of $0.01 per share.
On September 30, 2016, the Company and Direct Flow Medical entered into a waiver to the credit agreement where the parties agreed, among other things, to (i) delay payment on all overdue interest payments until October 31, 2016, (ii) waive the initial principal repayment until October 31, 2016 and (iii) continue to waive the liquidity requirements until October 31, 2016. Further, Direct Flow Medical agreed to issue to the Company a specified amount of warrants to purchase shares of convertible preferred stock at an exercise price of $0.01 per share.
On October 31, 2016, the Company agreed to extend the waivers described above until November 30, 2016 and on November 14, 2016, the Company advanced an additional $1.0 million loan while Direct Flow Medical continued to seek additional financing.
On November 16, 2016, Direct Flow Medical advised the Company that its potential financing source had modified its proposal from an equity investment to a loan with a substantially smaller amount and under less favorable terms. Direct Flow Medical shut down its operations in December 2016 and in January 2017 made an assignment for the benefit of creditors. The Company then initiated foreclosure proceedings, resulting in the Company obtaining ownership of most of the Direct Flow Medical assets through the Company’s wholly-owned subsidiary, DFM, LLC. The assets were held for sale and carried at the lower of carrying amount or fair value, less estimated selling costs, which was primarily based on supporting data from market participant sources, and valid offers from third parties.
At December 31, 2016, the Company completed an impairment analysis and concluded that the situation qualified as a troubled debt restructuring and recognized an impairment loss of $51.1 million.
In January 2017, the Company started to actively market the asset held for sale. On January 23, 2017, the Company and DFM, LLC entered into an Intellectual Property Assignment Agreement with Hong Kong Haisco Pharmaceutical Co., Limited (“Haisco”), a Chinese pharmaceutical company, whereby Haisco acquired former Direct Flow Medical clinical, regulatory and commercial information and intellectual property rights exclusively in China for $7.0 million. The Company, through DFM, LLC, also sold Haisco certain manufacturing equipment for $450,000 and collected $692,000 on outstanding Direct Flow Medical accounts receivable during the year ended December 31, 2017.
On January 6, 2018, DFM, LLC and HaisThera Advisors Co., Limited (“HaisThera”) entered into a license agreement whereby DFM, LLC granted HaisThera an exclusive license to develop, manufacture and commercialize percutaneously implanting stentless aortic valves in the EU. The consideration for the license agreement was $500,000 upfront and up to $2.0 million in royalty payments. In August 2019, the remaining assets of DFM, LLC were sold for $5.0 million.
kaléo Note Purchase Agreement
On April 1, 2014, the Company entered into a note purchase agreement with Accel 300, LLC (“Accel 300”), a wholly-owned subsidiary of kaléo, Inc. (“kaléo”), pursuant to which the Company acquired $150.0 million of secured notes due 2029 (the “kaléo Note”). The kaléo Note was issued pursuant to an indenture between Accel 300 and U.S. Bank, National Association, as trustee, and was secured by 20% of net sales of its first approved product, Auvi-Q® (epinephrine auto-injection, USP) (known as Allerject® in Canada) and 10% of net sales of kaléo’s second proprietary auto-injector based product, EVZIO (naloxone hydrochloride injection ) (the “kaléo Revenue Interests”), and a pledge of kaléo’s equity ownership in Accel 300.
On September 21, 2017, the Company entered into an agreement (the “kaléo Note Sale Agreement”) with MAM-Kangaroo Lender, LLC, a Delaware limited liability company (the “kaléo Purchaser”), pursuant to which the Company sold its entire interest in the kaléo Note.
Pursuant to the kaléo Note Sale Agreement, the kaléo Purchaser paid to the Company an amount equal to all of the then outstanding principal, a premium of 1% of such amount and accrued interest under the kaléo Note, for an aggregate cash purchase price of $141.7 million, subject to an 18-month escrow holdback of $1.4 million against certain potential contingencies. The escrow period ended on March 20, 2019 and the escrow agent released the entire $1.4 million to the Company.
CareView Credit Agreement
On June 26, 2015, the Company entered into a credit agreement with CareView, under which the Company made available to CareView up to $40.0 million in loans comprised of two tranches of $20.0 million each, subject to CareView’s attainment of specified milestones relating to the placement of CareView Systems. On October 7, 2015, the Company and CareView entered into an amendment of the credit agreement to modify certain definitions related to the first and second tranche milestones and the Company funded the first tranche of $20.0 million, net of fees, based on CareView’s attainment of the first milestone, as amended. The second $20.0 million tranche was not funded due to CareView’s failure to achieve the related funding milestones and there is no additional funding obligation due from the Company. Outstanding borrowings under the credit agreement initially bore interest at the rate of 13.5% per annum and are payable quarterly in arrears.
As part of the original credit agreement, the Company received a warrant to purchase approximately 4.4 million shares of common stock of CareView at an exercise price of $0.45 per share. The Company has accounted for the warrant as derivative asset with an offsetting credit as debt discount. Under the Going Concern Basis, the warrant was market to market for changed in fair value each reporting period.
In connection with the October 2015 amendment of the credit agreement, the Company and CareView also agreed to amend the warrant to purchase common stock agreement by reducing the warrant’s exercise price from $0.45 to $0.40 per share.
In February 2018, the Company entered into a modification agreement with CareView (the “February 2018 Modification Agreement”) whereby the Company agreed, effective December 28, 2017, to modify the credit agreement before remedies could otherwise have become available to the Company under the credit agreement in relation to certain obligations of CareView that would potentially not be met, including the requirement to make principal payments. Under the February 2018 Modification Agreement, the Company agreed that (i) a lower liquidity covenant would be applicable and (ii) principal repayment would be delayed until December 31, 2018. In exchange for agreeing to these modifications, among other things, the exercise price of the Company’s warrants to purchase 4.4 million shares of common stock of CareView was repriced from $0.40 to $0.03 per share and, subject to the occurrence of certain events, CareView agreed to grant the Company additional equity interests. As a result of the February 2018 Modification Agreement, the Company determined the loan to be impaired and it ceased to accrue interest revenue effective October 1, 2017.
In September 2018, the Company entered into an amendment to the February 2018 Modification Agreement with CareView whereby the Company agreed, effective as of September 28, 2018, that a lower liquidity covenant would be applicable. In December 2018, the Company further modified the loan by agreeing that (i) a lower liquidity covenant would be applicable, (ii) the first principal payment would be deferred until January 31, 2019, and (iii) the scheduled interest payment due December 31, 2018 would be deferred until January 31, 2019. In December 2018, and in consideration of the further modification to the credit agreement, the Company completed an impairment analysis and determined that the note was impaired and recorded an impairment loss of $8.2 million. The principal repayment and interest payment were subsequently deferred until May 15, 2019 under additional amendments. In May 2019, and in consideration of additional capital raised by CareView, the Company further modified the loan by agreeing that (i) the first principal and interest payments would be deferred until September 30, 2019 (ii) the remaining liquidity covenant would be removed, and (iii) the interest rate would be increased to 15.5%. Pursuant to further amendments to the February 2018 Modification Agreement in September 2019, December 2019, January 2020, April 2020, September 2020, November 2020 and January 2021, the Company agreed to defer principal and interest payments until May 31, 2021.
In December 2019, and in consideration of the further modification to the credit agreement and February 2018 Modification Agreement, the Company updated its impairment analysis and determined that an additional impairment was necessary and recorded an impairment loss of $10.8 million.
As of December 31, 2020, under the Liquidation Basis, the expected cash realizable value of the CareView note receivable and warrant was $0.8 million and included in “Other assets” on the Statement of Net Assets in Liquidation. Refer to Note 3, Net Assets in Liquidation, for a discussion of the valuation of the warrants under the Liquidation Basis.
10. Leases
Lessee arrangements
As of December 31, 2020, the Company has an operating lease for corporate offices. The Company’s operating lease has a remaining lease term of two years, with an option to extend the lease for up to six months.
Prior to the sale of Noden and the spin-off of LENSAR, the Company also included operating leases for their corporate offices and certain equipment.
The components of lease expense from continuing operations under the Going Concern Basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended
|
|
Year Ended
|
(in thousands)
|
|
August 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Operating lease cost
|
|
$
|
532
|
|
|
$
|
760
|
|
Short-term lease cost
|
|
49
|
|
|
79
|
|
Total lease cost
|
|
$
|
581
|
|
|
$
|
839
|
|
Supplemental cash flow information related to leases for continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended
|
|
Year Ended
|
(in thousands)
|
|
August 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
522
|
|
|
$
|
762
|
|
Right-of-use-assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating leases
|
|
$
|
3,320
|
|
|
$
|
2,055
|
|
The following table presents the lease balances relating to continuing operations within the Consolidated Balance Sheet, weighted-average remaining lease term, and weighted-average discount rates related to the Company’s operating leases (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Classification
|
|
December 31, 2019
|
|
|
|
|
|
Operating lease ROU assets
|
|
Other assets
|
|
$
|
1,359
|
|
|
|
|
|
|
Operating lease liabilities, current
|
|
Accrued liabilities
|
|
$
|
760
|
|
Operating lease liabilities, long-term
|
|
Other long-term liabilities
|
|
634
|
|
Total operating lease liabilities
|
|
Total operating lease liabilities
|
|
$
|
1,394
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
1.9 years
|
Weighted-average discount rate
|
|
6.5
|
%
|
_______________
Operating leases above exclude right of use assets and liabilities of $0.3 million classified as held for sale in the Consolidated Balance Sheet as of December 31, 2019.
Maturities of operating lease liabilities as of December 31, 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
|
|
2021
|
|
$
|
37
|
|
2022
|
|
38
|
|
2023
|
|
—
|
|
2024
|
|
—
|
|
2025
|
|
—
|
|
Thereafter
|
|
—
|
|
Total operating lease payments
|
|
75
|
|
Less: imputed interest
|
|
—
|
|
Total operating lease liabilities
|
|
$
|
75
|
|
Lessor arrangements
The Company had operating leases for medical device equipment generated from its Medical Devices segment. The Company’s leases had remaining lease terms of less than one to four years, some of which included options to extend the leases on a month-to-month basis if the customer did not notify the Company of the intention to return the equipment at the end of the lease term. The Company typically did not offer options to terminate the leases before the end of the lease term. The Medical Devices segment was spun-off on October 1, 2020.
The components of lease income under the Going Concern Basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended
|
|
Year Ended
|
(in thousands)
|
|
Classification
|
|
August 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease income
|
|
Lease revenue
|
|
$
|
2,139
|
|
|
$
|
5,072
|
|
Under the Going Concern Basis, and prior to the spin-off of LENSAR, Equipment under lease was stated at cost less accumulated depreciation and was classified as Property and equipment, net on the Consolidated Balance Sheet. Depreciation was computed using the straight-line method over an estimated useful life of the greater of the lease term or five years to ten years. Equipment under lease was as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Equipment under lease
|
|
|
|
$
|
6,652
|
|
Less accumulated depreciation
|
|
|
|
(5,231)
|
|
Equipment under lease, net
|
|
|
|
$
|
1,421
|
|
Depreciation expense on equipment under lease amounted to $1.0 million, $2.1 million and $2.7 million for the eight months ended August 31, 2020 and the years ended December 31, 2019 and 2018, respectively.
11. Property and Equipment
Property and equipment, net under the Going Concern Basis consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
December 31, 2019
|
Leasehold improvements
|
|
|
|
$
|
350
|
|
Manufacturing equipment
|
|
|
|
1,550
|
|
Computer and office equipment
|
|
|
|
9,101
|
|
Furniture and fixtures
|
|
|
|
136
|
|
Equipment under lease
|
|
|
|
6,652
|
|
Transportation equipment
|
|
|
|
67
|
|
Total
|
|
|
|
17,856
|
|
Less accumulated depreciation
|
|
|
|
(16,040)
|
|
Construction in progress
|
|
|
|
744
|
|
Property and equipment, net (1) (2)
|
|
|
|
$
|
2,560
|
|
________________
(1) The amounts above exclude $3.0 million of Property and Equipment at Noden classified as held for sale as of December 31, 2019. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
(2) The amounts above include amounts held by LENSAR which was spun-off on October 1, 2020.
Depreciation expense on property and equipment amounted to $1.0 million, $2.7 million and $3.1 million for the eight months ended August 31, 2020 and the years ended December 31, 2019 and 2018, respectively.
12. Intangible Assets
Noden
On June 8, 2018, Noden DAC entered into a Settlement Agreement (the “Settlement Agreement”) with Anchen Pharmaceuticals, Inc. and its affiliates (“Anchen”) to resolve the patent litigation relating to infringement of U.S. Patent No. 8,617,595 (the “‘595 Patent”) based on their submission of an Abbreviated New Drug Application (“ANDA”) seeking authorization from the FDA to market a generic version of aliskiren, the active ingredient in the Tekturna and Tekturna HCT drug. Under the Settlement Agreement, Anchen, the sole ANDA filer of which the Company is aware, agreed to not commercialize its generic version of aliskiren prior to March 1, 2019. Per the Settlement Agreement, Anchen may commercialize their formulation of aliskiren, but is not permitted to commercialize a copy of Tekturna.
Accordingly, under the Going Concern Basis, management evaluated the ongoing value of the Noden DAC asset group based upon the probability of Anchen’s market entry of a generic version of aliskiren in the United States and the associated cash flows and conducted a test for impairment. Due to the increased probability of a generic version of aliskiren being launched in the United States, the Company revised its estimates of future cash flows and as a result of this analysis, determined that the sum of undiscounted cash flows was not greater than the carrying value of the assets. Therefore, the Company performed a discounted cash flow analysis to estimate the fair value of the asset group in accordance with ASC 360, Impairment or Disposal of Long-lived Assets. The cash flows used in this analysis were those expected to be generated by market participants, discounted to reflect an appropriate amount of risk, which was determined to be 21%. The Company concluded that the Noden DAC acquired product rights and customer relationship long-lived assets, with a carrying amount of $192.5 million, were no longer recoverable and wrote them down to their estimated fair value of $40.1 million, resulting in an impairment charge of $152.3 million in the second quarter of 2018. This write-down is included in Loss from discontinued operations before income taxes in the Consolidated Statement of Operations and Net cash used in operating activities - discontinued operations in the Consolidated Statement of Cash Flows for the year ended December 31, 2018.
At December 31, 2019, due to the Company’s monetization strategy and updated forecasts for Noden, the Company revised its estimates of future cash flows and as a result of this analysis, determined that the sum of undiscounted cash flows was not greater than the carrying value of the assets. Therefore, the Company performed a discounted cash flow analysis to estimate the fair value of the asset group in accordance with ASC 360. The cash flows used in this analysis were those expected to be generated by market participants, discounted to reflect an appropriate amount of risk, which was determined to be 19%. The Company concluded that the Noden DAC acquired product rights and customer relationship long-lived assets, with a carrying amount of
$32.6 million, were no longer recoverable and wrote them down to their estimated fair value of $10.1 million, resulting in an impairment charge of $22.5 million in the fourth quarter of 2019. This write-down is included in Loss from discontinued operations before income taxes in the Consolidated Statement of Operations and Net cash used in operating activities - discontinued operations in the Consolidated Statement of Cash Flows for the year ended December 31, 2019.
During the fourth quarter of 2019, while performing its impairment analysis on its Noden intangible assets, the Company identified an error in the 2018 impairment charge recorded on its Noden intangible assets, which resulted in a $10.5 million overstatement of the 2018 impairment charge. As of December 31, 2018, the net carrying value of the intangible asset was understated by $9.8 million with a corresponding overstatement of net loss for the year ended December 31, 2018. This prior year impairment expense error was corrected as an out of period adjustment in 2019 in connection with the further impairment of the intangible asset to $10.1 million.
Based on an analysis of Accounting Standards Codification (“ASC”) 250, Accounting Changes and Error Corrections (“ASC 250”), Staff Accounting Bulletin 99, Materiality (“SAB 99”) and Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), the Company determined that these errors were immaterial to the previously issued annual and interim financial statements. The amount of the intangible assets and accumulated amortization were corrected as of December 31, 2019.
LENSAR
In April 2019, LENSAR acquired certain intellectual property from a third-party for $2.0 million in cash and obligations to pay a $0.3 million milestone payment and royalties upon the completion of certain events, which were met prior to December 31, 2019.
In September 2019, LENSAR exclusively licensed certain intellectual property from a third-party for $3.5 million in cash for use in research and development activities. The amount was immediately expensed and is included in Research and development expense in the Consolidated Statement of Operations for the year ended December 31, 2019.
LENSAR was spun-off on October 1, 2020.
The components of intangible assets as of December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
(in thousands)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
|
|
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships 1, 3
|
|
$
|
4,045
|
|
|
$
|
(884)
|
|
|
$
|
3,161
|
|
|
|
|
|
|
|
Acquired technology 1, 2, 4
|
|
11,500
|
|
|
(1,741)
|
|
|
9,759
|
|
|
|
|
|
|
|
Acquired trademarks 1
|
|
570
|
|
|
(304)
|
|
|
266
|
|
|
|
|
|
|
|
Total 5
|
|
$
|
16,115
|
|
|
$
|
(2,929)
|
|
|
$
|
13,186
|
|
|
|
|
|
|
|
_______________
1 The Company acquired certain intangible assets as part of its acquisition of LENSAR in May 2017. These assets were being amortized on a straight-line basis over a weighted-average period of 15 years. The intangible assets for customer relationships were being amortized using a double-declining method of amortization as such method better represents the economic benefits to be obtained.
2 The Company acquired certain intangible assets as part of the foreclosure on certain of Direct Flow Medical assets. In August 2019, the Company sold the DFM, LLC intangible assets for $5.0 million in cash and a single-digit percentage of any net final award received as part of the acquirer’s monetization process using the intangible assets. Prior to the sale, these intangible assets were being amortized on a straight-line basis over a weighted-average period of 10 years.
3 LENSAR acquired certain intangible assets for customer relationships from Precision Eye Services, which were being amortized using a double-declining method over a period of 20 years.
4 LENSAR acquired certain intangible assets from a third-party in 2019, which were being amortized on a straight-line basis over a period of 15 years.
5 The Company acquired certain intangible assets as part of the Noden transaction. Those intangible assets are excluded from the table above and included in “Assets held for sale” as of December 31, 2019. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
Amortization expense related to our continuing operations for the eight months ended August 31, 2020 and the years ended December 31, 2019 and 2018 was $0.8 million, $1.3 million and $1.3 million, respectively.
13. Accrued Liabilities
Accrued liabilities under the Going Concern Basis consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Accrued rebates, chargebacks and other revenue reserves
|
|
|
|
$
|
5
|
|
Deferred revenue
|
|
|
|
959
|
|
Compensation
|
|
|
|
6,823
|
|
Interest
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal
|
|
|
|
921
|
|
Other
|
|
|
|
3,145
|
|
Total (1) (2)
|
|
|
|
$
|
11,923
|
|
________________
(1) The amounts above exclude $16.4 million of accrued liabilities at Noden classified as held for sale as of December 31, 2019. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
(2) The amounts above include amounts held by LENSAR which was spun-off on October 1, 2020.
Upon adoption of the Liquidation Basis, the Company accrued for all estimated cash expenditures. These expenses include $9.3 million in accrued compensation and benefit costs, $9.0 million in deferred tax liabilities (see Note 23, Income Taxes, for additional information), $4.0 million in estimated costs to dispose of the Assertio asset and $7.3 million in estimated future expenses related to operating the business through dissolution and settlement of future liabilities. Amounts include estimated compensation, legal and other professional fees, insurance, taxes, estimated costs to dispose of our assets and other miscellaneous expenses. For additional information, see Note 3, Net Assets in Liquidation.
14. Convertible Senior Notes
February 2018 Notes
On February 12, 2014, the Company issued $300.0 million in aggregate principal amount, at par, of the 4.0% Convertible Senior Notes due February 1, 2018 (the “February 2018 Notes”) Notes in an underwritten public offering, for net proceeds of $290.2 million. The February 2018 Notes were due February 1, 2018, and the Company paid interest at 4.0% on the February 2018 Notes semiannually in arrears on February 1 and August 1 of each year, beginning August 1, 2014. A portion of the proceeds from the February 2018 Notes, net of amounts used for purchased call option transactions and provided by the warrant transactions described below, were used to redeem $131.7 million of the Company’s 2.975% Convertible Senior Notes due February 17, 2016.
In accordance with the accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion, the Company was required to separately account for the liability component of the instrument in a manner that reflected the market interest rate for a similar nonconvertible instrument at the date of issuance. As a result, the Company separated the principal balance of the February 2018 Notes between the fair value of the debt component and the fair value of the common stock conversion feature. Using an assumed borrowing rate of 7.0%, which represented the estimated market interest rate for a similar nonconvertible instrument available to the Company on the date of issuance, the Company recorded a total debt discount of $29.7 million, allocated $19.3 million to additional paid-in capital and allocated $10.4 million to deferred tax liability. The discount was being amortized to interest expense over the term of the February 2018 Notes and increased interest expense during the term of the February 2018 Notes from the 4.0% cash coupon interest rate to an effective interest rate of 6.9%.
In connection with the issuance of the February 2018 Notes, the Company entered into purchased call option transactions with two hedge counterparties. The Company paid an aggregate amount of $31.0 million for the purchased call options with terms substantially similar to the embedded conversion options in the February 2018 Notes. The purchased call options covered, subject to anti-dilution and certain other customary adjustments substantially similar to those in the February 2018 Notes, approximately 13.8 million shares of the Company’s common stock. Outstanding purchased call options expired on February 1, 2018.
In addition, the Company sold to the hedge counterparties warrants exercisable, on a cashless basis, for the sale of rights to receive shares of common stock underlying the February 2018 Notes at a strike price of $10.3610 per share, which represented a
premium of approximately 30% over the last reported sale price of the Company’s common stock of $7.97 on February 6, 2014. The Company received an aggregate amount of $11.4 million for the sale from the two counterparties.
The purchased call options and warrants were considered indexed to the Company stock, required net-share settlement and met all criteria for equity classification at inception and in subsequent periods. The purchased call options cost of $31.0 million less deferred taxes of $10.8 million, and the $11.4 million received for the warrants, were recorded as adjustments to additional paid-in capital.
On November 20, 2015, the Company’s agent initiated the repurchase of $53.6 million in aggregate principal amount of its February 2018 Notes for $43.7 million in cash in four open market transactions. The closing of these transactions occurred on November 30, 2015. It was determined that the repurchase of the principal amount should be accounted for as a partial extinguishment of the February 2018 Notes. As a result, a gain on extinguishment of $6.5 million was recorded at closing of the transaction. The $6.5 million gain on extinguishment included the de-recognition of a proportional share of the original issuance discount of $3.1 million, outstanding deferred issuance costs of $0.9 million and agent fees of $0.1 million. In connection with this repurchase of the February 2018 Notes, the Company unwound a corresponding portion of the purchased call options related to the notes. As a result of this unwinding, the Company received $0.3 million in cash. The payments received have been recorded as an increase to additional paid-in-capital. In addition, the Company unwound a corresponding portion of the warrants issued in connection with the notes for $0.2 million in cash, payable by the Company. The payments have been recorded as a decrease to additional paid-in-capital.
On November 22, 2016, the Company repurchased $120.0 million in aggregate principal amount of its February 2018 Notes for approximately $121.5 million in cash (including $1.5 million of accrued interest) in open market transactions. It was determined that the repurchase of the principal amount be accounted for as an extinguishment. The extinguishment included the de-recognition of a proportional share of the original issuance discount of $4.3 million and outstanding deferred issuance costs of $1.3 million. In connection with the repurchase of the February 2018 Notes, the Company unwound a corresponding portion of the purchased call options. The transaction did not result in any cash payments between the parties. In addition, the Company and the counterparties agreed to unwind a corresponding portion of the warrants, which also did not result in any cash payments between the parties.
On February 1, 2018, upon maturity of the February 2018 Notes, the Company repaid a total cash amount of $129.0 million to the custodian, The Bank of New York Mellon Trust Company, N.A., which was comprised of $126.4 million in principal amount and $2.6 million in accrued interest, to retire the February 2018 Notes.
Interest expense for the February 2018 Notes on the Company’s Consolidated Statements of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
Contractual coupon interest
|
|
|
|
|
|
$
|
422
|
|
Amortization of debt issuance costs
|
|
|
|
|
|
88
|
|
Amortization of debt discount
|
|
|
|
|
|
293
|
|
Total
|
|
|
|
|
|
$
|
803
|
|
December 2021 Notes
On November 22, 2016, the Company issued $150.0 million in aggregate principal amount, at par, of 2.75% Convertible Senior Notes due December 1, 2021 (the “December 2021 Notes”) in an underwritten public offering, for net proceeds of $145.7 million. The December 2021 Notes are due December 1, 2021, and the Company pays interest at 2.75% on the December 2021 Notes semiannually in arrears on June 1 and December 1 of each year, beginning June 1, 2017. A portion of the proceeds from the December 2021 Notes, net of amounts used for the capped call transaction described below, was used to extinguish $120.0 million of the February 2018 Notes.
In September 2019, the Company entered into privately negotiated exchange agreements with certain holders of approximately $86.1 million aggregate principal amount of outstanding December 2021 Notes. The Company exchanged $86.1 million aggregate principal of December 2021 Notes for an identical principal amount of 2.75% Convertible Senior Notes due December 1, 2024 (the “December 2024 Notes”), plus a cash payment of $70.00 for each $1,000 principal amount tendered (“September
2019 Exchange Transaction”). See “December 2024 Notes” below. The terms of the remaining December 2021 Notes remained unchanged.
The September 2019 Exchange Transaction qualified as a debt extinguishment and the Company recognized a loss on exchange of the convertible notes of $3.9 million, which is included in Non-operating income (expense), net in the Consolidated Statement of Operations for the year ended December 31, 2019.
Upon the occurrence of a fundamental change, as defined in the indenture entered into in connection with the December 2021 Notes (the “December 2021 Notes Indenture”), holders have the option to require the Company to repurchase their December 2021 Notes at a purchase price equal to 100% of the principal, plus accrued interest.
Prior to the delisting of its common stock, the December 2021 Notes were convertible into PDL common stock upon the occurrence of specified corporate events as described in the December 2021 Notes Indenture or under either of the following circumstances at any time prior to the close of business on the business day immediately preceding June 1, 2021 (or at any time beginning on June 1, 2021 until the close of business on the second scheduled trading day immediately preceding the stated maturity):
•During any fiscal quarter (and only during such fiscal quarter) commencing after the fiscal quarter ended June 30, 2017, if the last reported sale price of Company common stock for at least 20 trading days (whether or not consecutive), in the period of 30 consecutive trading days, ending on, and including, the last trading day of the immediately preceding fiscal quarter, exceeds 130% of the conversion price for the notes on each applicable trading day; or
•During the five business-day period immediately after any five consecutive trading-day period, which the Company refers to as the measurement period, in which the trading price per $1,000 principal amount of notes for each trading day of that measurement period was less than 98% of the product of the last reported sale price of Company common stock and the conversion rate for the notes for each such trading day.
The December 2021 Notes remain convertible upon the occurrence of specified corporate events.
The initial conversion rate for the December 2021 Notes was 262.2951 shares of the Company’s common stock per $1,000 principal amount of December 2021 Notes, which was equivalent to an initial conversion price of approximately $3.81 per share of common stock, subject to adjustments upon the occurrence of certain specified events as set forth in the December 2021 Notes Indenture, the following of which occurred in 2020:
•Upon the distribution by the Company of its stock in Evofem to the PDL stockholders on May 21, 2020, the conversion rate for the December 2021 Notes increased from 262.2951 to 316.5801 shares of the Company’s common stock per $1,000 principal amount of December 2021 Notes equating to a conversion price of $3.16 per share of common stock.
•Upon the stockholders’ approval of the dissolution of the Company on August 19, 2020, a Fundamental Make-Whole Change, as defined in the December 2021 Notes Indenture, was triggered and the conversion rate for the December 2021 Notes was temporarily increased by 26.5297 to 343.1098 shares of the Company’s common stock for those bondholders who elected to convert their bonds during the conversion period.
•Upon the spin-off of the Company’s majority-owned subsidiary, LENSAR, on October 1, 2020, the conversion rate increased for the December 2021 Notes from 316.5801 to 410.6268 shares of the Company’s common stock per $1,000 principal amount of December 2021 Notes equating to a conversion price of $2.44 per share of common stock.
•As the adjustment to the conversion rate resulting from the spin-ff of LENSAR occurred during the fundamental make-whole period, the temporary increase to the conversion rate of 26.5297 shares of the Company’s common stock associated with the stockholders’ approval of the dissolution of the Company was further increased by 7.8812 shares of the Company’s common stock for the applicable portion of the observation period for those bondholders who elected to convert their bonds during the conversion period.
•Upon the suspension of trading of the Company’s common stock on the Nasdaq prior to the opening of business on December 31, 2020, a Fundamental Make-Whole Change occurred on December 31, 2020 resulting in a temporary increase to the conversion rate of 34.7383 shares of the Company’s common stock during the conversion period.
In accordance with the accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion, upon the issuance of the December 2021 Notes in November 2016 the Company was required to separately account for the liability component of the instrument in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance. As a result, the Company separated the principal balance of the December 2021 Notes between the fair value of the debt component with the remainder of the consideration being allocated to the equity component. Using an assumed borrowing rate of 9.5%, which represented the estimated market interest rate for a similar nonconvertible instrument
available to the Company on the date of issuance, the Company recorded a debt discount of $4.3 million, allocated $23.8 million to Additional paid-in capital for the conversion feature and allocated $12.8 million to deferred tax liability.
The debt discount, including the conversion feature and issuance costs allocated to debt, which remained after amortization and the effect of the September 2019 Exchange Transaction, was being amortized to interest expense over the term of the December 2021 Notes until the adoption of the Liquidation Basis and increased, until such time, interest expense for the December 2021 Notes from the 2.75% cash coupon interest rate to an effective interest rate of 9.7%.
On December 17, 2019, the Company repurchased $44.8 million in aggregate principal amount of its December 2021 Notes for $39.9 million in cash and 3.5 million shares of its common stock in privately negotiated transactions (the “December 2019 Exchange Transaction”). It was determined that the repurchase of the principal amount should be accounted for as a partial extinguishment of the December 2021 Notes. As a result, a loss on extinguishment of $2.5 million was recorded at closing of the transaction. The loss on extinguishment included the de-recognition of a proportional share of the original issuance discount of $0.3 million and outstanding deferred issuance costs of less than $0.1 million.
The approval of the Plan of Dissolution by the Company’s stockholders in August 2020, provided for a Fundamental Change Repurchase Right, as defined in the December 2021 Notes Indenture, to each holder of the December 2021 Notes which would require the Company, at the holder’s option, to repurchase for cash on September 29, 2020 such holder’s notes, or any portion of the principal amount thereof, equal to $1,000 or an integral multiple of $1,000. No holders tendered their notes for repurchase under this Fundamental Change Repurchase Right.
The approval of the Plan of Dissolution by the Company’s stockholders also initiated a Fundamental Make-Whole Change, as noted above, allowing the holders of the December 2021 Notes to exercise their conversion rights during the conversion period for a cash amount equal to the conversion rate as defined in the December 2021 Notes Indenture (the “September 2020 Conversion”). Holders of $11.2 million par value of December 2021 Notes exercised their conversion right for an aggregate cash amount of $12.0 million. Such notes were repurchased and retired prior to December 31, 2020.
As a result of the suspension of trading of the Company’s common stock on the Nasdaq prior to the opening of business on December 31, 2020, a Fundamental Change occurred on December 31, 2020, the first day the Company’s common stock was no longer quoted and traded on a national securities exchange, and accordingly provided for a Fundamental Change Repurchase Right, which requires the Company, at the holder’s option, to repurchase for cash on February 17, 2021 such holder’s notes, or any portion of the principal amount thereof, equal to $1,000 or an integral multiple of $1,000. See Note 26, Subsequent Events, for further information.
The suspension of trading of the Company’s common stock also initiated a Fundamental Make-Whole Change allowing the holders of the notes to exercise their conversion rights until the close of business on February 16, 2021 for a cash amount equal to the conversion rate as defined in the December 2021 Notes Indenture (the “2021 Conversion”). See Note 26, Subsequent Events, for further information.
In December 2020, the Company repurchased an additional $2.2 million par value of December 2021 Notes in separate privately negotiated transactions for an aggregate amount of $2.3 million, including interest (the “December 2020 Repurchases”). As of December 31, 2020, $1.9 million par value of these notes remained outstanding pending final settlement, the offset of which is recorded as “Other Assets” on the Company’s Consolidated Statement of Net Assets as of December 31, 2020.
The carrying value and unamortized discount of the December 2021 Notes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
(Liquidation Basis)
|
|
(Going Concern Basis)
|
|
|
|
|
|
Principal amount of the December 2021 Notes
|
|
$
|
2,330
|
|
|
$
|
19,170
|
|
Unamortized discount of liability component under Going Concern Basis
|
|
—
|
|
|
(2,220)
|
|
Expected settlement premium under Liquidation Basis
|
|
132
|
|
|
—
|
|
Net carrying value of the December 2021 Notes
|
|
$
|
2,462
|
|
|
$
|
16,950
|
|
Interest expense for the December 2021 Notes included in the Company’s Consolidated Statements of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended
|
|
Year Ended December 31,
|
(in thousands)
|
August 31, 2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Contractual coupon interest
|
$
|
281
|
|
|
$
|
3,390
|
|
|
$
|
4,125
|
|
|
|
Amortization of debt issuance costs
|
5
|
|
|
64
|
|
|
76
|
|
|
|
Amortization of debt discount
|
39
|
|
|
459
|
|
|
542
|
|
|
|
Amortization of conversion feature
|
544
|
|
|
5,973
|
|
|
6,611
|
|
|
|
Total
|
$
|
869
|
|
|
$
|
9,886
|
|
|
$
|
11,354
|
|
|
|
As of December 31, 2020, the December 2021 Notes are convertible.
Capped Call Transaction
In connection with the offering of the December 2021 Notes, the Company entered into a privately-negotiated capped call transaction with an affiliate of the underwriter of such issuance. The aggregate cost of the capped call transaction was $14.4 million. The capped call transaction is generally expected to reduce the potential dilution upon conversion of the December 2021 Notes and/or partially offset any cash payments the Company is required to make in excess of the principal amount of converted December 2021 Notes in the event that the market price per share of the Company’s common stock, as measured under the terms of the capped call transaction, is greater than the strike price of the capped call transaction. This initially corresponds to the approximate $3.81 per share conversion price of the December 2021 Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the December 2021 Notes. The cap price of the capped call transaction was initially $4.88 per share and is subject to certain adjustments under the terms of the capped call transaction. Both the per share conversion price and cap price were adjusted for the above-noted changes to the conversion rate of the December 2021 Notes that occurred during 2020. The Company will not be required to make any cash payments to the option counterparty upon the exercise of the options that are a part of the capped call transaction, but the Company will be entitled to receive from it an aggregate amount of cash and/or number of shares of the Company’s common stock, based on the settlement method election chosen for the related convertible senior notes, with a value equal to the amount by which the market price per share of the Company’s common stock, as measured under the terms of the capped call transaction, is greater than the strike price of the capped call transaction during the relevant valuation period under the capped call transaction, with such number of shares of the Company’s common stock and/or amount of cash subject to the cap price.
The Company evaluated the capped call transaction under authoritative accounting guidance and determined that it should be accounted for as a separate transaction and classified as a net reduction to additional paid-in capital within stockholders’ equity with no recurring fair value measurement recorded.
In connection with the September 2019 Exchange Transaction, the Company unwound a portion of the capped call entered into when the December 2021 Notes were issued, as they were no longer scheduled to mature in 2021. This generated proceeds to the Company of $0.9 million. The $0.9 million proceeds from the unwind of the capped call, which reflected the value of the options outstanding at the time of the September 2019 Exchange Transaction and the average share price of the Company’s common stock were included as an increase to Additional paid-in capital within stockholders’ equity.
In connection with the December 2019 Exchange Transaction, the Company unwound a corresponding portion of the capped call related to the notes and repurchased 1.6 million shares of its common stock from the counterparty. The Company paid the capped call counterparty $3.1 million, representing $5.6 million for the common stock repurchased from the counterparty, net of $2.5 million owed from the counterparty to the Company for unwinding the capped call. The common stock repurchased was reflected as a decrease to Retained earnings within stockholders’ equity. The proceeds from the capped call were included as an increase to Additional paid-in capital within stockholders’ equity.
In connection with the September 2020 Conversion and the December 2020 Repurchases, the Company unwound a corresponding portion of the capped call which generated aggregate proceeds to the Company of $1.3 million.
As of December 31, 2020, under the Liquidation Basis, the estimated cash expenditures of the December 2021 Notes was $2.5 million, this includes principal, interest and other payments expected to repurchase or convert the notes to cash. For additional information, see Note 3, Net Assets in Liquidation.
December 2024 Notes
On September 17, 2019, in connection with the September 2019 Exchange Transaction, the Company exchanged $86.1 million aggregate principal of December 2021 Notes for an identical aggregate original principal amount of December 2024 Notes, plus a cash payment of $70.00 for each $1,000 principal amount exchanged, totaling approximately $6.0 million. The December 2024 Notes were scheduled to mature on December 1, 2024. The Company paid interest at 2.75% on the December 2024 Notes semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2019. The original principal of the December 2024 Notes was expected to accrete at a rate of 2.375% per year (“Accretion Interest”) commencing September 17, 2019 through the maturity of the December 2024 Notes. The accreted principal amount of the December 2024 Notes was payable in cash upon maturity and is included in “Other long-term liabilities” on the Company’s Consolidated Balance Sheet as of December 31, 2019.
Upon the occurrence of a fundamental change, as defined in the indenture entered into in connection with the December 2024 Notes (the “December 2024 Notes Indenture”), holders have the option to require the Company to repurchase their December 2024 Notes at a purchase price equal to 100% of the accreted principal amount of such December 2024 Notes, plus accrued interest on the original principal amount thereon.
Prior to the delisting of its common stock, the December 2024 Notes were convertible into PDL common stock upon the occurrence of specified corporate events as described in the December 2024 Notes Indenture or under either of the following circumstances at any time prior to the close of business on the business day immediately preceding June 1, 2024 (or at any time beginning on June 1, 2024 until the close of business on the second scheduled trading day immediately preceding the stated maturity):
•During any fiscal quarter (and only during such fiscal quarter) commencing after the fiscal quarter ended December 31, 2019, if the last reported sale price of Company common stock for at least 20 trading days (whether or not consecutive), in the period of 30 consecutive trading days, ending on, and including, the last trading day of the immediately preceding fiscal quarter, exceeds 130% of the conversion price for the notes on each applicable trading day; or
•During the five business-day period immediately after any five consecutive trading-day period, which the Company refers to as the measurement period, in which the trading price per $1,000 original principal amount of notes for each trading day of that measurement period was less than 98% of the product of the last reported sale price of Company common stock and the conversion rate for the notes for each such trading day.
In accordance with the terms of the December 2024 Notes Indenture, the Company had the right, but not the obligation, to redeem all or any portion of the December 2024 Notes that is equal to $1,000 original principal amount or an integral multiple of $1,000 prior to their scheduled maturity on a redemption date beginning on or after December 1, 2021 and on or before the 60th scheduled trading day before December 1, 2024, for a cash purchase price equal to the redemption price, but only if the last reported sale price of Company common stock exceeds 128% of the conversion price for the December 2024 Notes on (i) each of at least 20 trading Days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the trading day immediately before the redemption notice date for such redemption; and (ii) the trading day immediately before such redemption notice date. The redemption price for the December 2024 Notes called for redemption is equal to the then accreted principal amount of such December 2024 Notes plus accrued but unpaid interest on the original principal amount thereon. The calling of any December 2024 Notes for redemption would constitute a make-whole fundamental change with respect to such notes, entitling the holders who convert such December 2024 Notes called for redemption prior to the applicable redemption date to receive an increase in the applicable conversion rate, as described in the December 2024 Notes Indenture.
The initial conversion rate for the December 2024 Notes was 262.2951 shares of the Company’s common stock per $1,000 original principal amount of December 2024 Notes, which was equivalent to an initial conversion price of approximately $3.81 per share of common stock, subject to adjustments upon the occurrence of certain specified events as set forth in the December 2024 Notes Indenture, the following of which occurred in 2020:
•Upon the distribution by the Company of its stock in Evofem to the PDL stockholders on May 21, 2020, the conversion rate for the December 2024 Notes increased from 262.2951 to 316.5801 shares of the Company’s common stock per $1,000 principal amount of December 2024 Notes equating to a conversion price of $3.16 per share of common stock.
•Upon the stockholders’ approval of the dissolution of the Company on August 19, 2020, a Fundamental Make-Whole Change, as defined in the December 2024 Notes Indenture, was triggered and the conversion rate for the December 2024 Notes was temporarily increased by 62.2203 to 378.8004 shares of the Company’s common stock during the conversion period.
•Upon the spin-off of the Company’s majority-owned subsidiary, LENSAR, On October 1, 2020 the conversion rate increased for the December 2024 Notes from 316.5801 to 410.6268 shares of the Company’s common stock per $1,000 principal amount of December 2024 Notes equating to a conversion price of $2.44 per share of common stock.
In accordance with the accounting guidance for an extinguishment of convertible debt instruments with a cash conversion feature, the Company was required to allocate the fair value of the consideration transferred between the liability component and the equity component. To calculate the fair value of the debt immediately prior to derecognition, the carrying value was recalculated in a manner that reflected the estimated market interest rate for a similar nonconvertible instrument at the date of issuance. Using an assumed borrowing rate of 7.05% the Company calculated the fair value of the debt representing the amount allocated to the liability component of the December 2024 Notes with the remainder of the consideration allocated to the equity conversion feature, to reflect the reacquisition of the embedded conversion option. The conversion feature together with the fees allocated to the debt are accounted for as a debt discount. As a result of the September 2019 Exchange Transaction, the Company recorded a total debt discount of $9.4 million, which included the cash conversion feature of $8.1 million and the debt issuance fees of $1.3 million, charged $5.5 million to Additional paid-in capital ($13.5 million charge to Additional paid-in capital representing the reduction to the 2021 equity component, partially offset by the $8.1 million allocated to equity for the 2024 notes) and recorded $1.2 million to deferred tax liability. The net amount charged to Additional paid-in capital represents the difference between the consideration paid for the September 2019 Exchange Transaction and the fair value of the convertible debt prior to the extinguishment.
The Accretion Interest and debt discount, including the conversion feature and issuance costs allocated to debt, were being amortized to interest expense over the term of the December 2024 Notes until the adoption of the Liquidation Basis and increased, until such time, interest expense for the December 2024 Notes from the 2.75% cash coupon interest rate to an effective interest rate of 7.5%.
On December 17, 2019, in connection with the December 2019 Exchange Transaction, the Company repurchased $74.6 million in aggregate principal amount of its December 2024 Notes for $58.0 million in cash and 9.9 million shares of its common stock in privately negotiated transactions. It was determined that the repurchase of the principal amount should be accounted for as a partial extinguishment of the December 2024 Notes. As a result, a loss on extinguishment of $2.1 million was recorded at closing of the transaction. The loss on extinguishment included the de-recognition of a proportional share of the deferred issuance costs of $1.1 million.
The approval of the Plan of Dissolution by the Company’s stockholders in August 2020 provided for a Fundamental Change Repurchase Right, as defined in the December 2024 Notes Indenture, to each holder of the December 2024 Notes which would require the Company, at the holder’s option, to repurchase for cash on September 29, 2020 such holder’s notes, or any portion of the principal amount thereof, equal to $1,000 or an integral multiple of $1,000. No holders tendered their notes for repurchase under this Fundamental Change Repurchase Right.
The approval of the Plan of Dissolution by the Company’s stockholders also initiated a Fundamental Make-Whole Change allowing the holders of the December 2024 Notes to exercise their conversion rights during the conversion period for a cash amount equal to the conversion rate as defined in the December 2024 Notes Indenture (the “September 2020 Conversion”). No holders exercised their conversion right for the December 2024 Notes.
In December 2020, the Company repurchased $1.0 million par value of December 2024 Notes in a privately negotiated transaction for an aggregate amount of $1.1 million, including interest.
There were no December 2024 Notes outstanding as of December 31, 2020.
The carrying value, accretion and unamortized discount of the December 2024 Notes under the Going Concern Basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Principal amount of the December 2024 Notes
|
|
|
|
$
|
11,500
|
|
|
|
Unamortized discount of liability component
|
|
|
|
(1,200)
|
|
|
|
Net carrying value of the December 2024 Notes
|
|
|
|
$
|
10,300
|
|
|
|
Interest expense for the December 2024 Notes included in the Company’s Consolidated Statement of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended
|
|
Year Ended
|
(in thousands)
|
August 31, 2020
|
|
December 31, 2019
|
|
|
|
|
Contractual coupon interest
|
$
|
49
|
|
|
$
|
598
|
|
Accretion Interest on outstanding principal
|
42
|
|
517
|
|
Amortization of debt issuance costs
|
6
|
|
53
|
|
Amortization of conversion feature
|
29
|
|
350
|
|
Total
|
$
|
126
|
|
|
$
|
1,518
|
|
Capped Call Transaction
In connection with the issuance of the December 2024 Notes in the September 2019 Exchange Transaction, the Company entered into a privately-negotiated capped call transaction with an affiliate of the underwriter of such issuance. The aggregate cost of the capped call transaction was $4.5 million. The capped call transaction is generally expected to reduce the potential dilution upon conversion of the December 2024 Notes and/or partially offset any cash payments the Company is required to make in excess of the principal amount of converted December 2024 Notes in the event that the market price per share of the Company’s common stock, as measured under the terms of the capped call transaction, is greater than the strike price of the capped call transaction. This initially corresponds to the approximate $3.81 per share conversion price of the December 2024 Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the December 2024 Notes. The cap price of the capped call transaction was initially $4.88 per share and is subject to certain adjustments under the terms of the capped call transaction. Both the per share conversion price and cap price were adjusted for the above-noted changes to the conversion rate of the December 2024 Notes that occurred during 2020. The Company will not be required to make any cash payments to the option counterparty upon the exercise of the options that are a part of the capped call transaction, but the Company will be entitled to receive from it an aggregate amount of cash and/or number of shares of the Company’s common stock, based on the settlement method election chosen for the related convertible senior notes, with a value equal to the amount by which the market price per share of the Company’s common stock, as measured under the terms of the capped call transaction, is greater than the strike price of the capped call transaction during the relevant valuation period under the capped call transaction, with such number of shares of the Company’s common stock and/or amount of cash subject to the cap price.
The Company evaluated the capped call transaction under authoritative accounting guidance and determined that it should be accounted for as separate transaction from the debt as it was entered into with a separate counterparty and does not relate to the same risk. The $4.5 million premium for the capped call was classified as a reduction to Additional paid-in capital within stockholders’ equity and will not be subject to recurring fair value measurement.
In connection with the December 2019 Exchange Transaction, the Company unwound a corresponding portion of the capped call related to the notes and repurchased 1.6 million shares of its common stock from the counterparty. The Company paid the capped call counterparty $1.2 million, representing $5.4 million for the common stock repurchased from the counterparty, net of $4.2 million owed from the counterparty to the Company for unwinding the capped call. The common stock repurchased was reflected as a decrease to Retained earnings within stockholders’ equity. The proceeds from the capped call were included as an increase to Additional paid-in capital within stockholders’ equity.
In connection with the repurchase of the December 2024 Notes in December 2020, the Company unwound a corresponding portion of the capped call which generated aggregate proceeds to the Company of $0.1 million.
As of December 31, 2020, the future minimum principal payments under the December 2021 and December 2024 Notes were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 2021 Notes
|
|
December 2024 Notes
|
|
Total
|
|
|
|
|
|
|
|
2021
|
|
$
|
405
|
|
|
$
|
—
|
|
|
$
|
405
|
|
2022
|
|
—
|
|
|
—
|
|
|
—
|
|
2023
|
|
—
|
|
|
—
|
|
|
—
|
|
2024
|
|
—
|
|
|
—
|
|
|
—
|
|
2025
|
|
—
|
|
|
—
|
|
|
—
|
|
Thereafter
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
405
|
|
|
$
|
—
|
|
|
$
|
405
|
|
15. Other Long-Term Liabilities
Other long-term liabilities under the Going Concern Basis consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
December 31,2019
|
|
|
|
|
|
Uncertain tax positions
|
|
|
|
$
|
37,574
|
|
Deferred tax liability
|
|
|
|
1,571
|
|
Accrued lease liability
|
|
|
|
10,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
1,020
|
|
Total (1) (2)
|
|
|
|
$
|
50,865
|
|
________________
(1) The amounts above exclude $0.1 million of Other long-term liabilities at Noden classified as held for sale as of December 31, 2019. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
(2) The amounts above include amounts held by LENSAR which was spun-off on October 1, 2020.
16. Commitments and Contingencies
Lease Guarantee
In connection with the spin-off by the Company of Facet Biotech Corporation (“Facet”), the Company entered into amendments to the leases for the Company’s former facilities in Redwood City, California, under which Facet was added as a co-tenant, and a Co-Tenancy Agreement, under which Facet agreed to indemnify the Company for all matters related to the leases attributable to the period after the spin-off date. In April 2010, Abbott Laboratories acquired Facet and later renamed the entity AbbVie Biotherapeutics, Inc. (“AbbVie”). If AbbVie were to default under its lease obligations, the Company could be held liable by the landlord as a co-tenant and, thus, the Company has in substance guaranteed the payments under the lease agreements for the Redwood City facilities. As of December 31, 2020, the total lease payments for the duration of the guarantee, which runs through December 2021 and is non-extendible, are approximately $11.3 million.
The Company prepared a discounted, probability weighted cash flow analysis to calculate the estimated fair value of the lease guarantee as of the spin-off. The Company was required to make assumptions regarding the probability of Facet’s default on the lease payment, the likelihood of a sublease being executed and the times at which these events could occur. These assumptions are based on information that the Company received from real estate brokers and the then-current economic conditions, as well as expectations of future economic conditions. The fair value of this lease guarantee was charged to Additional paid-in capital upon the spin-off and any future adjustments to the carrying value of the obligation will also be recorded in Additional paid-in capital.
The Company has recorded a liability of $10.7 million as of December 31, 2020 and 2019, related to this guarantee.
Wind Down Payments to Stock Option Holders
The Wind Down Retention Plan provides for equitable adjustments to outstanding stock options held by participants to ensure such participants realize the same benefits provided to shareholders in the event one or more cash or other distributions become payable to shareholders. Consistent with the existing terms of the Equity Plan, in the event one or more cash or other distributions
are paid to shareholders, the exercise price of outstanding stock options will be reduced on a dollar-for-dollar basis to reflect the per share value of such distributions. In the event that the Company declares cash or other distributions that, in the aggregate, exceed the difference between the exercise price of an outstanding stock option and the par value of the underlying shares ($0.01), the holder of such stock option will be entitled to receive from the Company a cash payment in an amount equal to the number of shares subject to such stock option multiplied by the per share amount of the cash or other distribution that exceeds the difference between exercise price of the outstanding option and the par value of the underlying shares (a “true-up payment”). A true-up payment is also paid with respect to a post-dissolution cash or other distributions with respect to a stock-option that was not exercised prior to dissolution in the same fashion as provided above. True-up payments are to be made on the same date that cash or other distributions are paid or made to the Company’s stockholders. As of December 31, 2020, the Company has 11,141,051 stock options outstanding at a weighted average adjusted exercise price of $1.87. As of January 4, 2021, the date we filed our Certificate of Dissolution, the Company was unable to issue stock for any purpose, including to cover the exercise of employee options, and as a result such options became unexercisable.
Purchase Obligations
After the sale of Noden and the spin-off of LENSAR, the Company no longer has any purchase obligations and the Company was released from all of its guarantees for purchase obligations.
Escrow Receivable
SWK Royalty Asset Escrow
The proceeds from the sale of the three royalty interests to SWK totaled $4.35 million, 90% of which was received at the closing of the transaction. The remaining 10% or $435 thousand, included in “Receivables from asset sales” in the Statement of Net Assets in Liquidation, is currently held in escrow against certain potential contingencies and is to be released on the one-year anniversary of the closing, subject to the satisfaction of any such potential contingencies.
17. Stockholders’ Equity
Dividends
On May 5, 2020, our Board, pursuant to the Plan of Liquidation, approved a distribution of all of the Company’s shares of common stock of Evofem via a liquidation distribution to PDL stockholders. The Evofem shares were distributed on May 21, 2020 to PDL shareholders of record as of the close of business on May 15, 2020 (the “Evofem Record Date”). Based on the shares of PDL common stock outstanding as of the close of business on the Evofem Record Date, PDL stockholders were entitled to receive 0.11591985 shares of Evofem common stock for each share of PDL common stock held.
On September 10, 2020, the Company’s Board, pursuant to the Plan of Liquidation, approved a distribution of all of the Company’s shares of common stock of LENSAR via a liquidation distribution to PDL stockholders. The LENSAR shares were distributed on October 2, 2020 to PDL shareholders of record as of the close of business on September 22, 2020 (the “LENSAR Record Date”). Based on the shares of PDL common stock outstanding as of the close of business on the LENSAR Record Date, PDL stockholders were entitled to receive 0.075879 shares of LENSAR common stock for each share of PDL common stock held.
Stock Repurchase Program
On March 1, 2017, the Company announced that its Board authorized the repurchase through March 2018 of issued and outstanding shares of the Company’s common stock having an aggregate value of up to $30.0 million pursuant to a share repurchase program. The repurchases under the share repurchase program were made from time to time in the open market or in privately negotiated transactions and were funded from the Company’s working capital. All shares of common stock repurchased under the Company’s share repurchase program were retired and restored to authorized but unissued shares of common stock at June 30, 2017. The Company repurchased 13.3 million shares of its common stock under the share repurchase program during the fiscal year ended December 31, 2017 for an aggregate purchase price of $30.0 million, or an average cost of $2.25 per share, including trading commissions.
On September 25, 2017, the Company announced that its Board authorized the repurchase of issued and outstanding shares of the Company’s common stock having an aggregate value of up to $25.0 million pursuant to a share repurchase program. The repurchases under the share repurchase program were made from time to time in the open market or in privately negotiated
transactions and were funded from the Company’s working capital. All shares of common stock repurchased under this share repurchase program were retired and restored to authorized but unissued shares of common stock. The Company repurchased 8.7 million shares of its common stock under the share repurchase program during the fiscal year ended December 31, 2018, for an aggregate purchase price of $25.0 million, or an average cost of $2.86 per share, including trading commissions.
On September 24, 2018, the Company announced that its Board authorized the repurchase of issued and outstanding shares of the Company’s common stock having an aggregate value of up to $100.0 million pursuant to a share repurchase program. Repurchases under this share repurchase program were made from time to time in the open market or in privately negotiated transactions and funded from the Company’s working capital. All shares of common stock repurchased under this repurchase program were retired and restored to authorized but unissued shares of common stock at July 31, 2019. The Company repurchased 31.0 million shares of its common stock under this share repurchase program for an aggregate purchase price of $100.0 million, or an average cost of $3.22 per share, including trading commissions.
On December 9, 2019, the Company announced that its Board authorized the repurchase of issued and outstanding shares of the Company's common stock and convertible notes up to an aggregate value of $200 million. On December 16, 2019, the Company announced that its Board approved a $75 million increase to the aforementioned $200 million repurchase program to acquire outstanding PDL common stock and convertible notes. Repurchases under the new repurchase program were made from time to time in the open market or in privately negotiated transactions and funded from the Company’s working capital. All shares of common stock repurchased under the Company’s repurchase program were retired and restored to authorized but unissued shares of common stock. All convertible notes repurchased under the program were retired. During the year ended December 31, 2019, the Company repurchased $44.8 million in aggregate principal amount of 2021 Convertible Notes and $74.6 million in aggregate principal amount of 2024 Convertible Notes for consideration consisting of a cash payment of $97.9 million and the issuance of 13.4 million shares of the Company’s common stock. During the eight months ended August 31, 2020, the Company repurchased $5.4 million in aggregate principal amount of 2021 Convertible Notes and $10.5 million in aggregate principal amount of 2024 Convertible Notes for cash payments totaling $18.8 million. During the eight months ended August 31, 2020, the Company repurchased 12.3 million shares of its common stock under the share repurchase program for an aggregate purchase price of $39.4 million, or an average cost of $3.20 per share, including trading commissions.
Upon the approval by the Company’s stockholders 2020 to seek dissolution in August 2020 during the Annual Shareholder Meeting, holders of $11.2 million par value of December 2021 Notes exercised their conversion right for an aggregate amount of $12.0 million. Such notes were repurchased entirely for cash and were retired prior to December 31, 2020. In December 2020, the Company repurchased an additional $2.2 million par value of December 2021 Notes in separate privately negotiated transactions for an aggregate amount of $2.3 million, including interest and repurchased $1.0 million par value of December 2024 Notes in a privately negotiated transaction for an aggregate amount of $1.1 million, including interest.
As of December 31, 2020, the Company had repurchased 12.3 million shares of its common stock under the share repurchase program for an aggregate purchase price of $39.4 million, or an average cost of $3.20 per share, including trading commissions.
18. Accumulated Other Comprehensive Income
Under the Going Concern Basis, comprehensive income is comprised of net loss and other comprehensive loss. The Company includes unrealized net gains (losses) on investments held in its available-for-sale securities in other comprehensive loss, and presents the amounts net of tax. The Company’s other comprehensive loss is included in the Company’s Consolidated Statements of Comprehensive Loss.
The balance of “accumulated other comprehensive loss,” net of tax, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Unrealized gains
(losses) on
available-for-
sale securities
|
|
|
|
|
|
Total Accumulated
Other
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
$
|
1,181
|
|
|
|
|
|
|
$
|
1,181
|
|
|
|
|
|
|
|
|
|
|
Activity for the year ended December 31, 2018
|
|
(1,181)
|
|
|
|
|
|
|
(1,181)
|
|
Ending Balance at December 31, 2018
|
|
—
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Activity for the year ended December 31, 2019
|
|
—
|
|
|
|
|
|
|
—
|
|
Ending Balance at December 31, 2019
|
|
—
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Activity for the eight months ended August 31, 2020
|
|
—
|
|
|
|
|
|
|
—
|
|
Ending Balance at August 31, 2020
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
19. Stock-Based Compensation
The Company previously granted restricted stock awards and stock options pursuant to a stockholder approved stock-based incentive plan.
The following table summarizes the Company’s stock option and restricted stock award compensation expense during the eight months ended August 31, 2020 and years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended August 31,
|
|
Year Ended December 31,
|
Stock-based Compensation
|
|
2020
|
|
2019
|
|
2018
|
(in thousands)
|
|
|
|
|
|
|
Employees and directors (1)
|
|
$
|
18,802
|
|
|
$
|
6,834
|
|
|
$
|
4,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_______________
(1) Stock option and restricted stock award compensation expense from discontinued operations are excluded from the table above.
The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility was based on the historical volatility of the Company’s common stock over the estimated expected life of the options. The expected term represents the period of time the options were expected to be outstanding. The expected term is based on the “simplified method” as defined by the SEC Staff Accounting Bulletin No. 110 (Topic 14.D.2). The Company used the “simplified method” due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the options. The risk-free rate was based on yields on U.S. Treasury securities with a maturity similar to the estimated expected term of the options. The fair value of restricted stock awards was based on the closing price of the Company’s common stock on the grant date.
The fair value of the Company’s stock options granted in the eight months ended August 31, 2020 and the years ended December 31, 2019 and 2018, were estimated assuming no expected dividends and the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended August 31,
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of expected term (in years)
|
|
1.0
|
|
3.5
|
-
|
6.1
|
|
3.5
|
-
|
6.0
|
|
|
|
|
Range of risk-free interest rate
|
|
0.1%
|
|
1.5%
|
-
|
3.0%
|
|
2.7%
|
-
|
3.0%
|
|
|
Expected volatility
|
|
55%
|
|
40%
|
|
40%
|
|
|
Stock-Based Incentive Plans
On February 7, 2020, the Board approved the Plan of Liquidation, which accelerated the vesting of a significant portion of the Company’s outstanding equity awards pursuant to provisions in the Wind Down Retention Plan. The Wind Down Retention Plan further provides for equitable adjustments to outstanding stock options held by participants to ensure such participants realize the same benefits provided to shareholders in the event one or more cash or other distributions become payable to shareholders. Consistent with the existing terms of the Equity Plan, in the event one or more cash or other distributions are paid to shareholders, the exercise price of outstanding stock options will be reduced on a dollar-for-dollar basis to reflect the per share value of such distribution. In the event that the Company declares cash or other distributions that, in the aggregate, exceed the difference between the exercise price of an outstanding stock option and the par value of the underlying shares ($0.01), the holder of such stock option will be entitled to receive from the Company a cash payment in an amount equal to the number of shares subject to such stock option multiplied by the per share amount of the cash or other distribution that exceeds the difference between exercise price of the outstanding option and the par value of the underlying shares (a “true-up payment”). A true-up payment is also paid with respect to a post-dissolution cash or other distributions with respect to a stock-option that was not exercised prior to dissolution in the same fashion as provided above. True-up payments are to be made on the same date that cash or other distributions are paid or made to the Company’s stockholders. In May 2020, in accordance with this provision and in conjunction with the Evofem distribution, the exercise price of the outstanding option awards was decreased by $0.58 per share. In October 2020, in accordance with this provision and in conjunction with the LENSAR distribution, the exercise price of the outstanding option awards was decreased by $0.78 per share. As of December 31, 2020, the Company has 11,141,051 stock options outstanding at a weighted average adjusted exercise price of $1.87. As of January 4, 2021, the date we filed our Certificate of Dissolution, the Company was unable to issue stock for any purpose, including to cover the exercise of employee options, and as a result such options became unexercisable.
2005 Equity Incentive Plan
The Company had one active stock-based incentive plan under which it previously granted stock-based awards to the Company’s employees, directors and non-employees.
Under the Company’s Amended and Restated 2005 Equity Incentive Plan effective June 8, 2018 (the “2005 Equity Incentive Plan”), the Company was authorized to issue a variety of incentive awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance share and performance unit awards, deferred compensation awards and other stock-based or cash-based awards. As of December 31, 2020, awards granted under the 2005 Equity Incentive Plan consisted of stock options and restricted stock awards. There were no other grants of any other award types under the 2005 Equity Incentive Plan. Upon the Company’s filing for dissolution in January 2021, the Company is no longer authorized to issue equity awards under the 2005 Equity Incentive Plan.
In June 2018, the Company’s stockholders approved an amendment and restatement of the 2005 Equity Incentive Plan that increased the number of shares available for grant by 15,000,000 to 26,200,000. The number of shares of common stock authorized for issuance, shares of common stock issued upon exercise of options or grant of restricted stock awards, shares of common stock subject to outstanding awards and shares available for grant under this plan as of December 31, 2020, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title of Plan
|
|
Total Shares of Common Stock Authorized
|
|
Total Shares of Common Stock Issued
|
|
|
|
Total Shares of Common Stock Available for Grant
|
|
|
|
|
|
|
|
|
|
2005 Equity Incentive Plan
|
|
26,200,000
|
|
|
17,731,795
|
|
|
|
|
8,468,205
|
|
Stock Options
The following table summarizes the option activity under the 2005 Equity Incentive Plan for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted-Average Adjusted Exercise Price
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
Outstanding at beginning of year
|
|
11,652
|
|
|
$
|
1.76
|
|
|
8.5
|
|
$
|
3,473
|
|
Granted
|
|
630
|
|
|
$
|
2.78
|
|
|
|
|
|
Exercised
|
|
(1,375)
|
|
|
$
|
1.84
|
|
|
|
|
|
Forfeited
|
|
(728)
|
|
|
$
|
3.08
|
|
|
|
|
|
Outstanding at end of year
|
|
10,180
|
|
|
$
|
1.87
|
|
|
7.8
|
|
$
|
6,298
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
10,180
|
|
|
$
|
1.87
|
|
|
7.8
|
|
$
|
6,298
|
|
Options to purchase common stock generally vested over a 3 or 4-year period and were generally granted for a term of 10 years.
The weighted-average grant-date fair value of options granted during the year ended December 31, 2020 was $0.78 per share. The intrinsic value of options exercised during the year ended December 31, 2020 was $1.2 million and the Company received $0.7 million in cash related to the exercise of the option awards. In conjunction with the dissolution process, all outstanding options were fully vested in the year ended December 31, 2020.
Restricted Stock Awards
Restricted stock has the same rights as other issued and outstanding shares of the Company’s common stock, including, in some cases, the right to accrue dividends, which are held in escrow until the award vests. The compensation expense related to these awards was determined using the fair market value of the Company’s common stock on the date of the grant, and the compensation expense was recognized ratably over the vesting period. Under the Company’s restricted stock plans, restricted stock awards typically vested over one to five years and compensation expense associated with these awards was recognized on a straight-line basis over the vesting period. In addition to service requirements, vesting of restricted stock awards may have been subject to the achievement of specified performance goals set by the Compensation Committee. If the performance goals were not met, no compensation expense was recognized and any previously recognized compensation expense was reversed.
The following table summarizes the restricted stock award activity under the 2005 Equity Incentive Plan for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
Number of shares
|
|
Weighted-average grant-date fair value per share
|
|
(in thousands)
|
|
|
Unvested at beginning of year
|
933
|
|
|
$
|
3.56
|
|
Awards granted
|
3,044
|
|
|
$
|
3.10
|
|
Awards vested
|
(2,872)
|
|
|
$
|
3.14
|
|
Withheld related to net settlement
|
(1,089)
|
|
|
$
|
3.39
|
|
Forfeited
|
(16)
|
|
|
$
|
3.22
|
|
Unvested at end of year
|
—
|
|
|
$
|
—
|
|
The total fair value of restricted stock awards vested during the years ended December 31, 2020, 2019 and 2018 was approximately $9.0 million, $1.4 million and $2.1 million, respectively.
The weighted-average grant date fair value for restricted stock awards granted under the 2005 Equity Incentive Plan for the years end December 31, 2020, 2019 and 2018 was $3.10, $3.62 and $2.61, respectively.
At December 31, 2020, there was no unrecognized compensation expense related to stock options or restricted stock awards granted under the 2005 Equity Incentive Plan.
Inducement Award Agreements
On September 12, 2017, the Company granted 961,000 shares of common stock in the form of a non-statutory inducement stock option grant pursuant to a non-statutory inducement stock option agreement and granted 240,200 shares of our common stock in the form of an inducement restricted stock grant pursuant to an inducement restricted stock agreement. These inducement awards were not granted under the 2005 Equity Incentive Plan.
Inducement Stock Option Activity
As of December 31, 2020, all stock options awarded under the non-statutory inducement stock option agreement were outstanding and exercisable. All compensation costs related to these options have been fully recognized.
Inducement Restricted Stock
In the year ended December 31, 2020, the remaining 80,067 shares of restricted stock awarded under the non-statutory inducement restricted stock agreement were vested. The total fair value of the restricted stock awards vested during the year ended December 31, 2020 was approximately $0.3 million.
Compensation expense associated with unvested restricted stock awards was recognized on a straight-line basis over the vesting period. At December 31, 2020, there was no unrecognized compensation expense related to restricted stock awards granted under the non-statutory inducement restricted stock agreement.
20. Revenue from Contracts with Customers
Disaggregation of Revenue
The Company disaggregated its revenue from contracts with customers by segment and geographic location as the Company believed it best depicted how the nature, amount, timing and uncertainty of its revenue and cash flows were affected by economic factors. In the following table, revenue is disaggregated by segment and primary geographical market for the eight months ended August 31, 2020 and the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended August 31, 2020
|
|
Year Ended December 31, 2019
|
(in thousands)
|
Medical Devices
|
|
Pharmaceutical (1)
|
|
Medical Devices
|
|
Pharmaceutical (1)
|
|
|
|
|
|
|
|
|
Primary geographical markets:
|
|
|
|
|
|
|
|
North America
|
$
|
6,656
|
|
|
$
|
10,093
|
|
|
$
|
10,155
|
|
|
$
|
26,034
|
|
Europe
|
2,078
|
|
|
13,008
|
|
|
3,438
|
|
|
22,816
|
|
Asia
|
4,137
|
|
|
6,378
|
|
|
11,536
|
|
|
6,243
|
|
Other
|
200
|
|
|
—
|
|
|
433
|
|
|
—
|
|
Total revenue from contracts with customers (2)
|
$
|
13,071
|
|
|
$
|
29,479
|
|
|
$
|
25,562
|
|
|
$
|
55,093
|
|
_______________
(1) The revenue from the Company’s Pharmaceutical segment for the eight months ended August 31, 2020 and the year ended December 31, 2019 is included in Loss from discontinued operations. For additional information, see Note 4, Discontinued Operations Classified as Assets held for sale.
(2) The table above does not include lease revenue from the Company’s Medical Devices segment of $2.1 million and $5.2 million for the eight months ended August 31, 2020 and the year December 31, 2019, respectively. For additional information, see Note 10, Leases.
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Receivables, net
|
|
|
|
$
|
10,377
|
|
Contract assets
|
|
|
|
$
|
3,512
|
|
Contract liabilities
|
|
|
|
$
|
4,024
|
|
Receivables, Net—Receivables, net, included amounts billed and due from customers. The amounts due are stated at their net estimated realizable value and are classified as current or noncurrent based on the timing of when the Company expects to receive payment. The Company maintained an allowance for doubtful accounts to provide for the estimated amount of receivables that would not be collected. The allowance was based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and collateral to the extent applicable. Receivables, net for our Pharmaceutical segment were classified as a current asset and included in Assets held for sale. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
Contract Assets—The Company’s contract assets represented revenue recognized for performance obligations completed before an unconditional right to payment exists, and therefore invoicing or associated reporting from the customer regarding the computation of the net product sales had not yet occurred. The Company’s contract assets were only attributable to the Pharmaceutical segment, and as such classified contract assets in Assets held for sale on the Company’s Consolidated Balance Sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Medical Devices
|
|
Pharmaceutical
|
|
Total
|
|
|
|
|
|
|
|
Contract assets at December 31, 2019
|
|
$
|
—
|
|
|
$
|
3,512
|
|
|
$
|
3,512
|
|
Contract assets recognized
|
|
—
|
|
|
(6,730)
|
|
|
(6,730)
|
|
Payments received
|
|
—
|
|
|
8,562
|
|
|
8,562
|
|
Contract assets disposed of
|
|
—
|
|
|
(5,344)
|
|
|
(5,344)
|
|
Contract assets at December 31, 2020
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Contract Liabilities—The Company’s contract liabilities consisted of deferred revenue for products sold to customers for which the performance obligation had not been completed by the Company. The Company classified deferred revenue as current or noncurrent based on the timing of when it expected to recognize revenue. The noncurrent portion of deferred revenue was included in Other long-term liabilities on the Company’s Consolidated Balance Sheet. The Pharmaceutical segment deferred revenue was classified as a current liability and included in Liabilities held for sale on the Company’s Consolidated Balance Sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Medical Devices
|
|
Pharmaceutical
|
|
Total
|
|
|
|
|
|
|
|
Contract liabilities at December 31, 2019
|
|
$
|
1,075
|
|
|
$
|
2,949
|
|
|
$
|
4,024
|
|
Additions
|
|
658
|
|
|
1,659
|
|
|
2,317
|
|
Amounts recognized in revenue
|
|
(851)
|
|
|
(888)
|
|
|
(1,739)
|
|
Contract liabilities disposed of
|
|
(882)
|
|
|
(3,720)
|
|
|
(4,602)
|
|
Contract liabilities at December 31, 2020
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
21. Segment Information
Information regarding the Company’s segments for the eight months ended August 31, 2020 and the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by segment
|
|
Eight Months Ended
|
|
Year Ended
|
(in thousands)
|
|
August 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Medical Devices
|
|
$
|
15,211
|
|
|
$
|
30,742
|
|
Strategic Positions
|
|
—
|
|
|
—
|
|
Pharmaceutical
|
|
—
|
|
|
—
|
|
Income Generating Assets
|
|
110
|
|
|
(36)
|
|
Total revenues
|
|
$
|
15,321
|
|
|
$
|
30,706
|
|
________________
The table above excludes revenues related to discontinued operations. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income by segment
|
|
Eight Months Ended
|
|
Year Ended
|
(in thousands)
|
|
August 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Medical Devices
|
|
$
|
(4,454)
|
|
|
$
|
(5,230)
|
|
Strategic Positions
|
|
(15,723)
|
|
|
28,758
|
|
Pharmaceutical (1)
|
|
(15,855)
|
|
|
(19,048)
|
|
Income Generating Assets (1)
|
|
(37,217)
|
|
|
(74,891)
|
|
Total
|
|
(73,249)
|
|
|
(70,411)
|
|
Change in fair value of warrants not allocated to segments (2)
|
|
(4,047)
|
|
|
—
|
|
Total net loss
|
|
$
|
(77,296)
|
|
|
$
|
(70,411)
|
|
________________
(1) The (Loss) income by segment presented above includes amounts related to both continuing and discontinued operations. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
(2) The change in fair value of warrants not allocated to segments presented above includes the amounts related to the change in fair value of the Evofem warrants after the distribution of the Evofem common stock to PDL stockholders on May 21, 2020. The Strategic Positions segment ceased to be a reporting segment as of this date.
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets by segment
|
|
|
|
|
Year Ended
|
(in thousands)
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
Medical Devices
|
|
|
|
|
$
|
2,435
|
|
Strategic Positions
|
|
|
|
|
—
|
|
Pharmaceutical (1)
|
|
|
|
|
2,960
|
|
Income Generating Assets
|
|
|
|
|
125
|
|
Total long-lived assets
|
|
|
|
|
$
|
5,520
|
|
________________
(1) The amounts above include Property and Equipment in the Pharmaceutical segment classified as Assets held for sale. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
The operations for the Medical Devices segment were primarily located in the United States and the operations for the Pharmaceutical segment were primarily located in Italy, Ireland and the United States.
22. Concentration of Credit Risk
Product Line Concentration
The percentage of total revenue recognized, which individually accounted for 10% or more of the Company’s total revenues in one or more of the periods presented below, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended August 31,
|
|
Year Ended December 31,
|
(in thousands)
|
|
2020 (1)
|
|
2019 (1)
|
|
2018 (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biogen
|
|
—
|
%
|
|
—
|
%
|
|
14
|
%
|
LENSAR
|
|
99
|
%
|
|
100
|
%
|
|
77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________
(1) The amounts above exclude product sales in our Pharmaceutical segment and royalty rights classified as held for sale in the Income Generating Assets segment, each of which is included in the Statements of Operations as Loss from discontinued operations. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
Total revenues by geographic area are based on the country of domicile of the counterparty to the agreement are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended August 31,
|
|
Year Ended December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
United States
|
|
$
|
6,656
|
|
|
$
|
15,151
|
|
|
$
|
21,434
|
|
Europe
|
|
2,078
|
|
|
3,438
|
|
|
2,451
|
|
Rest of world
|
|
4,337
|
|
|
12,117
|
|
|
8,143
|
|
Total revenues (1)
|
|
$
|
13,071
|
|
|
$
|
30,706
|
|
|
$
|
32,028
|
|
________________
(1) The amounts above exclude product sales in our Pharmaceutical segment and royalty rights held for sale in the Income Generating Assets segment, each of which is included in the Statements of Operations as Loss from discontinued operations. See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
One customer accounted for more than 10% of accounts receivable, net as of December 31, 2019.
23. Income Taxes
For financial reporting purposes, Loss before income taxes from continuing operations includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended August 31,
|
|
Year Ended December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
United States
|
|
$
|
(60,820)
|
|
|
$
|
(61,446)
|
|
|
$
|
(39,518)
|
|
Foreign
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
(60,820)
|
|
|
$
|
(61,446)
|
|
|
$
|
(39,518)
|
|
The provision for income taxes from continuing operations for the eight months ended August 31, 2020 and the years ended December 31, 2019 and 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended August 31,
|
|
Year Ended December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Current income tax (benefit) expense
|
|
|
|
|
|
|
Federal
|
|
$
|
(14,316)
|
|
|
$
|
3,750
|
|
|
$
|
(271)
|
|
State
|
|
1,051
|
|
|
2,046
|
|
|
1,033
|
|
Foreign
|
|
—
|
|
|
—
|
|
|
—
|
|
Total current
|
|
(13,265)
|
|
|
5,796
|
|
|
762
|
|
Deferred income tax (benefit) expense
|
|
|
|
|
|
|
Federal
|
|
(4,340)
|
|
|
(10,978)
|
|
|
(7,932)
|
|
State
|
|
(175)
|
|
|
830
|
|
|
(615)
|
|
Foreign
|
|
—
|
|
|
—
|
|
|
1,032
|
|
Total deferred
|
|
(4,515)
|
|
|
(10,148)
|
|
|
(7,515)
|
|
Total provision
|
|
$
|
(17,780)
|
|
|
$
|
(4,352)
|
|
|
$
|
(6,753)
|
|
A reconciliation of the income tax benefit from continuing operations computed using the U.S. statutory federal income tax rate compared to the income tax benefit for income from continuing operations included in the Consolidated Statements of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months Ended August 31,
|
|
Year Ended December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Tax at U.S. statutory rate on loss before income taxes
|
|
$
|
(12,772)
|
|
|
$
|
(12,904)
|
|
|
$
|
(8,299)
|
|
Change in valuation allowance
|
|
(3,762)
|
|
|
3,613
|
|
|
875
|
|
State taxes
|
|
656
|
|
|
2,446
|
|
|
(397)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in uncertain tax positions
|
|
—
|
|
|
1,513
|
|
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
True-ups
|
|
—
|
|
|
249
|
|
|
(27)
|
|
CARES Act refund
|
|
(5,406)
|
|
|
—
|
|
|
—
|
|
Other
|
|
3,504
|
|
|
731
|
|
|
286
|
|
Total
|
|
$
|
(17,780)
|
|
|
$
|
(4,352)
|
|
|
$
|
(6,753)
|
|
Deferred tax assets and liabilities are determined based on the differences between financial reporting and income tax bases of assets and liabilities, as well as net operating loss carryforwards and are measured using the enacted tax rates and laws in effect
when the differences are expected to reverse. The significant components of the Company’s net deferred tax assets and liabilities from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
(Liquidation Basis)
|
|
(Going Concern Basis)
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
3,345
|
|
|
$
|
3,602
|
|
Research and other tax credits
|
|
1,448
|
|
|
1,448
|
|
ASC 740-10 Reserve
|
|
6,455
|
|
|
8,419
|
|
Stock-based compensation
|
|
2,513
|
|
|
1,758
|
|
Accruals
|
|
84
|
|
|
1,388
|
|
|
|
|
|
|
Debt modifications
|
|
6,030
|
|
|
7,189
|
|
|
|
|
|
|
Capital loss carryforward
|
|
2,947
|
|
|
1,213
|
|
Other
|
|
51
|
|
|
1,145
|
|
Total deferred tax assets
|
|
22,873
|
|
|
26,162
|
|
Valuation allowance
|
|
(21,105)
|
|
|
(7,465)
|
|
Total deferred tax assets, net of valuation allowance
|
|
1,768
|
|
|
18,697
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Debt modifications
|
|
—
|
|
|
(308)
|
|
Intangible assets
|
|
(21,673)
|
|
|
(19,649)
|
|
Other
|
|
(16)
|
|
|
(311)
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
(21,689)
|
|
|
(20,268)
|
|
Net deferred tax liabilities
|
|
$
|
(19,921)
|
|
|
$
|
(1,571)
|
|
The CARES Act, among other provisions, permits Net Operating Loss (“NOL”) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes at the 35% corporate tax rate then in effect. The Company was a significant taxpayer in the earlier eligible carryback years and expects that the NOL carryback provision of the CARES Act will result in a material cash benefit as a result of the 2020 ordinary tax losses generated and, to a lesser degree, for the 2019 tax year. The expected cash benefit to be received for ordinary losses incurred in 2020 totals $91.8 million. The Company received a refund of $2.1 million associated with 2019 ordinary losses that were carried back to an eligible carryback year.
As of December 31, 2020 and 2019, the Company had federal NOL carryforwards of $103.3 million and $108.6 million, respectively. As of December 31, 2020 and 2019, the Company also had state NOL carryforwards of $63.7 million and $63.9 million, respectively, excluding $215.5 million of California NOLs available to offset assessments, if any, resulting from the current audit by the California Franchise Tax Board (the “CA FTB”). The federal and state NOL carryforwards will begin expiring in the year 2023, if not utilized. As of December 31, 2020 and 2019, the Company had $2.2 million of federal tax credits that will begin expiring in the year 2025, if not utilized. As of December 31, 2020 and 2019, the Company had $19.3 million of state tax credit carryforwards that do not expire.
Utilization of the federal and state NOL and tax credit carryforwards may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of NOLs and credits before utilization. Of the Company’s $103.3 million of federal NOL carryforwards as of December 31, 2020, $26.9 million are subject to an annual limitation of $1.8 million for each of the years ending December 31, 2021 to 2022, and $1.3 million for the year ending December 31, 2023. As of December 31, 2020, the Company estimates that at least $22.0 million of federal NOL carryforwards will expire unutilized and none of the state NOLs will expire unutilized. Tax attributes acquired from LENSAR may be subject to separate return limitations that may limit the corporation’s ability to use the acquired NOLs and credits. Furthermore, under the Tax Cuts and Job Act of 2017 (the ‘2017 Tax Act’), although the treatment of tax losses generated in taxable years ending before December 31, 2017 has not changed, tax losses generated in taxable years beginning after December 31, 2017 may only be utilized to offset 80% of taxable income annually. This change may require the Company to pay additional federal income taxes in future years if additional losses are generated post 2017.
As of December 31, 2020, the Company determined that it was more likely than not that certain deferred tax assets from continuing operations would not be realized in the near future and had a $21.1 million valuation allowance against deferred tax assets. The net change in total valuation allowance for each of the years ending December 31, 2020 and 2019, was an increase of $13.6 million and $5.8 million, respectively. $2.9 million of the valuation allowance at December 31, 2020, is related to capital losses that have limited carryforward utilization. The Company does not have an expectation of future capital gains against which such losses could be utilized and as such determined that it was more likely than not that such deferred tax assets would not be realized. $18.2 million of the valuation allowance at December 31, 2020 is related to federal and state deferred tax assets that the Company determined it was more likely than not would be realized.
The 2017 Tax Act significantly changed the existing U.S. corporate income tax laws by, among other things, lowering the corporate tax rate (from a top rate of 35% to a flat rate of 21%), implementing elements of a territorial tax system, and imposing a one-time deemed repatriation transition tax on cumulative undistributed foreign earnings, for which the Company had not previously paid U.S. taxes.
A reconciliation of the Company’s unrecognized tax benefits, excluding accrued interest and penalties, for 2020, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Balance at the beginning of the year
|
|
$
|
84,213
|
|
|
$
|
80,783
|
|
|
$
|
79,179
|
|
Increases related to tax positions from prior fiscal years
|
|
—
|
|
|
3,927
|
|
|
1,604
|
|
|
|
|
|
|
|
|
Increases related to tax positions taken during current fiscal year
|
|
8,412
|
|
|
—
|
|
|
—
|
|
Decreases related to tax positions from prior fiscal years
|
|
(6,867)
|
|
|
(497)
|
|
|
—
|
|
Balance at the end of the year
|
|
$
|
85,758
|
|
|
$
|
84,213
|
|
|
$
|
80,783
|
|
The future impact of the unrecognized tax benefit of $85.8 million, if recognized, is as follows: $32.6 million would affect the effective tax rate and $53.2 million would result in adjustments to deferred tax assets and valuation allowances. The Company periodically evaluates its exposures associated with our tax filing positions. The Company is currently under audit by the CA FTB. The timing of the audit resolution and the amount to be ultimately paid (if any) is uncertain. The outcome of the audit could result in the payment of tax amounts that differ from the amounts the Company has reserved for uncertain tax positions for the periods under audit resulting in incremental expense or a reversal of the Company’s reserves in a future period. At this time, the Company does not anticipate a material change in the unrecognized tax benefits related to the California FTB audit that would affect the effective tax rate, deferred tax assets or valuation allowances over the next 12 months.
Estimated interest and penalties associated with unrecognized tax benefits increased our income tax expense in the Consolidated Statements of Operations by $1.0 million during the eight months ended August 31, 2020, $1.6 million during the year ended December 31, 2019 and $1.0 million during the year ended December 31, 2018. Interest and penalties associated with unrecognized tax benefits accrued on the statement of net assets and balance sheet were $11.2 million, $9.7 million, and $8.0 million as of December 31, 2020, 2019 and 2018, respectively.
The Company’s U.S. federal income tax returns are subject to examination for the tax years 2017 forward, In general, the Company’s state and local income tax returns are subject to examination by tax authorities for tax years 2000 forward. The Company is currently under income tax examination by the CA FTB for the tax years 2009 through 2018.
24. Net Loss per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per Basic and Diluted Share
|
Eight Months Ended August 31,
|
|
Year Ended December 31,
|
(in thousands, except per share amounts)
|
2020
|
|
2019
|
|
2018
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
$
|
(43,040)
|
|
|
$
|
(57,094)
|
|
|
$
|
(32,765)
|
|
Net loss from discontinued operations
|
$
|
(34,915)
|
|
|
$
|
(13,597)
|
|
|
$
|
(36,094)
|
|
Loss attributable to the PDL’s stockholders used to compute net loss per basic and diluted share
|
$
|
(77,296)
|
|
|
$
|
(70,411)
|
|
|
$
|
(68,859)
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Total weighted-average shares used to compute net loss attributable to PDL's stockholders, per basic share
|
118,001
|
|
|
118,631
|
|
|
145,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute net loss attributable to PDL’s stockholders, per diluted share
|
118,001
|
|
|
118,631
|
|
|
145,669
|
|
|
|
|
|
|
|
Net loss per share - basic
|
|
|
|
|
|
Continuing operations
|
$
|
(0.36)
|
|
|
$
|
(0.48)
|
|
|
$
|
(0.22)
|
|
Discontinued operations
|
$
|
(0.30)
|
|
|
$
|
(0.11)
|
|
|
$
|
(0.25)
|
|
Net loss attributable to PDL’s stockholders per basic share
|
$
|
(0.66)
|
|
|
$
|
(0.59)
|
|
|
$
|
(0.47)
|
|
|
|
|
|
|
|
Net loss per share - diluted
|
|
|
|
|
|
Continuing operations
|
$
|
(0.36)
|
|
|
$
|
(0.48)
|
|
|
$
|
(0.22)
|
|
Discontinued operations
|
$
|
(0.30)
|
|
|
$
|
(0.11)
|
|
|
$
|
(0.25)
|
|
Net loss attributable to PDL’s stockholders per diluted share
|
$
|
(0.66)
|
|
|
$
|
(0.59)
|
|
|
$
|
(0.47)
|
|
The Company computes net loss per diluted share using the sum of the weighted-average number of common and common equivalent shares outstanding common equivalent shares used in the computation of net loss per diluted share include shares that may be issued pursuant to outstanding stock options and restricted stock awards in each case, on a weighted-average basis for the period they were outstanding, including, if applicable, the underlying shares using the treasury stock method.
The February 2018 Notes that were repaid on February 1, 2018, the December 2021 Notes and the December 2024 Notes allow, or previously allowed, for the settlement entirely or partially in cash, and are accounted for under the treasury stock method. Under the treasury stock method, the shares issuable upon conversion of the notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the notes exceeds their principal amount. The effect of which, for diluted earnings per share purposes, is that only the number of shares of common stock that would be necessary to settle such excess, if the Company elected to settle such excess in shares, are included in the computation.
December 2021 Notes and December 2024 Notes Capped Call Potential Dilution
In November 2016, the Company issued $150.0 million in aggregate principal of the December 2021 Notes. In September 2019, the Company entered into the September 2019 Exchange Transaction through which it exchanged a portion of the December 2021 Notes for the December 2024 Notes. Both the December 2021 Notes and the December 2024 Notes provide in certain situations for the conversion of the outstanding principal amount into shares of the Company’s common stock at a predefined conversion rate. In conjunction with the issuance of the December 2021 Notes and the issuance of the December 2024 Notes pursuant to the September 2019 Exchange Transaction, the Company entered into capped call transactions, with a hedge counterparty. The capped call transactions are expected generally to reduce the potential dilution, and/or offset, to an extent, the cash payments the Company may choose to make in excess of the principal amount, upon conversion of the December 2021 Notes or the December 2024 Notes. The Company has excluded the capped call transaction from the net loss per diluted share computation as such securities would have an anti-dilutive effect and those securities should be considered separately rather than in the aggregate in determining whether their effect on net loss per diluted share would be dilutive or anti-dilutive. For additional information regarding the conversion rates and the capped call transactions related to the Company’s December 2021 Notes and December 2024 Notes; see Note 14, Convertible Senior Notes.
Anti-Dilutive Effect of Restricted Stock Awards and Stock Options
For the eight months ended August 31, 2020, and years ended December 31, 2019 and 2018, the Company excluded approximately 0.2 million, 1.0 million, and 1.1 million shares, respectively, underlying restricted stock awards, calculated on a weighted-average basis, from the Company’s net loss per diluted share calculations because their effect was anti-dilutive.
For the eight months ended August 31, 2020, and years ended December 31, 2019 and 2018, the Company excluded approximately 11.9 million, 11.2 million and 3.9 million shares underlying outstanding stock options, respectively, calculated on a weighted-average basis, from the Company’s net loss per diluted share calculations because their effect was anti-dilutive.
25. Legal Proceedings
Wellstat Litigation
On September 4, 2015, the Company filed in the Supreme Court of New York a motion for summary judgment in lieu of complaint which requested that the court enter judgment against Wellstat Diagnostics Guarantors for the total amount due on the Wellstat Diagnostics debt, plus all costs and expenses including lawyers’ fees incurred by the Company in enforcement of the related guarantees. On July 29, 2016, the court issued its Memorandum of Decision granting the Company’s motion for summary judgment and denying the Wellstat Diagnostics Guarantors’ cross-motion for summary judgment seeking a determination that they were no longer liable under the guarantees. The Supreme Court of New York held that the Wellstat Diagnostics Guarantors are liable for all “Obligations” owed by Wellstat Diagnostics to the Company. It did not set a specific dollar amount due, but ordered that a judicial hearing officer or special referee be designated to determine the amount of the Obligations owing, and awarded the Company its attorneys’ fees and costs in an amount to be determined. On July 29, 2016, the Wellstat Diagnostics Guarantors filed a notice of appeal from the Memorandum of Decision to the Appellate Division of the Supreme Court of New York. On February 14, 2017, the Appellate Division reversed the summary judgment decision of the Supreme Court in the Company’s favor, but affirmed the denial of the Wellstat Diagnostics Guarantors’ cross-motion for summary judgment. The Appellate Division determined that the action was inappropriate for summary judgment pursuant to New York Civil Practice Law & Rules section 3213 on procedural grounds, but specifically made no determination regarding whether the Company was entitled to a judgment on the merits. Pursuant to this decision, the action was remanded to the Supreme Court for further proceedings on the merits. The proceeding has been conducted as a plenary proceeding, with both parties having the opportunity to take discovery and file dispositive motions in accordance with New York civil procedure. On September 11, 2019, the Supreme Court of New York granted the Company’s summary judgment motion, the court holding that the guarantees executed by the Wellstat Diagnostics Guarantors are valid and enforceable, and that the Wellstat Diagnostics Guarantors are liable for the amount owed under the loan agreement. The court ordered a damages hearing before a special referee to calculate the amount owed under the loan agreement between Wellstat Diagnostics and the Company. On September 12, 2019, the Wellstat Diagnostics Guarantors filed a notice of appeal of the Supreme Court of New York’s decision on summary judgment. On September 17, 2019, the Wellstat Diagnostics Guarantors requested a stay of the enforcement of the New York Supreme Court’s decision pending their appeal of the decision, which was denied on November 21, 2019. A damages hearing was scheduled to begin before a judicial hearing officer on December 17, 2019. At the request of the judicial hearing officer, the parties agreed to mediate their dispute prior to the commencement of the damages hearing. As a result, no decision was made by the hearing officer with respect to the amount of damages owed to the Company.
On August 11, 2020, PDL entered into a Settlement and Mutual Release Agreement with all parties including Samuel J. Wohlstadter, Nadine H. Wohlstadter, Hyperion Catalysis International, Wellstat Vaccines, LLC, Wellstat ImmunoTherapeutics, LLC, Wellstat BioCatalysis, LLC, Wellstat AVT Investment, LLC, Wellstat Biologics Corporation, Wellstat Management Company, LLC, Wellstat Ophthalmics Corporation, Wellstat Therapeutics Corporation, Wellstat Therapeutics EU Limited, Duck Farm, Inc., Hebron Valley Farms, Inc., HVF, Inc., Hyperion Catalysis EU Limited, NHW, LLC, and SJW Properties, Inc., together with their respective successors and assigns, (collectively the “Wellstat Parties”), and Defined Diagnostics, LLC (f/k/a Wellstat Diagnostics, LLC) (“Diagnostics”), resolving all litigation between the Company and the Wellstat Parties (the “Settlement Agreement”).
Under the terms of the Settlement Agreement, the parties agreed that the Wellstat Parties would pay an amount of $7.5 million on the signing of the Settlement Agreement and either (1) $5.0 million by February 10, 2021 and $55.0 million by July 26, 2021; or (2) $67.5 million by July 26, 2021. Further under the terms of the Settlement Agreement, upon payment of either $5.0 million prior to April 21, 2021 or completion of the payment of $67.5 million by July 26, 2021, the Company will transfer to Diagnostics on an “as is” and “where is” basis certain assets currently owned by the Company which were acquired through the Company’s credit bid in 2017 for the assets of Diagnostics. If the Wellstat Parties or Diagnostics fail to make payment in full by July 26, 2021
as required under the terms of the Settlement Agreement, the Company is authorized to record judgment against the Wellstat Parties for an amount of $92.5 million or such lesser amount as may be owed under the Settlement Agreement as of that date. The foregoing description is qualified in its entirety by reference to the full text of the Settlement Agreement, a copy of which is expected to be filed with the Securities and Exchange Commission. On December 11, 2020, the Company sold its rights to the settlement agreement to a third-party. For additional information on the sale, see Note 9, Notes and Other Long-Term Receivables.
Glumetza Class Action Antitrust Litigation
On September 18, 2019, the City of Providence filed a civil antitrust suit on behalf of a putative class of payors in the Northern District of California against Bausch Health Companies, Inc., Salix Pharmaceuticals, Inc., Santarus, Inc., Assertio Therapeutics, Inc., Lupin Pharmaceuticals, Inc. and the Company, inter alia, alleging that a patent settlement agreement between Assertio and Lupin unlawfully restrained competition in an alleged market for Glumetza and its AB-rated generic equivalents sold in the United States. The plaintiffs claim that the settlement agreement violated the federal Sherman Act and various state antitrust laws. The Company was a named defendant by certain End Payor Plaintiffs (EPPs) due to its purchase from Assertio in 2013 of a royalty asset based on sales of Glumetza. On January 21, 2020, the EPPs voluntarily dismissed their claims against the Company, without prejudice. The Company agreed to toll the running of statute of limitations for a limited period of time and to respond to certain discovery requests, subject to reasonable objections, which time period has elapsed.
Noden Pharma DAC v Anchen Pharmaceuticals, Inc. et al
On June 12, 2017, Noden Pharma DAC filed a complaint against Anchen and Par Pharmaceutical (“Par”) for infringement of U.S. Patent No. 8,617,595 based on their submission of an ANDA seeking authorization from the FDA to market a generic version of Tekturna® aliskiren hemifumarate tablets, 150 mg and 300 mg, in the United States. Noden Pharma DAC’s suit triggered a 30-month stay of FDA approval of that application under the Hatch Waxman Act. Par filed a counterclaim seeking a declaratory judgment that their proposed generic version of Tekturna HCT® aliskiren hemifumarate hydrochlorothiazide tablets (150 mg eq. base/12.5 mg HCT, 150 mg eq. base/25 mg HCT, 300 mg eq. base/12.5 mg HCT, and 300 mg eq. base/25 mg HCT), described in a separate ANDA submitted by Par to FDA, alleging noninfringement of U.S. Patent No. 8,618,172 (“the ‘172 Patent”), also owned by Noden Pharma DAC. This case was litigated in the United States District Court for the District of Delaware. In March of 2018, the Parties filed a joint stipulation of dismissal of the defendants’ counterclaim seeking a declaratory judgment of non-infringement of the ‘172 Patent. In the stipulation, Anchen and Par agreed that they will not seek, or otherwise join or assist in, any post-grant review, including inter partes review, of the ‘172 patent or U.S. Patent No. 9,023,893. The defendants further stipulated that they will not seek marketing approval of Par’s ANDA or submit any other ANDA seeking approval to market aliskiren hemifumarate hydrochlorothiazide prior to the expiration of the ‘172 Patent in July of 2028. Both the ‘172 Patent and the ‘893 Patent are listed in the Orange Book for Tekturna HCT. On June 8, 2018, Noden and Anchen entered into the Settlement Agreement. Under the Settlement Agreement, the parties agreed to file a stipulation of dismissal with the court to facilitate dismissal of the litigation in its entirety, with prejudice. In the Settlement Agreement, Noden granted Anchen a non-exclusive, royalty free, fully paid up and non-transferable license to manufacture and commercialize in the United States a generic version of aliskiren which is described in Anchen’s ANDA, and Anchen agreed not to commercialize its generic version of aliskiren prior to March 1, 2019. The license grant excludes certain formulations covered by the ‘595 Patent which closely relate to the commercial formulation of Tekturna marketed by Noden. The Settlement Agreement includes a release by each party for liabilities associated with the litigation and an acknowledgment from Anchen that the ‘595 Patent claims are valid and enforceable.
Other Legal Proceedings
From time to time, the Company is involved in lawsuits, arbitrations, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. The Company makes provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions are reviewed at least quarterly and adjusted to reflect the impact of settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. If any unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of the Company’s operations of that period and on its cash flows and liquidity.
26. Subsequent Events
Dissolution
In January 2021, the Company filed a certificate of dissolution in Delaware and will proceed to wind-down and dissolve the Company in accordance with Delaware General Corporate Law. Also in January 2021, the Company’s common stock was formally delisted by Nasdaq.
Convertible Senior Notes
In connection with the Fundamental Change Repurchase Right resulting from the suspension of trading of the Company’s common stock on Nasdaq prior to the opening of business on December 31, 2020, holders of 142 December 2021 Notes tendered their notes for repurchase, which occurred on February 17, 2021.
In connection with the Fundamental Make-Whole Change resulting from the suspension of trading of the Company’s common stock on Nasdaq prior to the opening of business on December 31, 2020, holders of 50 December 2021 Notes exercised their conversion rights. Such notes will be retired for cash.
CareView
The first principal payment and the scheduled interest payment due December 31, 2018 that were previously deferred until January 31, 2021 were subsequently deferred until May 31, 2021 under additional amendments.
27. Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Months Ended
|
|
Three Months Ended
|
(in thousands, except per share amounts)
|
|
|
|
August 31,
2020
|
|
June 30,
2020
|
|
March 31,
2020
|
|
|
|
|
(Under Going Concern Basis of Accounting)
|
Total revenues
|
|
|
|
$
|
4,115
|
|
|
$
|
5,211
|
|
|
$
|
5,995
|
|
Net loss from continuing operations
|
|
|
|
$
|
(10,852)
|
|
|
$
|
(12,929)
|
|
|
$
|
(19,259)
|
|
Net income (loss) from discontinued operations
|
|
|
|
$
|
15,236
|
|
|
$
|
(37,399)
|
|
|
$
|
(12,752)
|
|
Net income (loss) attributable to PDL’s stockholders
|
|
|
|
$
|
4,398
|
|
|
$
|
(49,971)
|
|
|
$
|
(31,723)
|
|
Net loss from continuing operations per basic share
|
|
|
|
$
|
(0.10)
|
|
|
$
|
(0.11)
|
|
|
$
|
(0.15)
|
|
Net income (loss) from discontinued operations per basic share
|
|
|
|
$
|
0.14
|
|
|
$
|
(0.32)
|
|
|
$
|
(0.11)
|
|
Net loss from continuing operations per diluted share
|
|
|
|
$
|
(0.10)
|
|
|
$
|
(0.11)
|
|
|
$
|
(0.15)
|
|
Net income (loss) from discontinued operations per diluted share
|
|
|
|
$
|
0.14
|
|
|
$
|
(0.32)
|
|
|
$
|
(0.11)
|
|
Net income (loss) per basic share
|
|
|
|
$
|
0.04
|
|
|
$
|
(0.43)
|
|
|
$
|
(0.26)
|
|
Net income (loss) per diluted share
|
|
|
|
$
|
0.04
|
|
|
$
|
(0.43)
|
|
|
$
|
(0.26)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands, except per share amounts)
|
|
December 31,
2019
|
|
September 30,
2019
|
|
June 30,
2019
|
|
March 31,
2019
|
|
|
(Under Going Concern Basis of Accounting)
|
Total revenues
|
|
$
|
8,521
|
|
|
$
|
8,031
|
|
|
$
|
7,458
|
|
|
$
|
6,696
|
|
Net loss from continuing operations
|
|
$
|
(28,817)
|
|
|
$
|
(11,811)
|
|
|
$
|
(8,016)
|
|
|
$
|
(8,450)
|
|
Net (loss) income from discontinued operations
|
|
$
|
(26,011)
|
|
|
$
|
(6,155)
|
|
|
$
|
3,502
|
|
|
$
|
15,067
|
|
Net (loss) income attributable to PDL’s stockholders
|
|
$
|
(54,888)
|
|
|
$
|
(17,784)
|
|
|
$
|
(4,419)
|
|
|
$
|
6,680
|
|
Net loss from continuing operations per basic share
|
|
$
|
(0.25)
|
|
|
$
|
(0.10)
|
|
|
$
|
(0.07)
|
|
|
$
|
(0.07)
|
|
Net (loss) income from discontinued operations per basic share
|
|
$
|
(0.23)
|
|
|
$
|
(0.06)
|
|
|
$
|
0.03
|
|
|
$
|
0.12
|
|
Net loss from continuing operations per diluted share
|
|
$
|
(0.25)
|
|
|
$
|
(0.10)
|
|
|
$
|
(0.07)
|
|
|
$
|
(0.07)
|
|
Net (loss) income from discontinued operations per diluted share
|
|
$
|
(0.23)
|
|
|
$
|
(0.06)
|
|
|
$
|
0.03
|
|
|
$
|
0.12
|
|
Net (loss) income per basic share
|
|
$
|
(0.48)
|
|
|
$
|
(0.16)
|
|
|
$
|
(0.04)
|
|
|
$
|
0.05
|
|
Net (loss) income per diluted share
|
|
$
|
(0.48)
|
|
|
$
|
(0.16)
|
|
|
$
|
(0.04)
|
|
|
$
|
0.05
|
|
In the fourth quarter of 2020, the Company determined that a $3.0 million tax benefit from discontinued operations was omitted from the consolidated statement of operations for the two-month period ending August 31, 2020. This error resulted from an incorrect tax calculation related to the sale of the Noden business. To correct for this error, the Company recorded an out-of-period adjustment to increase Income tax receivable and record a tax benefit of $3.0 million as of and for the three months ended December 31, 2020. The Company determined that the error and out-of-period correction were not material to any of the Company’s interim period financial statements.