We own or have rights to certain trademarks, trade names, copyrights and other intellectual property used in our business, including PDL BioPharma, Inc. and the PDL logo, each of which is considered a registered trademark. All other company names, product names, trade names and trademarks included in this Annual ReportForm 10-K are trademarks, registered trademarks or trade names of their respective owners.
In this report all references to “PDL,” “we,” “us,” “our” or the “Company” mean collectively PDL BioPharma, Inc. and its subsidiaries, except where it is made clear that the term means only PDL BioPharma, Inc.
For details regarding the Noden transaction see Note 21 to the Consolidated Financial Statements included in Item 8.
Medical Devices
LENSAR
In December 2016, LENSAR filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code (the “Chapter 11 case”). With our support, LENSAR filed a Chapter 11 plan of reorganization under which LENSAR would issue 100% of its equity interests to us in exchange for the cancellation of our claims as a secured creditor in the Chapter 11 case. On May 11, 2017, pursuant to the plan of reorganization and the Chapter 11 plan of reorganization, most of LENSAR’s outstanding debt owed to us was converted to equity and LENSAR became our wholly-owned operating subsidiary.
LENSAR is a commercial-stage medical device company focused on the next generationdesigning, developing and marketing an advanced femtosecond cataract laser technology for refractive cataract surgery. Cataract surgery is the highest volume surgical procedure performed worldwide with over 26.2 million surgeries performed in 2017. The LENSAR® Laser System offers cataract surgeons automation and customization for their astigmatism treatment planning and other essential steps of the refractive cataract surgery procedure with the highest levels of precision, accuracy, and efficiency. These features assist surgeons in managing their astigmatism treatment plans for optimal overall visual outcomes.
The LENSAR® Laser System has been approved by the FDA for anterior capsulotomy, lens fragmentation, corneal and arcuate incisions. The LENSAR Laser with Augmented Reality™ provides an accurate 3-D model of the relevant anatomical features of each patients anterior segment, allowing precise laser delivery and to enhance the surgical confidence in performing accurate corneal incisions, precise size, shape and location of free-floating capsulotomies, and efficient lens fragmentation for all grades. The LENSAR® Laser System - fs 3D (LLS-fs 3D) with Streamline™ includes the integration with various pre-op diagnostic devices, automated Iris Registration with automatic cyclorotation adjustment, IntelliAxis-C™ (corneal) and IntelliAxis-L™ (Lens) markers for simple alignment without errors associated with manually marking the eye, of Toric IOLs as well as treatment planning tools for precision guided laser treatments. The corneal incision–only mode, expanded remote diagnostics capabilities, additional pre-programmable preferences, thoughtful ergonomics, and up to 20 seconds faster laser treatment times with Streamline allow for seamless integration and maximum surgical efficiency.
For additional details regarding the LENSAR, the LENSAR transaction and the Chapter 11 case, see Note 21 to the Consolidated Financial Statements included in Item 8.
Income Generating Assets
We have pursued income generating assets when such assets can be acquired on terms that we believe allow us to increase return to our stockholders. The income generating assets typically consist of (i) notes and other long-term receivables, (ii) royalty rights and hybrid notes/royalty receivables, (iii) equity investments acquired in connection with note receivable transactions and (iv) royalties from issued patents in the United States and elsewhere. We focus our income generating asset acquisition strategy on commercial-stage therapies and medical devices having strong economic fundamentals. However, our acquired income generating assets will not, in the near term, replace completely the revenues we generated from our license agreements related to our Queen et al. patents. In the second quarter of 2016, our revenues materially decreased after we stopped receiving payments from certain Queen et al. patent licenses and legal settlements, which accounted for 11%, 68% and 82% of our 2017, 2016 and 2015 revenues.
Notes and Other Long-Term Receivables
We have entered into credit agreements with borrowers across the healthcare industry, under which we make available cash loans to be used by the borrower. Obligations under these credit agreements are typically secured by a pledge of substantially all the assets of the borrower and any of its subsidiaries. While we currently maintain this portfolio of notes receivable, our intention is to pursue fewer of these transactions, and focus on acquiring additional specialty pharmaceutical products or companies. At December 31, 2017, we had a total of two notes receivable transactions outstanding, CareView and Wellstat Dignostics. The investments outstanding at December 31, 2017 are summarized below:
•CareView
Deal Summary
In July 2015, we entered into a credit agreement with CareView, under which we made available to CareView up to $40.0 million in two tranches of $20.0 million each. Under the terms of the credit agreement, each tranche has a five-year maturity and outstanding borrowings under the credit agreement will bear interest at the rate of 13.5% per annum and are payable quarterly in arrears. Principal repayment were to commence on the ninth quarterly interest payment date of each tranche of loans. The principal amount outstanding at commencement of repayment was required to be repaid in equal installments until final maturity of the loans. In addition, we have a security interest in substantially all of CareView’s assets.
In October 2015, we funded the first tranche of $20.0 million, net of fees. The second $20.0 million tranche was based on a milestone that was not achieved, and there is no additional funding obligation due from us.
In February 2018, we entered into a modification agreement with CareView whereby we agreed, effective as of December 28, 2017, to modify the credit agreement before remedies could otherwise have become available to us 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 modification agreement we agreed that (i) a lower liquidity covenant would be applicable and (ii) principal repayment would be delayed for a period of up to December 31, 2018. In exchange for agreeing to these modifications, among other things, the exercise price of our warrants to purchase 4.4 million shares of common stock of CareView was reduced and, subject to the occurrence of certain events, CareView agreed to grant us additional equity interests.
Technology
CareView is a provider of products and on-demand application services for the healthcare industry by specializing in bedside video monitoring, archiving and patient care documentation systems and patient entertainment services.
Wellstat Diagnostics
Deal Summary
In March 2012, we executed a $7.5 million two-year senior secured note receivable with the holders of the equity interests in Wellstat Diagnostics. In August 2012, we and Wellstat Diagnostics amended the note receivable, providing a senior secured note receivable of $10.0 million, bearing interest at 12% per annum, to replace the original $7.5 million note receivable. This $10.0 million note receivable was repaid on November 2, 2012, using the proceeds of the $40.0 million credit facility we entered into on the same date.
In November 2012, we entered into a $40.0 million credit agreement with Wellstat Diagnostics pursuant to which we were to accrue quarterly interest payments at the rate of 5% per annum. In January 2013, Wellstat Diagnostics defaulted on the credit agreement, and as a result both parties agreed to enter into a forbearance agreement whereby we agreed to provide additional funding. In August 2013, we entered into an amended and restated credit agreement with terms substantially the same as those of the original credit agreement. However, pursuant to the amended and restated credit agreement: (i) the principal amount was reset to approximately $44.1 million.
During 2015, 2016 and 2017, we, Wellstat Diagnostics, and Samuel J. Wohlstadter, Nadine H. Wohlstadter, Duck Farm, Inc., Hebron Valley Farms, Inc., HVF, Inc., Hyperion Catalysis EU Limited, Hyperion, NHW, LLC, Wellstat AVT Investment, LLC, Wellstat Biocatalysis, LLC, Wellstat Biologics Corporation, Wellstat Diagnostics, Wellstat Immunotherapeutics, LLC, Wellstat Management Company, LLC, Wellstat Ophthalmics Corporation, Wellstat Therapeutics Corporation, Wellstat Therapeutics EU Limited, Wellstat Vaccines, LLC and SJW Properties, Inc., the guarantors of Wellstat Diagnostics’ obligations to us (collectively, the “Wellstat Diagnostics Guarantors”) were involved in a series of legal actions. A further discussion of the Wellstat litigation is included in Note 23, “Legal Proceedings” in Item 8, “Financial Statements and Supplementary Data” of this Annual Report.
Technology
Wellstat Diagnostics is a private company dedicated to the development, manufacture, sale and distribution of small point of care diagnostic systems that can perform a wide variety of tests targeting the clinical diagnostics market.
Royalty Rights - At Fair Value
We have entered into various royalty purchase agreements with counterparties, whereby the counterparty conveys to us the right to receive royalties that are typically payable on sales revenue generated by the sale, distribution or other use of the counterparties’ products. Certain of our royalty agreements provide the counterparty with the right to repurchase the royalty rights at any time for a specified amount.
We record the royalty rights at fair value using discounted cash flows related to the expected future cash flows to be received. We use significant judgment in determining our valuation inputs, including estimates as to the probability and timing of future sales of the licensed product. A third-party expert is generally engaged to assist us with the development of our estimate of the expected future cash flows. The estimated fair value of the asset is subject to variation should those cash flows vary significantly from our estimates. At each reporting period, an evaluation is performed to assess those estimates, discount rates utilized and general market conditions affecting fair market value.
While we currently maintain this portfolio of royalty rights, our intention is to pursue fewer of these transactions while we focus on acquiring additional specialty pharmaceutical products or companies.
At December 31, 2017, we had a total of five royalty rights transactions outstanding, which are summarized below in chronological order:
Depomed
Deal Summary
In October 2013, we entered into a Royalty Purchase and Sale Agreement (the “Depomed Royalty Agreement”) with Depomed, whereby we acquired the rights to receive royalties and milestones payable on sales of five Type 2 diabetes products licensed by Depomed in exchange for a $240.5 million cash payment.
Under the terms of the Depomed Royalty Agreement, we will receive all royalty and milestone payments due under license agreements between Depomed and its licensees until we have received payments equal to two times the cash payment made to Depomed, after which all net payments received by Depomed will be shared evenly between us and Depomed.
The Depomed 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.
Technology
The rights acquired include Depomed’s royalty and milestone payments accruing from and after October 1, 2013: (a) from Valeant Pharmaceuticals International, Inc. (“Valeant”) 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); (c) from Janssen Pharmaceuticals N.V. (“Janssen Pharmaceuticals”) with respect to potential future development milestones and sales of its fixed-dose combination of Invokana® (canagliflozin, a sodium glucose co-transorter 2 (SGLT2) inhibitor) and extended-release metformin tablets, marketed as Invokamet XR®; (d) from Boehringer Ingelheim GmbH (“Boehringer Ingelheim”) with respect to potential development milestones and sales of the fixed-dose combinations of drugs and extended-release metformin subject to Depomed’s license agreement with Boehringer Ingelheim including its recently approved products, Jentadueto XR® and Synjardy XR®; and (e) from LG Life Sciences and Valeant for sales of extended-release metformin in Korea and Canada, respectively.
On May 31, 2016, Boehringer Ingelheim and Eli Lilly & Company announced that the FDA approved Jentadueto XR (a fixed dose combination of Linagliptin, a dipeptidyl peptidase-4 inhibitor and extended-release metformin tablets) system for the treatment of type 2 diabetes in adults, which will be marketed by both companies. This approval triggered the payment of a milestone to us of $6.0 million. On September 21, 2016, Janssen Pharmaceuticals announced that the FDA approved Invokamet XR for the treatment of type 2 diabetes in adults. This approval triggered the payment of a milestone to us of $5.0 million. On December 12, 2016, Boehringer Ingelheim and Eli Lilly announced that the FDA approved Synjardy® XR (a fixed dose combination of Empagliflozin, a sodium-glucose co-transporter 2 inhibitor, and extended-release metformin tablets)for the treatment of type 2 diabetes in adults, which will be marketed by both companies. This approval triggered the payment of a milestone to us of $6.0 million. In 2017, we started to receive royalties on the net sales of these three newly approved products.
In February and August of 2016, a total of three generic equivalents to Glumetza were approved to enter the market. In February 2016, Lupin Pharmaceuticals, Inc. and in August 2017, Teva Pharmaceutical Industries Ltd., launched a generic equivalent approved product. To date, the third generic equivalent to Glumetza has not launched.
In May 2017, we received notification that a subsidiary of Valeant had launched an authorized generic equivalent product in February 2017, and we received royalties on such authorized generic equivalent product under the same terms as the branded Glumetza product, retroactive to February 2017.
Viscogliosi Brothers
Deal Summary
In June 2014, we entered into a Royalty Purchase and Sale Agreement (the “VB Royalty Agreement”) with VB, whereby we acquired the right to receive royalties on net sales of a spinal implant that had 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. The royalty rights acquired includes royalties accruing from and after April 1, 2014. We receive all royalty payments due to VB pursuant to certain technology transfer agreements between VB and Paradigm Spine until we have received payments equal to 2.3 times the cash payment it made to VB, after which all payment rights will be returned to VB. VB may repurchase the royalty right at any time on or before June 26, 2018, for a specified amount. The chief executive officer of Paradigm Spine is one of the owners of VB. The Paradigm Spine Credit Agreement, entered into on February 14, 2014 between us and Paradigm Spine (the “Paradigm Spine Credit Agreement”),cataracts and the VB Royalty Agreement were negotiated separately.
Technology
The coflex® Interlaminarmanagement of pre-existing or surgically induced corneal astigmatism. LENSAR’s femtosecond laser uses proprietary advanced imaging and laser technology is an Interlaminar Stabilization® device indicated for use in one or two level lumbar stenosis from L1-L5 in skeletally mature patientsto customize planning and treatments, allowing faster visual recovery and improved outcomes, as compared to conventional cataract surgery, a more manual procedure combined with at least moderate impairment in function.
University of Michigan
Deal Summary
In November 2014, we acquired a portion of U-M’s worldwide royalty interest in Cerdelga™ (eliglustat) for $65.6 million pursuantultrasound, referred to the Royalty Purchase and Sale Agreement with U-M (the “U-M Royalty Agreement”). Under the terms of the U-M Royalty Agreement, we will receive 75% of all royalty payments due under U-M’s license agreement with Genzyme Corporation, a Sanofi company (“Genzyme”) until expiration of the licensed patents, excluding any patent term extension. The royalty rate used to calculate the royalties to be paid by Genzyme to U-M was not disclosed by the parties.
Technology
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 in January 2015 and in Japan in March 2015.
AcelRx
Deal Summary
In September 2015, we entered into a royalty interest assignment agreement (the “AcelRx Royalty Agreement”) with ARPI LLC, a wholly owned subsidiary of AcelRx, whereby we acquired a portion of the royalties on expected sales of Zalviso™ (sufentanil sublingual tablet system) in the European Union, Switzerland and Australia by AcelRx’s commercial partner, Grünenthal. Under the terms of the agreement, we paid AcelRx $65.0 million, and in exchange, we will receive 75% of the royalties AcelRx receives from Grünenthal as well as 80% of the first four commercial milestone payments, until the earlier of occur of (i) receipt by us of payments equal to three times the cash payments made to AcelRx and (ii) the expiration of the licensed patents. We believe that the applicable patents run until January 2032. Zalviso received marketing approval by the European Commission in September 2015. Grünenthal launched Zalviso in the second quarter of 2016 and we started to receive royalties in the third quarter of 2016.
Technology
Zalviso is a combination drug and device product which, using a patient controlled dispenser, delivers a sub-lingual formulation of sufentanil, an opioid with a high therapeutic index. Zalviso is approved in the European Union.
KYBELLA
Deal Summary
In July 2016, we entered into a royalty purchase and sales agreement with an individual, whereby we acquired the individual’s rights to receive certain royalties on sales of KYBELLA by Allergan, Plc (“Allergan”) in exchange for a $9.5 million cash payment and up to $1.0 million in future milestone payments based upon achieving specified product sales targets. We started to receive royalty payments during the third quarter of 2016.
Technology
KYBELLA is an FDA approved injectable treatment for adults with moderate-to-severe fat below the chin, known as submental fat. KYBELLA contains deoxycholic acid which destroys fat cells, and allows for a safer and less invasive alternative to surgical procedures.
Equity Investments
In connection with credit and royalty agreements, from time to time we may make equity investments in healthcare companies. Our investment objective with respect to potential equity investments is to maximize our portfolio total return by generating current income from capital appreciation, and our primary business objectives are to increase our net income, net operating income and asset value by investing in companies with the potential for equity appreciation and realized gains.
Royalties from Queen et al. patents
While the Queen et al. patents have expired and the resulting royalty revenue has dropped substantially since the first quarter of 2016, we continue to receive royalty revenue from one product under the Queen et al. patent licenses, Tysabri®, as a result of sales of the product that was manufactured prior to patent expiry. In November 2017, we were notified by Biogen Inc. (“Biogen”) that product supply for Tysabri® that was manufactured prior to patent expiry, and for which we would receive royalties on, had been extinguished in the United States and was rapidly being reduced in other countries. As a result, we anticipate royalties from product sales of Tysabri to be substantially lower in 2018 and are expected to cease after the first quarter of 2019.
Intellectual Property
Patents
Tekturna is protected by multiple patents worldwide, which specifically cover the composition of matter, the pharmaceutical formulations and methods of production. In the United States, the FDA Orange Book lists one patent, U.S. patent No. 5,559,111 (the “’111 Patent”), which covers compositions of matter comprising aliskiren. The ‘111 Patent expires on January 21, 2019, which was previously extended through a pediatric extension. In addition, the FDA Orange Book for Tekturna lists U.S. Patent No. 8,617,595, which covers certain compositions comprising aliskiren, together with other formulation components, and will expire on February 19, 2026. The FDA Orange Book for Tekturna HCT lists U.S. patent No. 8,618,172, which covers certain compositions comprising aliskiren, together with other formulation components, and will expire on July 13, 2028. In Europe, European patent No. 678 503B (the “’503B Patent”) expired in 2015. However, numerous SPCs have been granted which are based on the ‘503B Patent and which will provide for extended protection. These SPCs generally expire in April of 2020.
phacoemulsification. LENSAR has developed the LENSAR®Laser System, (the “LENSAR Technology”). The LENSAR Technologywhich is the only femtosecond cataract laser built specifically for refractive cataract surgery. TheAt spin-off, LENSAR Technology is protected byhad over 6095 granted patents in the United States and the rest of the world and over 4555 pending patentspatent applications in the United States and the rest of the world.
We have been issued patents in the United States and elsewhere, covering the humanizationAs noted above, on October 1, 2020 all outstanding shares of antibodies, which we referLENSAR common stock held by us were distributed to as our Queen et al. patents. Our Queen et al. patents, for which final patent expiry was in December 2014, covered, among other things, humanized antibodies, methods for humanizing antibodies, polynucleotide encoding in humanized antibodies and methodsholders of producing humanized antibodies.
Our U.S. patent No. 5,693,761 (the “761 Patent”), which expired on December 2, 2014, covered methods and materials used in the manufacture of humanized antibodies. In addition to covering methods and materials used in the manufacture of humanized antibodies, coverage under our 761 Patent typically extended to the use or sale of compositions made with those methods and/or
materials. Our European patent no. 0 451 216B (the “216B Patent”) expired in Europe in December 2009. We have been granted Supplementary Protection Certificates (“SPCs”) for the Avastin®, Herceptin®, Lucentis®, Xolair® and Tysabri® products in manycommon stock as of the jurisdictions in the European Union in connection with the 216B Patent. The SPCs effectively extended our patent protection with respect to Avastin, Herceptin, Lucentis, Xolair and Tysabri generally until December 2014, except that the SPCs for Herceptin expired in July 2014. Because SPCs are granted on a jurisdiction-by-jurisdiction basis, the duration of the extension varies slightly in certain jurisdictions.
Licensing Agreements
We previously entered into licensing agreements under our Queen et al. patents with numerous entities that are independently developing or have developed humanized antibodies. Although the Queen et al. patents and related rights have expired, we are entitled under our license agreements to continue to receive royalties in certain instances based on net sales of products that were made prior to but sold after patent expiry. In addition, we are entitled to royalties based on know-how provided to a licensee. In general, these agreements cover antibodies targeting antigens specified in the license agreements. Under our licensing agreements, we are entitled to receive a flat-rate royalty based upon our licensees’ net sales of covered antibodies.
Our total revenues from licensees under our Queen et al. patents were $36.4 million, $166.2 million and $485.2 million, net of rebates and foreign exchange hedge adjustments, for the years ended December 31, 2017, 2016 and 2015, respectively.
Licensing Agreements for Marketed Products
In the year ended December 31, 2017, we received royalties on sales of Tysabri from Biogen, and in the year ended December 31, 2016, we also received royalties on sales of the six humanized antibody products listed below from Genentech, Inc. (“Genentech”).
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| | |
Licensee | | Product Names |
Genentech | | Avastin®
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| | Herceptin®
|
| | Xolair®
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| | Lucentis®
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| | Perjeta®
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| | Kadcyla®
|
Genentech
We entered into a master patent license agreement, effective September 25, 1998, under which we granted Genentech a license under our Queen et al. patents to make, use and sell certain antibody products.
LENSAR Record Date. On January 31, 2014, we entered into the Settlement Agreement (the “Settlement Agreement”) with Genentech and F. Hoffman LaRoche, Ltd. (“Roche”) that resolved all existing legal disputes between the parties.
The Settlement Agreement precluded Genentech and Roche from challenging the validityOctober 1, each of our patents, including our SPCs in Europe, from contesting their obligation to pay royalties to us, from contesting patent coveragestockholders received 0.075879 shares of LENSAR common stock for Avastin, Herceptin, Lucentis, Xolair, Perjeta, Kadcyla and Gazyva (collectively, the “Genentech Products”) and from assisting or encouraging any third party in challenging our patents and SPCs. The Settlement Agreement further outlined the conduct of any audits initiated by us of the books and records of Genentech in an effort to ensure a full and fair audit procedure. Finally, the Settlement Agreement clarified that the sales amounts from which the royalties are calculated do not include certain taxes and discounts. Under the terms of the Settlement Agreement, we ceased receiving any revenue from Genentech after the first quarter of 2016.
Biogen
We entered into a patent license agreement, effective April 24, 1998, under which we granted to Elan Corporation, plc (“Elan”) a license under our Queen et al. patents to make, use and sell antibodies that bind to the cellular adhesion molecule α4 in patients with multiple sclerosis. Under the agreement, we are entitled to receive a flat royalty rate in the low, single digits based on Elan’s net sales of the Tysabri product. This license agreement entitles us to royalties following the expirationevery one share of our patents with respect to sales of licensed product manufactured prior to patent expiry in jurisdictions providing patent protection. In April 2013, Biogen
completed its purchase of Elan’s interest in Tysabri, and in connection withcommon stock held by such purchase all obligations under our patent license agreement with Elan were assumed by Biogen.
In November 2017, we were notified by Biogen that product supply that was manufactured prior to patent expiry, and for which we would receive royalties on, had been extinguished in the United States and was rapidly being reduced in other countries. This will result in a reduction in royalties from product sales of Tysabri, and we expect royalties to be substantially lower in 2018 and are expected to cease in the first quarter of 2019.
Major Customers
Our revenues consist predominantly of product revenue, royalties and the changes in fair value of our royalty right assets. In 2017, 2016 and 2015, Genentech accounted for zero, 43%, and 70% of our revenues, respectively, and Biogen accounted for 11%, 24% and 9% of our revenues, respectively. Although the last of our Queen et al. patents expired in December 2014, the royalty payments extended beyond the patent expirationholders, based on the termsnumber of our licensesoutstanding shares on the LENSAR Record Date. LENSAR continues to own and our legal settlements. Inoperate its femtosecond laser system business following completion of the distribution. As of October 1, 2020 LENSAR became an independent, publicly traded company listed on the Nasdaq Stock Market under the symbol “LNSR”.
Strategic Positions
Evofem
We invested $60.0 million in Evofem in the second quarter of 2016, our revenues materially decreased after2019, representing approximately a 27% ownership interest in the company as of March 31, 2020. The transaction was structured in two tranches. The first tranche comprised $30.0 million, which was funded on April 11, 2019. We invested an additional $30.0 million in a second tranche on June 10, 2019, alongside two existing Evofem stockholders, who each invested an additional $10.0 million. On May 21, 2020 we stopped receiving payments from certain Queen et al. patent licenses, which accounted for 11%, 68% and 82%distributed all of our 2017, 201613,333,334 shares of common stock of Evofem to our stockholders of record on the Evofem Record Date, which represented approximately 26.7% of the outstanding shares of Evofem common stock as of the close of business on May 15, 2020. As of December 31, 2020, we continued to hold the warrants to purchase up to 3,333,334 shares of Evofem common stock.
Evofem is a commercial-stage biopharmaceutical company committed to developing and 2015 revenues.
Beginningcommercializing 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 for its first commercial product Phexxi® (L-lactic acid, citric acid and potassium bitartrate) for hormone-free birth control. On May 22, 2020 Phexxi® was approved by the fourth quarterU.S. Food and Drug Administration for the prevention of 2016, we startedpregnancy in women who choose to generate revenue from product sales to three major wholesalersuse on demand methods for their contraceptive needs. On September 8, 2020, Phexxi® was commercially launched in the United States.
As of December 31, 2017, these three wholesalers accounted for 4.3%, 3.2%June 30, 2020, the Strategic Positions segment was classified as discontinued operations.
Pharmaceutical
Noden
On July 1, 2016, our subsidiary, Noden DAC, entered into an asset purchase agreement (“Noden Purchase Agreement”) whereby it purchased from Novartis the exclusive worldwide rights to manufacture, market, and 4.8%, respectively,sell the Noden Products and certain related assets and assumed certain related liabilities (the “Noden Transaction”). Noden DAC and Noden USA, together, and including their respective subsidiaries represented deployed capital of our total net sales in fiscal year 2017, and as of December 31, 2016, these three wholesalers accounted for 1.6%, 1.9% and 1.6%, respectively, of our total net sales in fiscal year 2016.$191.2 million.
Competition
Pharmaceutical Segment
The pharmaceutical industry is characterized by intense competition and rapid innovation. Our Pharmaceutical segment currently consistsTekturna (or Rasilez outside of the Noden Products. The Noden Products areUnited States) contains aliskiren, a direct renin inhibitors approvedinhibitor, for the treatment of hypertension. They compete againstWhile indicated as a number of classes of treatments including changes in diet, thiazide diuretics, ACEIs, ARBs, calcium channel blockers, cardioselective beta blockers, alpha blockers, direct vasodilators and centrally acting agents. With the exception of diet, there are numerous drugs within each of the classes enumerated above, most of which have generic versions that are less expensive than Tekturna and Tekturna HCT. Physicians may also treat hypertension patients by combining one orfirst line treatment, it is more of the enumerated classes of treatments. Diet, thiazide diuretics, ACEIs, ARBs and calcium channel blockers are most commonly used as firsta third line treatments for hypertension and dominate the market,treatment in part, because of the availability of low cost generics in each category. Renin inhibitors, such as Tekturna and Tekturna HCT which are the only approved direct renin inhibitors, and beta blockers are used thereafter followed by direct vasodilators, central acting agents and alpha blockers. Tekturna and Tekturna HCT are generally perceived as alternatives forthose patients who do not respond to, or are intolerant of the first line therapies. In the United States, thereangiotensin-receptor blockers (“ARBs”) or angiotensin converting enzyme inhibitors (“ACEIs”). Studies indicate that approximately 12% of hypertension patients are approximately six thiazide diuretics, eleven ACEIs, eightARB/ACEI intolerant. Tekturna and Rasilez are not indicated for use with ARBs and thirty-five calcium channel blockers,ACEIs in each case, a numberpatients with diabetes or renal impairment and are contraindicated for use by pregnant women. In March 2019, we launched an authorized generic (“AG”) form of which have one or more generic versions. There are approximately ten cardioselective beta blockersTekturna, aliskiren hemifumarate 150 mg and 300 mg tablets in the United States with the same drug formulation as Tekturna. The AG is distributed by Prasco, LLC d/b/a number of which have one or more generic versions.Prasco Laboratories.
The LENSAR Laser SystemTekturna HCT is a femtosecond cataract laserscombination of aliskiren and hydrochlorothiazide, a diuretic, for refractive cataract surgery. Cataract surgerythe treatment of hypertension in patients not adequately controlled by monotherapy and as an initial therapy in patients likely to need multiple drugs to achieve their blood pressure goals. It is not indicated for use with ACEIs and ARBs in patient with diabetes or renal impairment, or for use in patients with known anuria or hypersensitivity to sulfonamide derived drugs and is contraindicated for use by pregnant women.
On September 9, 2020, we sold 100% of our interests in our wholly owned subsidiaries Noden DAC and Noden USA to Stanley Capital.
As of March 31, 2020, the highest volume surgical procedure globally, with 26.2 million cataract surgeries estimated to have been performed in 2017. The market penetration of femtosecond cataract lasers with approximately 9.5% of total procedures in the United States, while approximately 2.4% of the total cataract surgeries performed globally. We believe femtosecond cataract laser procedures are expected to grow approximately 15% annually through 2021.Pharmaceutical segment was classified as discontinued operations.
Income Generating Assets
The acquisition of royalty revenues or other income generating assets included in continuing operations consist of (i) notes and other long-term receivables, (ii) equity investments and (iii) royalties from the Queen et. al patents.
Notes and Other Long-Term Receivables
We have entered into credit agreements with borrowers across the healthcare industry, under which we made available cash loans to be used by the borrower. Obligations under these credit agreements are typically secured by a pledge of substantially all the assets of the borrower and any of its subsidiaries. As of December 31, 2020, we had one note receivable transaction outstanding, CareView, which is summarized below:
CareView
Technology
CareView is a highly competitive areaprovider of products and on-demand application services for the healthcare industry by specializing in which other companies, financial institutionsbedside video monitoring, archiving and private funds compete for assetspatient care documentation systems and patient entertainment services.
Deal Summary
In June 2015, we entered into a credit agreement with CareView, whereby we made available to CareView up to $40.0 million in loans comprised of interest to us.
Governmental Regulation
The research and development, manufacturing and marketingtwo tranches of pharmaceutical and medical device products are$20.0 million each, subject to regulation by numerous governmental authoritiesCareView’s attainment of specified milestones and under which we have a security interest in substantially all of CareView’s assets. In October 2015, we and CareView entered into an amendment of the United Statescredit agreement to modify certain definitions related to the first and other countries. Wesecond tranche milestones and our licensees, borrowerswe 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 meet the funding milestone and we have no further funding obligation at this time. The outstanding borrowing under the credit agreement initially bore interest at the rate of 13.5% per annum payable quarterly in arrears. Principal repayment was to commence on the ninth quarterly interest payment date and continue in equal installments until final maturity of the loan in October 2020.
royalty-agreement counterparties, depending on specific activities performed, are subjectIn February 2018, we entered into a modification agreement with CareView (the “February 2018 Modification Agreement”) whereby we agreed, effective as of December 28, 2017, to modify the credit agreement before remedies could otherwise have become available to us 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, we agreed that (i) a lower liquidity covenant would be applicable and (ii) principal repayment would be delayed for a period of up to December 31, 2018. In exchange for agreeing to these regulations. In the United States, pharmaceuticals and medical devices are subject to regulation by both federal and various state authorities, including the FDA. The Federal Food, Drug and Cosmetic Act (“FFDCA”) governs the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of pharmaceutical and medical device products, and with respect to biologics, compliance with the Public Health Service Act is also required. There are also comparable laws and regulations that apply at the state level and in other countries as well. For both currently marketed and products in development, failure to comply with applicable regulatory requirements can, among other things, result in delays, the suspension of regulatory approvals, as well as possible civil and criminal sanctions.
Regulation of Pharmaceuticals in the United States
The process required by the FDA before a drug may be marketed in the United States generally involves the following:
completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, or GLP, regulations;
submission to the FDA of an investigational new drug application, or IND, which must become effective before human clinical trials may begin;
approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated;
performance of adequate and well-controlled human clinical trials in accordance with good clinical practice, or GCP, requirements to establish the safety and efficacy of the proposed drug product for each indication;
submission to the FDA of an NDA;
satisfactory completion of an FDA advisory committee review, if applicable;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current good manufacturing practice, or cGMP, requirements and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and
FDA review and approval of the NDA.
Preclinical Studies
Preclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess potential safety and efficacy. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data and any available clinical data or literature, among other things, to the FDA as part of an IND. Some preclinical testing may continue even after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or more proposed clinical trials and places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.
Clinical Trials
Clinical trials involve the administration of the investigational new drug to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include the requirement that all research subjects provide their informed consent in writing for their participation in any clinical trial. Clinical trials are conducted under protocols detailing,modifications, among other things, the objectivesexercise price of our warrants to purchase 4.4 million shares of common stock of CareView was reduced and, subject to the occurrence of certain events, CareView agreed to grant us additional equity interests. In each of September 2018, December 2018, May 2019, September 2019 and December 2019, we entered into amendments to the February 2018 Modification Agreement with CareView whereby we agreed to deferrals of principal repayments and interest payments. In the May 2019 amendment we also increased the interest rate to 15.5% and removed the liquidity covenant under the credit agreement. In January 2020 we agreed to a further amendment of the trial, the parametersFebruary 2018 Modification Agreement that deferred principal repayment and interest payments until April 30, 2020, which was conditioned upon CareView raising additional financing from third parties. Pursuant to be used in monitoring safety, and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocolfurther amendments must be submitted to the FDA as part ofFebruary 2018 Modification Agreement, the IND. In addition, an IRB at each institution participating in the clinical trial must reviewCompany has agreed to defer principal and approve the plan for any clinical trial before it commences at that institution. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public dissemination on their www.clinicaltrials.gov website.interest payments until May 31, 2021.
Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:
Phase 1: The drug is initially introduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness.Royalties from Queen et al. patents
Phase 2: The drug is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
Phase 3: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the
product for approval, to establish the overall risk-benefit profile of the product, and to provide adequate information for the labeling of the product.
Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.
Marketing Approval
Assuming successful completion of the required clinical testing, the results of the preclinical and clinical studies, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the product for one or more indications. In most cases, the submission of an NDA is subject to a substantial application user fee. Under the Prescription Drug User Fee Act, or PDUFA, guidelines that are currently in effect, the FDA has a goal of ten months from the date of “filing” of a standard NDA for a new molecular entity to review and act on the submission. This review typically takes twelve months from the date the NDA is submitted to FDA because the FDA has 60 days to make a “filing” decision.
In addition, under the Pediatric Research Equity Act of 2003, or PREA, as amended and reauthorized, certain NDAs or supplements to an NDA must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. The FDA also may require submission of a risk evaluation and mitigation strategy, or REMS, plan to ensure that the benefits of the drug outweigh its risks. The REMS plan could include medication guides, physician communication plans, assessment plans, and/or elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization tools.
The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to determine whether they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA reviews an NDA to determine, among other things, whether the drug is safe and effective and whether the facility in which it is manufactured, processed, packaged or held meets standards designed to assure the product’s continued safety, quality and purity.
The FDA may refer an application for a novel drug to an advisory committee. An advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA may inspect one or more clinical trial sites to assure compliance with GCP requirements. After evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection reports regarding the manufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete response letter generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA and may require additional clinical or preclinical testing in order for FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditionsWe have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.
Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be
conducted to further assess a drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution and use restrictions or other risk management mechanisms under a REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further testing requirements and FDA review and approval.
Special FDA Expedited Review and Approval Programs
The FDA has various programs, including fast track designation, accelerated approval, priority review, and breakthrough therapy designation, which are intended to expedite or simplify the process for the development and FDA review of drugs that are intended for the treatment of serious or life threatening diseases or conditions and demonstrate the potential to address unmet medical needs. The purpose of these programs is to provide important new drugs to patients earlier than under standard FDA review procedures.
To be eligible for a fast track designation, the FDA must determine, based on the request of a sponsor, that a product is intended to treat a serious or life-threatening disease or condition and demonstrates the potential to address an unmet medical need. The FDA will determine that a product will fill an unmet medical need if it will provide a therapy where none exists or provide a therapy that may be potentially superior to existing therapy based on efficacy or safety factors. The FDA may review sections of the NDA for a fast track product on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA. The FDA may give a priority review designation to drugs that offer major advances in treatment, or provide a treatment where no adequate therapy exists. A priority review means that the goal for the FDA to review an application is six months, rather than the standard review of ten months under current PDUFA guidelines. Under the new PDUFA agreement, these six and ten month review periods are measured from the “filing” date rather than the receipt date for NDAs for new molecular entities, which typically adds 60 days to the timeline for review and decision from the date of submission. Most products that are eligible for fast track designation are also likely to be considered appropriate to receive a priority review.
In addition, products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may be eligible for accelerated approval and may be approved on the basis of adequate and well-controlled clinical trials establishing that the drug product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may require a sponsor of a drug receiving accelerated approval to perform post-marketing studies to verify and describe the predicted effect on irreversible morbidity or mortality or other clinical endpoint, and the drug may be subject to accelerated withdrawal procedures.
Moreover, under the provisions of the Food and Drug Administration Safety and Innovation Act, or FDASIA, passed in July 2012, a sponsor can request designation of a product candidate as a “breakthrough therapy.” A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. Drugs designated as breakthrough therapies are also eligible for accelerated approval. The FDA must take certain actions, such as holding timely meetings and providing advice, intended to expedite the development and review of an application for approval of a breakthrough therapy.
Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be shortened.
Post-Approval Requirements
Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims are subject to prior FDA review and approval. There also are continuing, annual user fee requirements.
The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP requirements and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in mandatory revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:
restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
fines, warning letters or holds on post-approval clinical trials;
refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product approvals;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.
Medical Devices Regulation in the United States
Under the FFDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each medical device and the extent of control needed to ensure safety and effectiveness. Class I devices are those for which safety and effectiveness can be assured by adherence to FDA’s general controls for medical devices, which include compliance with the applicable portions of the FDA’s Quality System Regulation, or QSR, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Class II devices are subject to FDA’s general controls, and any other special controls as deemed necessary by FDA to ensure the safety and effectiveness of the device. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification procedure, unless exempt. A Class III product is a product which has a new intended use or uses advanced technology that is not substantially equivalent to that of a legally marketed device. The safety and effectiveness of Class III devices cannot be assured solely by the General Controls and the other requirements described above. These devices almost always require formal clinical studies to demonstrate safety and effectiveness. Our current medical device products are classified Class II medical devices.
When a 510(k) is required, the manufacturer must submit to the FDA a premarket notification submission demonstrating that the device is “substantially equivalent” to either: a device that was legally marketed prior to May 28, 1976, the date upon which the Medical Device Amendments of 1976 were enacted, and for which the FDA has not yet called for the submission of pre-market approval applications, or PMAs, or is a device that has been reclassified from Class III to either Class II or I.
If the FDA agrees that the device is substantially equivalent to a predicate device, it will grant clearance to commercially market the device in the U.S. The FDA’s 510(k) clearance process usually takes from three to twelve months from the date the application is submitted and filed with the FDA, but may take significantly longer and clearance is never assured. Although many 510(k) pre-market notifications are cleared without clinical data, in some cases, the U.S. Food and Drug Administration requires significant
clinical data to support substantial equivalence. In reviewing a pre-market notification, the FDA may request additional information, including clinical data, which may significantly prolong the review process. If the FDA determines that the device, or its intended use, is not “substantially equivalent,” the FDA may deny the request for clearance. After a device receives 510(k) clearance, any subsequent modification of the device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new 510(k) clearance or could require pre-market approval. The FDA requires each manufacturer to make this determination initially, but the FDA may review any such decision and may disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA may require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or pre-market approval is obtained. We have modified aspects of some of our devices since receiving regulatory clearance and we have made the determination that new 510(k) clearances or pre-market approvals were not required.
Although unlikely for the types of medical devices marketed by us, the FDA may classify the device, or the particular use of the device, into Class III, and the device sponsor must then fulfill more rigorous pre-market approval (“PMA”) requirements. A PMA application, which is intended to demonstrate that a device is safe and effective, must be supported by extensive data, including extensive technical and manufacturing data and data from preclinical studies and human clinical trials. After a PMA application is submitted and filed, the FDA begins an in-depth review of the submitted information, which typically takes between one and three years, but may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA will usually be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with the QSR, which impose elaborate design development, testing, control, documentation and other quality assurance procedures in the design and manufacturing process. The FDA may approve a PMA application with post-approval conditions intended to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and distribution and collection of long-term follow-up data from patients in the clinical study that supported approval. Failure to comply with the conditions of approval can result in materially adverse enforcement action, including the loss or withdrawal of the approval. New PMA applications or PMA supplements are required for significant modifications to the manufacturing process, labeling of the product and design of a device that is approved through the PMA process. PMA supplements often require submission of the same type of information as an original PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA, and may not require as extensive clinical data or the convening of an advisory panel.
A clinical trial is typically required to support a PMA application and is sometimes required for a 510(k) pre-market notification. Clinical trials generally require submission of an application for an Investigational Device Exemption, or IDE, to the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the investigational protocol is scientifically sound. The IDE application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for more abbreviated IDE requirements. Clinical trials for a significant risk device may begin once the IDE application is approved by the FDA as well as the appropriate institutional review boards at the clinical trial sites, and the informed consent of the patients participating in the clinical trial is obtained. After a trial begins, the FDA may place it on hold or terminate it if, among other reasons, it concludes that the clinical subjects are exposed to an unacceptable health risk. Any trials we conduct must be conducted in accordance with FDA regulations as well as other federal regulations and state laws concerning human subject protection and privacy.
In addition, after a device is placed on the market, numerous FDA and other regulatory requirements continue to apply. These include establishment registration and device listing with the FDA; compliance with medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; and compliance with corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FFDCA that may present a risk to health. The FDA and the Federal Trade Commission (“FTC”) also regulate the advertising and promotion of our products to ensure that the claims we make are consistent with our regulatory clearances, that there is scientific data to substantiate the claims and that our advertising is neither false nor misleading. In general, we may not promote or advertise our products for uses not within the scope of our intended use statement in our clearances or make unsupported safety and effectiveness claims. Many regulatory jurisdictions outside of the U.S. have similar regulations to which we are subject.
Foreign Regulation of Drugs and Medical Devices
In order for us to market our products in countries outside the United States, we must obtain regulatory approvals and comply with extensive product and quality system regulations in other countries. These regulations, including the requirements for
approvals or clearance and the time required for regulatory review, vary from country to country. Some countries have regulatory review processes which are substantially longer than U.S. processes. Failure to obtain regulatory authorizations or approvals in a timely manner and to meet all local requirements including language and specific safety standards in any foreign country in which we plan to market our products could prevent us from marketing products in such countries or subject us to sanctions and fines.
Foreign Regulation of Drugs
In order to market drug products in the European Economic Area, or EEA (which is comprised of the 28 Member States of the EU plus Norway, Iceland and Liechtenstein), and many other foreign jurisdictions, we must obtain separate regulatory approvals. More concretely, in the EEA, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types of marketing authorizations:
The Community MA, which is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for Medicinal Products for Human Use of the European Medicines Agency, or EMA, and which is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, and medicinal products indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU.
National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a Member State of the EEA, this National MA can be recognized in another Member State through the Mutual Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure.
Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.
In the EEA, marketing authorization applications for new medicinal products not authorized have to include the results of studies conducted in the pediatric population, in compliance with a pediatric investigation plan, or PIP, agreed with the EMA’s Pediatric Committee, or PDCO. The PIP sets out the timing and measures proposed to generate data to support a pediatric indication of the drug for which marketing authorization is being sought. The PDCO can grant a deferral of the obligation to implement some or all of the measures of the PIP until there are sufficient data to demonstrate the efficacy and safety of the product in adults. Further, the obligation to provide pediatric clinical trial data can be waived by the PDCO when these data is not needed or appropriate because the product is likely to be ineffective or unsafe in children, the disease or condition for which the product is intended occurs only in adult populations, or when the product does not represent a significant therapeutic benefit over existing treatments for pediatric patients. Once the marketing authorization is obtained in all Member States of the European Union and study results are included in the product information, even when negative, the product is eligible for six months’ supplementary protection certificate extension.
Foreign Regulation of Medical Devices
Commercialization of medical devices in Europe is regulated by the European Union (“EU”). The EU presently requires that all medical products bear the Conformité Européenne (“CE”) mark, for compliance with the Medical Device Directive (93/42/EEC) as amended. The CE mark is an international symbol of adherence to certain essential principles of safety and performance mandated in applicable European medical device directives, which once affixed, enables a product to be sold in member countries of the EU and those affiliated countries which accept the CE mark. The CE mark is also recognized in many countries outside of the EU, such as Australia, and can assist in the clearance process. In order to affix the CE mark on products, a recognized European Notified Body must certify a manufacturer’s quality system and design dossier for compliance with international and European requirements. To maintain authorization to apply the CE mark, we are subject to annual surveillance audits and periodic re-certification audits. In September 2013, the European Commission adopted a recommendation indicating that all Notified Bodies, including Presafe, should carry out unannounced audits, at least once every third year, of the manufacturers whose medical devices they have certified. These unannounced audits can also extend to the manufacturer’s critical suppliers or sub-contractors (those that supply a critical input or perform a critical function for the manufacturer).
Federal, State and Foreign Fraud and Abuse and Physician Payment Transparency Laws
We are also subject to federal and state healthcare laws and regulations pertaining to fraud and abuse, physician payment transparency, privacy, and security laws and regulations. These laws include: without limitation, foreign, federal, and state anti-kickback and false claims laws, as well as transparency laws regarding payments or other items of value provided to healthcare providers. The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any good, facility, item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value, including stock, stock options, and the compensation derived through ownership interests.
Recognizing that the federal Anti-Kickback Statute is broad and may prohibit many innocuous or beneficial arrangements within the healthcare industry, the DHHS issued regulations in July 1991, which the Department has referred to as “safe harbors.” These safe harbor regulations set forth certain provisions which, if met in form and substance, will assure medical device manufacturers, healthcare providers and other parties that they will not be prosecuted under the federal Anti-Kickback Statute. Additional safe harbor provisions providing similar protections have been published intermittently since 1991. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the federal Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the federal Anti-Kickback Statute has been violated. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Moreover, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act (described below).
Violations of the federal Anti-Kickback Statute may result in civil monetary penalties up to $74,792 for each violation, plus up to three times the remuneration involved. Civil penalties for such conduct can further be assessed under the federal False Claims Act. Violations can also result in criminal penalties, including criminal fines of up to $100,000 and imprisonment of up to ten years. Similarly, violations can result in exclusion from participation in government healthcare programs, including Medicare and Medicaid. Liability under the federal Anti-Kickback Statute may also arise because of the intentions or actions of the parties with whom we do business. Conduct and business arrangements that do not fully satisfy one of these safe harbor provisions may result in increased scrutiny by government enforcement authorities. The majority of states also have anti-kickback laws which establish similar prohibitions and in some cases may apply more broadly to items or services covered by any third-party payor, including commercial insurers and self-pay patients.
The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval to the federal government or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. The federal civil False Claims Act also applies to false submissions that cause the government to be paid less than the amount to which it is entitled, such as a rebate. Intent to deceive is not required to establish liability under the civil federal civil False Claims Act.
In addition, private parties may initiate “qui tam” whistleblower lawsuits against any person or entity under the federal civil False Claims Act in the name of the government and share in the proceeds of the lawsuit. Penalties for federal civil False Claim Act violations include fines for each false claim, plus up to three times the amount of damages sustained by the federal government and, most critically, may provide the basis for exclusion from the federally funded healthcare program. On May 20, 2009, the Fraud Enforcement Recovery Act of 2009, or FERA, was enacted, which modifies and clarifies certain provisions of the federal civil False Claims Act. In part, the FERA amends the federal civil False Claims Act such that penalties may now apply to any person, including an organization that does not contract directly with the government, who knowingly makes, uses or causes to be made or used, a false record or statement material to a false or fraudulent claim paid in part by the federal government. The government may further prosecute conduct constituting a false claim under the federal criminal False Claims Act. The criminal False Claims Act prohibits the making or presenting of a claim to the government knowing such claim to be false, fictitious or fraudulent and, unlike the federal civil False Claims Act, requires proof of intent to submit a false claim. When an entity is determined to have violated the federal civil False Claims Act, the government may impose civil fines and penalties ranging from
$11,181 to $22,363 for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs.
The federal Civil Monetary Penalty Act of 1981 imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal healthcare program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent, or offering or transferring remuneration to a federal healthcare beneficiary’s that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier.
The Health Insurance Portability and Accountability Act of 1996, or HIPAA also created additional federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
Many foreign countries have similar laws relating to healthcare fraud and abuse. Foreign laws and regulations may vary greatly from country to country. For example, the advertising and promotion of our products is subject to EU Directives concerning misleading and comparative advertising and unfair commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices. These laws may limit or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals. Also, many US states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs.
Additionally, there has been a recent trend of increased foreign, federal, and state regulation of payments and transfers of value provided to healthcare professionals or entities. The federal Physician Payments Sunshine Act imposes annual reporting requirements on certain drug, biologics, medical supplies and device manufacturers for which payment is available under Medicare, Medicaid or CHIP for payments and other transfers of value provided by them, directly or indirectly, to physicians (including physician family members) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. A manufacturer’s failure to submit timely, accurately and completely the required information for all payments, transfers of value or ownership or investment interest may result in civil monetary penalties of $11, 052 per failure up to an aggregate of $165,786 per year (or up to an aggregate of $1.105 million per yea for “knowing failures”).. Manufacturers mustsubmit reports by the 90th day of each calendar year. Certain foreign countries and US states also mandate implementation of commercial compliance programs, impose restrictions on device manufacturer marketing practices and require tracking and reporting of gifts, compensation and other remuneration to healthcare professionals and entities.
Coverage and reimbursement
In the United States and markets in other countries, patients who are prescribed treatments for their conditions and providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use our products or the products for which we receive royalty revenue unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost. Sales of any products therefore depend, in part, on the availability of coverage and adequate reimbursement from third-party payors. Third-party payors include government authorities, managed care plans, private health insurers and other organizations.
The process for determining whether a third-party payor will provide coverage for a pharmaceutical or device product typically is separate from the process for setting the price of such product or for establishing the reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors may limit coverage to specific products on an approved list, also known as a formulary, which might not include all of the FDA-approved products for a particular indication. A decision by a third-party payor not to cover our products could reduce physician utilization of our products and have a material adverse effect on our sales, results of operations and financial condition. Moreover, a third-party payor’s decision to provide coverage for a pharmaceutical or device product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Additionally, coverage and reimbursement for products can differ significantly from payor to payor. One third-party payor’s decision to cover a particular medical product or service does not ensure that other payors will also provide coverage for the medical product or service, or will provide coverage at an adequate reimbursement rate.
The reimbursement to the facility from third-party payors is intended to cover the overall cost of treatment, including the cost of our devices used during the procedure as well as the overhead cost associated with the facility where the procedure is performed. We do not directly bill any third-party payors; instead, we receive payment from the hospital or other facility that uses our devices. Failure by physicians, hospitals, and other users of our devices to obtain sufficient coverage and reimbursement from healthcare payors for procedures in which our devices are used, or adverse changes in government and private third-party payors’ policies could have a material adverse effect on our business, financial condition, results of operations and future growth prospects.
In addition, there are periodic changes to reimbursement. Third-party payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine reimbursement amounts. This includes annual updates to payments to physicians, hospitals and other facilities for procedures during which our devices are used. Because the cost of our devices generally is recovered by the healthcare provider as part of the payment for performing a procedure and not separately reimbursed, these updates could directly impact the demand for our devices. An example of such payment updates is the Medicare program’s updates to hospital and physician payments, which are done on an annual basis using a prescribed statutory formula. In the past, with respect to reimbursement for physician services under the Medicare Physician Fee Schedule, when the application of the formula resulted in lower payment, Congress has passed interim legislation to prevent the reductions.
The containment of healthcare costs is a priority of federal, state and foreign governments, and the prices of pharmaceutical or device products have been a focus in this effort. Third-party payors are increasingly challenging the prices charged for medical products and services, examining the medical necessity and reviewing the cost-effectiveness of pharmaceutical products, medical devices and medical services, in addition to questioning safety and efficacy. If these third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products or, if they do, the level of payment may not be sufficient to allow us to sell our products at a profit.
Healthcare Reform
The United States and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payorspatents in the United States and elsewhere, there is significant interestcovering the humanization of antibodies, which we refer to as our Queen et al. patents. Our Queen et al. patents, for which final patent expiry was in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality or expanding access. Current and future legislative proposals to further reform healthcare or reduce healthcare costs may limit coverage of or lower reimbursement for the procedures associated with the use of our products. The cost containment measures that payors and providers are instituting and the effect of any healthcare reform initiative implemented in the future could impact our revenue from the sale of our products.
The implementation of the Affordable Care Act, (the “ACA”), in the United States, for example, has changed healthcare financing and delivery by both governmental and private insurers substantially, and affected medical device manufacturers significantly. The ACA imposed,December 2014, covered, among other things, humanized antibodies, methods for humanizing antibodies, polynucleotide encoding in humanized antibodies and methods of producing humanized antibodies.
We previously entered into licensing agreements under our Queen et al. patents with numerous entities that are independently developing or have developed humanized antibodies. Under our licensing agreements, we are entitled to receive a 2.3% federal excise tax, with limited exceptions, on any entity that manufactures or imports Class I, IIflat-rate royalty based upon our licensees’ net sales of covered antibodies, although the royalties under these agreements have substantially ended.
Solanezumab is a Lilly-licensed humanized monoclonal antibody being tested in a study of older individuals who may be at risk of memory loss and III medical devices offered for salecognitive decline due to Alzheimer’s disease. Lilly has characterized the study as an assessment of whether an anti-amyloid investigational drug in the United States that began on January 1, 2013. Through a series of legislative amendments, the tax was suspended for 2016 through 2019. Absent further legislative action, the device excise tax will be reinstated on medical device sales starting January 1, 2020. The ACA also provided incentives to programs that increase the federal government’s comparative effectiveness research, and implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models. Additionally, the ACA has expanded eligibility criteria for Medicaid programs and created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research. Weolder individuals who do not yet knowshow symptoms of Alzheimer's disease cognitive impairment or dementia can slow memory loss and cognitive decline. The study will also test whether solanezumab treatment can delay the full impact that the ACA will haveprogression of Alzheimer’s disease related brain injury on our business.
There have been judicialimaging and Congressional challengesother biomarkers. If solanezumab is approved and commercialized pursuant to certain aspects of the ACA, andthis clinical trial or another, we expect additional challenges and amendmentswould be entitled to receive a royalty based on a "know-how" license for technology provided in the future. Moreover,design of this antibody. The 2% royalty on net sales is payable for 12.5 years after the Trump Administrationproduct's first commercial sale. The above described study is currently in Phase 3 testing with an estimated study completion date expected in January of 2023.
Competition
The underlying products associated with our income generating assets compete with existing products and the U.S. Congress may take further action regarding the ACA, including, but not limitedare vulnerable to repealnew branded or replacement.
Moreover, other legislative changes have been proposed and adopted since the ACA was enacted. For example, the Budget Control Act of 2011, among other things, included reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2025 unless additional Congressional action is taken. Additionally, the American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
We expect additional state and federal healthcare reform measures to be adoptedgeneric entrants in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.marketplace.
In addition, changes in existing regulations could have a material adverse effect on us or our licensees, borrowers or royalty-agreement counterparties. For a discussion of the risks associated with government regulations, see Item 1A, “Risk Factors.”
Human Capital
Manufacturing
Noden Products
Through our Noden subsidiary, we currently contract with one third party for manufacturing of the Noden Products. This arrangement is covered by a foreign long-term supply agreement in effect through November 2020. To date, our third-party manufacturer has met our manufacturing requirements. Although to date we have not experienced interruptions in supplies, we cannot assure that we will continue to receive uninterrupted or adequate supplies of such products. We expect that the third-party manufacturer is capable of providing sufficient quantities of the Noden Products to meet anticipated demands. Our foreign long-term supply agreement is subject to, among other risks, FDA approval, governmental clearances, export duties, political instability, and restrictions on the transfers of funds.
Any inability to obtain supply of the Noden Products on a timely basis, or any significant delay in packaging bulk products, or any significant delay in packaging bulk products, or any significant price increases not passed on to customers, could have a material adverse effect on our business, results of operations and financial condition.
LENSAR
Through our LENSAR subsidiary, we currently manufacture our LENSAR®Laser System at a facility in Orlando, Florida.
In June 2016, LENSAR and Coherent, Inc. entered into an Original Equipment Manufacturer agreement pursuant to which Coherent, Inc. will manufacture and supply to LENSAR Staccato Lasers by December 31, 2018. The supply agreement commits LENSAR to a minimum purchase obligation of approximately $1.3 million over the next twelve months. LENSAR expects to meet this requirement.
We purchase both custom and off-the-shelf components from a small number of suppliers and subject them to stringent quality specifications and processes. Some of the components necessary for the assembly of the LENSAR®Laser System are currently provided to us by sole-sourced suppliers (the only recognized supply source available to us) or single-sourced suppliers (the only approved supply source for us among other sources). We purchase the majority of our components and major assemblies through purchase orders with limited long-term supply agreements and generally do not maintain large volumes of finished goods.
Our manufacturing processes are required to comply with the FDA’s cGMP requirements, which for medical devices, are contained in its QSR and associated regulations and guidance. The QSR covers, among other things, the methods used in, and the facilities and controls used for, the design, manufacture, packaging, labeling, storage, installation, and servicing of all medical devices intended for human use. The QSR also requires maintenance of extensive records which demonstrate compliance with FDA regulation, the manufacturer’s own procedures, specifications, and testing as well as distribution and post-market experience. Compliance with the QSR is necessary to receive FDA clearance or approval to market new products and is necessary for a manufacturer to be able to continue to market cleared or approved product offerings in the United States. A company’s facilities, records, and manufacturing processes are subject to periodic scheduled or unscheduled inspections by the FDA, which may issue reports known as Forms FDA 483 or Notices of Inspectional Observations which list instances where the FDA inspector believes the manufacturer has failed to comply with applicable regulations and/or procedures. If the observations are sufficiently serious or the manufacturer fails to respond appropriately, the FDA may issue Warning Letters, or Untitled Letters, which are notices of potential enforcement actions against the manufacturer. If a Warning Letter or Untitled Letter is not addressed to the satisfaction of the FDA, or if the FDA becomes aware of any other serious issue with a manufacturer’s products or facilities, it could result in fines, injunctions, civil penalties, delays, suspension or withdrawal of clearances, seizures or recalls of products, operating restrictions, total shutdown of production facilities, prohibition on export or import and criminal prosecution. Such actions may have further indirect consequences for the manufacturer outside of the United States, and may adversely affect the reputation of the manufacturer and the product. In the United States, routine FDA inspections usually occur every two years, and may occur more often for cause.
To a greater or lesser extent, most other countries require some form of quality system and regulatory compliance, which may include periodic inspections, inspections by third party auditors, and specialized documentation. Failure to meet all the requirements of these countries could jeopardize our ability to import, market, support, and receive reimbursement for the use of our products in these countries.In addition to the above, we may seek to conduct clinical studies or trials in the U.S. or other countries on products that have not yet been cleared or approved for a particular indication. Products manufactured outside the United States by or for us are subject to U.S. Customs and FDA inspection upon entry into the United States. We must demonstrate compliance of such products to U.S. regulations and carefully document the eventual distribution or re-exportation of such products. Failure to comply with all applicable regulations could prevent us from having access to products or components critical to the manufacture of finished products and lead to shortages and delays.
Distribution
Noden Products
We entered into an arrangement with a third party logistic provider (“3PL”) who has commenced distribution of the Noden Products within the United States on our behalf. The Noden Products are sold directly to wholesalers from 3PL-owned distribution centers.
The pharmaceutical industry’s largest wholesale distributors, Amerisource Bergen, McKesson and Cardinal Health, accounted for 4.3%, 3.2% and 4.8%, respectively, of our total net sales in fiscal year 2017, and 1.6%, 1.9% and 1.6%, respectively, of our total net sales in fiscal year 2016
LENSAR
LENSAR markets and sells the LENSAR® Laser System to ophthalmic ambulatory surgical centers, specialty ophthalmic hospitals and multi-specialty hospitals in the United States through a direct sales force. Outside of the United States, LENSAR typically sells the LENSAR® Laser System through distributors, on a “sell-in” basis, that cover a variety of markets.
Employees
As of December 31, 2017,2020, we had 1411 full-time employees managing our intellectual property, our asset acquisitions, operations and other corporate activities, as well as providing forperforming certain essential reporting and management functions of a public company. In addition, we have 15 full-time employees atAll of our operating subsidiary, Noden, who manage Noden’s business and operations, and 58 full-time employees at our operating subsidiary, LENSAR, who manage LENSAR’s business and operations. Geographically, 76 employees were based in the United States and 11 employees were based in Europe.States. None of our employees are covered by a collective bargaining agreement, and we consider our relationship with our employees to be good. As a result of the dissolution process, our human capital resources objectives include, retaining, and incentivizing our management team and other employees as we continue our monetization strategy. For example, the Compensation Committee of the Board adopted a Wind Down Retention Plan in which our executive officers and other employees 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 us as we continue our monetization strategy and dissolution process.
About PDL
We were incorporated under the laws of the state of Delaware in 1986 under the name Protein Design Labs, Inc. In 2006, we changed our name to PDL BioPharma, Inc. Our business previously included a biotechnology operation that was focused on the discovery and development of novel antibodies. We spun-off the operation to our stockholders as Facet Biotech Corporation (“Facet”) in December 2008. Our principal executive offices are located at 932 Southwood10585 Double R Boulevard, Incline Village,Reno, Nevada, 89451,89521, (775) 832-8500, and our website address is www.pdl.com. The information in or accessible through our website is not incorporated into, and is not considered part of, this filing.
Available Information
We file electronically with the U.S. Securities and Exchange Commission (the “SEC”)SEC our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.amended (the “Exchange Act”). The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that website is www.sec.gov.
We make available free of charge on or through our website at www.pdl.comour Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and proxy statements, as well as amendments to these reports and
statements, as soon as practicable after we have electronically filed such material with, or furnished them to, the SEC. You may
also obtain copies of these filings free of charge by calling us at (775) 832-8500. Also, our Audit Committee Charter, Compensation Committee Charter, Nominating and Governance Committee Charter, Litigation Committee Charter, Corporate Governance Guidelines and Code of Business Conduct, as well as amendments thereto, are also available free of charge on our website or by calling the number listed above. The information in or accessible through the SEC and our website is not incorporated into, and is not considered part of, this filing.
We operateOn January 8, 2021, we filed a Form 15 notifying the SEC of deregistration of our business as three segments as defined by U.S. generally accepted accounting principles (“GAAP”). Our financial results forcommon stock under Section 12(g) of the years ended December 31, 2017, 2016Exchange Act and 2015 are discussed in “Item 7. Management’s Discussionsuspension of our duty to file reports under Sections 13 and Analysis15(d) of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of this Annual Report.the Exchange Act.
ITEM 1A. RISK FACTORS
RISK FACTORS
Set forth below and elsewhere in this Annual Report on Form 10-K and in other documents we file with the Securities and Exchange Commission (SEC) are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by forward looking statements contained in this Annual Report on Form 10-K. You should carefully consider and evaluate all of the information included and incorporated by reference in this Annual Report,report, including the risk factors listed below. Anyset forth. The following is not an exhaustive discussion of theseall of the risks as well as other risks and uncertainties, could materially and adversely affectfacing our business, results of operations and financial condition, which in turn could materially and adversely affect the trading price of shares of our common stock.company. Additional risks not currentlypresently known or currently material to us or that we currently deem immaterial may also harmimpair our business.wind-down.
Risks Related to Our Dissolution
There can be no assurances as to the amount of distributions, if any, to be made to our stockholders.
We have historically derived a significant portionfiled for dissolution in January of 2021 and intend to use the dissolution process under Delaware law to liquidate our remaining assets, settle claims and, if available, make liquidating distributions of cash or other property to our stockholders. However, our dissolution and the liquidation of our remaining assets will be subject to uncertainties, and it is possible that there will be no additional liquidating distribution made to our stockholders.
We intend to rely on the “safe harbor” procedures under Sections 280 and 281(a) of the Delaware General Corporation Law (the DGCL) to, among other things, obtain an order from the Delaware Court of Chancery (the Court Order) establishing the amount and form of security for pending claims for which the Company is a party, contingent or unmatured contract claims for which the holder declined the Company’s offer of a security, and unknown claims that, based on facts known to the Company, are likely to arise or become known within five years from the filing of the Certificate of Dissolution (or such longer period of time, not to exceed ten years, as the Delaware Court of Chancery may determine), and pay or make reasonable provision for our uncontested known claims and expenses and establish reserves for other claims as required by the Court Order and the DGCL. We expect to distribute all of our remaining assets in excess of the amount to be used by us to pay claims and fund the reserves required by the Court Order and pay our operating expenses through the completion of the dissolution and winding-down process to our stockholders. The Court Order will reflect the Delaware Court of Chancery’s own determination as to the amount and form of security reasonably likely to be sufficient to provide compensation for all known, contingent and potential future claims against us. There can be no assurances that the Delaware Court of Chancery will not require us to withhold additional amounts in excess of the amounts that we believe are sufficient to satisfy our potential claims and liabilities. Accordingly, stockholders may not receive any distributions of our remaining assets, if any, for a substantial period of time.
In addition, there are numerous factors that could impact the amount of the reserves to be determined by the Court Order, and consequently the amount of cash initially available for distribution, if any, to our stockholders following the filing of the Certificate of Dissolution, including without limitation:
•whether any claim is resolved or barred pursuant to Section 280 of the DGCL;
•unanticipated costs relating to the defense, satisfaction or settlement of existing or future lawsuits or other claims threatened against us;
•whether unforeseen claims are asserted against us, in which case we would have to defend or resolve such claims and/or be required to establish additional reserves to provide for such claims;
•the amount of time it will take us to liquidate all of our remaining non-cash assets, and the amount of any costs and expenses that may be incurred in connection therewith;
•the amount of cash collected from amounts due from previous asset sales, such as our sale of Noden to Stanley Capital;
•the time to complete any tax audits for tax years impacted by amounts claimed under the CARES Act;
•the value, if any, we are able to obtain for our remaining non-cash assets in our monetization process;
•whether our royalty revenues from Genentechassets, for the next couple of years, and afterwards if retained in a liquidation trust, continue to perform as expected; and
•whether any of the expenses incurred in the winding-down process, including expenses of required personnel and other Queen et al. patent licensees which, inoperating expenses (including legal, accounting and other professional fees) necessary to dissolve and liquidate the caseCompany, are more or less than our estimates.
Further, the amount of our largest licensee, Genentech, expired in early 2016. Failure to acquire additional sources of revenue, including new product acquisitions and royalty revenue, after expiration of our Queen et al. patents and the related licenses may cause us to have insufficient revenues and positive cash flows to continue operations.
Our revenues through the first quarter of 2016 consisted almost entirely of royalties from licensees of our Queen et al. patents. Of this revenue from licensees of the Queen et al. patents accounted for 11%, 68% and 82% of our revenues for the years ended December 31, 2017, 2016 and 2015, respectively. Our license agreement with Genentech expired in the first quarter of 2016, and our other licensees, and efforts to identify and replace those sources of revenues in the future might not be successful. Failure to replace Queen et al. patent license revenues in an amount sufficient to continue our operations would have a material adverse effect on our business.
Prospectively, we expect to focus on the acquisition of additional products and except to transact fewer royalty transactions and still fewer debt transactions. We anticipate that over time more of our revenues will come from our Pharmaceutical and Medical Devices segments and less of our revenues will come from our Income Generating Assets segment. We do not expect that acquisitions assets under these segments will, in the near term, fully replace the revenues we have generated from our license agreements related to the Queen et al. patents. Specifically, after the first quarter of 2016, our revenues materially decreased after we stopped receiving significant payments from these Queen et al. patents license agreements and related legal settlements. Our continued success will become more dependent on the timingany distributable proceeds and our ability to acquiremake distributions to our stockholders depend on our ability to execute our monetization strategy for our remaining non-cash assets, which is subject to significant risks and uncertainties, as further discussed in our Pharmaceuticalother risk factors herein.
In addition, as we wind down, we will continue to incur costs to manage the remaining business, such as salaries and Medical Devices segmentsother employee compensation, rental payments, insurance, and taxes, contractual obligations to generate revenues going forwardcurrent and former employees (e.g., true-up payments to support our business model. We may be unableholders of stock options that vested prior to acquire or develop sufficient pharmaceutical products, medical devices and/or income generating assetsthe filing for a number of reasons, including the fact that the acquisition of new products, royalty revenues ordissolution) and other income generating assets in the healthcare industry is a highly competitive area inlegal, accounting, financial advisory and consultant fees, which other companies, financial institutions and private funds competewill reduce any amounts available for assets of interestdistribution to us. Those entities may have access to lower costs of capital, strategic opportunities or competitive advantages that may not be available to us. Other factors that may prevent us from acquiring additional pharmaceutical products, medical devices and/or favorable income generating assets include the following:
we may be unable to acquire additional pharmaceutical products, medical devices and/or income generating assets on terms that would allow us to make an appropriate level of return from the asset;
our products and asset investments may be less successful in the marketplace than may be necessary to generate an appropriate level of return from the asset; or
we may be forced to undertake more risk in obtaining the assets we pursue.
If we are unable to acquire additional pharmaceutical products, medical devices and/or suitable income generating assets our business may suffer and we may determine that a wind-down, sale, or liquidation is in the best interests of our stockholders.
Any difficulties from strategic acquisitions could adversely affect our stock price and results of operations.
We may acquire companies, businesses and products that complement or augment our existing business. We may not be able to integrate any acquired business successfully or operate any acquired business profitably. Integrating any newly acquired business
could be expensive and time-consuming. Integration efforts often take a significant amount of time, place a significant strain on managerial, operational and financial resources and could prove to be more difficult or expensive than we predict. The diversion of our management’s attention and any delay or difficulties encountered in connection with any future acquisitions we may consummate could result in the disruption of our ongoing business or inconsistencies in standards and controls that could negatively affect our ability to maintain third party relationships. Moreover, we may need to raise additional funds through public or private debt or equity financing, or issue additional shares, to acquire any businesses or products, which may result in dilution for stockholders or the incurrence of indebtedness.
Our investment in Noden is our first investment in support of commercial products rather than an investment in financial assets or royalties for income generation. Our returns from the investment in Noden are dependent upon the success of the acquired prescription pharmaceutical products sold under the brand names Tekturna, Tekturna HCT, Rasilez and Rasilez HCT and there can be no assurance that we will be able to successfully attain and maintain significant market acceptance of our products among physicians, patients, third party payors and others in the health care community. Further, our acquisition of 100% of the equity interests in LENSAR is our first acquisition in support of our Medical Device segment. Our revenues from our Medical Device segment consist entirely of sales of the LENSAR laser system. There can be no assurance that we will be able successfully develop and expand these systems on a commercial scale.
We are dependent upon Noden and its management team for sales in our Pharmaceutical segment, and LENSAR and its management team for sales in Medical Device segment, in each case in gaining and maintaining acceptance among physicians, third party payors, patients and others in the health care community for our products or devices.
Continued market acceptance of any approved product depends on a number of other factors, including:
the receipt of regulatory clearance of marketing claims for the uses that we may in the future develop;
the establishment and demonstration of the advantages and safety of our laser technology;
pricing and reimbursement policies of government and third party payers such as insurance companies, health maintenance organizations and other health plan administrators;
the effectiveness of sales and marketing efforts.
Noden has limited commercial experience and is undertaking the commercialization of the Noden Products with a new contract sales force in the United States and no current commercial infrastructure outside the United States. Our revenues from the investment in Noden depend on Noden’s ability to successfully transition the Noden Products to a new commercial team, the failure of which could have an adverse impact on our revenues, could lead to an impairment charge of our long-lived assets and could have an adverse impact on the value of our investment in Noden.
In addition, the supply agreement with Novartis commits Noden to minimum purchase obligation of the Noden Products, which may result in excess inventory if Noden’s new commercial team is not able to sell the Noden Products at sufficient levels to cover the minimum purchase obligations. If we experience excess inventory, it may be necessary to write down or even write off such excess inventory, which could adversely affect our operating results.
Through our investment in Noden, we have a significant investment in the commercialization of products worldwide, and our returns on investment on the Noden Products are subject to a number of risks associated with international operations that could materially and adversely affect our business.
As a result of these and other factors, we cannot assure you as to any amounts to be distributed to our acquisitionstockholders in dissolution.
Liquidating distributions to stockholders could be substantially reduced and/or delayed due to uncertainty regarding the resolution of potential tax claims, litigation matters and other unresolved contingent liabilities of the Noden ProductsCompany.
Whether any remaining assets of the Company can be used to make liquidating distributions to stockholders would depend on whether claims for which we have set aside reserves are resolved or satisfied at amounts less than such reserves and whether a need has arisen to establish additional reserves. For example, we are subject to tax audits by the California Franchise Tax Board that have yet to be resolved, and the timing for resolution of such audits is uncertain. We cannot assure stockholders that our liabilities can be resolved for less than the amounts we have reserved, that unknown liabilities that have not been accounted for will not arise or the timing with respect to resolution of any such liabilities or claims. As a result, we may continue to hold back funds and delay additional liquidating distributions to stockholders.
We cannot predict the timing of the distributions to stockholders.
Under the DGCL, before a dissolved corporation may make any distribution to its stockholders, it must pay or make reasonable provision to pay all of its claims and obligations, including all contingent, conditional or unmatured contractual claims known to the corporation. The precise amount and timing of any distributions to our stockholders will depend on and could be delayed or diminished due to many factors, including without limitation:
•whether a claim is resolved for more than the amount of reserve established for such claim pursuant to the Court Order;
•whether we are unable to resolve claims with creditors or other third parties, or if such resolutions take longer than expected;
•whether a creditor or other third party seeks an injunction against the making of additional distributions to stockholders on the basis that the amounts to be distributed are needed to satisfy our liabilities or other obligations to the extent not previously reserved for;
•whether due to new facts and developments, new claims, as the Board reasonably determines, require additional funds to be reserved for their satisfaction; and
•whether the expenses we incur in the winding-down process, including expenses of personnel required and other expenses (including legal, accounting and other professional fees) necessary to dissolve and liquidate the Company are more than anticipated.
As a result of these and other factors, it might take significant time to resolve these matters, and as a result we are unable to predict the timing of distributions, if any, made to our stockholders.
Our dissolution pursuant to the Plan of Dissolution may be disrupted and adversely impacted by the effects of natural disasters, political crises, public health crises, and other events outside of our control.
Natural disasters, such as adverse weather, fires, earthquakes, power shortages and outages, political crises, such as terrorism, war, political instability, or other conflict, criminal activities, public health crises, such as the COVID-19 pandemic and other disease epidemics and pandemics, and other disruptions or events outside of our control could negatively affect our operations and our ability to monetize our remaining assets or realize the estimated value of our net assets in liquidation. Any of these events may cause a delay in our ability to make distributions in dissolution, and may materially impact the amount of cash or value of other non-cash assets available to distribute to our stockholders, if any.
Our stockholders may be liable to our creditors for part or all of the amount received from us in our liquidating distributions if reserves are inadequate.
In dissolution we may establish a contingency reserve designed to satisfy any additional claims and obligations that may arise. Any contingency reserve may not be adequate to cover all of our claims and obligations. Under the DGCL, if we fail to create an adequate contingency reserve for payment of our expenses, claims and obligations, each stockholder could be held liable for payment to our creditors for claims brought during this three-year period after we filed the Certificate of Dissolution with the Secretary of State, up to the lesser of (i) such stockholder’s pro rata share of amounts owed to creditors in excess of the contingency reserve and (ii) the amounts previously received by such stockholder in dissolution from us and from any liquidating
trust or trusts. Accordingly, in such event, a stockholder could be required to return part or all of the distributions previously made to such stockholder in dissolution, and a stockholder could receive nothing from us under the Plan of Dissolution. Moreover, if a stockholder has paid taxes on amounts previously received, a repayment of all or a portion of such amounts received could result in a situation in which such repayment does not result in a commensurate refund of such taxes paid. As a result, while we intend to use the protections of DGCL Sections 280 and 281(a), including having a court order approve distributions, it is important for us to retain sufficient funds through our investmentdissolution to pay the expenses and liabilities actually owed to our creditors because if we fail to do so, each stockholder could be held liable for the repayment to creditors out of the amounts previously distributed to such stockholder from us or from any liquidating trust or trusts, up to the full amount actually received by such stockholder in Noden,our dissolution.
The directors and officers of the Company will continue to receive benefits from the Company during the dissolution.
During the dissolution, we expectwill continue to indemnify each of our current and former directors and officers to the extent permitted under the DGCL and the Company’s certificate of incorporation, bylaws and agreements as in effect at the time of the filing of the Certificate of Dissolution.
Further stockholder approval will not be required in connection with the implementation of our Plan of Dissolution, including for the sale or disposition of any of our remaining assets.
Our Plan of Dissolution provides that we may sell our remaining assets after dissolution, as necessary to affect our Plan of Dissolution. Under our Plan of Dissolution, we will not seek and are not required to seek additional stockholder authorization of any future asset sale. As a result, the Board may authorize actions in implementing the Plan of Dissolution, including the terms and prices for the sale or disposition of our remaining assets, with which our stockholders may not agree.
Our common stock ceased to be traded at the time of our dissolution.
We closed our stock transfer books of our common stock after our dissolution became effective at approximately 4:00 p.m., Eastern time on January 4, 2021 (the “Final Record Date”). Therefore, shares of our common stock are no longer freely transferable. As a result of the closing of the stock transfer books, all liquidating distributions from a liquidating trust, if any, or from us after the Final Record Date will be made pro rata to the stockholders of record as of the Final Record Date.
We have not and do not intend to record any assignments or transfers of our common stock after the Final Record Date, other than as required by will, intestate succession or operation of law. We have been informed that after the Final Record Date some shares of our common stock have been traded under contractual obligations between the seller and purchaser of the stock, who negotiate and rely on themselves with respect to the allocation of stockholder proceeds arising from ownership of the shares. We are not facilitating or participating in the trading in our common stock or interests in proceeds from our liquidation. Accordingly, trading in our stock is highly speculative and the market for our stock is highly illiquid. As we are no longer an operating company, the only value underlying the trading price of our shares is the right to receive further distributions, if any, as part of the liquidation process. Because of the difficulty in estimating the amount and timing of the liquidating distributions and due to the other risk factors discussed herein, the economic interests derived from our common stock may be subject to a numbersignificant volatility and may trade above or below the amount of risks related to the sale of products worldwide, including:
international regulatory requirements for drug marketing and pricing in foreign countries;
varied standards of care in various countries that could complicate the commercial success of products;
varied drug import and export rules;
varying standards for the protection of intellectual property rights which may result in reduced or compromised exclusivity in certain countries;
unexpected changes in tariffs, trade barriers and regulatory requirements;
varied reimbursement systems and different competitive drugs indicated to treat the indications for which Noden Products are being commercialized;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
compliance with tax, employment, immigration and labor laws applicable to foreign operations;
compliance with the U.S. Foreign Corrupt Practices Act (“FCPA”), the UK Bribery Act, and other anti-corruption and anti-bribery laws;
foreign taxes and duties;
foreign currency fluctuations and other obligations incident to doing business in another country;
workforce uncertainty in countries where labor unrest is more common than in the United States;
reliance on management, contract services organizations and other third partiesany future liquidating distribution that may be less experienced with manufacturing and commercialization than the party from whom the Noden Products were acquired;made.
potential liability resulting from product liability laws or the activities
The loss of foreign distributors; and
business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.
In addition, our international operations could be affected by currency fluctuations, capital and exchange controls, expropriation and other restrictive government actions as well as by political unrest, unstable governments and legal systems and inter-governmental disputes. Any of these circumstances could adversely affect our business.
We rely on third party manufacturers to manufacture our products, and these third parties may not perform adequately.
We do not have any operating manufacturing facilities for Noden Products at this time, and do not expect to independently manufacture our products or any future products under the Pharmaceutical segment. We currently rely on Novartis for a specified period of time to manufacture and package the Noden Products, and are required thereafter to identify and transition to third parties to scale-up, manufacture and supply the Noden Products. The facilities used by our contract manufacturers to manufacture our drug products must be approved by the FDA pursuant to the approved NDA and are subject to FDA inspection for our drug and medical devices. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with the regulatory requirements, known as current good manufacturing practice, or cGMP, requirements for manufacture of our drug and device products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure or maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not authorize these facilities for the manufacture of our product candidates or if it withdraws any such authorization in the future, we may need to find alternative manufacturing facilities, which would significantly impact our business and results of operations.
Other risks arising from reliance on third party manufacturers include:
inability to identify and enter into a manufacturing and supply agreement with a third party manufacturer having the appropriate capabilities to cost-effectively and timely manufacture products at the sales levels that we anticipate;
reduced control and additional burdens of oversight as a result of using third party manufacturers for all aspects of manufacturing activities, including regulatory compliance and quality control and assurance;
termination or non-renewal of manufacturing and supply agreements with third parties in a manner or at a time that may negatively impact commercialization activities; and
disruption in the operations of third party manufacturers or suppliers unrelated to our products, including the bankruptcy of the manufacturer or supplier or a catastrophic event affecting the third manufacturers or suppliers.
Any of these eventskey personnel could adversely affect our ability to successfully commercialize our products. In addition, if any third party manufacturer terminates its engagement with us or fails to perform as agreed, we may be required to find replacement manufacturers, which would result in significant costefficiently dissolve, liquidate and delay.wind down.
In addition, difficulties or delays in product manufacturing and reliance on third party manufacturing could affect our future results reflected in the performance of Noden and the Noden Products by virtue of regulatory actions, shut-downs, approval delays, withdrawals, recalls, penalties, supply disruptions or shortages or force majeure events, reputational harm, product liability, unanticipated costs or otherwise. Examples of such difficulties or delays include, but are not limited to, the inability to increase production capacity commensurate with demand; the possibility that the supply of incoming materials may be delayed or become unavailable or be subject to increased costs and that the quality of incoming materials may be substandard and not detected; the possibility that third party manufacturers may fail to maintain appropriate quality standards throughout the internal and external supply network and/or comply with cGMPs and other applicable regulations such as tracking and tracing of products in the supply chain to enhance patient safety; risks to supply chain continuity as a result of natural or man-made disasters at a supplier or vendor; or failure to maintain the integrity of the supply chains against intentional and criminal acts such as economic adulteration, product diversion, product theft, and counterfeit goods.
Product sales are expected to generate a significant share of our revenues in the future and are subject to the risks and uncertainties of branded pharmaceutical products.
If our products become subject to problems such as changes in prescription growth rates, product liability litigation, unexpected side effects, regulatory proceedings, manufacturing issues, publicity affecting doctor or patient confidence, pressure from existing competitive products, changes in labeling, loss of patent protection (when applicable), or, if a new, more effective treatment should be introduced, the adverse impact on our revenues could be significant.
We depend uponintend to rely on a limited numberfew individuals in key management roles to dissolve, liquidate our remaining assets and wind-down operations. Loss of wholesalers for a significant portion of our revenues from the Noden Products, and the loss of,one or significant reduction in sales to, any onemore of these wholesalerskey individuals could adversely affect our operations and financial condition.hamper the efficiency or effectiveness of these processes.
We sell the Noden Products primarily to wholesalers. Wholesalers sell the Noden Products to hospitals and physician offices. We do not promote the Noden Products to wholesalers, and they do not set or determine demand for Noden Products. Our ability to successfully commercialize Noden Products will depend, in part, on the extent to which we are able to provide adequate distribution of the Noden Products to patients. Although we have contracted with a number of wholesalers, they are expected generally to carry a very limited inventory and may be reluctant to be part of our distribution network in the future if demand for the product does not increase.
The use of pharmaceutical wholesalers involves certain risks, including, but not limited to, risks that these pharmaceutical wholesalers will not provide us accurate or timely information regarding their inventories, demand from wholesaler customers buying the Noden Products or complaints about the Noden Products, that these wholesalers will reduce their efforts or discontinue to sell or support or otherwise not effectively sell or support the Noden Products, or not devote the resources necessary to sell the Noden Products in the volumes and within the time frames that we expect.
Further, it is possible that these wholesalers could decide to change their policies or fees, or both, at some time in the future. This could result in their refusal to carry smaller volume products such as Noden Products, or lower margins or the need to find alternative methods of distributing the Noden Products. Although we believe we can find alternative channels to distribute the Noden Products on relatively short notice, our revenue during that period of time may suffer and we may incur additional costs to replace any such wholesaler. The loss of any large wholesaler as part of our distribution network, a significant reduction in sales we make to wholesalers, or any failure to pay for the Noden Products we have shipped to them could materially and adversely affect our results of operations and financial condition.
We have significantly restructured our business and revised our business plan, including entering into a new segment reporting structure. Our three industry segments designated as Income Generating Assets, Pharmaceutical and Medical Devices, and our restructured business plan, have been in effect for a limited period of time and there are no assurances that we will be able to successfully implement our business plan or successfully operate in our Pharmaceutical or Medical Devices segments.
From 2012 to 2016 we focused on acquiring income generating assets when such assets can be acquired on terms that we believe allow us to increase return to our stockholders. Currently and prospectively, we expect to focus on the acquisition of additional products and devices in our Pharmaceutical and Medical Device segments, respectively, and expect to transact fewer royalty transactions and debt transactions under our Income Generating Assets segment. We anticipate that over time more of our revenues will come from our Pharmaceutical and Medical Device segments and less of our revenues will come from our Income Generating Assets segment. Our strategy is based on a number of factors and assumptions, some of which are not within our control, such as the actions of third parties. There can be no assurance that we will be able to successfully execute all or any elements of our strategy, or that our ability to successfully execute our strategy will be unaffected by external factors. If we are unsuccessful in growing our product sales business or our medical device sales business as planned, our financial performance could be adversely affected.
Our current and future acquisitions of other material products, medical devices and/or income generating assets may not produce anticipated revenues, and if such transactions are secured by collateral, we may be, or may become, under-secured by the collateral or such collateral may lose value and we will not be able recuperate our capital expenditures in the acquisition.
We are engaged in a continual review of opportunities to acquire pharmaceutical products, medical devices and/or income generating assets, whether royalty-based or otherwise, or to acquire companies who own or are acquiring pharmaceutical products
or medical devices, or that hold royalty or other income generating assets. We currently, and generally at any time, have acquisition opportunities in various stages of active review, including, for example, our engagement of consultants and advisors to analyze particular opportunities, technical, financial and other confidential information, submission of indications of interest and involvement as a bidder in competitive auctions or other processes for the acquisition of pharmaceutical products, devices and/or income generating assets. Many potential acquisition targets do not meet our criteria, and for those that do, we may face significant competition for these acquisitions from other financial investors and enterprises whose cost of capital may be lower than ours. Competition for future product, device or asset acquisition opportunities in our markets is competitive and we may be forced to increase the price we pay for such assets or face reduced potential acquisition opportunities. In addition, ten out of seventeen of our acquisitions to date have been or are dependent on, or secured by, single product revenue streams, which increases the risk of payments based on the competitive factors in the market as well as the pricing of the product. The success of our income generating asset acquisitions is based on our ability to make accurate assumptions regarding the valuation, timing and amount of payments, which is highly complex and uncertain, and the success of our equity investments and product and device acquisitions are based on our ability to accurately measure the anticipated commercial success, including regulatory approval and pricing, of our products or devices and our counterparties products or devices, which is difficult and subject to various competitive and market factors that may be outside of our control. For example, recently there has been heightened governmental scrutiny over the manner in which drug manufacturers set prices for their commercial products, which has resulted in several Congressional inquiries and proposed bills designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. We are unable to control the pricing strategies used by our counterparties, and if our counterparties fail to use appropriate pricing strategies, or receive negative reactions to their pricing strategies, it could negatively impact products from which our revenues would be derived. The failure of any of our acquisitions to produce anticipated revenues may materially and adversely affect our financial condition and results of operations.
Some of our income generating acquisitions expose us to credit risk in the event of default by the counterparty, and we expect the credit-based mix of assets in our portfolio to increase in the future. To mitigate this risk, on occasion, we may obtain a security interest as collateral in the assets of such counterparty. Our credit risk in respect of such counterparty may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount we are due pursuant to the terms of the particular income generating assets or products. This could occur in circumstances where the original collateral was not sufficient to cover a complete loss (e.g., our interests were only partially secured) or may result from the deterioration in value of the collateral, so that, in either such case, we are unable to recover our full capital outlay and any anticipated return. Additionally, we may face difficulty in collection efforts with respect to a credit agreement counterparty that is in default under a credit agreement with us. Such difficulties could lead to litigation or other legal procedures which may or may not be successful, and which will require significant financial and management resources to address. For example, we have been engaged in multiple legal proceedings with Wellstat Diagnostics and its affiliates related to their credit agreement default, which is described in more detail in Note 23, “Legal Proceedings” of this Annual Report. Any such losses resulting therefrom could materially and adversely affect our financial condition and results of operations.
We are exposed to the credit risk of some of our customers, which could result in material losses.
We believe customer financing through leasing is a consideration for some of our Medical Devices segment customers and have experienced an increase in demand for customer financing. We may experience loss from a customer’s failure to make payments according to the contractual lease terms. Our exposure to the credit risks relating to our lease financing arrangements may increase if our customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty, or other customer-specific factors.
Although we have programs in place that are designed to monitor and mitigate the associated risk, there can be no assurance that such programs will be effective in reducing credit risks relating to these lease financing arrangements. If the level of credit losses we experience in the future exceed our expectations, such losses could have a material adverse effect on our financial condition or results of operations.
We and ourremaining licensees, borrowers and royalty-agreement counterparties may be unable to maintain regulatory approvals for currently licensedtheir products, or to obtain regulatory approvals or favorable pricing for new products, and we or they may voluntarily remove currently licensed products from marketing and commercial distribution. Any of such events, whether due to safety issues or other factors, could limit our revenues or return on investment. or our ability to generate expected returns from the monetization of such assets, including their sale, and reduce resulting distributions to our revenues.stockholders in dissolution.
We and ourOur licensees, borrowers and royalty-agreement counterparties are subject to stringent regulation with respect to product safety and efficacy by various international, federal, state and local authorities. Of particular significance are the FDA requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for
human use in the United States. As a result of these requirements, the length of time, the level of expenditures and the laboratory and clinical information required for approval of a biologic license application or new drug application are substantial and can require a number of years. In addition, evenEven if our products, or our licensees’, borrowers’ and royalty-agreement counterparties’ products receive regulatory approval, we and they will remain subject to ongoing FDA and other international regulations including, but not limited to, obligations to conduct additional clinical trials or other testing, changes to the product label, new or revised regulatory requirements for manufacturing practices, written advisements to physicians and/or a product recall or
withdrawal. We and ourOur licensees, borrowers and royalty-agreement counterparties may not maintain necessary regulatory approvals for our or their existing licensed products or we or our licensees may not obtain necessary regulatory approvals on a timely basis, if at all, for any of our products, or the licensed products our licensees are developing or manufacturing.products. Moreover, the current political environment in the United States is focused on potential reductions in pricing for pharmaceutical and other health carehealthcare products, which may negatively impact any existing or new products from which our revenues would be derived. We are unable to control the pricing strategies used by our licensees, borrowers and royalty-agreement counterparties, and if they fail to use appropriate pricing strategies, or receive negative reactions to their pricing strategies, it could negatively impact our revenues. revenues or return on investment.
In addition, communications from government officials regarding pricing for pharmaceutical and other health care products could have a negative impact on our stock price,the value of the assets we intend to monetize, even if such communications do not ultimately impact our products or our licensees’, borrowers’ and royalty-agreement counterparties’ products. The occurrence of adverse events reported by any licensee, borrower or royalty-agreement counterparty may result in the revocation of regulatory approvals or decreased sales of the applicable product due to a change in physicians’ willingness to prescribe, or patients’ willingness to use the applicable product.We and our licensees,Our borrowers and royalty-agreement counterparties could also choose to voluntarily remove licensed products from marketing and commercial distribution. In anyAny value we may receive upon a potential transaction in furtherance of these cases, our revenuesmonetization strategy in dissolution could be materially and adversely affected. For example, in November 2011, the FDA removed the indication for breast cancer from Avastin’s label. In 2005, Tysabri, was temporarily suspended and then returned to the market. In such cases, our revenues could be materially and adversely affected.
In addition, the current regulatory framework could change, or additional regulations could arise at any stage during our licensees’ product development or marketing which may affect our licensees’ ability to obtain or maintain approval of their licensed products. Delays in our licensees receiving regulatory approval for licensed products or their failure to maintain existing regulatory approvals could have a material adverse effect on our business.
ManyThe value of our potential pharmaceutical products, medical devices andremaining income generating royalty assets are in companies or assets that have limited commercialized revenue-generating products or aremay be dependent on the actions of unrelated third parties, which may negatively impact our investment returns.the value we are able to realize in dissolution.
In anticipation of the expiration of our Queen et al. patents and related license agreements, we recently began acquiring, and plan to continue acquiring, pharmaceutical products and medical devices. Our investment objective with respect to these transactions is to maximize our portfolio’s total return by generating current income from product sales or sales of medical devices. We consummated our first investment in our Pharmaceutical segment with Noden in July 2016 and our first acquisition in our Medical Device segment with LENSAR in May 2017. In addition, we have made and will likely continue to make investments in pharmaceutical products, medical devices and/or income generating assets, such as equity investments in product or device focused companies, loans in exchange for a profit share or royalty streams, in the healthcare industries, which investments may be in companies that, at the time of investment, have limited or no commercialized revenue-generating products or devices. If the assets are not successfully commercialized, the value of our investments would be negatively affected and our investment returns would be negatively impacted. The ultimate success of our investments in many of our potential pharmaceutical products, devices and/or income generating assets in these industries will depend on our ability, and the ability of our counterparties or their licensees to innovate, develop and commercialize such assets, in competitive and highly regulated markets. Our or their inability to do so would negatively affect our investment returns. In addition, in connection with many of our potential pharmaceutical products, medical devices and/or income generating assets, we are dependent, to a large extent, on third parties to enforce certain rights for our benefit. For example, we acquired certain royalty rights from Depomed, which,Assertio (formerly Depomed), as the licensor of certain patents, retains various rights, including the contractual right to audit its licensees and to ensure those licensees are complying with the terms of the underlying license agreements. DepomedAssertio also retainsretained full responsibility to protect and maintain the intellectual property rights underlying the licenses. While we have contractual rights to require DepomedAssertio to take action regarding manycertain of these rights, because Depomed’sAssertio’s economic interest in the license agreements is limited, it may not enforce or protect those rights as it otherwise would have had it retained the full economic interest in the payments under the license agreements. Moreover, in respect of the royalty stream relating to the Glumetza diabetes medication that we acquired from Depomed, which is the royalty right producing the highest revenues from our Depomed acquired royalties, a single generic manufacturer was approved to enter the market in February 2016 and two additional generic manufacturers were approved to enter the market in August 2016 as provided for in settlement agreements between Depomed and these generic manufacturers. We were aware of these settlement
agreements, considered them in the cost of the acquiring this asset and expect the entry of these generic products to reduce our Glumetza revenues.
We and our licensees, borrowers andOur royalty-agreement counterparties face significant market pressures with respect to our and their products, and the amount of revenues from our investment in Noden, LENSAR or royalties from ourtheir pharmaceutical products or medical devices, or from our income generating assets that we receive are subject to various competitive and market factors, including generic competitors, that may be outside of our control.
We and our companies, licensees, borrowers andOur royalty-agreement counterparties face competition from other pharmaceutical biotechnology, device and diagnostic companies. The introduction of new competitive products, including generics, may result in lost market share for us or our licensees, borrowers and royalty-agreement counterparties, reduced use of our or their products, lower prices and/or reduced product sales, any of which could reduce our royalty revenues, or the revenues on which we rely to produce the returns on our acquisitions, and have a material adverse effect on our resultsany realized value we may obtain in connection with the evaluation of operations.potential transactions to monetize such remaining assets in dissolution.
The amounts we are able to realize from any transaction in furtherance of our monetization of our remaining assets, and the amount of any royalties and returns oncash or other assets we are able to distribute our investments that we receive from our pharmaceutical products, medical device and/or income generating assetsstockholders in dissolution, will depend on many factors, including the following:
•the timing and availability of generic product or devices competition for our products or devices, and our licensees’, borrowers’ and royalty-agreement counterparties’ products or devices;products;
•potential challenges or design aroundsdesign-arounds to product, use or manufacturing related patents which provide exclusivity for products and assets before their expiration by generic pharmaceutical manufacturers;
•the size of the market for our products or devices, and our licensees’, borrowers’ and royalty-agreement counterparties’ products or devices;products;
•the extent and effectiveness of the sales and marketing and distribution support for our licensees’, borrowers’ and royalty-agreement counterparties’ products or devices and the implementation of a new sales force and commercial infrastructure with commercial experience in connection with the commercialization of our products or devices;products;
•the existence of novel or superior products or devices to our products or devices, or our licensees’, borrowers’ and royalty-agreement counterparties’ products or devices;products;
•the availability of reduced pricing and discounts applicable to our licensees’, borrowers’ and royalty-agreement counterparties’ products or devices;products;
•stocking and inventory management practices related to our products or our licensees’, borrowers’ and royalty-agreement counterparties’ products or devices;products;
•limitations on indications for which our products or devices or our licensees’, borrowers’ and royalty-agreement counterparties’ products or devices can be marketed; the competitive landscape for approved products or devices and developing therapies that compete with our products or devices or our licensees’, borrowers’ and royalty-agreement counterparties’ products or devices;products;
•the ability of patients to be able to afford our products or devices, or our licensees’, borrowers’ and royalty-agreement counterparties’ products or devices or obtain health carehealthcare coverage that covers those products or devices;products;
•acceptance of, and ongoing satisfaction with, our products or devices and our licensees’, borrowers’ and royalty-agreement counterparties’ products or devices by the care providers, patients receiving therapy and third partythird-party payors; or
•the unfavorable outcome (or potential thereof) of any potential litigation relating to our products or devices and our licensees’, borrowers’ and royalty-agreement counterparties’ productsbusiness practices or devices.products.
For example, in 2015, Valeantmid-2019, Bausch Health announced twoexpected price increasesdecreases on Glumetza, a royalty-bearing product under our DepomedAssertio Royalty Agreement. While theThese price increases would have been expected to increasedecreases could negatively affect revenues and thus our royalties, the entry of one generic manufacturer into this market in February of 2016 and one additional generic manufacturer in August 2017 has resulted in a significant reduction in pricing and market share for Glumetza.royalties. Due to the uncertainties caused by changes in pricing by third parties that are outside our control, andincluding as a result of generic competition, we may not be able to accurately estimate the impact on royalties on such sales paid to us for Glumetza or any other product. Additionally, Noden’s ’111 Patent, expires in January
We are also aware of 2019 extended by virtuea number of pediatric testing requirements. While Noden has additional patent coverage related to drug formulation and manufacturing technologyapproved generic extended-release metformin products, which relate to our commercialization of Tekturna in the United States and which expires later than 2019, competitors may be able to design around these patents and one potential competitor is making such a challenge. We may face generic competition with respect to Tekturna in the United States earlier than the expirationcould further negatively affect Glumetza revenues.
Any of these latter patents.
We and our licensees must protect our and their intellectual property rights for us to succeed.
Our success is dependent in significant part on our ability and the ability of third parties in control of the assets in which we’ve invested to protect the scope, validity and enforceability of our and their intellectual property, including the patents, SPCs and license agreements, all of which support our revenues. The scope, validity, enforceability and effective term of patents and SPCs can be highly uncertain and often involve complex legal and factual questions and proceedings. In addition, the legal principles applicable to patents in any given jurisdictionfactors may be altered through changing court precedent and legislative action, and such changes may affect the scope, strength and enforceability of our patent rights or the nature of proceedings which may be brought related to the relevant patent rights. A finding in a proceeding related to patent rights which support our revenues which narrows the scope or which affects the validity or enforceability of some or all of our patent rights could have a material impactand adverse effect on our ability to continue to collect royalty payments from our investments or collect revenue from our sales of our pharmaceutical products, medical devices and income generating assets.
Our reliance on sole and single source suppliers could harm our ability to meet demandrealize significant value for our productsremaining royalty assets and negatively affect the amount of cash or devicesother assets we are able to distribute to our stockholders in dissolution.
Risks Related to Taxes
We may not be able to realize certain expected tax benefits.
During 2020, we engaged in certain transactions that may result in the recognition of ordinary tax losses. Such losses, through provisions of the CARES Act, could generate meaningful tax benefits to the Company as the CARES Act permits taxpayers to carry back five years any net operating losses arising in a timely mannertaxable year beginning in 2018, 2019 or within budget.
Some of the components necessary for the assembly of2020. In connection with our Medical Devices segment devices are currently provided to us by sole-sourced suppliers or single-sourced suppliers. We generally purchase components through purchase orders rather than long-term supply agreements and generally do not maintain large volumes of inventory. While alternative suppliers exist andmonetization process, we have executed transactions that result in ordinary tax losses that could be identified for sole-sourced components, the disruption or termination of the supply of components could causeapplied to prior tax years in which PDL was a significant increase in the costs of these components, which could affect our operating results. A disruption or termination in the supply of components could also result in our inability to meet demand for our products, which could harm our ability to generate revenues, lead to customer dissatisfaction and damage our reputation. Furthermore, if we are required to change the manufacturer of a key component of our products, we maysubstantial tax payor. There can be required to verifyno assurance that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could delay our ability to manufacture our products in a timely manner or within budget, which may have a material adverse impact on our business, financial condition, results of operations, or cash flows.
Recently enacted and future legislation is expected to increase the difficulty and costs to maintain revenues from our products, and in particular may negatively impact the pricing of our products.
In the United States and some foreign jurisdictions, there have been, and we expect theresuch tax benefits will continue to be a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, affect our ability to profitably sell our products.
realized as expected. For example, in February 2021, a letter was sent to congressional leaders signed by 120 members of Congress that proposed retroactively repealing the United States in March 2010, the ACA was enacted to increase access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and the health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The law has continued the downward pressure on pharmaceutical pricing, especially under the Medicare program, and increased the industry’s regulatory burdens andnet operating costs. Among theloss carry back provisions of the ACA of importance are the following:
an annual, non-tax deductible fee payable by any entity that manufactures or imports specified branded prescription drugs payable to the federal government based on each company’s market share of prior year total sales of branded products to certain federal healthcare programs;
imposed an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions (described in more detail below), although the effective rate paid may be lower. Through a series of legislative amendments, the tax was suspended for 2016 through 2019. Absent further legislative action, the device excise tax will be reinstated on medical device sales starting January 1, 2020; implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;
a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;
extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations;
expansion of eligibility criteria for Medicaid programs in certain states;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries under their coverage gap period, as a
condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D. Subsequent legislative amendments have increased the point-of-sale discounted to 70%, effective 2019;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.
The potential financial impact of the ACA over the next few years will depend on a number of factors including policies reflected in implementing regulations and guidance and changes in sales volumes for products affected by the new system of rebates, discounts and fees. The taxes imposed by the ACA and the expansion in the government’s role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursement by payors for our products, and/or reduced medical procedure volumes, all of which mayCARES Act. If these provisions were retroactively repealed, it would likely have a material adverse effect on our business, financial condition and resultsthe amount of operations. The Trump Administration and the U.S. Congresstax benefits that may take further action regarding the ACA, including, but not limited to, repeal or replacement. For example, the Tax Cuts and Jobs Act of 2017 was enacted, which, among other things, removes penalties for not complying with the individual mandate to carry health insurance. Additionally, all or a portion of the ACA and related subsequent legislation may be modified, repealed or otherwise invalidated through judicial challenge.
In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. These changes included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2025 unless additional action is taken by Congress. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers and increased the statute of limitations period in which the government may recover overpayments to providers from three to five years. In addition, recently there has been heightened governmental scrutiny over the manner in which drug manufacturers set prices for their commercial products. The implementation of cost containment measures or other healthcare reforms may limit us from being able to generate revenue, attain profitability, or commercializing our products, which could have a material adverse effect on business and results of operations.
In any event, we expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for pharmaceutical products, which could result in reduced demand for our products or our counterparties’ products or additional pricing pressures on our products or our counterparties’ products.
Changes in the third-party coverage and reimbursement may affect product sales from which we receive royalty revenues. And the growth of managed care organizations (“MCOs”) is expected to increase pricing pressures on our products in the United States.
Sales of our products, the products from which we receive royalties and the products our borrowers sell to generate revenues will depend significantly on the extent to which reimbursement for the cost of such products and related treatments will be available to physicians and patients from various levels of United States and international government health authorities, private health insurers and other organizations. Third-party payers and government health administration authorities increasingly attempt to limit and/or regulateus under the coverage and reimbursement of medical products and services, including branded prescription drugs. Changes in government legislation or regulation, such as the ACA, and changes in formulary or compendia listing or changes in private third-party payers’ policies toward reimbursement for such products may reduce reimbursementcurrent provisions of the cost ofCARES Act. Any failure to obtain such products to physicians, pharmacies and distributors. Decreases in third-party reimbursement couldexpected tax benefits under the CARES Act would likely reduce usage of such products and sales to collaborators, which may have a material adverse effect on our revenues derived from our products, those from which we receive royalties from the business of our borrowers. In addition, macroeconomic factors may affect the ability of patients to pay or co-pay for costs or otherwise pay for our products or the products from which we, our royalty counterparties and borrowers generate revenues by, for example, decreasing the number of patients covered by insurance policies or increasing costs associated with such policies.
In the United States in particular, the influence of MCOs has increased in recent years due to the growing number of patients receiving coverage through MCOs. The growth of MCOs has increased pressure on drug prices as well as revenues for pharmaceutical companies. One objective of MCOs is to contain and, where possible, reduce healthcare expenditures. MCOs typically use formularies as a means to negotiate prices with pharmaceutical providers; physician protocols requiring prior authorization for a branded product if a generic product isfunds available or requiring the patient to first fail on one or more generic products before permitting access to a branded medicine; volume purchasing; and long-term contracts. In addition, by placing branded medicines on higher-tier status in their formularies or non-preferred tier status, MCOs transfer a portion of the cost of those medicines to the patient (through and increase in co-payment requirements), resulting in significant out-of-pocket expenses
for the patient. This financial disincentive is a means by which MCOs manage drug costs and influence patients to use medicines preferred by the MCOs.
Exclusion of a product from a formulary or other MCO-implemented restrictions can significantly impact drug usage in the MCO patient population. Consequently, pharmaceutical companies compete to gain access to formularies for their products. Unique product features, such as greater efficacy, better patient ease of use, or fewer side effects, are generally beneficial to achieving access to formularies. Larger pharmaceutical companies have the ability to bundle available products and discounts in an effort to place and maintain products on formulary. We will be responsible for meeting the requirements of MCO’s in the United States and ensuring the competitive use of our products in a highly uncertain and changing environment. There can be no assurance that we will be able to maintain or increase the use of our products, and their inability to succeed could have a material adverse impact on the value of our investments.
Generic products may increase pricing pressures on our products.
Although we believe that our products benefit from both issued and/or pending patents as well as proprietary manufacturing technology, one competitive challenge that our branded pharmaceuticals products face is or will be from generic pharmaceutical manufacturers. Upon the expiration or loss of patent protection for a product, especially a small molecule product, the major portion of revenues for that product may be dramatically reduced in a very short period of time. Several such competitors make a regular practice of challenging product patents before their expiration. Also, manufacturers of generic pharmaceutical products may file or have already filed Abbreviated New Drug Applications (“ANDA”) with the FDA seeking to market generic forms of our products prior to the expiration of relevant patents owned by Noden. We are aware of two such ANDAs that have been filed with the FDA with respect to Tekturna, but neither has been approved. Patent litigation and other challenges to Noden’s patents would be costly and unpredictable, would require extensive management time and resources, and may ultimately deprive us of market exclusivity for our products in a given geographical territory. The FDA ANDA approval process exempts generics from costly and time-consuming clinical trials to demonstrate their safety and efficacy, allowing generic manufacturers to rely on the safety and efficacy data of the innovator’s product. Generic competitors do not generally need to conduct clinical trials and can market a competing version of a product after the expiration or loss of patent or regulatory exclusivity and often charge significantly lower prices. In addition, as noted above, MCOs that focus primarily on the immediate cost of medicines often favor generics over branded drugs. Many governments also encourage the use of generics as alternatives to brand-name drugs in their healthcare programs. Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies or in other circumstances, which could diminish or eliminate sales and profits from those regions, negatively affect our results of operations and cash flows, lead to an impairment charge of our long-lived assets
or result in a material decline of our revenue.
Our products may develop undesirable side effects or have other properties impacting safety or efficacy.
Undesirable side effects caused by our products or similar products sold or developed by other companies, could reveal a high and unacceptable severity and prevalence of side effects or adverse events, a number of potentially significant negative consequences could result, including:
regulatory authorities may withdraw approvals of such product;
regulatory authorities may require additional warnings on the label;
we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;our stockholders.
we could be sued and held liable for harm caused to patients; and
our reputation may suffer.
Any of these events could significantly harm our business and the value of our investments.
We may have significant product liability exposure and our insurance may not cover all potential claims.
We are exposed to product liability and other claims in the event that our technologies or products are alleged to have caused harm. WeU.S. Stockholders may not be able to obtain insurancerecognize a loss for U.S. federal income tax purposes until they receive a final distribution from us.
Distributions made pursuant to the Plan of Dissolution are intended to be treated as received by a U.S. stockholder in exchange for the potential liability on acceptable terms with adequate coverage or at reasonable costs. Any potential product liability claims could exceedU.S. stockholder’s shares of our common stock. Accordingly, the amount of our insurance coverage or may be excluded from coverage under the termsany such distribution allocable to a block of shares of our policies. Our insurancecommon stock owned by the U.S. stockholder will reduce the U.S. stockholder’s tax basis in such shares, but not below zero. Any excess amount allocable to such shares will be taxable as capital gain. Such gain generally will be taxable as long-term capital gain if the shares have been held for more than one year. Any tax basis remaining in a share of our common stock following the final liquidating distribution by the Company will be treated as a capital loss. The deductibility of capital losses is subject to limitations. U.S. stockholders should consult their tax advisors as to the particular tax consequences of our dissolution for them, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.
The tax treatment of any liquidating distribution may not be renewed at a cost and level of coverage comparablevary from stockholder to that then in effect. Any of these events could significantly harm our business, financial position and results of operations.stockholder.
Our third party contractors as well as our own employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could result in significant liability for us and harm our reputation.
We are exposed tohave not requested a ruling from the risk of fraud or other misconduct in connection with international business operations and our reliance on third party contractors to manage and conduct those activities with respect to our products. These risks include potential failures to:
comply with FDA regulations or similar regulations of comparable foreign regulatory authorities;
provide accurate information to the FDA or comparable foreign regulatory authorities;
comply with manufacturing standards applicable to our products;
comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities;
comply with the FCPA, the UK Bribery Act, and other anti-bribery laws;
report financial information or data and our business affairs accurately;
or disclose unauthorized activities to us.
Our investment in Noden, an Irish entity, subjects us to both United States and international tax lawsIRS with respect to the structureanticipated tax consequences of our complete dissolution and liquidation, and we will not seek an opinion of counsel with respect to the anticipated tax consequences of any liquidating distributions. If any of the anticipated tax consequences prove to be incorrect, the result could be increased taxation at the corporate or stockholder level, thus reducing the benefit to our stockholders and us from our dissolution and liquidation. Tax considerations applicable to particular stockholders may vary with and be contingent on the stockholder’s individual circumstances. Stockholders should consult with their own tax advisors for tax advice on our dissolution and liquidation’s impact on their taxes.
General Risk Factors
Failure to protect our information technology infrastructure against cyber-based attacks, network security breaches, service interruptions or data corruption could materially disrupt our operations ofand adversely affect our business and operating results.
We rely on our information technology systems to effectively manage all business activities and data, including accounting, financial and legal functions, asset management and business development. Our information technology systems are vulnerable to damage or interruption from earthquakes, fires, floods and other natural disasters, terrorist attacks, power losses, computer system
or data network failures, security breaches, data corruption and cyber-based attacks, including malicious software programs or other attacks, which have been attempted against us in the business conductedpast. In addition, a variety of our software systems are cloud-based data management applications, hosted by Noden, whichthird-party service providers whose security and information technology systems are subject to continued scrutiny and change by governments and maysimilar risks.
The failure to protect either our or our service providers’ information technology infrastructure could disrupt our entire operation or result in additional liabilities that may affect our resultsinability to manage and monetize our remaining assets, increased overhead costs, loss or misuse of operations.
Noden is incorporated in Ireland and maintains the performance of certain functions and ownership of certain assets in a more tax-efficient jurisdiction than the United States. Taxing authorities, such as the United States Internal Revenue Service (“IRS”), actively audit and otherwise challenge these types of arrangements, and have regularly done so in the pharmaceutical industry. We remain subject to reviews and audits by the IRS and other taxing authorities from time to time, and the IRSproprietary or other taxing authority may challenge our structure and intra-company arrangements through an auditconfidential information, intellectual property or lawsuit. Responding tosensitive or defending against those and other challenges from taxing authorities could be expensive and in any event would consume time and other resources, and divert management’s time and focus from business operations. We generally cannot predict whether taxing authorities will conduct an audit or file a lawsuit challenging our current structure, the cost involved in responding to any inquiry or audit or lawsuit, or the outcome. If we are unsuccessful, we may be required to consolidate income and pay greater taxes as well as interest, fines or penalties, and may be obligated to pay increased taxes in the future, anypersonal information, all of which could have a material adverse effect on our results of operations and could negatively affect our ability to be competitive in the acquisition of future, additional products.
The regulatory clearance and approval processes of the FDA are lengthy, time-consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory clearance or approval for any new product candidates or modifications to existing products, our business will be substantially harmed.
The time required to obtain approval or clearance of a drug or device, respectively, by the FDA is unpredictable but typically takes many years following the commencement of clinical trials, if required, and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval or clearance policies, regulations, or the type and amount of clinical data necessary to gain marketing authorization may change during the course of a product candidate’s development and may vary among jurisdictions. We are not permitted to market any new product candidates in the United States until we receive regulatory approval of an NDA for any new drug product candidate or clearance of a 510(k) premarket notification (or approval of a premarket approval application, or PMA) for any new medical device from the FDA, unless the device is exempt from such requirements.
Prior to obtaining approval to commercialize a drug product candidate in the United States or abroad, we or our collaborators must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA, that such product candidates are safe and effective for their intended uses. Results from preclinical studies and clinical trials can be interpreted in different ways. Even if we believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. The FDA may also require us to conduct additional preclinical studies or clinical trials for our product candidates either prior to or post-approval, or it may object to elements of our clinical development program.
In the United States, before we can market a new medical device, or a new use of, new claim for or significant modification to an existing product, we must first receive either clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or
FFDCA, or approval of a premarket approval, or PMA, application from the FDA, unless an exemption applies. In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (pre-amendments device), a device that was originally on the U.S. market pursuant to an approved premarket approval, or PMA, application and later down-classified, or a 510(k)-exempt device. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. In the PMA process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices.
Modifications to products that are approved through a PMA application generally require FDA approval. Similarly, certain modifications made to products cleared through a 510(k) may require a new 510(k) clearance. Both the PMA approval and the 510(k) clearance process can be expensive, lengthy and uncertain. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, we cannot assure you that any particular device will be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory approvals could harm our business.
In the United States, we have obtained 510(k) premarket clearance from the FDA to market the LENSAR device. An element of our strategy is to continue to add new features and seek new indications. We expect that any such modifications may require new 510(k) clearance; however, future modifications may be subject to the substantially more costly, time-consuming and uncertain PMA process. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, product introductions or modifications could be delayed or canceled, which could cause our sales to decline.
The FDA can delay, limit or deny clearance or approval of our product candidates or require us to conduct additional preclinical or clinical testing or abandon a program for many reasons, including:
the FDA’s disagreement with the design or implementation of our clinical trials;
negative or ambiguous results from our clinical trials;
results that may not meet the level of statistical significance required by the FDA for approval or clearance;
serious and unexpected drug-related adverse events experienced by participants in our clinical trials or by individuals using drugs similar to our product candidates;
our inability to demonstrate to the satisfaction of the FDA that our product candidates are safe and effective for the proposed indication or, in the case of our medical devices, are substantially equivalent to our proposed predicate device;
the FDA’s disagreement with the interpretation of data from preclinical studies or clinical trials;
our inability to demonstrate that the clinical and other benefits of our product candidates outweigh any safety or other perceived risks;
the FDA’s requirement for additional preclinical studies or clinical trials;
the FDA’s disagreement regarding the formulation, labeling or the specifications of our product candidates;
the FDA’s agency’s failure to approve the manufacturing processes or facilities of third-party manufacturers with which we contract; or
the potential for approval policies or regulations of the FDA to significantly change in a manner rendering our clinical data insufficient for approval.
Of the large number of products in development, only a small percentage successfully complete the FDA marketing authorization process and become commercialized. The lengthy process as well as the unpredictability of outcomes from future clinical trials may result in our failing to obtain regulatory authorization to market our product candidates.
Even if we eventually complete clinical testing and receive approval of an NDA, 510(k), or similar foreign marketing application for our product candidates, the FDA may grant approval contingent on the performance of costly additional clinical trials, including Phase 4 clinical trials, or in the case of our drugs, the implementation of a Risk Evaluation and Mitigation Strategy, or
REMS, which may be required to ensure safe use of the drug after approval. The FDA also may authorize a product candidate for a more limited indication or patient population than we originally requested, and the FDA may not authorize us to market the product with the labeling that we believe is necessary or desirable for the successful commercialization of a product candidate. Any delay in obtaining, or inability to obtain, applicable regulatory authorization would delay or prevent commercialization of that product candidate.
The safety and efficacy of our medical device products is not yet supported by long-term clinical data, which could limit sales, and our products might therefore prove to be less safe or effective than initially thought.
Our medical device products have received premarket clearance under Section 510(k) of the FFDCA. In the 510(k) clearance process, before a device may be marketed the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (pre-amendments device), a device that was originally on the U.S. market pursuant to an approved premarket approval, or PMA, application and later down-classified, or a 510(k)-exempt device. This process is typically shorter and generally requires the submission of less supporting documentation than the FDA’s premarket approval, or PMA, process and does not always require long-term clinical studies.
In the European Economic Area, or EEA, manufacturers of medical devices are required by the Medical Devices Directive to collect post-marketing clinical data in relation to their CE marked medical devices. Post-market surveillance includes the conduct of post-market clinical follow-up studies permitting manufacturers to gather information concerning quality, safety or performance of medical devices after they have been placed on the market in the EU. All information collected as part of the post-market surveillance process must be reviewed, investigated and analyzed on a regular basis in order to determine whether trending conclusions can be made concerning the safety or performance of the medical device and decisions must be taken in relation to the continued marketing of medical devices currently on the market. We expect to incur ongoing costs to comply with these post-market clinical obligations in EEA markets for so long as we continue to market and sell products in those markets. We anticipate that these costs will be immaterial going forward.
Given the foregoing regulatory environment in which we operate, we lack the breadth of published long-term clinical data supporting the safety and efficacy of our medical devices and the benefits they offer that might have been generated in connection with other approval processes. For these reasons, the market may be slow to adopt our products, we may not have comparative data that our competitors have or are generating, and we may be subject to greater regulatory and product liability risks.
In addition, while our LENSAR® Laser systems were first approved in 2010 in the United States and in 2013 in EU, we have limited complication or patient success rate data with respect to uses of our products. In addition, if future studies and experience indicate that the our products cause unexpected or serious complications or other unforeseen negative effects, we could be subject to mandatory product recalls or suspension or withdrawal of FDA clearance, and our reputation with physicians, patients and healthcare providers may suffer.
The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.
Our products have been approved or cleared by the FDA for specific indications. We train our marketing and direct sales force to not promote our products for uses outside of these cleared or approved indications for use, known as “off-label uses.” We cannot, however, prevent a physician from using or prescribing our products off-label, when in the physician’s independent professional medical judgment he or she deems it appropriate. There may be increased risk of injury to patients if physicians prescribe or use our products off-label. Furthermore, the use of our products for indications other than those cleared or approved by the FDA or any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.
If the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations.
Moreover, if our products are misused or used with improper technique, we may become subject to costly litigation. Product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizeable damage awards against us that may not be covered by insurance. In addition, any of the events described above could harm our business.
Even though we have received regulatory approval for our drug product candidates and clearance of a premarket notification for our devices, we are subject to ongoing regulatory obligations and continued regulatory review, which results in significant additional expense, and we may be subject to penalties, if we fail to comply with regulatory requirements or experience unanticipated problems with our product candidates.
Any regulatory approvals or clearances that we receive may be subject to limitations on the approved indicated uses for which the product may be marketed or the conditions of approval, or contain requirements for potentially costly post-market testing and surveillance to monitor the safety and efficacy of the product candidate. The FDA may also require a REMS as a condition of approval of our product candidates, which could include requirements for a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools.
In addition, once the FDA or a comparable foreign regulatory authority authorizes a product for marketing, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and recordkeeping are subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMPs and GCP requirements for any clinical trials that we conduct post-approval. For example, we are subject to the medical device reporting requirements for our medical device products, which require us to report to the FDA when we receive or become aware of information that reasonably suggests that one or more of our medical devices may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, the FDA could take enforcement action against us. We are subject to similar post-market reporting requirements with respect to our drug products.
Later discovery of previously unknown problems with our product candidates, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:
restrictions on the marketing or manufacturing of our product candidates, withdrawal of the product from the market, or voluntary or mandatory product recalls;
fines, warning letters or holds on clinical trials;
refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of approvals;
product seizure or detention, or refusal to permit the import or export of our product candidates; and
injunctions or the imposition of civil or criminal penalties.
The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could impact our business. For example, in December 2016, the 21st Century Cures Act, or Cures Act, was signed into law. The Cures Act, among other things, is intended to modernize the regulation of drugs and medical devices and spur innovation, but its ultimate implementation remains unclear. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may fail to obtain any marketing approvals, lose any marketing approval that we have obtained and we may not achieve or sustain profitability.
We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. If these executive actions impose constraints on FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.
Our acquisition of pharmaceutical products, including the Noden Products, and acquisitions of medical devices, including the LENSAR laser system, will make us subject to more extensive healthcare laws, regulation and enforcement and our failure to comply with those laws could have a material adverse effect on our results of operations and financial condition.
The acquisition of pharmaceutical products and medical devices, and our sales and marketing efforts with respect to our products and/or medical devices, will increase our potential risk of civil and criminal enforcement by the federal government and the states and foreign governments. Our business practices and relationships with providers are subject to scrutiny under these laws. We may also be subject to privacy and security regulation related to patient, customer, employee and other third-party information by both the federal government and the states and foreign jurisdictions in which we conduct our business. The laws, regulations and codes that may affect us in the United States include:
the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation. The U.S. government has interpreted this law broadly to apply to the marketing and sales activities of manufacturers. Moreover, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Violations of the federal Anti-Kickback Statute may result in civil monetary penalties up to $74,792 for each violation, plus up to three times the remuneration involved. Civil penalties for such conduct can further be assessed under the federal False Claims Act. Violations can also result in criminal penalties, including criminal fines of up to $100,000 and imprisonment of up to 10 years. Similarly, violations can result in exclusion from participation in government healthcare programs, including Medicare and Medicaid;
federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third party payors that are false or fraudulent. Private individuals can bring False Claims Act ‘‘qui tam’’ actions, on behalf of the government and such individuals, commonly known as ‘‘whistleblowers,’’ may share in amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the federal civil False Claims Act, the government may impose civil fines and penalties ranging from $11,181 to $22,363 for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs;
the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier;
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;
HIPAA, as amended by the Health Information for Economic and Clinical Health Act of 2009 (“HITECH”), and its implementing regulations, which imposes certain requirements on certain covered healthcare providers, health plans and healthcare clearinghouses as well as their business associates that perform services for them that involve individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information, without appropriate authorization, including mandatory contractual terms as well as directly applicable privacy and security standards and requirements. Failure to comply with the HIPAA privacy and security standards can result in civil monetary penalties up to $55,910 per violation, not to exceed $1.68 million per calendar year for non-compliance of an identical provision, and, in certain circumstances, criminal penalties with fines up to $250,000 per violation and/or imprisonment. State attorneys general can also bring a civil action to enjoin a HIPAA violation or to obtain statutory damages on behalf of residents of his or her state;
the federal physician sunshine requirements under the ACA, which requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the Centers for Medicare and Medicaid Services (“CMS”), information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members. Applicable manufacturers are required to submit annual reports to CMS. Failure to submit required information may result in civil monetary penalties of $11,052 per failure up to an aggregate of $165,786 per year (or up to an aggregate of $1.105 million per year for ‘‘knowing failures’’), for all payments, transfers of value or ownership or investment interests that are not timely, accurately, and completely reported in an annual submission, and may result in liability under other federal laws or regulations;
guidelines promulgated by the Office of Inspector General of the U.S. Department of Health and Human Services related to pharmaceutical company regulatory compliance programs and the PhRMA Code on Interactions with Healthcare Professionals, as amended;
foreign and state law equivalents of each of the above federal laws, such as the FCPA, anti-kickback and false claims laws that may apply to items or services reimbursed by any third party payor, including commercial insurers;
state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources;
state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and
state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, thus complicating compliance efforts.
These laws and regulations, among other things, constrain our business, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with hospitals, physicians or other potential purchasers of our products. Due to the breadth of these laws, the narrowness of statutory exceptions and regulatory safe harbors available, and the range of interpretations to which they are subject, it is possible that some of our current or future practices might be challenged under one or more of these laws.
To enforce compliance with the healthcare regulatory laws, certain enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business. Additionally, as a result of these investigations, healthcare providers and entities may have to agree to additional compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity, and be costly to respond to.
We do not have experience in establishing the compliance programs necessary to comply with this complex and evolving regulatory environment and our reliance on Noden and LENSAR to operate and address these requirements appropriately increases the risks that we may be found to violate the applicable laws and regulations if they are applied to us. If we are found to be in violation of any of such laws or any other governmental regulations, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs, imprisonment, contractual damages, reputational harm, disgorgement and the curtailment or restructuring of our operations, any of which could materially adversely affect interests in our products, including having a material adverse effect on our financial results.
Our common stock may lose value, our common stock could be delisted from Nasdaq and our business may be liquidated due to several factors, including the expiration of our Queen et al. patents, the failure to acquire additional sources of revenue, decrease in revenues from of our income generating assets, the failure to continue to produce revenues for our existing assets in our Pharmaceutical or Medical Device segments, the payment of dividends or distributions to our stockholders and failure to meet analyst expectations.
Our revenues to date have consisted mostly of royalties from licensees of our Queen et al. patents, which patents expired in December of 2014 and most related licenses expired in the first quarter of 2016.
Prospectively, we expect to focus on the acquisition of additional products and devices and anticipate that over time more of our revenues will come from our Pharmaceutical and Medical Device segments and less of our revenues will come from our Income Generating Assets segment. If we are unable to successfully execute all or any elements of our strategy, our financial performance
could be adversely affected, and the price of our common stock may fall. If the price of our common stock were to fall and remain below Nasdaq listing standards, our common stock may be delisted. If our common stock were delisted, market liquidity for our common stock could be severely affected and our stockholders’ ability to sell securities in the secondary market could be limited. Delisting from Nasdaq would negatively affect the value of our common stock. Delisting could also have other negative results, including, but not limited to, the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.
The lack of liquidity for the assets in our acquisitions may adversely affect our business and, if we need to sell any of our acquired assets, we may not be able to do so at a favorable price. As a result, we may suffer losses.
We generally acquire patents, royalty rights and debt instruments that have limited secondary resale markets. The illiquidity of most of our assets may make it difficult for us to dispose of them at a favorable price and, as a result, we may suffer losses if we are required to dispose of any or all such assets in a liquidation or otherwise. In addition, if we liquidate all or a portion of our assets quickly or in connection with a liquidation, we may realize significantly less than the value at which we had previously recorded these assets.
We may use a certain amount of cash from time to time in order to satisfy the obligations relating to our convertible notes. The maturity or conversion of any of our convertible notes may adversely affect our financial condition and operating results.
On February 1, 2018, we repaid our 4.0% Convertible Senior Notes due February 1, 2018 (the “February 2018 Notes”) in full at their stated maturity. In addition, we are required to repay the full principal amount of $150.0 million in principal amount outstanding under the 2.75% Convertible Senior Notes due December 1, 2021 (the “December 2021 Notes”) if not previously converted.
Our ability to make scheduled payments of the principal of, to pay interest on, to pay any cash due upon conversion of, or to refinance, our indebtedness, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Holders of the December 2021 Notes may convert their notes at their option under the following conditions at any time prior to the close of business on the business day immediately preceding June 1, 2021: (i) during any fiscal quarter (and only during such fiscal quarter) commencing after the fiscal quarter ending March 31, 2017, if the last reported sale price of our 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; (ii) during the five business day period immediately after any five consecutive trading-day period (the measurement period), in which the trading price per $1,000 principal amount of the December 2021 Notes for each trading day of that measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the notes for each such trading day; or (iii) upon the occurrence of specified corporate events.
The December 2021 Notes may be settled by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, although it is the current intention that they will be net-share settled. If one or more holders elect to convert their notes when conversion is permitted, we would be required to make cash payments to satisfy up to the face value of our conversion obligation in respect of each note, which could adversely affect our liquidity.
We may use a certain amount of cash from time to time in order to satisfy repurchase or other obligations relating to our convertible notes which could adversely affect the amount or timing of any distribution to our stockholders or any income generating transactions. In addition,assets we may redeem, repurchase or otherwise acquire the convertible notes in the open market in the future, any of which could adversely affect the amount or timing of any cash distribution to our stockholders.
The conversion or any future exchanges of any of the December 2021 Notes into shares of our common stock would have a dilutive effect that could cause our stock price to go down.
Until June 1, 2021, the December 2021 Notes are convertible into shares of our common stock only if specified conditions are met and thereafter convertible at any time, at the option of the holder. We have reserved shares of our authorized common stock for issuance upon conversion of these convertible notes. Upon conversion, the principal amount is due in cash, and to the extent that the conversion value exceeds the principal amount, the difference is due in shares of common stock. If any or all of these convertible notes are converted into shares of our common stock, our existing stockholders will experience immediate dilution of voting rights and our common stock price may decline. Furthermore, the perception that such dilution could occur may cause the market price of our common stock to decline.
We entered into a capped call transaction in connection with the issuance of our December 2021 Notes that may affect the value of our common stock and any desired dilution mitigation will be limited to the extent that our stock price rises above the cap price of the capped call transaction.
In connection with the issuance of our December 2021 Notes, we entered into a capped call transaction, with a hedge counterparty, which we expect to reduce the potential dilution upon conversion of the December 2021 Notes in the event that the market price per share of our common stock, as measured under the terms of the capped call transaction, at the time of exercise is greater than the strike price of the capped call transaction, which corresponds to the initial conversion price of the notes and is subject to certain adjustments similar to those contained in the December 2021 Notes. If, however, the market price per share of our common stock, as measured under the terms of the capped call transaction, exceeds the cap price ($4.88 per share) of the capped call transaction, there would nevertheless be dilution to the extent that such market price exceeds the cap price of the capped call transaction.
In connection with hedging the capped call transaction, the hedge counterparty or its affiliates:
expect to purchase our common stock in the open market and/or enter into various derivatives and/or enter into various derivative transactions with respect to our common stock; and
may enter into or unwind various derivatives and/or purchase or sell our common stock in secondary market transactions.
These activities could have the effect of increasing or preventing a decline in the price of our common stock concurrently with or following the pricing of the December 2021 Notes and could have the effect of decreasing the price of our common stock during the period immediately prior to a conversion of the December 2021 Notes.
The hedge counterparty or its affiliates are likely to modify their hedge positions in relation to the capped call transaction from time to time prior to conversion or maturity of the December 2021 Notes by purchasing and selling our common stock, other of our securities, or other instruments they may wish to use in connection with such hedging.
In addition, we intend to exercise options we hold under the capped call transaction whenever the December 2021 Notes are converted. In order to unwind its hedge positions with respect to those exercised options, the counterparty or affiliates thereof expect to sell our common stock in secondary market transactions or unwind various derivative transactions with respect to our common stock during the period immediately prior to conversion of the December 2021 Notes. We have also agreed to indemnify the hedge counterparty and affiliates thereof for losses incurred in connection with a potential unwinding of their hedge positions under certain circumstances.
The effect, if any, of any of these transactions and activities on the market price of our common stock will depend in part on market conditions and cannot be ascertained at this time, but any of these activities could adversely affect the value of our common stock. For further information regarding the mechanics of our capped call transaction refer to our discussion in the Liquidity and Capital Resources section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 14, “Convertible Notes and Term Loans” in Item 8, “Financial Statements and Supplementary Data” of this Annual Report.
Despite our current debt levels, we may still incur additional debt; if we incur substantial additional debt, these higher levels of debt may affect our ability to pay the principal of and interest on our convertible notes.
We and our subsidiaries may be able to incur substantial additional debt in the future, some of which may be secured debt. The indenture governing the convertible notes do not restrict our ability to incur additional indebtedness or require us to maintain financial ratios or specified levels of net worth or liquidity. If we incur substantial additional indebtedness in the future, these
higher levels of indebtedness may affect our ability to pay the principal of and interest on our convertible notes, or any fundamental change in purchase price or any cash due upon conversion, and our creditworthiness generally.
We have implemented a corporate structure taking into consideration our limited operations and potentially applicable tax impact on our royalty and other income, and any changes in applicable tax laws and regulations or enforcement positions of tax authorities may negatively impact our financial condition and operating results.
We have established our corporate structure to be closely aligned with the financial nature of our business. There can be no assurance that the applicable tax laws and regulations will continue in effect or that the taxing authorities in any or all of the applicable jurisdictions will not challenge one or more aspects or characterizations of our corporate structure and the treatment of transactions or agreements within our corporate structure, or determine that the manner in which we operate our business is not consistent with our corporate structure. For example, recently-enacted U.S. tax legislation may result in an increased tax liability as a result of our current corporate structure. We may also have disputes with one or more state tax authorities regarding whether we are subject to that state’s tax and, if we are subject to such state’s tax, what proportion of our revenues is subject to taxation in such state. For example, we are currently subject to an audit by the California Franchise Tax Board and, while we may disagree with their conclusions regarding such issues, the proceedings extend over long periods of time and we may ultimately be required to pay taxes either in a settlement or upon a final decision of an agency or court. Any unfavorable changes in laws and regulations or positions by tax authorities could harm our financial position, results of operations and cash flows.
We may have exposure to additional tax liabilities.
We are subject to taxes in the United States and other jurisdictions. Tax rates in these jurisdictions may be subject to significant change due to economic and/or political conditions. A number of other factors may also impact our future effective tax rate including:
the jurisdictions in which profits are determined to be earned and taxed;
the resolution of issues arising from tax audits with various tax authorities;
changes in valuation of our deferred tax assets and liabilities;
increases in expenses not deductible for tax purposes, including write-offs of acquired intangibles and impairment of goodwill in connection with acquisitions;
changes in availability of tax credits, tax holidays, and tax deductions;
changes in share-based compensation; and
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles.
On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (“2017 Tax Act”). The 2017 Tax Act significantly changed the existing U.S. corporate income tax laws by, among other things, lowering the corporate tax rate, implementing a territorial tax system, and imposing a one-time deemed repatriation toll tax on cumulative undistributed foreign earnings, for which we have not previously provided U.S. taxes. Given the timing, scope, and magnitude of the changes enacted by the 2017 Tax Act, along with on-going implementation efforts, guidance, and other developments from U.S. regulatory and standard-setting bodies, the completion of the accounting for certain tax items included in Note 17 to the Consolidated Financial Statements included in Part II, Item 8, that have been reported as provisional, or where no estimate of the impact was provided as a result of us not having the necessary information, may be subject to material change. Any significant changesdistribute to our future effective tax rate, including final resolution of provisional amounts relating to effects of the 2017 Tax Act, may resultstockholders in a material adverse effect on our business, financial condition, results of operations, or cash flows.dissolution.
In addition, certain activities conducted by our foreign subsidiaries may give rise to United States corporate income tax, even if there are no distributions to the United States. These taxes would be imposed on us when our subsidiaries that are controlled foreign corporations generate income that is subject to Subpart F of the U.S. Internal Revenue Code (“Subpart F”). Passive income, such as rents, royalties, interest and dividends, is among the types of income subject to taxation under Subpart F. Any income taxable under Subpart F is taxable in the United States at federal corporate income tax rates of 21.0%. Subpart F income that is taxable to us, even if it is not distributed to us, may also include income from intercompany transactions between our U.S. and non-U.S. subsidiaries, or where our non-U.S. subsidiaries make an “investment in U.S. property,” within the meaning of Subpart F, such as holding the stock in, or making a loan to, a U.S. corporation.
While we may mitigate this increase in its effective tax rate through claiming a foreign tax credit against our U.S. federal income taxes or potentially have foreign or U.S. taxes reduced under applicable income tax treaties, we are subject to various limitations on claiming foreign tax credits and we may lack treaty protections in certain jurisdictions that will potentially limit any reduction
of the increased effective tax rate. A higher effective tax rate may also result to the extent that losses are incurred in non-U.S. subsidiaries do not reduce our U.S. taxable income.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
At December 31, 2017, we had federal and state net operating loss carryforwards of $117.3 million and $299.9 million, respectively, and federal and state tax credit carryforwards of $2.3 million and $19.3 million, respectively. There may be limitations on our ability to use our net operating loss carryforwards or other tax assets. For example, under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We or our subsidiaries may have experienced, or may in the future experience, “ownership changes” as a result of shifts in stock ownership. Tax attributes acquired from LENSAR may be subject to separate return limitations (“SRLY”) that may limit the corporation’s ability to use the acquired net operating losses and credits. Any limitations on our ability to use our net operating loss carryforwards and other tax assets could adversely impact our financial condition and results of operations. Furthermore, under the 2017 Tax Act, although the treatment of tax losses generated in taxable years ending before December 31, 2017 has generally 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 us to pay additional federal income taxes in future years.
We depend on our licensees and royalty-agreement counterparties for the determination of royalty payments. While we have rights to audit our licensees and royalty-agreement counterparties, the independent auditors may have difficulty determining the correct royalty calculation, we may not be able to detect errors and payment calculations may call for retroactive adjustments. We may have to exercise legal remedies to resolve any disputes resulting from the audit or otherwise related to non-performance by a licensee or royalty counterparty.
The royalty payments we receive are determined by our licensees based on their reported sales. Each licensee’s calculation of the royalty payments is subject to and dependent upon the adequacy and accuracy of its sales and accounting functions, and errors may occur from time to time in the calculations made by a licensee. Our license and royalty agreements provide us the right to audit the calculations and sales data for the associated royalty payments; however, our right to conduct such audits may be limited in terms of the covered periods, and such audits may occur many months following our recognition of the royalty revenue, may require us to adjust our royalty revenues in later periods and may require incurring additional expenses on our part. Further, our licensees and royalty-agreement counterparties may be uncooperative or have insufficient records, which may complicate and delay the audit process.
Although we regularly exercise our royalty audit rights, and reference publicly available information in the assessment of the paid royalties, we rely in the first instance on our licensees and royalty-agreement counterparties to accurately report sales and calculate and pay applicable royalties and, upon exercise of such royalty audit rights, we rely on licensees’ and royalty-agreement counterparties’ cooperation in performing such audits. In the absence of such cooperation, we may be forced to exercise legal remedies to enforce our agreements.
We may experience increases and decreases in our revenues due to fluctuations in foreign currency exchange rates and we may be unsuccessful in our attempts to mitigate this risk.
Our operating results are subject to volatility due to fluctuations in foreign currency exchange rates. Our primary exposure to fluctuations in foreign currency exchange rates relates to revenue and operating expenses denominated in currencies other than the U.S. dollar. Fluctuations in foreign currency rates, particularly the Euro, relative to the U.S. dollar can significantly affect our revenues and operating results. While foreign currency conversion terms vary by license agreement, generally most agreements require that royalties first be calculated in the currency of sale and then converted into U.S. dollars using the average daily exchange rates for that currency for a specified period at the end of the calendar quarter. For example, when the U.S. dollar weakens in relation to other currencies, the converted amount is greater than it would have been had the U.S. dollar exchange rates remained unchanged. Our revenues may fluctuate due to changes in foreign currency exchange rates and is subject to foreign currency exchange risk.
To compensate for Euro currency fluctuations, we hedge Euro currency exposures with Euro forward and option contracts, to offset the risks associated with these Euro currency exposures. We may suspend the use of these contracts from time to time or we may be unsuccessful in our attempt to hedge our Euro currency risk. We will continue to experience foreign currency related fluctuations in our royalty revenues in certain instances when we do not enter into foreign currency exchange contracts or where it is not possible or cost effective to hedge our foreign currency related exposures. Currency related fluctuations in our royalty
revenues will vary based on the currency exchange rates associated with these exposures and changes in those rates, whether we have entered into foreign currency exchange contracts to offset these exposures and other factors. All of these factors could materially impact our results of operations, financial position and cash flows, the timing of which is variable and generally outside of our control.
We must attract, retain and integrate key employees in order to succeed. It may be difficult to recruit, retain and integrate key employees.
To be successful, we must attract, retain and integrate qualified personnel. Our business is intellectual property asset management and acquisition, investing in pharmaceutical products, devices and/or income generating assets and maximizing the value of our patent portfolio and related assets, which requires only a small number of employees. Due to the remote location of our company’s headquarters, it may be difficult for us to recruit and retain qualified personnel. If we are unsuccessful in attracting, retaining and integrating qualified personnel, our business could be impaired.
Our agreements with Facet may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties.
The agreements associated with the spin-off of Facet Biotech Corporation (“Facet”) in December 2008 (the “Spin-Off”), including the Separation and Distribution Agreement, Tax Sharing and Indemnification Agreement and Cross License Agreement, were negotiated in the context of the Spin-Off while Facet was still part of us and, accordingly, may not reflect more favorable terms that may have resulted from arm’s-length negotiations between unaffiliated third parties.
We may have obligations for which we may not be able to collect under our indemnification rights from Facet.
Under the terms of the Separation and Distribution agreement with Facet, we and Facet agreed to indemnify the other from and after the Spin-Off with respect to certain indebtedness, liabilities and obligations that were retained by our respective companies. These indemnification obligations could be significant. The ability to satisfy these indemnities, if called upon to do so, will depend upon our future financial strength. We cannot assure you that, if Facet has to indemnify us for any substantial obligations, Facet will have the ability to satisfy those obligations. If Facet does not have the ability to satisfy those obligations, we may be required to satisfy those obligations instead. For example, in connection with the Spin-Off, we entered into amendments to the leases for the facilities in Redwood City, California, which formerly served as our corporate headquarters, under which Facet was added as a co-tenant under the leases and a Co-Tenancy Agreement under which Facet agreed to indemnify us for all matters related to the leases attributable to the period after the Spin-Off date. Should Facet default under its lease obligations, we would be held liable by the landlord as a co-tenant and, thus, we have in substance guaranteed the payments under the lease agreements for the Redwood City facilities, the disposition of which could have a material adverse effect on the amount or timing of any distribution to our stockholders. As of December 31, 2017, the total lease payments for the duration of the guarantee, which runs through December 2021, are approximately $45.1 million. We would also be responsible for lease-related payments including utilities, property taxes and common area maintenance that may be as much as the actual lease payments. In April 2010, Abbott Laboratories acquired Facet and renamed the company Abbott Biotherapeutics Corp., and in January 2013, Abbott Biotherapeutics Corp. was renamed AbbVie Biotherapeutics, Inc. and spun off from Abbott as a subsidiary of AbbVie Inc. We do not know how Abbott’s acquisition of Facet will impact our ability to collect under our indemnification rights or whether Facet’s ability to satisfy its obligations will change. In addition, we have limited information rights under the Co-Tenancy Agreement. As a result, we are unable to determine definitively whether Facet continues to occupy the space and whether it has subleased the space to another party or the basis upon which our potential co-tenant obligation may be triggered. See “Item 2—Properties.”
As we continue to develop our business, our mix of assets and sources of income may require that we register with the SEC as an “investment company” in accordance with the Investment Company Act of 1940.
We are not registered and have no intention to register as an “investment company” under the Investment Company Act of 1940 (the “40 Act”). As a result, we are not and do not expect to become subject to regulation under the 40 Act, including its reporting and corporate governance requirements and restrictions on leverage and affiliate transactions.
Generally, to avoid being regulated as an “investment company” under the 40 Act an issuer must:
not be engaged or hold itself out as being engaged primarily in the business of investing, reinvesting or trading in securities and not own or propose to acquire “investment securities” with a value of more than 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis; or
be able to rely on an exception from the definition of “investment company” under the ’40 Act or an exemptive rule.
“Investment securities” are any securities other than U.S. government securities and securities issued by a majority-owned subsidiary that is not itself either an “investment company” or a private investment company, meaning a company that is excluded from the definition of “investment company” by Section 3(c)(1) or Section 3(c)(7) of the 40 Act.
We have in the past and may in the future rely on one or more exceptions to the definition of “investment company” under the 40 Act, including the exception under Section 3(c)(5) of the 40 Act. To rely on Section 3(c)(5), as interpreted by the staff of the SEC, we would be required to have at least 55% of our total assets in certain qualifying assets. In a no-action letter issued to Royalty Pharma on August 13, 2010, the SEC staff stated that certain royalty interests of the type we own can be treated as qualifying assets.
In light of the change in the composition of our assets as a result of the Noden Transaction, we determined that the exception provided by Section 3(c)(5) might no longer be applicable and we therefore have elected for now to rely on the exemption provided by Rule 3a-2 under the 40 Act for so-called “transient investment companies”. Rule 3a-2 provides a safe harbor for a period of one year so long as the company does not intend to engage primarily in the business of investing, reinvesting, owning, holding or trading in securities and has a bona fide intent to be engaged primarily as soon as is reasonably possible, and in any event within that one-year period, in a non-investment company business. A company may rely on Rule 3a-2 only once during any three-year period.
Our board of directors has determined and resolved that we not engage in the business of investing, reinvesting, owning, holding or trading in securities and is implementing a plan to restructure our business and the composition of our assets to make clear that we are not an “investment company” within the meaning of the 40 Act. This may limit our ability to make certain investments (including divesting certain assets), or require us to take or forego certain actions, that could materially and adversely affect our financial condition and results of operation. There can be no assurance that we will be able to execute that plan within the one-year deadline. In addition, if the SEC, its staff or the courts changes their interpretation of certain provisions of the 40 Act, including Section 3(c)(5), we may need to take additional steps in order to avoid becoming subject to regulation under the 40 Act, which could materially and adversely affect our financial condition and results of operation.
If we were required to register as an “investment company,” the obligations imposed on us by the 40 Act would likely require substantial changes in the way we do business and would result in significant additional regulatory and administrative burdens and costs. In order to remain outside the scope of regulation under the 40 Act, we may need to take various actions which we might otherwise not pursue. These actions may include restructuring our company and modifying our mixture of assets and income, including divesting certain desirable assets immediately, and could have a material and adverse effect on us.
We have in the past and are currently involved in, and expect that in the future we will from time to time be involved in, litigation, either as a defendant or a plaintiff, which could have a negative impact on our operations and results.
Monitoring and defending against or prosecuting legal actions is time-consuming for our management and may detract from our ability to fully focus our internal resources on our core business goal of acquiring and managing income generating assets. In addition, legal fees and costs incurred in connection with such activities may be significant. Depending on the nature of the lawsuit, a decision adverse to our interests could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations and financial position or impact our rights in an adverse way.
Failure in our information technology and storage systems could significantly disrupt the operation of our business.
Our ability to execute our business plan depends, in part, on the continued and uninterrupted performance of our information technology (“IT”) systems. IT systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers may be vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our IT systems, sustained or repeated system failures that interrupt our ability to generate and maintain data could adversely affect our ability to operate our business.
Changes to financial accounting standards may affect our reported results of operations
A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing standards or the reevaluation of current practices may adversely affect our reported financial results or the way we conduct our business.
We use estimates, make judgments, and apply certain methods in measuring the progress of our business in determining our financial results and in applying our accounting policies. As these estimates, judgments, and methods change, our assessment of the progress of our business and our results of operations could vary.
The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time may lead us to change our methods, estimates, and judgments. Changes in any of our assumptions may adversely affect our reported financial results.
If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our financial condition, results of operations or cash flows, which may adversely affect investor confidence in us and, as a result, the value of our common stock.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. We are required, under Section 404 of the Sarbanes-Oxley Act (“Section 404”), to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment must include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 also generally requires an attestation from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting.
Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant management efforts. Our acquired businesses may have limited experience complying with Section 404 and if in the future we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. Furthermore, we cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Income Generating Assets Segment
We lease approximately 1,750 square feet of office space in Reno, Nevada, which serves as our corporate headquarters. The lease expires in December 2022. Previously, we leased approximately 5,900 square feet of office space in Incline Village, Nevada, which servesserved as our corporate headquarters. Theheadquarters until December 31, 2020 when the lease expires in May 2020.was terminated.
In July 2006, we entered into two leases and a sublease for facilities in Redwood City, California, which formerly served as our corporate headquarters and cover approximately 450,000 square feet of office space. Under the amendments to the leases entered into in connection with the Spin-Off,spin-off of Facet, Facet was added as a co-tenant under the leases. As a co-tenant, Facet is bound by all of the terms and conditions of the leases. We and Facet are jointly and severally liable for all obligations under the leases, including the payment of rental obligations. However, weThe guarantee runs through December 2021. We also entered into a Co-Tenancy Agreement with Facet in connection with the Spin-Offspin-off and the lease amendments under which we assigned to Facet all rights under the leases, including, but not limited to, the right to amend the leases, extend the lease terms or terminate the leases, and Facet assumed all of our obligations under the leases. Under the Co-Tenancy Agreement, we also relinquished any right or option to regain possession, use or occupancy of these facilities. Facet agreed to indemnify us for all matters associated with the leases attributable to the period after the Spin-Offspin-off date and we agreed to indemnify Facet for all matters associated with the leases attributable to the period before the Spin-Offspin-off date. In addition, in connection with the Spin-Off,spin-off, we assigned the sublease to Facet. In April 2010, Abbott Laboratories acquired Facet
and later renamed the entity AbbVie Biotherapeutics, Inc. (“AbbVie”). To date, AbbVie has satisfied all obligations under the Redwood City leases.
Pharmaceutical Segment
Noden Pharma DAC leases approximately 3,100 square feet of office space in Dublin, Ireland, which serves as the office managing all pharmaceutical operations. The lease expires in September 2025 and Noden Pharma DAC has the option to terminate the lease in September 2021.
Medical Devices Segment
LENSAR leases an office and manufacturing facility of approximately 33,900 square feet in Orlando, Florida, which serves as the office managing all medical device operations. The lease expires in July 2021.
We believe that our existing facilities are adequate to meet our business requirements for the reasonably foreseeable future and that additional space will be available on commercially reasonable terms, if required.future.
ITEM 3. LEGAL PROCEEDINGS
The information set forth in Note 23, “Legal Proceedings”25, Legal Proceedings, to the Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this Annual Report is incorporated by reference herein.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price rangeOn December 8, 2020, we formally notified the Nasdaq Stock Market, Inc. of our intent to delist the Company's common stock
Our common stock trades on from the Nasdaq Global Select Market under("Nasdaq"). We filed a Form 25 (Notification of Removal from Listing) with the symbol “PDLI.” Prices indicated below areSEC and Nasdaq relating to the high and low intra-day sales prices per sharevoluntary delisting of our common stock as reported byon December 28, 2020 and suspended trading of our common stock prior to the Nasdaq Global Select Market foropening of trading on December 31, 2020. We filed a certificate of dissolution with the periods indicated.Delaware Secretary of State on January 4, 2021 (the “Final Record Date”) and instructed our transfer agent to close our stock transfer books at the close of business on this date. PDL's common stock was delisted effective on January 7, 2021. On January 8, 2021, we filed a Form 15 notifying the SEC of our deregistration of our common stock under Section 12(g) of the Exchange Act and suspension of our duty to file reports under Sections 13 and 15(d) of the Exchange Act.
|
| | | | | | | |
| | High | | Low |
| 2017 | | | |
| First Quarter | $ | 2.39 |
| | $ | 1.96 |
|
| Second Quarter | $ | 2.63 |
| | $ | 2.00 |
|
| Third Quarter | $ | 3.43 |
| | $ | 2.15 |
|
| Fourth Quarter | $ | 3.55 |
| | $ | 2.70 |
|
| 2016 | | | |
| First Quarter | $ | 3.57 |
| | $ | 2.58 |
|
| Second Quarter | $ | 3.84 |
| | $ | 2.94 |
|
| Third Quarter | $ | 3.62 |
| | $ | 2.69 |
|
| Fourth Quarter | $ | 3.77 |
| | $ | 1.93 |
|
Holders of Common Stock
As of March 13, 2018,January 6, 2021, we had approximately 12486 common stockholders of record. Most of our outstanding shares of common stock are held of record by one stockholder, Cede & Co., as nominee for the Depository Trust Company. Many brokers, banks and other institutions hold shares of common stock as nominees for beneficial owners that deposit these shares of common stock in participant accounts at the Depository Trust Company. The actual number of beneficial owners of our stock is likely significantly greater than the number of stockholders of record; however, we are unable to reasonably estimate the total number of beneficial owners.
Dividends
On August 3, 2016,May 5, 2020, our board of directors decidedapproved a distribution of all of the Company’s shares of common stock of Evofem Biosciences, Inc. (“Evofem”) via a special one-time dividend to eliminatePDL stockholders. The Evofem shares were distributed on May 21, 2020 to PDL shareholders of record as of the quarterly cashclose 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, our board of directors approved a distribution of all of the Company’s shares of common stock of LENSAR via a special one-time dividend payment. See Note 19, “Cash Dividends” in Item 8, “Financial Statements and Supplementary Data”to PDL stockholders. The LENSAR shares were distributed on October 2, 2020 to PDL shareholders of this Annual Reportrecord 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 a discussioneach share of cash dividend payments made prior to August 3, 2016.PDL common stock held.
Equity Compensation Plan Information
See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized for issuance under equity compensation plans.
Recent Sales of Unregistered Securities
None.There were no unregistered sales of equity securities during the period covered by this report.
Issuer purchases of Equity Securities
On September 25, 2017, our board of directors authorized the repurchase of issued and outstanding sharesThere were no repurchases of our common stock having an aggregate value of up to $25.0 million pursuant to a new share repurchase program. As ofmade by us in the three months ended December 31, 2017, we have not repurchased shares under this plan. The repurchase program may be suspended or discontinued at any time without notice.2020.
Comparison of Stockholder Returns
The line graph below compares the cumulative total stockholder return on our common stock between December 31, 2012,2015, and December 31, 2017,2020, with the cumulative total return of (i) the Nasdaq Biotechnology Index and (ii) the Nasdaq Composite Index over the same period. This graph assumes that $100.00 was invested on December 31, 2012,2015, in our common stock at the closing sales price forourcommon stock on that date and at the closing sales price for each index on that date and that all dividends were reinvested. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns and are not intended to be a forecast.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 12/31/2012 | | 12/31/2013 | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 |
| PDL BioPharma, Inc. | $ | 100.00 |
| | $ | 129.34 |
| | $ | 126.33 |
| | $ | 64.93 |
| | $ | 40.07 |
| | $ | 51.79 |
|
| Nasdaq Biotechnology Index | $ | 100.00 |
| | $ | 174.05 |
| | $ | 230.33 |
| | $ | 244.29 |
| | $ | 194.95 |
| | $ | 228.29 |
|
| Nasdaq Composite Index | $ | 100.00 |
| | $ | 141.63 |
| | $ | 162.09 |
| | $ | 173.33 |
| | $ | 187.19 |
| | $ | 242.29 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 |
| PDL BioPharma, Inc. | $ | 100.00 | | | $ | 61.71 | | | $ | 79.76 | | | $ | 84.42 | | | $ | 94.46 | | | $ | 95.29 | |
| Nasdaq Composite Index | $ | 100.00 | | | $ | 108.87 | | | $ | 141.13 | | | $ | 137.12 | | | $ | 187.44 | | | $ | 271.64 | |
| Nasdaq Biotechnology Index | $ | 100.00 | | | $ | 78.65 | | | $ | 95.67 | | | $ | 87.19 | | | $ | 109.08 | | | $ | 137.90 | |
The information in this section shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference in such filing.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information has been derived from our consolidated financial statements. The information below is not necessarily indicative of the results of future operations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Item 1A, “Risk Factors” and the consolidated financial statements and related notes thereto included in Item 8, “Financial Statements and Supplementary Data” in order to fully understand factors that may affect the comparability of the information presented below.Reserved.
Consolidated Statements of Income Data
|
| | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| (in thousands, except per share data) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Revenues: | | | | | | | | | | |
| Royalties from Queen et al. patents | | $ | 36,415 |
| | $ | 166,158 |
| | $ | 485,156 |
| | $ | 486,888 |
| | $ | 430,219 |
|
| Royalty rights - change in fair value | | 162,327 |
| | 16,196 |
| | 68,367 |
| | 45,742 |
| | 5,565 |
|
| Interest revenue | | 17,744 |
| | 30,404 |
| | 36,202 |
| | 48,020 |
| | 18,976 |
|
| Product revenue, net | | 84,123 |
| | 31,669 |
| | — |
| | — |
| | — |
|
| License and other | | 19,451 |
| | (126 | ) | | 723 |
| | 575 |
| | 1,500 |
|
| Total revenues | | 320,060 |
| | 244,301 |
| | 590,448 |
| | 581,225 |
| | 456,260 |
|
| Operating expenses: | | | | | | | | | | |
| Cost of product revenue, (excluding intangible amortization) | | 30,537 |
| | 4,065 |
| | — |
| | — |
| | — |
|
| Amortization of intangible assets | | 24,689 |
| | 12,028 |
| | — |
| | — |
| | — |
|
| General and administrative expenses | | 45,641 |
| | 39,790 |
| | 36,090 |
| | 34,914 |
| | 29,755 |
|
| Sales and marketing | | 17,683 |
| | 538 |
| | — |
| | — |
| | — |
|
| Research and development | | 7,381 |
| | 3,820 |
| | — |
| | — |
| | — |
|
| Change in fair value of anniversary payment and contingent consideration | | 349 |
| | (3,716 | ) | | — |
| | — |
| | — |
|
| Acquisition-related costs | | — |
| | 3,564 |
| | — |
| | — |
| | — |
|
| Loss on extinguishment of notes receivable | | — |
| | 51,075 |
| | 3,979 |
| | — |
| | — |
|
| Asset impairment loss | | — |
| | 3,735 |
| | — |
| | — |
| | — |
|
| Total operating expenses | | 126,280 |
| | 114,899 |
| | 40,069 |
| | 34,914 |
| | 29,755 |
|
| Operating income | | 193,780 |
| | 129,402 |
| | 550,379 |
| | 546,311 |
| | 426,505 |
|
| Gain on bargain purchase | | 9,309 |
| | — |
| | — |
| | — |
| | — |
|
| Other non-operating expense, net | | (18,561 | ) | | (20,032 | ) | | (20,241 | ) | | (45,039 | ) | | (24,629 | ) |
| Non-operating expense, net | | (9,253 | ) | | (20,032 | ) | | (20,241 | ) | | (45,039 | ) | | (24,629 | ) |
| Income before income taxes | | 184,527 |
| | 109,370 |
| | 530,138 |
| | 501,272 |
| | 401,876 |
|
| Income tax expense | | 73,826 |
| | 45,711 |
| | 197,343 |
| | 179,028 |
| | 137,346 |
|
| Net income | | 110,701 |
| | 63,659 |
| | 332,795 |
| | 322,244 |
| | 264,530 |
|
| Less: Net income attributable to noncontrolling interests | | (47 | ) | | 53 |
| | — |
| | — |
| | — |
|
| Net income attributable to PDL’s stockholders | | $ | 110,748 |
| | $ | 63,606 |
| | $ | 332,795 |
| | $ | 322,244 |
| | $ | 264,530 |
|
| | | | | | | | | | | |
| Net income per basic share: | | | | | | | | | | |
| Net income | | $ | 0.71 |
| | $ | 0.39 |
| | $ | 2.04 |
| | $ | 2.04 |
| | $ | 1.89 |
|
| Net income per diluted share: | | | | | | | | | | |
| Net income | | $ | 0.71 |
| | $ | 0.39 |
| | $ | 2.03 |
| | $ | 1.86 |
| | $ | 1.66 |
|
| Dividends per share: | | | | | | | | | | |
| Cash dividends declared and paid | | $ | — |
| | $ | 0.10 |
| | $ | 0.60 |
| | $ | 0.60 |
| | $ | 0.60 |
|
Consolidated Balance Sheet Data
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| (in thousands) | | 2017 1 | | 2016 | | 2015 | | 2014 | | 2013 |
| Cash, cash equivalents, short-term investments and restricted investments | | $ | 532,114 |
| | $ | 242,141 |
| | $ | 220,352 |
| | $ | 293,687 |
| | $ | 99,540 |
|
| Working capital | | $ | 447,334 |
| | $ | 267,716 |
| | $ | 245,969 |
| | $ | 167,914 |
| | $ | (299,727 | ) |
| Total assets | | $ | 1,243,123 |
| | $ | 1,215,387 |
| | $ | 1,012,205 |
| | $ | 954,946 |
| | $ | 540,858 |
|
| Long-term obligations, less current portion | | $ | 204,124 |
| | $ | 329,649 |
| | $ | 279,512 |
| | $ | 306,977 |
| | $ | 23,042 |
|
| Retained earnings | | $ | 945,614 |
| | $ | 857,116 |
| | $ | 810,036 |
| | $ | 575,740 |
| | $ | 350,151 |
|
| Total stockholders’ equity | | $ | 845,890 |
| | $ | 755,423 |
| | $ | 695,952 |
| | $ | 460,437 |
| | $ | 113,489 |
|
|
| |
1
| Reflects the provisional estimated amounts recorded in recognition of the enactment of the 2017 Tax Act. See Note 17 to the Consolidated Financial Statements included in Part II, Item 8 of this report for further details. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and the Consolidated Financial Statements and related Notes included elsewhere in this Report.Form 10-K.
Overview
We seekThroughout our history, our mission has been to provide a significant return for our stockholdersimprove the lives of patients by acquiring and managing a portfolio of companies, products, royalty agreements and debt facilitiesaiding in the biotechnology, pharmaceuticalsuccessful development of innovative therapeutics and medical device industries.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, we changed our name to PDL BioPharma, Inc.
Historically, we generated a substantial portion of our revenues through the license agreements related to patents covering the humanization of antibodies, which we refer to as the Queen et al. patents. In 2012, and in anticipation of declining revenues from the Queen et al. patents, we began providing alternative sources of capital through royalty monetizationsmonetization and debt facilities, and, in 2016, we began acquiring commercial-stage products and launching specialized companies dedicated to the commercialization of these products. To date,products, first with our acquisition of branded prescription pharmaceutical drugs from Novartis in 2016 and, in 2017, with the acquisition of LENSAR, a medical device ophthalmology equipment manufacturing company. In 2019, we have consummated seventeenentered into a securities purchase agreement with Evofem pursuant to which we invested $60.0 million in a private placement of such transactions,securities. These investments provided funding for Evofem’s pre-commercial activities for Phexxi®, its non-hormonal, on-demand prescription contraceptive gel for women.
Based on the nature of which nine are activeour investments entered into between 2012 through 2019 and outstanding. We have one debt transaction outstanding, representing deployed capital of $20.0 million: CareView Communications, Inc. (“CareView”); we have one hybrid royalty/debt transaction outstanding, representing deployed capital of $44.0 million: Wellstat Diagnostics, LLC (“Wellstat Diagnostics”); and we have five royalty transactions outstanding, representing deployed capital of $396.1 million: KYBELLA®, AcelRx Pharmaceuticals, Inc. (“AcelRx”), The Regents of the University of Michigan (“U-M”), Viscogliosi Brothers, LLC and Depomed, Inc. (“Depomed”). Our equity and loan investmentsfurther discussed below, our operations were structured in Noden Pharma DAC, Inc. and Noden Pharma USA, Inc. (together, and including their respective subsidiaries, “Noden”) represent deployed capital of $179.0 million, and our converted equity and loan investment in LENSAR, Inc. (“LENSAR”) represents deployed capital of $40.0 million.
We operate in threefour segments designated as Medical Devices, Strategic Positions, Income Generating Assets, Medical Devices and Pharmaceutical.
Our Medical Devices segment consisted of revenue from the sale and lease of the LENSAR® Laser System, which included equipment, PIDs, procedure licenses, training, installation, warranty and maintenance agreements.
Our Strategic Positions segment consisted of an investment in Evofem (NASDAQ: EVFM). Our investment included shares of common stock and warrants to purchase additional shares of common stock.
Our Pharmaceutical segment consisted of revenue derived from the Noden Products.
Our Income Generating Assets segment consistsconsisted of revenue derived from (i) notes and other long-term receivables, (ii) royalty rights - at fair value,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. Our Pharmaceutical segment consists
Financial information about our segments, including our revenues and net loss for the eight months ended August 31, 2020 and the years ended December 31, 2019 and 2018, and select long-lived assets as of revenue derived from Tekturna®, Tekturna HCT®, Rasilez®December 31, 2020 and Rasilez HCT® (collectively,2019, is included in our Consolidated Financial Statements and accompanying notes in this Form 10-K.
In September 2019, we engaged financial and legal advisors and initiated a review of our strategy. This review was completed in December 2019. At such time, we disclosed that we planned to halt the “Noden Products”execution of our growth strategy, cease making additional strategic transactions and investments and instead pursue a formal process to unlock the value of our portfolio by monetizing our assets and ultimately distributing net proceeds to stockholders (the “monetization strategy”). Pursuant to our monetization strategy, we did not expect to enter into any additional strategic investments. We further announced in December 2019 that we would explore a variety of potential transactions in connection with the monetization strategy, including a whole Company sale, divestiture of our assets, spin-offs of operating entities, merger opportunities or “Tekturna”a combination thereof. Over the subsequent months, our board of directors (the “Board”) sales. Our Medical Devices segment consistsand management analyzed, together with our outside financial and legal advisors, how to best capture value pursuant to our monetization strategy and best return the significant intrinsic value of revenue derivedthe assets in our portfolio to the stockholders.
In February 2020, the Board approved a plan of complete liquidation (the “Plan of Liquidation”) of our assets and passed a resolution to seek stockholder approval to dissolve our Company. At our Annual Meeting of Stockholders in August 2020, the proposal to liquidate and dissolve our Company pursuant to a plan of dissolution was approved by our stockholders. On November 5, 2020, our Board approved filing a certificate of dissolution with the Secretary of State of Delaware in January 2021
and proceeding to complete the dissolution process for our Company in accordance with the Delaware General Corporate Law. The filing of the certificate of dissolution occurred on January 4, 2021 and we closed our stock transfer books as of such date (the “Final Record Date”). After such time, we are not recording any further transfers of our common stock, except pursuant to the provisions of a deceased stockholder’s will, intestate succession, or by operation of law and we will not issue any new stock certificates, other than replacement certificates. In addition, we will not be issuing any shares of our common stock upon exercise of 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. In accordance with our dissolution plan, we completed the voluntary delisting process from the Nasdaq Stock Market exchange so that suspension of trading occurred before the market opened on December 31, 2020 and official delisting of our stock occurred on January 7, 2021. We do not anticipate participating in any OTC trading of our stock or economic rights in our stock.
Pursuant to our monetization strategy, we explored a variety of potential transactions, including a whole Company sale, divestiture of assets, spin-offs of operating entities, merger opportunities or a combination thereof. In addition, we analyzed, and continue to analyze, optimal mechanisms for returning value to stockholders in a tax-efficient manner, including share repurchases, cash dividends and other distributions of assets. Despite the challenges of COVID-19, we made significant progress in our monetization strategy during 2020, including monetizing most of our key assets and resolving a longstanding legal issue as follows:
•In May 2020, we made a liquidation distribution of all of our common stock in Evofem to our stockholders. As of December 31, 2020, we held warrants to purchase up to 3,333,334 shares of Evofem common stock with an exercise price of $6.38
•In August 2020, we entered into a settlement agreement (the “ Settlement Agreement”) with related entities of Defined Diagnostics, LLC (f/k/a Wellstat Diagnostics, LLC) ("Wellstat Diagnostics" and, together with such related entities, the "Wellstat Parties") resolving previously reported litigation relating to loans made to Wellstat Diagnostics by us
•In August 2020, we sold three royalty interests related to third party sales of Kybella®, Zalviso®, and Coflex®
•In September 2020, we completed the previously announced sale of our interest in Noden DAC and Noden USA
•In October 2020, we completed the previously announced spin-off of LENSAR® Laser System sales. Prospectively, whereby we made a liquidation distribution of all of our shares of LENSAR common stock to our stockholders as of September 22, 2020
•In December 2020, we entered into a Capital Provision Agreement with Epps Investments LLC (“Epps”) regarding our previously announced Settlement Agreement with the Wellstat Parties whereby we sold all remaining amounts owed to us under the Settlement Agreement for consideration received
The Settlement Agreement with the Wellstat Parties provided for the payment of $7.5 million upon the signing of the Settlement Agreement, which has been received, 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. Under the terms of the Settlement Agreement, failure by the Wellstat Parties to make payment in full by July 26, 2021, authorized us 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.
The Capital Provision Agreement with Epps provided for the payment of $51.4 million, which was received on December 31, 2020, in exchange for 100% of the payments or other property or value received by PDL on or after the date of the Capital Provision Agreement pursuant to the Settlement Agreement.
The proceeds from the sale of the three royalty interests totaled $4.35 million, 90% of which was received at the closing of the transaction. The remaining 10% 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.
On July 30, 2020, we signed a definitive agreement for the sale of our interest in Noden DAC and Noden USA to CAT Capital Bidco Limited (“Stanley Capital”). In accordance with the terms of the agreement, we expect to focusreceive consideration of up to $52.8 million. Stanley Capital made an initial cash payment to us of $12.2 million on the acquisitionSeptember 9, 2020 closing date. We are 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 us in twelve equal quarterly installments from January 2021 to October 2023, of which the first installment payment has been received. An additional products$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 us. We are 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. We are also entitled to 50% of a license fee from a third party distributor within 10 days of receipt by Noden. Upon closing, we recorded a gain of $0.2 million. In connection with the
closing of the transaction, the guaranty agreement between Novartis and devices and expectus which guaranteed certain payments owed to transact fewer royalty transactions and still fewer debt transactions. Novartis by Noden was terminated.
We anticipate that over time moreintend to pursue monetization of our revenues will come fromremaining assets in a disciplined and cost-effective manner to maximize returns to stockholders. At the same time, we recognize that accelerating the timeline to complete our Pharmaceuticalmonetization process, while continuing to optimize asset value, could increase returns to stockholders due to reduced general and Medical Devices segmentsadministrative expenses as well as provide for faster returns to stockholders. While we are cognizant that an accelerated timeline may provide greater and lessfaster returns to our stockholders, we also recognize that the duration and extent of the public health issues related to the COVID-19 pandemic make it possible that the timing of the sale of all or substantially all of our revenuesremaining assets may require additional time to execute or for us to pursue alternatives to the sale of these assets. For example, if a suitable offer to purchase the remaining royalty assets is not received prior to completing the dissolution process, they could be ultimately placed in a liquidating trust. The available proceeds from either the ongoing collection of royalty income or from the sale of the royalty assets would ultimately be distributed to our stockholders. We will come fromcontinue to assess the market for our Income Generating Assets segment.remaining assets to determine the appropriate time to sell them or to opt for alternative paths to return their value to our stockholders.
Critical Accounting Policies and Significant Estimates
The preparation of financial statements and related disclosures in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) and the discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statementsConsolidated Financial Statements and accompanying notes. Note 2, “SummarySummary of Significant Accounting Policies” of the NotesPolicies, to the Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data”this Form 10-K describes the significant accounting policies and methods used in the preparation of our consolidated financial statements.Consolidated Financial Statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.
While our significant accounting policies are more fully described in the notes to our Consolidated Financial Statements appearing elsewhere in this Annual Report,Form 10-K, management believes that the following accounting policies related to the liquidation basis of accounting, assets and liabilities held for sale, discontinued operations, notes receivable and other long-term receivables, inventory, intangible assets, convertible notes, product revenue, royalty rights - at fair value, and income taxes and business combination are critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.
Liquidation Basis of Accounting
As a result of the approval of the Company’s stockholders to pursue dissolution of the Company pursuant to a plan of dissolution, the Company’s basis of accounting transitioned, effective September 1, 2020, from the going concern basis of accounting (“Going Concern Basis”) to the liquidation basis of accounting (“Liquidation Basis”) in accordance with Generally Accepted Accounting Principles. Under the Liquidation Basis, the values of the Company's assets and liabilities include management's estimate of income to be generated from the remaining assets until the anticipated date of sale, estimated sales proceeds, estimates for operating expenses and expected amounts required to settle liabilities. The estimated liquidation values for assets derived from future revenue streams and asset sales and the settlement of estimated liabilities are reflected on the Consolidated Statement of Net Assets in Liquidation. The actual amounts realized could differ materially from the estimated amounts.
Assets Held for Sale
Under the Going Concern Basis, assets and liabilities are classified as held for sale and presented separately on the balance sheet 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. The Pharmaceutical segment, Strategic Positions segment and certain royalty right assets within the Income Generating Assets segment are classified as held for sale. The royalty right assets that were classified as held for sale are Assertio, Viscogliosi Brothers, University of Michigan, AcelRx, and Kybella. The assets and liabilities held for sale are included on the Company’s Consolidated Balance Sheet as of December 31, 2019, as Assets held for sale and Liabilities held for sale.
Discontinued Operations
Discontinued operations comprise those activities that were disposed of during the period or that 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 of the investments classified as held for sale, the Pharmaceutical segment, the Strategic Positions segment, and certain royalty assets noted above, are presented on the Consolidated Statements of Operations as discontinued operations. Depreciation and amortization of assets ceases upon designation as held for sale.
See Note 4, Discontinued Operations Classified as Assets Held for Sale, for additional information.
Notes Receivable and Other Long-Term Receivables
We accountUnder the Going Concern Basis, we accounted for our notes receivable at amortized cost, net of unamortized origination fees, if any, and adjusted for any allowance for loanimpairment losses. Interest iswas accreted or accrued to “Interest revenue” using the effective interest method. When and if supplemental payments are received from certain of these notes and other long-term receivables, an adjustment to the estimated effective interest rate iswas affected prospectively.
We evaluateevaluated the collectability of both interest and principal for each note receivable or loan to determine whether it is impaired. A note receivable or loan iswas considered to be impaired when, based on currentavailable information and events, we determinedetermined it is probable that it willwould be unable to collect amounts due according to the existing contractual terms. When a note receivable or loan iswas considered to be impaired, the amount of loss iswas 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 iswas collateralized and we expectexpected repayment to be provided solely by the collateral. Impairment assessments requirerequired significant judgments and arewere based on significant assumptions related to the borrower’s credit risk, financial performance, expected sales, and estimated fair value of the collateral.
We recordrecorded interest on an accrual basis and recognizerecognized it as earned in accordance with the contractual terms of the applicable credit agreement, to the extent that the underlying note receivable or loan was not impaired and such amounts arewere expected to be collected. When a note receivable or loan becomesbecame past due, or if management otherwise doesdid not expect that principal, interest, and other obligations due willwould be collected in full, we will generally placeplaced the note receivable or loan on non-accrualan impaired status and ceaseceased recognizing interest income on that note receivable or loan until all principal and interest due has been paid or until such time that we believe the borrower has demonstrated the ability to repay its current and future contractual obligations.loan. Any uncollected interest related to prior periods iswas reversed from income in the period that collection of the interest receivable is determined to be doubtful. However, we may make exceptions to this policy if the investment has sufficient collateral value and is in the process
As of collection.
At December 31, 2017,2020, we had three notesone note receivable investment with an aggregate carrying value of approximately $0.7 million, compared to two note receivable investments on non-accrual statuswhich we determined to be impaired as of December 31, 2019 with a cumulative investment costan aggregate carrying value and fair value of approximately $70.7$52.1 million and $71.3$57.3 million, compared to four noterespectively. We did not recognize any losses on extinguishment of notes receivable investments on non-accrual atduring the eight months ended August 31, 2020 or the years ended December 31, 2016 with a cumulative investment cost2019 and fair value of approximately $105.3 million and $107.4 million.2018. There were no impairment losses on notes receivable for the eight months ended August 31, 2020. During the years ended December 31, 2017, 20162019 and 2015,2018, we recognized a loss on extinguishmentrecorded impairment losses of notes receivable of zero, $51.1$10.8 million and $4.0$8.2 million, respectively.respectively, related to the CareView note receivable. For the eight months ended August 31, 2020 and the year ended December 31, 2019, we did not recognize any interest income for note receivable investments as all such note receivable investments were on an impaired status and no cash interest payments were received. For the year ended December 31, 2017,2018, we recognized $3.1$2.3 million of interest revenue for the CareView note receivable investment as result of cash interest payments made during the fiscal 2017. For the years ended December 31, 2016 and 2015, we did not recognize any interest for note receivable investments on non-accrual status.year.
Inventory
Inventory,Under the Going Concern Basis, inventory, which consistsconsisted of raw material,materials, work-in-process and finished goods, iswas stated at the lower of cost or marketnet realizable value. We determinedetermined cost using the first-in, first-out method. Inventory levels arewere analyzed periodically and written down to their net realizable value if they havehad become obsolete, havehad a cost basis in excess of its expected net realizable value or arewere in excess of expected requirements. During 2017We analyzed current and 2016, we recognized anfuture product demand relative to the remaining product shelf life to identify potential excess inventory. We 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 write-down of approximately $2.0 million and $0.5 million, respectively, relatedas current on the Consolidated Balance Sheet when the Company expected inventory to Noden Products that we forecast we will be unable to sell prior to its expiration.consumed for commercial use within the next twelve months.
Intangible Assets
IntangibleUnder the Going Concern Basis, intangible assets with finite useful lives consistconsisted primarily of acquired product rights and acquired technology and arewere amortized on a straight-line basis over their estimated useful lives (10(five to 1520 years). The estimated useful lives associated with finite-lived intangible assets arewere consistent with the estimated lives of the associated products and may be modified when circumstances warrant.products. Such assets arewere reviewed for impairment when events or circumstances indicateindicated that the carrying value of an asset may not be recoverable. An impairment loss would bewas recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition arewere less than its carrying amount. The amount of any impairment isloss was measured as the difference between the carrying amount and the fair value of the impaired asset.
In 2017 we performed an event driven impairment assessment of our Noden asset group and concluded that forecasted undiscounted future cashflows exceeded the carrying value of the Noden asset group. We continue to closely monitor the performance of the Noden asset group. If revenues, gross margins and cashflows from the Noden asset group do not meet our expectations an impairment could occur in a future period.
Convertible Notes
We performUnder the Going Concern Basis, we performed an assessment of all embedded features of a debt instrument to determine if (i) such features should be bifurcated and separately accounted for, and (ii) if bifurcation requirements are met, whether such features should be classified and accounted for as equity or debt instruments. If the embedded feature meetsmet the requirements to be bifurcated and accounted for as a liability, the fair value of the embedded feature is measured initially, included as a liability on the Consolidated Balance Sheets,Sheet, and re-measured to fair value at each reporting period. Any changes in fair value arewere recorded in the Consolidated Statement of Income.Operations. We monitor,monitored, on an ongoing basis, whether events or circumstances could give rise to a change in our classification of embedded features.
We issued the February 2018 Notes with a net share settlement feature, meaning that upon any conversion, the principal amount will be settled in cash and the remaining amount, if any, will be settled in shares$150.0 million of our common stock. We issued the December 2021 Notes with an option to settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, but with the current intention that the principal amount will be settled in cash and the remaining amount, if any, will be settled in shares of our common stock.election. In accordance with accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion, we 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.
TheOn September 17, 2019, we 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 (the “September 2019 Exchange Transaction”). We issued the December 2024 Notes with an option to settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. In accordance with accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion, we 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.
The September 2019 Exchange Transaction qualified as a debt extinguishment.
In accordance with the accounting guidance for an extinguishment of convertible debt instruments with a cash conversion feature, we were 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.
In connection with the September 2019 Exchange Transaction, we entered into a capped call transaction with a counterparty on similar terms and conditions as the capped call transaction entered into between the two parties when the December 2021 Notes were issued. We 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. Also with the September 2019 Exchange Transaction, we and the counterparty 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. The 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 our common stock, were included as an increase to Additional paid-in capital within stockholders’ equity.
On December 12, 2019, we initiated the repurchase of $119.3 million in aggregate principal amount of our December 2021 and December 2024 convertible notes for $97.9 million in cash and 13.4 million shares of our common stock in privately negotiated transactions (the “December Exchange Transaction”). The closing of the December Exchange Transaction occurred on December 17, 2019. We determined that the repurchase of the principal amount should be accounted for as a partial extinguishment of the December 2021 Notes and December 2024 Notes and a loss on extinguishment was estimatedrecorded at $109.1 million at issuance. Therefore, the difference between the face valueclosing of the transaction. The loss on extinguishment included the derecognition of a proportional share of the deferred issuance costs. In connection with the December Exchange Transaction, we unwound a corresponding portion of the capped call related to the convertible notes and
repurchased 3.2 million shares of our common stock from the capped call counterparty. 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 furtherance of our monetization strategy, we expect to continue to repurchase or satisfy obligations relating to our convertible notes.
During the eight months ended August 31, 2020, the Company repurchased $5.4 million in aggregate principal amount of its December 2021 Notes at issuance and $10.5 million in aggregate principal amount of its December 2024 notes for cash.
In December 2020, the estimated fairCompany repurchased an additional $2.2 million par value of the liability component will be amortized to interest expense over the term of the December 2021 Notes using the effective interest method.and $1.0 million par value of December 2024 Notes in a privately negotiated transactions for cash.
The estimated fair value of the liability components at the date of issuance for the February 2018December 2021 Notes and December 20212024 Notes were determined using valuation models and are complex and subject to judgment. Significant assumptions within the valuation models included an implied credit spread, the expected volatility and dividend yield of our common stock and the risk freerisk-free interest rate for notes with a similar term.
Product Revenue
General
We recognizeIn accordance with ASC 606, revenue under the Going Concern Basis, was recognized from the sale of its products and services when (i) delivery has occurred, (ii) title has transferred, (iii)a customer obtained control of such promised products and services. The amount of revenue recognized reflected the selling price is fixed or determinable, (iv) collectability is reasonably assuredconsideration to which we expected to be entitled to receive in exchange for these products and (v) we have no furtherservices. A five-step model was utilized to achieve the core principle and includes the following steps: (1) identify the customer contract; (2) identify the contract’s performance obligations. We assess whether the fee is fixed or determinable based on the payment terms associated withobligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and whether(5) recognize revenue when the sales priceperformance obligations were satisfied.
The following is subject to refund or adjustment. a description of principal activities, separated by reportable segments, from which we generated revenue.
Medical Devices
We exercise judgmentprincipally generated revenue in determining that collectability is reasonably assured or that services have been delivered in accordance withour Medical Devices segment from the arrangement. We assess collectability based primarily on the customer’s payment historysale and on the creditworthinesslease of the customer.
Revenues from LENSAR product sales contain multiple elements, including LENSAR®Laser system(s), disposable consumables, procedures,System, which included equipment, PIDs, procedure licenses, and training, installation, warranty and maintenance services.agreements.
For bundled packages, we accounted for individual products and services separately if they were distinct - i.e. if a product or service is separately identifiable from other promises in the bundled package and if the customer can 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 iswere one unit of accounting.performance obligation. All other elements are separate units of accounting. Disposable consumables,performance obligations. PIDs, procedure licenses, warranty and maintenance services arewere also sold on a stand-alone basis.
For multiple-element arrangements, revenue isAs we both sold and leased the LENSAR® Laser System, the consideration (including any discounts) was first allocated to each unit of accountingbetween lease and non-lease components and then allocated between the separate products and services based on their relativestand-alone selling prices. RelativeThe stand-alone selling prices are based first on vendor specific objective evidence of fair value (“VSOE”), then on third-party evidence of selling price (“TPE”) when VSOE does not exist,for the PIDs and then on management's best estimate of the selling price (“ESP”) when VSOE and TPE do not exist.
Because we have neither VSOE nor TPE for our LENSAR® Laser systems, the allocation of revenue isprocedure licenses were determined based on ESP for the systems sold. The objective of ESP is to determine the priceprices at which we would transactseparately sold the PIDs and procedure licenses. The LENSAR® Laser System and warranty stand-alone selling prices were determined using the expected cost plus a margin approach.
For LENSAR® Laser System sales, we recognized revenue in product revenue when a customer took possession of the system. This usually occurred after the customer signs a contract, LENSAR installed the system, and LENSAR performed the requisite training for use of the system. For LENSAR® Laser System leases, we recognized revenue in Product revenue over the length of the lease in accordance with ASC Topic 840, Leases through December 31, 2018 and recognized Product revenue in accordance with ASC Topic 842, Leases, after January 1, 2019.
The LENSAR® Laser System requires both a PID and a procedure license to perform each procedure. We recognized revenue for PIDs in product revenue when the customer took possession of the PID. PIDs were sold by the case. We recognized revenue for procedure licenses in product revenue when a customer purchased a procedure license from the web portal. Typically, consideration for PIDs and procedure licenses was considered fixed consideration except for certain customer agreements that provided for tiered volume discount pricing which was considered variable consideration.
We offered an extended warranty that provided additional services beyond the standard warranty. We recognized revenue from the sale of extended warranties in product revenue over the warranty period. Customers had the product been sold onoption of renewing the warranty period, which was considered a stand-alone basis. We determine ESP for our systems by considering multiple factors, including, but not limited to, featuresnew and functionality of the system, geographies, type of customer, and market conditions. We regularly review ESP and maintain internal controls over establishing and updating these estimates.separate contract.
Revenues from the Noden Products sales are recorded net of allowances for customer credits, including estimated chargebacks, rebates, discounts, returns, distribution service fees, patient assistance programs, and government rebates, such as Medicare Part D coverage gap reimbursements in the United States and other deductions and returns in the same period the related sales are recorded. Product shipping and handling costs are included in cost of product revenues.Income Generating Assets
For the period July 1, 2016 to October 4, 2016, all of our products were distributed by Novartis under the terms of the Noden Purchase Agreement as transfer of the marketing right authorizations was pending. We presented revenue under the Novartis transition arrangement on a “net” basis and established a reserve for retroactive adjustment to the profit split with Novartis.
For the period October 5, 2016 to December 31, 2017, Noden Pharma USA, Inc. distributed the Noden Products in the United States. We presented revenue for all sales in the United States on a “gross” basis and established a reserve for allowances.
For the period 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, Inc. began distributing the Noden Products to select countries outside the United States. We presented revenue for Noden Products sold by Novartis outside of the United States on a “net” basis.
Provisions
Customer Credits: Our customers are offered various forms of consideration, including allowances, service fees and prompt payment discounts. We expect our customers will earn prompt payment discounts and, therefore, we deduct the full amount of these discounts from total product sales when revenues are recognized. Service fees are also deducted from total product sales as they are earned.
Rebates and Discounts: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program in the United States and mandated discounts in the European Union 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 is based on statutory discount rates and expected utilization as well as historical data we have obtained from Novartis. Our estimates for expected utilization of rebates are based on data received from our customers. Rebates are 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. If actual future rebates vary from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.
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, purchase directly from our wholesalers. Contracted customers generally purchase the product at a discounted price. The wholesalers, in turn, charges back to us the difference between the price initially paid by the wholesalers and the discounted price paid by the contracted customers. In addition to actual chargebacks received, we maintain an accrual for chargebacks based on the estimated contractual discounts on the inventory levels on hand in our distribution channel. If actual future chargebacks vary from these estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.
Medicare Part D Coverage Gap: Medicare Part D prescription drug benefit mandates manufacturers to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Our estimates for the expected Medicare Part D coverage gap are based on historical invoices received and in part from data received from our customers. Funding of the coverage gap is 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. If actual future funding varies from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.
Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue 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 are generally estimated and recorded based on historical sales and returns information. Products that exhibit unusual sales or return patterns due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for sales returns accruals.
Royalty Rights - At Fair Value
Currently,Under the Going Concern Basis, we accountaccounted for our investments in royalty rights at fair value with changes in fair value presented in earnings. The fair value of the investments in royalty rights iswas determined by using a discounted cash flow analysis related to the expected future cash flows to be received. TheseFor each arrangement, we are entitled to royalty payments based on revenue generated by the net sales of the product.
Under the Going Concern Basis, these assets are classified as Level 3 assets within the fair value hierarchy, as our valuation estimates utilize significant unobservable inputs, including estimates. Critical estimates as to themay include probability and timing of future sales of the related products. Transaction-related fees and costs are expensed as incurred.
The changes in the estimated fair value from investments in royalty rights along with cash receipts in each reporting period are presented together on our Consolidated Statements of Income as a component of revenue under the caption, “Royalty rights - change in fair value.”
Realized gains and losses on Royalty Rights are recognized as they are earned and when collection is reasonably assured. Royalty Rights revenue is recognized over the respective contractual arrangement period. Critical estimates may includeproducts, product demand and market growth assumptions, inventory target levels, product approval and pricing assumptions. Factors that could cause a change in estimates of future cash flows include a change in estimated market size, market share of the products on which we receive royalties, a change in pricing strategy or reimbursement coverage, a delay in obtaining regulatory approval, changes to forecast volume and pricing as a result of generic competition, a change in dosage of the product, and a change in the number of treatments. For
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 are presented together on our Consolidated Statements of Operations as a component of revenue under the caption, “Royalty rights - change in fair value.” 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 we are entitled to royalty payments based on revenue generated by the net sales of the product.period. Transaction-related fees and costs were expensed as incurred.
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 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.
We recognize 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 financial statementsConsolidated 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. We adjust 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.
The 2017 TaxCoronavirus Aid, Relief, and Economic Security (“CARES”) Act significantly changedwas signed into law at the existing U.S. corporateend of March 2020 and contains numerous forms of economic stimulus, including Small Business Association guaranteed loans and certain income tax laws by,provisions. The CARES Act, among other things, loweringprovisions, 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 (fromthen in effect.
Recently Issued Accounting Standards
See Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements of this Form 10-K for a top ratediscussion of 35% to a flat raterecently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as 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 we have not previously paid U.S. taxes. In connection with our analysis of the impact of the 2017 Tax Act, we recorded a net tax benefit of $0.4 million in the period ending December 31, 2017, mostly as a result of the reduced corporate tax rate. We have also provided a provisional estimate on our analysis of the deemed repatriation transition tax and have concluded that we will owe an immaterial amount of transition tax. Due to the complexities involved in accounting for the recently-released 2017 Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. SAB 118 provides a measurement period of up to one year after the enactment date of the 2017 Tax Act to finalize the recording of the related tax impacts. We have not completed our accounting for the income tax effects of certain elements of the 2017 Act, including the global intangible low-taxed income (“GILTI”), the base-erosion and anti-abuse tax (“BEAT”), and executive compensation under Section 162(m), and have not included an estimate of the tax expense/benefit related to these items for the period ended December 31, 2017. We have not yet made a policy election with respect to our treatment of potential GILTI. Companies can either account for taxes on GILTI as incurred or recognize deferred taxes when basis differences exist that are expected to affect the amount of the GILTI inclusion upon reversal. In the subsequent period, provisional amounts will be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by the U.S. Department of the Treasury. The ultimate impact on us from the 2017 Tax Act may differ from the amounts currently included, although the net impact is not expected to be material, due to, among other things, additional analysis, changes in interpretations and assumptions as applicable and additional regulatory guidance that may be issued prior to filing the 2017 U.S. corporate income tax return in 2018.2020.
We apply ASC 805, Business combinations, pursuant to which the cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of the (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the Consolidated Statements of Income.
The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these
valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of products and forecasted life cycle and forecasted cash flows over that period. Although management believes that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.
Recent Developments
Dissolution
On February 1, 2018, at their stated maturity date,January 4, 2021, we retiredfiled a Certificate of Dissolution with the February 2018State of Delaware and closed our stock transfer books. On January 7, 2021, we were formally de-listed from Nasdaq.
Convertible Senior Notes by making a payment
In connection with the Fundamental Change Repurchase Right resulting from the suspension of $129.0 milliontrading of the Company’s common stock on Nasdaq prior to the custodian, The Bankopening of New York Mellon Trust Company, N.A.,business on December 31, 2020, holders of 142 December 2021 Notes tendered their notes for repurchase, which was comprised of $126.4 million in principal amount and $2.6 million in accrued interest.occurred on February 17, 2021.
In February 2018, we entered into a modification agreementconnection with CareView whereby we agreed, effective asthe Fundamental Make-Whole Change resulting from the suspension of December 28, 2017,trading of the Company’s common stock on Nasdaq prior to modify the credit agreement before remedies could otherwise have become available to us under the credit agreement in relation to certain obligationsopening of CareView that would potentially not be met, including the requirement to make principal payments. Under the modification agreement we agreed agreed that (i) a lower liquidity covenant would be applicable and (ii) principal repayment would be delayed for a period of up tobusiness on December 31, 2018. In exchange2020, holders of 50 December 2021 Notes exercised their conversion rights. Such notes will be retired for agreeing to these modifications, among other things, the exercise price of our warrants to purchase 4.4 million shares of common stock of cash.
CareView was reduced
As further discussed in Note 9, Notes and subjectOther Long-Term Receivables, to the occurrence of certain events, CareView agreed to grant usConsolidated Financial Statements included in Item 8, the first principal payment and the scheduled interest payment due December 31, 2018 and those that followed that were previously deferred until January 31, 2021 were subsequently deferred until May 31, 2021 under additional equity interests.amendments.
Summary of 2017, 20162020, 2019 and 20152018 Financial Results
•Our net incomeloss for the eight months ended August 31, 2020 and the years ended December 31, 2017, 20162019 and 20152018 was $110.7$77.3 million, $63.6$70.4 million and $332.8$68.9 million, respectively and included net loss from discontinued operations of $34.9 million, $13.6 million and $36.1 million, respectively;
•At December 31, 2017,2020, we had cash and cash equivalents and short-term investments of $532.1$126.8 million as compared with $242.1$169.0 million at December 31, 2016;2019, excluding, as of December 31, 2019, cash and cash equivalents classified in assets held for sale of $24.5 million;
•At December 31, 2017,2020, we had $1,243.1$386.9 million in net assets in liquidation;
•At December 31, 2019, we had $717.2 million in total assets, including $447.9 million classified as compared with $1,215.4 million at December 31, 2016;assets held for sale; and
At December 31, 2017, we had $397.2 $123.9 million in total liabilities as compared with $460.0 million at December 31, 2016.2019, including $31.2 million classified as liabilities held for sale.
Revenues
A summary of our revenues for the yearseight months ended DecemberAugust 31, 2017, 20162020 and2015, is presented below:
|
| | | | | | | | | | | | | | | | | | |
| (Dollars in thousands, except for percentages) | | 2017 | | 2016 | | Change from Prior Year % | | 2015 | | Change from Prior Year % |
| Revenues: | | | | | | | | | | |
| Royalties from Queen et al. patents | | $ | 36,415 |
| | $ | 166,158 |
| | (78 | )% | | $ | 485,156 |
| | (66 | )% |
| Royalty rights - change in fair value | | 162,327 |
| | 16,196 |
| | 902 | % | | 68,367 |
| | (76 | )% |
| Interest revenue | | 17,744 |
| | 30,404 |
| | (42 | )% | | 36,202 |
| | (16 | )% |
| Product revenue, net | | 84,123 |
| | 31,669 |
| | 166 | % | | — |
| | N/M |
|
| License and other | | 19,451 |
| | (126 | ) | | N/M |
| | 723 |
| | (117 | )% |
| Total revenues | | $ | 320,060 |
| | $ | 244,301 |
| | 31 | % | | $ | 590,448 |
| | (59 | )% |
___________________
N/M = Not meaningful
Total revenues were $320.1 million, $244.3 million and $590.4 million for the years ended December 31, 2017, 20162019 and 2015, respectively.2018, is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Eight Months Ended August 31, | | Year Ended December 31, | | Change from | | Year Ended December 31, | | Change from |
| (Dollars in thousands) | | 2020 | | 2019 | | Prior Year % | | 2018 | | Prior Year % |
| Revenues: | | | | | | | | | | |
Product revenue, net (1) | | $ | 10,946 | | | $ | 22,331 | | | (51) | % | | $ | 15,928 | | | 40 | % |
| Lease revenue | | 2,139 | | | 5,072 | | | (58) | % | | 5,903 | | | (14) | % |
| Service revenue | | 2,126 | | | 3,339 | | | (36) | % | | 2,821 | | | 18 | % |
| Royalty rights - change in fair value | | — | | | — | | | N/M | | (30) | | | N/M |
| Royalties from Queen et al. patents | | — | | | 9 | | | N/M | | 4,536 | | | (100) | % |
| Interest revenue | | — | | | — | | | N/M | | 2,337 | | | N/M |
| License and other | | 110 | | | (45) | | | 344 | % | | 533 | | | (108) | % |
| Total revenues | | $ | 15,321 | | | $ | 30,706 | | | (50) | % | | $ | 32,028 | | | (4) | % |
___________________
N/M Not meaningful
(1)Our Product revenue, net consisted entirely of revenue from our Medical Devices segment. We recorded Product revenue from our Medical Devices segment from our LENSAR product sales which include LENSAR® Laser Systems, PIDs, procedures, training, installation, warranty and maintenance services.
For the eight months ended August 31, 2020, compared to the year ended December 31, 2019
Our total revenues decreased by 50%, or $15.4 million, for the eight months ended August 31, 2020, when compared to the year ended December 31, 2019. The decrease was primarily due to:
•the shorter measurement period in the current year period due to the transition to the Liquidation Basis on September 1, 2020,
•a decrease in Product, Lease and Service revenues from our Medical Devices segment due to the COVID-19 pandemic reducing demand for elective surgical procedures in North America and the rest of the world, and
•no Queen et al. patent revenue in the current year period, partially offset by
•higher license and other revenue.
Revenue from our Medical Devices segment for the eight months ended August 31, 2020 was $15.2 million, a decrease of 51% compared to the year ended December 31, 2019. The decrease is attributable to lower net revenues in both North America and the rest of the world. The decrease was primarily driven by the impact of the COVID-19 pandemic on the Medical Devices segment and the associated decline in elective surgical procedures in addition to the shorter measurement period in the current year.
Revenue from our Income Generating Assets segment for the eight months ended August 31, 2020 was $0.1 million, an increase of $0.1 million when compared to the year ended December 31, 2019. The increase was primarily due to:
•higher license and other revenue, partially offset by
•decreasing royalties from the Queen et al. patents as the patents have expired.
For the year ended December 31, 2017,2019, compared to December 31, 20162018
Our total revenues increaseddecreased by 31%4%, or $75.8$1.3 million, for the year ended December 31, 2017,2019, when compared to the same period in 2016.year ended December 31, 2018. The increasedecrease was primarily due to:
•lower Queen et al. patent revenue in the current period
•decreased interest revenue related to the CareView note receivable asset, and
•lower license and other revenue, partially offset by
•an increase in estimated fair valueproduct revenue from sales of the Depomed royalty asset recognizedLENSAR Laser Systems in our Medical Devices segment.
Revenue from our Medical Devices segment for the year ended December 31, 2019 was $30.7 million, an increase of 25% compared to the year ended December 31, 2018. The increase is attributable to higher net revenues in both North America and the product revenues fromrest of the Noden Products and LENSAR, and a one time, lump-sum paymentworld, with the majority of $19.5 million inthe increase outside of North America.
connection with a settlement agreement entered into with Merck pertaining to a patent infringement lawsuit (the “Merck settlement payment”).
Revenue from our Income Generating Assets segment for the year ended December 31, 20172019 was $235.9 million, an increase$(36,000), a decrease of 11.0%100%, or $23.3$7.4 million, when compared to the same period in 2016.2018. The increasedecrease was primarily due to increased cash royalty payments, including a one-time settlement payment from Valeant resulting from a royalty audit of Glumetza and to:
•the increased fair value of the Depomed royalty asset, as well as due to the Merck settlement payment. such increases were partially offset by a decreaseabsence of royalties from our licensees related to the Queen et al. patents whichas the patents have expired, during
•the first quarterabsence of 2016, and reduced royalty paymentsinterest revenue recognized from Tysabri as a result of the product supply having been extinguished in the United States and reduced in other countries during 2017, as well as due to the decrease in interest revenues from the early repayment of the Paradigm Spine, LLCour CareView note receivable in 2019, and
•lower license and the sale of the kaléo, Inc. note receivable.other revenue.
The following tables provides a summary of activity with respect to our royalty rights - change in fair value for the year ended December 31, 2017:
|
| | | | | | | | | | | | |
| | | | | Change in | | Royalty Rights - |
| (in thousands) | | Cash Royalties | | Fair Value | | Change in Fair Value |
| Depomed | | $ | 97,644 |
| | $ | 67,968 |
| | $ | 165,612 |
|
| VB | | 1,276 |
| | (617 | ) | | 659 |
|
| U-M | | 3,662 |
| | (8,617 | ) | | (4,955 | ) |
| ARIAD | | 3,081 |
| | (462 | ) | | 2,619 |
|
| AcelRx | | 120 |
| | 5,411 |
| | 5,531 |
|
| Avinger | | 1,220 |
| | (1,242 | ) | | (22 | ) |
| KYBELLA | | 250 |
| | (7,367 | ) | | (7,117 | ) |
| | | $ | 107,253 |
| | $ | 55,074 |
| | $ | 162,327 |
|
The increase in the Depomed royalty asset is mainly due to a one-time settlement payment from Valeant resulting from the royalty audit of Glumetza and the launch of the authorized generic for Glumetza® sold by Valeant Pharmaceuticals International, Inc. We receive royalties on the authorized generic equivalents under the same terms as the branded Glumetza product.
The following table summarizes the percentage of our total revenues earned, from our licensees’ net product sales, which individually accounted for 10% or more of our total revenues for the yearseight months ended DecemberAugust 31, 2017, 20162020 and 2015:
|
| | | | | | | | | | | |
| | | | | Year Ended December 31, |
| Licensee | | Product Name | | 2017 | | 2016 | | 2015 |
| Genentech | | Avastin | | — | % | | 16 | % | | 27 | % |
| | | Herceptin | | — | % | | 16 | % | | 26 | % |
| | | | | | | | | |
| Biogen | | Tysabri | | 11 | % | | 24 | % | | 9 | % |
| | | | | | | | | |
| Depomed | | Glumetza, Janumet XR, Jentadueto XR, Invokamet XR and Synjardy XR | | 52 | % | | 13 | % | | 9 | % |
| | | | | | | | | |
| Noden | | Tekturna, Tekturna HCT, Rasilez and Rasilez HCT | | 22 | % | | 13 | % | | — | % |
Product revenues for the year ended December 31, 2017 were $84.1 million, an increaseone or more of 166%, when compared to the same period in 2016. All product revenues were derived from the Noden Products and the LENSAR business and includes revenues from our Pharmaceutical and Medical Device segments.
Revenue from our Pharmaceutical segment for the year ended December 31, 2017 was $69.0 million, an increase of 118.0% when compared to the same period in 2016. While we acquired the exclusive worldwide rights to manufacture, market, and sell the Noden Products from Novartis in 2016, Novartis was still the primary obligor during the third quarter of 2016 for sales in the
United States and through the fourth quarter of 2017 for sales outside of the United States, therefore revenue is presented on a “net” basis for the third quarter in 2016 for sales in the United States and through the fourth quarter of 2017 for sales outside of the United States. Our revenue recognition policies require estimated product returns, pricing discounts including rebates offered pursuant to mandatory federal and state government programs and chargebacks, prompt pay discounts and distribution fees and co-pay assistance for product sales at each period.
The following table provides a summary of activity with respect to our sales allowances and accruals for the year ended December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Discount and Distribution Fees | | Government Rebates and Chargebacks | | Assistance and Other Discounts | | Product Return | | Total |
| Balance at January 1, 2017: | | $ | 2,475 |
| | $ | 5,514 |
| | $ | 2,580 |
| | $ | 1,769 |
| | $ | 12,338 |
|
| Allowances for current period sales | | 8,952 |
| | 19,541 |
| | 8,934 |
| | 3,691 |
| | 41,118 |
|
| Allowances for prior period sales | | — |
| | 253 |
| | — |
| | — |
| | 253 |
|
| Credits/payments for current period sales | | (5,530 | ) | | (10,823 | ) | | (5,256 | ) | | (1,145 | ) | | (22,754 | ) |
| Credits/payments for prior period sales | | (2,475 | ) | | (5,776 | ) | | (2,080 | ) | | (1,011 | ) | | (11,342 | ) |
| Balance at December 31, 2017 | | $ | 3,422 |
| | $ | 8,709 |
| | $ | 4,178 |
| | $ | 3,304 |
| | $ | 19,613 |
|
Revenue from our Medical Device segment for the year ended December 31, 2017 was $15.1 million. For the seven months period following our acquisition of our LENSAR subsidiary during the second quarter of 2017 and the creation of this operation segment, revenue from LENSAR product sales contain multiple elements, including LENSAR® Laser system(s), disposable consumables, procedures, training, installation, warranty and maintenance services.
Foreign currency exchange rates also impact our reported revenues. Our revenues may fluctuate due to changes in foreign currency exchange rates and are subject to foreign currency exchange risk. While foreign currency conversion terms vary by license agreement, generally most agreements require that royalties first be calculated in the currency of sale and then converted into U.S. dollars using the average daily exchange rates for that currency for a specified period at the end of the calendar quarter. Accordingly, when the U.S. dollar weakens against other currencies, the converted amount is greater than it would have been had the U.S. dollar not weakened. The impact of changes in foreign currency exchange rates to our reported revenue was insignificant for the year ended December 31, 2017.
For the year ended December 31, 2016, we hedged certain Euro-denominated currency exposures related to our licensees’ product sales with Euro forward contracts. We designated foreign currency exchange contracts used to hedge royalty revenues based on underlying Euro-denominated sales as cash flow hedges. The aggregate unrealized gain or loss, net of tax, on the effective portion of the hedge was recorded in stockholders’ equity as “Accumulated other comprehensive income (loss).” Gains or losses on cash flow hedges were recognized as an adjustment to royalty revenue in the same period that the hedged transaction impacted earnings. For the years ended December 31, 2017, 20162019 and 2015, we recognized income of zero, $2.8 million and $8.3 million in royalty revenues from our Euro forward contracts, respectively.2018:
| | | | | | | | | | | | | | | | | | | | |
| | Eight Months Ended August 31, | | Year Ended December 31, |
| Product Name | | 2020 | | 2019 | | 2018 |
| | | | | | |
| | | | | | |
| Biogen | | — | % | | — | % | | 14 | % |
| LENSAR | | 99 | % | | 100 | % | | 77 | % |
For the year ended December 31, 2016, compared to December 31, 2015
Our total revenues declined by 59%, or $346.1 million, for the year ended December 31, 2016, when compared to the same period of 2015. The decrease was primarily due to the expiration of the patent license agreement with Genentech and the decrease in estimated fair value of the U-M royalty asset, partially offset by the increase in estimated fair value of the Depomed and ARIAD royalty assets recognized in revenues, as well as due to the product revenues from Noden.
Revenue from our Pharmaceutical segment for the year ended December 31, 2016 were $31.7 million, an increase of 100% compared to the year ended December 31, 2015. All Pharmaceutical segment revenues were derived from sales of the Noden Products. While we acquired the exclusive worldwide rights to manufacture, market, and sell the Noden Products from Novartis at the beginning of the third quarter of 2016, Novartis was still the primary obligor during the third quarter of 2016 for sales in the United States and during the fourth quarter for sales outside of the United States. Therefore revenue is presented on a “net” basis for the third quarter in 2016 for sales in the United States and through the fourth quarter for sales outside of the United States.
Revenue from our Income Generating Assets segment for the year ended December 31, 2016 was $212.6 million, a decrease of 58.6%, or $346.1 million, compared to the year ended December 31, 2015, primarily due to the reduction in royalties from $485.2 million to $166.2 million when the patent license agreement with Genentech expired after the first quarter of 2016 and a reduction in royalty rights-change in fair value due to a reduction in estimated fair value of the Depomed and U-M royalty assets. This
decrease was partially offset by an increase in royalty rights - change in fair value due to a $5.0 million milestone payment received for Invokamet XR, a $6.0 million milestone payment received for Jentadueto XR, a $6.0 million milestone payment received for Synjardy XR under the Depomed Royalty Agreement. Net cash royalty payments for the year-end December 31, 2016 were $72.6 million, compared with $43.4 million in the previous year.
The following tables provides a summary of activity with respect to our royalty rights - change in fair value for the year ended December 31, 2016:
|
| | | | | | | | | | | | |
| | | | | Change in | | Royalty Rights - |
| (in thousands) | | Cash Royalties | | Fair Value | | Change in Fair Value |
| Depomed | | $ | 59,342 |
| | $ | (27,796 | ) | | $ | 31,546 |
|
| VB | | 1,468 |
| | (2,135 | ) | | (667 | ) |
| U-M | | 3,013 |
| | (34,799 | ) | | (31,786 | ) |
| ARIAD | | 7,508 |
| | 8,590 |
| | 16,098 |
|
| AcelRx | | 8 |
| | 46 |
| | 54 |
|
| Avinger | | 1,220 |
| | (905 | ) | | 315 |
|
| KYBELLA | | 23 |
| | 613 |
| | 636 |
|
| | | $ | 72,582 |
| | $ | (56,386 | ) | | $ | 16,196 |
|
Operating Expenses
A summary of our operating expenses for the eight months ended August 31, 2020 and the years ended December 31, 2017, 20162019 and 2015,2018 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Eight Months Ended August 31, | | Year Ended December 31, | | Change from | | Year Ended December 31, | | Change from |
| (Dollars in thousands) | | 2020 | | 2019 | | Prior Year % | | 2018 | | Prior Year % |
| Costs of product revenue (excluding intangible amortization) | | $ | 6,626 | | | $ | 17,276 | | | (62) | % | | $ | 13,555 | | | 27 | % |
| Amortization of intangible assets | | 841 | | | 1,290 | | | (35) | % | | 1,294 | | | — | % |
| Severance and retention | | 24,713 | | | — | | | N/M | | — | | | N/M |
| General and administrative | | 29,695 | | | 38,334 | | | (23) | % | | 33,700 | | | 14 | % |
| Sales and marketing | | 3,322 | | | 6,806 | | | (51) | % | | 6,341 | | | 7 | % |
| Research and development | | 4,374 | | | 7,350 | | | (40) | % | | 2,759 | | | 166 | % |
| | | | | | | | | | |
| Asset impairment loss | | — | | | 10,768 | | | (100) | % | | 8,200 | | | 31 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| Change in fair value of contingent consideration | | — | | | — | | | N/M | | 369 | | | N/M |
| Total operating expenses | | $ | 69,571 | | | $ | 81,824 | | | (15) | % | | $ | 66,218 | | | 24 | % |
| Percentage of total revenues | | 454 | % | | 266 | % | | | | 207 | % | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| (Dollars in thousands, except for percentages) | | 2017 | | 2016 | | Change from Prior Year % | | 2015 | | Change from Prior Year % |
| Costs of product revenue, (excluding intangible amortization) | | $ | 30,537 |
| | $ | 4,065 |
| | 651 | % | | $ | — |
| | N/M |
|
| Amortization of intangible assets | | 24,689 |
| | 12,028 |
| | 105 | % | | — |
| | N/M |
|
| General and administrative | | 45,641 |
| | 39,790 |
| | 15 | % | | 36,090 |
| | 10 | % |
| Sales and marketing | | 17,683 |
| | 538 |
| | 3,187 | % | | — |
| | N/M |
|
| Research and development | | 7,381 |
| | 3,820 |
| | 93 | % | | — |
| | N/M |
|
| Change in fair value of anniversary payment and contingent consideration | | 349 |
| | (3,716 | ) | | (109 | )% | | — |
| | N/M |
|
| Asset impairment loss | | — |
| | 3,735 |
| | (100 | )% | | — |
| | N/M |
|
| Acquisition-related costs | | — |
| | 3,564 |
| | (100 | )% | | — |
| | N/M |
|
| Loss on extinguishment of notes receivable | | — |
| | 51,075 |
| | (100 | )% | | 3,979 |
| | 1,184 | % |
| Total operating expenses | | $ | 126,280 |
| | $ | 114,899 |
| | 10 | % | | $ | 40,069 |
| | 187 | % |
| Percentage of total revenues | | 39 | % | | 47 | % | | | | 7 | % | | |
___________________
N/M = Not meaningful
For the yeareight months ended DecemberAugust 31, 2017,2020, compared toDecember 31, 2016
Total operating expenses increased by 10%, or $11.4 million for the year ended December 31, 2017,2019
Total operating expenses decreased by 15%, or $12.3 million for the eight months ended August 31, 2020, when compared to the year ended December 31, 2016.2019. The increasedecrease was primarily a result of:
•lower general and administrative expenses, primarily due to a shorter measurement period due to our transition to the Liquidation Basis,
•a decrease in operatingresearch and development expenses wasin our Medical Devices segment primarily due to the exclusive licensing of intellectual property from a third party in 2019 for $3.5 million in cash,
•lower cost of product revenue, due to decreased sales in our Medical Devices segment, as previously discussed,
•lower sales and marketing expenses in our Medical Devices segment due to the impact of COVID-19, and
•a $10.8 million impairment loss on the CareView note receivable recorded in 2019 with no comparable adjustment in the current year period, partially offset by
•severance and retention recorded in the current year period with no corresponding expense in the prior year period, including provisions under our Wind Down Retention Plan, which, as a result of the acquisitionsadoption of the Plan of Liquidation in the Pharmaceutical and Medical Devices segments, contributing an additional $26.5 millionfirst quarter of cost2020, accelerated the vesting of product revenue, $12.7 million of amortization of intangible assets, $17.1 million in sales and marketing expenses, and $3.6 million in research and development costsoutstanding stock awards for the completion of a pediatric trial for Tekturna. General administrative expenses increased by $5.9 million of which $7.5 million was related to the Pharmaceutical segment and $3.2 million was related to the Medical Device segment, partially offset by decreased $51.1 million in loss on extinguishment for the Direct Flow Medical notes receivable, decreased professional consulting service expenses, and decreased asset purchase expenses.employees.
For the year ended December 31, 2016,2019, compared to December 31, 20152018
Total operating expenses increased by 187%24%, or $74.8$15.6 million for the year ended December 31, 2016,2019, when compared to the year ended December 31, 2015.2018. The increase in operating expenses was primarily a result of a $51.1 million impairment charge relating to our Direct Flow Medical note receivable investment, a $12.0 million amortization charge for acquisition-related intangible assets, a $3.7 million goodwill impairment charge as result of lower cash flow projections for the Noden reporting unit, a $3.8 million charge relating to cost for the sale of the Noden Products, a $3.8 millionof:
•an increase in research and development chargeexpenses in our Medical Devices segment primarily due to the exclusive licensing of intellectual property from a third party for $3.5 million in cash for use in developing its next generation technology,
•higher cost of product revenue, due to increased sales in our Medical Devices segment, with the majority of the increase related to increased system sales in 2019,
•an increase in our general and administrative expenses, as detailed below,
•an increase in our sales and marketing expenses in our Medical Devices segment, and
•a $10.8 million impairment loss on the Tekturna pediatric trial and $3.6CareView note receivable recorded in 2019 compared to the $8.2 million of acquisition related costs incurred as result ofimpairment loss on the Noden Transaction. This wasCareView note receivable recorded in 2018, partially offset by
•a $3.7 million net gaindecline in the expense recorded for acquisition-related contingent consideration, which consists of certain potential milestone obligations to Novartis, and was recorded on the acquisition date, July 1, 2016, at the estimated fair value of the obligation, and was remeasured as of December 31, 2016. The change in fair value of contingent consideration.
General and administrative expenses for the contingent consideration as ofeight months ended August 31, 2020 and theyears ended December 31, 2016 is primarily due to the reduction in estimated future cash flows used2019 and 2018 by segment are summarized in the fair value calculation at the date of acquisition.tables below:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Eight Months Ended August 31, 2020 |
| (in thousands) | | | | Medical Devices | | Income Generating Assets | | Total |
| Compensation | | | | $ | 2,464 | | | $ | 8,633 | | | $ | 11,097 | |
| Salaries and wages (including taxes) | | | | 1,666 | | | 4,468 | | | 6,134 | |
| Bonuses (including accruals) | | | | 410 | | | 1,890 | | | 2,300 | |
| Equity | | | | 388 | | | 2,275 | | | 2,663 | |
| Asset management | | | | — | | | 5,299 | | | 5,299 | |
| Business development | | | | — | | | 650 | | | 650 | |
| Accounting and tax services | | | | 2,221 | | | 4,156 | | | 6,377 | |
| Other professional services | | | | 369 | | | 2,365 | | | 2,734 | |
| Other | | | | 1,184 | | | 2,354 | | | 3,538 | |
| Total general and administrative | | | | $ | 6,238 | | | $ | 23,457 | | | $ | 29,695 | |
Non-Operating
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, 2019 |
| (in thousands) | | | | Medical Devices | | Income Generating Assets | | Total |
| Compensation | | | | $ | 4,109 | | | $ | 16,656 | | | $ | 20,765 | |
| Salaries and wages (including taxes) | | | | 1,883 | | | 6,277 | | | 8,160 | |
| Bonuses (including accruals) | | | | 1,260 | | | 3,643 | | | 4,903 | |
| Equity | | | | 966 | | | 6,736 | | | 7,702 | |
| Asset management | | | | — | | | 2,041 | | | 2,041 | |
| Business development | | | | — | | | 1,282 | | | 1,282 | |
| Accounting and tax services | | | | 759 | | | 4,400 | | | 5,159 | |
| Other professional services | | | | 403 | | | 1,970 | | | 2,373 | |
| Other | | | | 1,713 | | | 5,001 | | | 6,714 | |
| Total general and administrative | | | | $ | 6,984 | | | $ | 31,350 | | | $ | 38,334 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, 2018 |
| (in thousands) | | | | Medical Devices | | Income Generating Assets | | Total |
| Compensation | | | | $ | 3,627 | | | $ | 10,204 | | | $ | 13,831 | |
| Salaries and wages (including taxes) | | | | 1,871 | | | 6,193 | | | 8,064 | |
| Bonuses (including accruals) | | | | 991 | | | (203) | | | 788 | |
| Equity | | | | 765 | | | 4,214 | | | 4,979 | |
| Asset management | | | | — | | | 5,040 | | | 5,040 | |
| Business development | | | | — | | | 1,168 | | | 1,168 | |
| Accounting and tax services | | | | 39 | | | 4,288 | | | 4,327 | |
| Other professional services | | | | 825 | | | 1,921 | | | 2,746 | |
| Other | | | | 1,399 | | | 5,189 | | | 6,588 | |
| Total general and administrative | | | | $ | 5,890 | | | $ | 27,810 | | | $ | 33,700 | |
Non-operating Expense, Net
A summary of our non-operating expense, net, for the eight months ended August 31, 2020 and theyears ended December 31, 2017, 20162019 and 2015,2018, is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Eight Months Ended August 31, | | Year Ended December 31, | | Change from | | Year Ended December 31, | | Change from |
| (Dollars in thousands) | | 2020 | | 2019 | | Prior Year % | | 2018 | | Prior Year % |
| Interest and other income, net | | $ | 608 | | | $ | 6,030 | | | (90) | % | | $ | 6,065 | | | (1) | % |
| Interest expense | | (996) | | | (11,404) | | | (91) | % | | (12,157) | | | (6) | % |
| | | | | | | | | | |
| Gain on sale of intangible assets | | — | | | 3,476 | | | N/M | | — | | | N/M |
| | | | | | | | | | |
| (Loss) gain on investments | | (5,576) | | | — | | | N/M | | 764 | | | N/M |
| | | | | | | | | | |
| Loss on exchange and extinguishment of convertible notes | | (606) | | | (8,430) | | | (93) | % | | — | | | N/M |
| | | | | | | | | | |
| Total non-operating expense, net | | $ | (6,570) | | | $ | (10,328) | | | (36) | % | | $ | (5,328) | | | 94 | % |
|
| | | | | | | | | | | | | | | | | | |
| (Dollars in thousands, except for percentages) | | 2017 | | 2016 | | Change from Prior Year % | | 2015 | | Change from Prior Year % |
| Interest and other income, net | | $ | 1,659 |
| | $ | 588 |
| | 182 | % | | $ | 368 |
| | 60 | % |
| Interest expense | | (20,221 | ) | | (18,267 | ) | | 11 | % | | (27,059 | ) | | (32 | )% |
| Gain (loss) on bargain purchase | | 9,309 |
| | — |
| | N/M |
| | — |
| | — | % |
| Gain (loss) on extinguishment of debt | | — |
| | (2,353 | ) | | (100 | )% | | 6,450 |
| | (136 | )% |
| Total non-operating expense, net | | $ | (9,253 | ) | | $ | (20,032 | ) | | (54 | )% | | $ | (20,241 | ) | | (1 | )% |
___________________
N/M = Not meaningful
For the eight months ended August 31, 2020, compared to the year ended December 31, 2017, compared to December 31, 20162019
Total non-operating expensesexpense, net, decreased by 54%, or $10.836% from $10.3 million for the year ended December 31, 2017, when2019 to $6.6 million for the eight months ended August 31, 2020, primarily due to:
•lower interest expense in conjunction with the extinguishment of a substantial portion of our convertible notes, and
•a larger loss on the exchange and extinguishment of convertible notes in the prior period, partially offset by
•a decrease in interest and other income due to lower cash balances in the current period,
•a decrease in the value of our investment in AEON, and
•a gain recognized in the prior year on the sale of our Direct Flow Medical, Inc. (“Direct Flow Medical”) intangible assets.
For the year ended December 31, 2019, compared to December 31, 2018
Total non-operating expenses, net, increased by 94%, or $5.0 million for the year ended December 31, 2019, compared to the year ended December 31, 2016. Non-operating expense, net, decreased, in part, due to the gain on bargain purchase recognized upon the acquisition of LENSAR and the partial repayment of the February 2018 Notes in November 2016, partially offset by the increase in interest expense from the December 2021 Note issued during the fourth quarter of 2016. The increase in interest expense for the year ended December 31, 2017, as compared to 2016, consisted primarily of non-cash interest expense as we are required to compute interest expense using the interest rate for similar nonconvertible instruments in accordance with the accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion.
For the year ended December 31, 2016, compared to December 31, 2015
2018. Non-operating expense, net, increased due to:
•the loss on the exchange and extinguishment of a portion of our December 2021 Notes and December 2024 Notes, partially offset by
•the decrease in part,interest expense due to the Series 2012 Notesrepurchase of some of our convertible notes, and May 2015 Notes extinguishment and partial extinguishment
•the gain recognized in 2019 on the sale of the February 2018 Notes resulting in a gain on extinguishment of $6.5 million during 2015 and a partial extinguishment of the February 2018 Notes resulting in a loss on extinguishment of $5.1 million during 2016.our Direct Flow Medical, Inc. intangible assets.
Income Taxes
Income tax expensebenefit from continuing operations for the eight months ended August 31, 2020 and the years ended December 31, 2017, 2016,2019 and 2015,2018 was $73.8$17.8 million, $45.7$4.4 million and $197.3$6.8 million, respectively, which resulted primarily from applying the federal statutory income tax rate to incomeloss before income taxes.taxes from continuing operations. The tax rate of 40.0% in 2017 and 41.8% in 201629.2% for the eight months ended August 31, 2020 differs from the statutory tax rate of 35%,21% primarily as a result of Subpart F income, gain on bargain purchase recognized uponnet operating loss carryback under the acquisitionCARES Act. The tax rate of LENSAR, state taxes7.2% in 2019 and the impacts of applying the revaluation of deferred taxes resulting17.0% in 2018 differs from the 2017 Tax Act enactment.
During 2017,statutory tax rate of 21% primarily as a result of the evaluationincrease in our valuation allowance in both years and, for 2019, the increase in our unrecognized tax benefits.
During 2020, the amount of our uncertain tax positions, we increased the unrecognized tax benefits increased by $19.8 million primarily related to state items.$1.5 million. The future impact of the unrecognized tax benefits of $79.2$85.8 million, if recognized, is comprised of $23.7$32.6 million, which would affect the effective tax rate, and $55.5$53.2 million, which would result in adjustments to deferred tax assets.assets and our valuation allowance.
Estimated interest and penalties associated with unrecognized tax benefits increased our income tax expense in the Consolidated Statements of IncomeOperations 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, 2017, increased income tax expense by $1.0 million during the year ended December 31, 2016, and increased income tax expense by $2.3 million during the year ended December 31, 2015. In general, our income tax returns are subject to examination by U.S. federal, state and local tax authorities for tax years 1996 forward.2018. Interest and penalties associated with
unrecognized tax benefits accrued on the balance sheet were $7.0$11.2 million, $9.7 million and $6.0$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, our state and 2016, respectively. In May 2012, we received a “no-change” letter from the IRS upon completion of anlocal income tax returns are subject to examination of our 2008 federalby tax return.authorities for tax years 2000 forward. We are currently under income tax examination inby the stateState of California for tax years 2009 through 2015. Although the2018. The timing of the resolution of the income tax examinationsexamination is highly uncertain, and the amountsamount ultimately paid, if any, upon resolution of the issues raised by the taxing authoritiesauthority may differ materially from the amounts accrued for each year, except as noted above, weyear. We do not anticipate any material change to the amount of our unrecognized tax benefit over the next 12 months.
Assets held for sale and discontinued operations
The Strategic Positions segment, Pharmaceutical segment and the royalty right assets in the Income Generating Assets segment have been classified as held for sale and reported as discontinued operations. The operating results from discontinued operations are presented separately in the Company’s Consolidated Statements of Operations as discontinued operations. Components of amounts reflected in Loss from discontinued operations are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 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 following tables provides a summary of activity with respect to our royalty rights assets in discontinued operations for the eight months ended August 31, 2020 and the year ended December 31, 2019:
| | | | | | | | | | | | | | | | | | | | |
| | Eight Months Ended August 31, 2020 |
| | | | Change in | | |
| (in thousands) | | Cash Royalties | | Fair Value | | Total |
| Assertio | | $ | 29,926 | | | $ | (18,209) | | | $ | 11,717 | |
| VB | | 612 | | | (9,408) | | | (8,796) | |
| U-M | | 4,355 | | | (2,948) | | | 1,407 | |
| | | | | | |
| AcelRx | | 194 | | | (12,952) | | | (12,758) | |
| | | | | | |
| KYBELLA | | 42 | | | (416) | | | (374) | |
| | $ | 35,129 | | | $ | (43,933) | | | $ | (8,804) | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
| | | | Change in | | |
| (in thousands) | | Cash Royalties | | Fair Value | | Total |
| Assertio | | $ | 72,225 | | | $ | (45,699) | | | $ | 26,526 | |
| VB | | 966 | | | (518) | | | 448 | |
| U-M | | 5,664 | | | (5,197) | | | 467 | |
| | | | | | |
| AcelRx | | 307 | | | (57,428) | | | (57,121) | |
| KYBELLA | | 110 | | | (1,472) | | | (1,362) | |
| | $ | 79,272 | | | $ | (110,314) | | | $ | (31,042) | |
The adjustment to the fair value of the AcelRx royalty asset in the second quarter of 2019 was due to the slower than expected adoption of Zalviso® since its initial launch relative to our estimates and the increased variance noted between our forecast model and actual results in the second quarter of 2019. We engaged a third-party expert in the second quarter of 2019 to reassess the market and expectations for the product. Key findings from the third-party study included: the post-surgical PCA (Patient-Controlled Analgesia) market being smaller than previously forecasted; the higher price of the product relative to alternative therapies, the product not being used as a replacement for systemic opioids and the design of the delivery device, which is pre-filled for up to three days of treatment, which limited its use for procedures with anticipated shorter recovery times.
The adjustment to the fair value of the Assertio royalty asset in the fourth quarter of 2019 was due to a decrease in the sales forecast for the Assertio products. We engaged a third-party expert in the fourth quarter of 2019 to reassess the market and expectations for the royalty asset. Key findings from the third-party study included: an anticipated decrease in the Glumetza net sales forecast due to an accelerated shift in the channel mix resulting in a substantial decline in net selling prices, particularly in the fourth quarter of 2019 and beyond, as previously announced by Bausch Health and the delayed launch dates of the extended release products in the Assertio royalty asset portfolio outside of the United States.
Revenue from our Pharmaceutical segment for the eight months ended August 31, 2020 was $29.5 million, a decrease of 46% when compared to the year ended December 31, 2019. All revenues from our Pharmaceutical segment were derived from sales of the Noden Products. The decrease in revenue from our Pharmaceutical segment reflects a shorter measurement period as well as lower net revenues in the United States and the rest of the world. The decrease in revenue from our Pharmaceutical segment in the United States for the eight months ended August 31, 2020 reflects the introduction of our authorized generic of Tekturna and a third-party generic of aliskiren late in the first quarter of 2019. The decrease in revenue for the rest of the world is due to lower sales volume of Rasilez in certain territories.
Revenue from our Pharmaceutical segment for the year ended December 31, 2019 was $55.1 million, a decrease of 32% when compared to the same period in 2018. The decrease in revenue from our Pharmaceutical segment reflects lower net revenues in the United States and the rest of the world. In particular, the decrease in revenue from our Pharmaceutical segment in the United States for the year ended December 31, 2019 reflects the introduction of our authorized generic form of Tekturna and a third-party generic form of aliskiren during the year ended December 31, 2019. The decrease in revenue for the rest of the world is due to lower sales volume of Rasilez in certain territories. This increase in cost of goods sold, compared to the prior year is due to the higher percentage of authorized generic sales in the current period and costs associated with the amended Novartis supply
agreement. Sales and marketing expenses have decreased substantially while the portion of general and administrative expenses attributable to the Pharmaceutical segment decreased as well. Intangible assets amortization expense decreased after Noden’s intangible assets were impaired at June 30, 2018.
Expenses decreased in our Pharmaceutical segment by 70%, or $50.0 million for the eight months ended August 31, 2020, when compared to the year ended December 31, 2019. The decrease was primarily a result of:
•a shorter measurement period in the current year,
•lower cost of sales due to decreased sales in the current year period,
•lower amortization expense for the Noden intangible assets in 2020 resulting from the accounting for discontinued operations, and
•lower sales and marketing expenses.
Expenses decreased in our Pharmaceutical segment by 61%, or $110.4 million for the year ended December 31, 2019, when compared to the year ended December 31, 2018. The decrease was primarily a result of:
•a $22.5 million impairment of the Noden intangible asset in the current year compared to a $152.3 million impairment in 2018,
•lower amortization expense for the Noden intangible assets in 2019 resulting from the impairment recorded in 2018 due to the increased probability of a third-party generic form of aliskiren being launched in the United States,
•lower sales and marketing expenses reflecting the cost savings from the change in our marketing strategy to a non-personal promotion strategy for the Noden Products in anticipation of a launch of a third-party generic form of aliskiren. This non-personal promotion strategy was subsequently discontinued upon the launch of our authorized generic form of Tekturna in the first quarter of 2019, partially offset by,
•the favorable adjustment to the Noden acquisition related contingent consideration, which was first reduced in the second quarter of 2018 prompted by the increased probability of a third-party generic form of aliskiren being launched in the United States and subsequently eliminated in the fourth quarter of 2018 when the launch was imminent.
Net IncomeLoss per Share
Net incomeloss per share for the eight months ended August 31, 2020 and the years ended December 31, 2017, 20162019 and 2015,2018, is presented below:
| | | | | | | | | | | | | | | | | |
| Eight Months Ended August 31, | | Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| | | | | |
| 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 shareholders 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 shareholders per diluted share | $ | (0.66) | | | $ | (0.59) | | | $ | (0.47) | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income per basic share | $ | 0.71 |
| | $ | 0.39 |
| | $ | 2.04 |
|
| Net income per diluted share | $ | 0.71 |
| | $ | 0.39 |
| | $ | 2.03 |
|
Liquidity and Capital Resources
In February 2020, our Board approved the Plan of Liquidation. In August 2020, we received stockholder approval to dissolve our Company under Delaware law and in January 2021 we filed a certificate of dissolution in Delaware. Our liquidity and capital resource needs in dissolution primarily consist of managing the successful wind down of our business and distributing the remaining net proceeds to our stockholders,
We financehave previously financed our operations primarily through royalty and other license-related revenues, public and private placements of debt and equity securities, interest income on invested capital and revenuescash generated from pharmaceutical and medical device product sales. During 2020, we also generated cash from the sale of several assets in our portfolio, including our
Pharmaceutical segment and certain royalty rights assets included in our Income Generating Assets’ segment. We currently have 14 full-time employees at PDL managingplan to finance our intellectual property,operations in the near term primarily through existing cash, from our asset acquisitions, operationsremaining royalty rights assets until such assets are sold or placed in a liquidating trust and other corporate activities as well as providing for certain essential reporting and management functionsfrom additional cash proceeds from the sale of a public company. one or more of the assets in our portfolio.
In addition, we have 15 full-time employees atexpect to generate additional cash from the recovery under the CARES Act of previous taxes paid and from the collection of additional amounts owed from prior assets sales, primarily the sale of our operating subsidiary,Pharmaceutical segment.
In September 2020, we sold our interests in Noden who manageDAC and Noden USA which comprised our Pharmaceutical segment. Upon closing, we were released of our guarantee to Novartis under Noden’s businesssupply agreement. Under the terms of the sale of our interests in Noden DAC and operations, and 58 full time employees at our operating subsidiary, LENSAR, who manageNoden USA, we received proceeds of $12.2 million on September 9, 2020, the medical device business and operations.closing date of the transaction. We are also entitled to recover $0.5 million related to VAT for inventory purchases from Novartis. The agreement provides for an additional $33.0 million to be paid to the us in twelve equal quarterly installments from January 2021 to October 2023, of which the first installment has been received. 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 us. We are 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. We are also entitled to 50% of a license fee from a third party distributor within 10 days of receipt by Noden.
Our future capital requirements are difficultprimarily relate to forecast and will depend upon many factors, including our ability to identify and acquire specialty pharmaceutical products, the costs and timing of future commercialization activities,to wind down the Company, including product manufacturing, marketing, sales and distribution,expenses to manage the resources we devote to developing and supporting our productsremaining business, such as salaries and other factors. Additionally, weemployee compensation, rental payments, insurance, and taxes, contractual obligations to current and former employees (e.g., true-up payments to holders of stock options that vested prior to the filing for dissolution) and other legal, accounting, financial advisory and consultant fees, which will continuereduce any amounts available for distribution to evaluate possible acquisitions of new products, royalty revenues or other income generating assets, which may require the use of cash or additional financing.our stockholders.
The general cash needs of our Income Generating Assets, Pharmaceutical and Medical Device segments can vary significantly. The cash needs of our Income Generating Assets segment tend to be driven by legal and professional service fees as well as the funding of potential repurchases of our common stock. In our Pharmaceutical segment, cash needs tend to be driven primarily by material purchases and anticipated near term capital expenditures. In our Medical Device segment, the primary factors determining cash needs tend to be the funding of our operations.
We had cash, cash equivalents and investments in the aggregate of $532.1 million and $242.1 million at December 31, 2017 and 2016, respectively. The increase was primarily attributable to sale of the kaléo note receivables for $144.8 million, the receipt of $108.2 million from ARIAD to repurchase their royalty rights, proceeds from royalty right payments of $107.3 million, proceeds from the sale of assets held for sale of $8.2 million, and cash provided by operating activities of $40.6 million, partially offset by the anniversary payment to Novartis of the $89.0 million under the Noden Purchase Agreement, repurchase of common stock under our share repurchase program for $30.0 million, cash paid for the repurchase of a noncontrolling interest in Noden of $2.2 million, and the purchase of fixed assets of $1.3 million.
On March 1, 2017,December 9, 2019, we announced that our board of directorsBoard authorized the repurchase of up to $30.0 millionissued and outstanding shares of our common stock through March 2018and convertible notes up to an aggregate value of $200.0 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 our 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 as of June 30, 2017. We repurchased 13.3 million shares of common stock under the share repurchase program during the year endedOn December 31, 2017 for an aggregate purchase price of $30.0 million, or an average cost of $2.25 per share.
On September 25, 2017,16, 2019, we announced that our board of directors authorizedBoard approved a new$75.0 million increase to this repurchase program. Repurchases under this program were eligible to repurchase up to $25.0 million of our common stock. Under the new share repurchase program, purchases of our common stock may be made from time to time in the open market or in privately negotiated transactions and are funded from our working capital. The amountCommon stock and timing of suchconvertible note repurchases are dependent upon the price and availability of shares, general market conditions and the availability of cash. Repurchases maywere also eligible to be made under a trading plan under Rule 10b5-1, trading plan, which would permit shares and convertible notes to be repurchased when we might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. The 10b5-1 plan was terminated on May 31, 2020 in consideration of the impact and uncertainty introduced by the COVID-19 pandemic on our monetization process and no common stock was repurchased after this date. All shares of common stock repurchased under the shareour repurchase program are expected to bewere retired and restored to authorized but unissued shares of common stock. All convertible notes repurchased under the program were retired as will any additional convertible notes that may be repurchased prior to their scheduled maturity on December 1, 2021.
Our debt service obligations consist of interest payments and repayment of our December 2021 Notes. As of December 31, 2017, we have not2020 approximately $2.3 million in aggregate principal amount of December 2021 Notes outstanding of which $1.9 million par value was repurchased shares under this plan dueprior to trading restrictions.December 31, 2021 but pending settlement. We may continue to repurchase the remaining outstanding December 2021 Notes with cash on hand.
We had cash and cash equivalents in the aggregate of $126.8 million and $169.0 million at December 31, 2020 and 2019, respectively, representing a decrease of $42.2 million. The decrease was primarily attributable to the repurchase program may be suspended or discontinued at any time without notice.of the December 2021 Notes and December 2024 Notes and the repurchase of stock, partially offset by cash received from royalties, cash received from the sale of the Wellstat receivable (including the subsequent sale of the Settlement Agreement) and the sale of the Noden entities and certain royalty rights assets.
We believe that cash on hand and cash generated from future revenues from acquired pharmaceutical products, medical devices and/or income generating assets,the above-described sources, net of operating expenses, debt service and income taxes, plus cash on hand, will be sufficient to fund our wind-down operations over the next several years. However,until all net proceeds are distributed to our acquired pharmaceutical products, medical devices and/or income generating assets will not result in cash flows to us, in the near term, that will replace the cash flows we received from our license agreements related to the Queen et al. patents. In the second quarter of 2016, our cash flows materially decreased after we stopped receiving payments from certain of the Queen et al. patent licenses and our legal settlements. Our continued success is dependent on our ability to acquire new additional pharmaceutical products, medical devices and/or income generating assets, and the timing of these transactions, in order to provide recurring cash flows going forward that support our business model, and service our debt.stockholders.
We continuously evaluate alternatives to increase return for our stockholders, including, for example, purchasing income generating assets, selling certain assets, buying back our convertible notes, repurchasing our common stock or potentially selling our company.
We may consider additional debt or equity financings to support growth if cash flows from our existing business are not sufficient to fund future product or income generating asset opportunities and acquisitions.
Off-Balance Sheet Arrangements
As of December 31, 2017,2020, we did not have any off-balance sheet arrangements, as defined under SEC Regulation S-K Item 303(a)(4)(ii).
Contractual Obligations
Convertible Note
As of December 31, 2017, our convertible note obligation consisted of our February 2018 Notes and December 2021 Notes, which in the aggregate totaled $276.4 million in principal. On February 1, 2018, we repaid the February 2018 Notes at their maturity for a total cash payment of $129.0 million.
We expect that our debt service obligations over the next several years will consist of interest payments and repayment of our December 2021 Notes. We may further seek to exchange, repurchase or otherwise acquire the convertible notes in the open market in the future, which could adversely affect the amount or timing of any distributions to our stockholders. We would make such exchanges or repurchases only if we deemed it to be in our stockholders’ best interest. We may finance such repurchases with cash on hand and/or with public or private equity or debt financings if we deem such financings to be available on favorable terms.
Noden Purchase Agreement
Pursuant to the Noden Purchase Agreement, Noden is required to pay up to $95.0 million in milestone payments, subject to the occurrence of such milestones. If the milestones are achieved, we expect to fund at least $38.0 million in the form of additional equity contributions to Noden.
Kybella Royalty Agreement
On July 8, 2016, we entered into a royalty purchase and sales agreement with an individual, whereby we 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 following table summarizes our contractual obligations and commercial commitments as of December 31, 2017:2020:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| | | Less Than | | | | | | More than | | |
| (in thousands) | | 1 Year | | 1-3 Years | | 4-5 Years | | 5 years | | Total |
Operating leases (1) | | $ | 1,133 |
| | $ | 2,711 |
| | $ | — |
| | $ | — |
| | $ | 3,844 |
|
Convertible notes (2) | | 130,993 |
| | 162,375 |
| | — |
| | — |
| | 293,368 |
|
Inventory (3) | | 75,564 |
| | 105,795 |
| | — |
| | — |
| | 181,359 |
|
Contingent consideration (4) | | — |
| | 55,000 |
| | 40,000 |
| | — |
| | 95,000 |
|
| Total contractual obligations | | $ | 207,690 |
| | $ | 325,881 |
| | $ | 40,000 |
| | $ | — |
| | $ | 573,571 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (in thousands) | | Less than 1 year | | 1-3 years | | 3-5 years | | Thereafter | | Total |
Operating leases 1 | | $ | 37 | | | $ | 38 | | | $ | — | | | $ | — | | | $ | 75 | |
Convertible notes 2 | | 412 | | | — | | | — | | | — | | | 412 | |
| | | | | | | | | | |
| Total contractual obligations | | $ | 449 | | | $ | 38 | | | $ | — | | | $ | — | | | $ | 487 | |
_____________________________
(1)1 Amounts represent the lease for our headquartersoffices in Incline Village,Reno, Nevada and do not include estimated remaining lease payments guaranteed under the Redwood City lease for the Noden Pharma DAC office in Dublin, Ireland, the lease for the LENSAR office and manufacturing facility in Orlando, Florida and operating leases for office equipment.discussed below.
(2) Amounts represent2 Amount represents estimated remaining principal and cash interest payments due on the convertible notes.December 2021 Notes and excludes amounts paid before December 31, 2020 for an unsettled trade totaling $1.9 million.
(3) Consist
Our liability for uncertain tax positions was $35.3 million as of minimum purchase obligation underDecember 31, 2020, all of which has been excluded from the Novartis supply agreement for bulk tablets and active pharmaceutical ingredient (API) and Coherent, Inc. Original Equipment Manufacturing agreement for LENSAR Staccato Lasers.
(4) Pursuanttable above due to the termsuncertainty in the timing of the Noden settlement of these positions.
The above table excludes any contractually committed wind down payments due to stock option holders discussed under Guarantees below as the amount and timing of such payments, if any, is uncertain.
Purchase Agreement,Obligations
After the sale of Noden Pharma DAC is committed to pay Novartis up to an additional $95.0 million contingent on achievement of milestones based on sales targets and the datespin-off of the launchLENSAR, we no longer have any purchase obligations and were released from all of a generic drug containing the pharmaceutical ingredient aliskiren.our guarantees for purchase obligations.
Guarantees
Redwood City Lease Guarantee
In connection with the Spin-Offspin-off of Facet in December 2008, we entered into amendments to the leases for our 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 us for all matters related to the leases attributable to the period after the Spin-Offspin-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, we could be held liable by the landlord as a co-tenant, and, thus, we have 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, are approximately $11.3 million. For additional information regarding our lease guarantee, see Note 16, Commitments and Contingencies.
Wind Down Payments to Stock Option Holders
On December 21, 2019, the Compensation Committee of the Board adopted a Wind Down Retention Plan in which our executive officers and other employees who are participants in the Company’s Severance Plan are eligible to participate. 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 cash or other 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”). 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. For a full discussion regarding the Wind-Down Retention Plan, including benefits conferred on employee option holders post-dissolution, please see Item 11.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitive Financial Instruments
Our exposure to market risk for changes in interest rates relates primarily to our excess cash investments and our convertible notes.
Our excess cash investments consist of Rule 2a-7 money market funds and had a fair value of approximately $51.2 million at December 31, 2020 and $131.3 million at December 31, 2019. Due to the short duration of these investments, with a maximum weighted average maturity of 60 days or less, if market interest rates were to increase or decrease by 1%, there would be no material impact on the fair value of our portfolio.
As of December 31, 2020, our convertible notes consisted of $2.3 million in principal of the December 2021 Notes with an annual fixed interest rate of 2.75%, of which $1.9 million par value was acquired before December 31, 2020 in a transaction that remained unsettled at year end. The aggregate fair value of our convertible notes was estimated to be $33.9 million at December 31, 2019. At December 31, 2019 our convertible notes consisted of the December 2021 Notes and the December 2024 Notes. The December 2024 Notes had an annual fixed interest rate of 2.75% and a principal accretion rate of 2.375% per year. Changes in interest rates do not affect interest expense on fixed rate debt. While changes in interest rates do not impact the amount of interest we pay, these obligations are subject to interest rate risk because changes in interest rates would affect the fair values of fixed rate debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of PDL BioPharma, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of PDL BioPharma, Inc. and its subsidiaries (the “Company”) as of December 31, 2019, and the related consolidated statements of operations, of comprehensive (loss) income, of stockholders’ equity and of cash flows for each of the two years in the period ended December 31, 2019 and for the period from January 1, 2020 to August 31, 2020, and audited the consolidated statement of net assets in liquidation as of December 31, 2020, and the related consolidated statement of changes in net assets in liquidation for the period from September 1, 2020 to December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019 and for the period from January 1, 2020 to August 31, 2020, its net assets in liquidation as of December 31, 2020, and the changes in its net assets in liquidation for the period from September 1, 2020 to December 31, 2020 in conformity with accounting principles generally accepted in the United States of America applied on the bases described below.
Basis of Accounting
As discussed inNotes 2 and 3to the consolidated financial statements, the stockholders of the Company approved a plan of liquidation on August 19, 2020, and the Company determined liquidation is imminent. As a result, the Company changed its basis of accounting on September 1, 2020 from the going concern basis to a liquidation basis. This matter is also discussed below as a critical audit matter.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Liquidation Basis of Accounting
As described above and in Notes 2 and 3 to the consolidated financial statements, 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 from the going concern basis of accounting to the liquidation basis of accounting on September 1, 2020, in accordance with generally accepted accounting principles. Under the liquidation basis,
the remeasurement of the Company's assets and liabilities include 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. 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 assets, estimated settlement amounts of liabilities, the estimated revenue and operating expenses that are projected during dissolution, and discount rates. Additional significant estimates under the liquidation basis include the recognition and measurement of amounts recoverable under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The total effect of adoption of the liquidation basis of accounting was a $21,339 thousand increase from consolidated net equity as of August 31, 2020 to net assets in liquidation as of September 1, 2020. The changes in net assets and liabilities in liquidation from September 1, 2020 to December 31, 2020 was a reduction of $59,634 thousand.
The principal considerations for our determination that performing procedures relating to the Company’s adoption of the liquidation basis of accounting is a critical audit matter are the significant judgment by management when determining (i) the point at which liquidation was imminent, and (ii) remeasuring the values of assets and liabilities, which included significant assumptions related to sales proceeds of assets, settlement amounts of liabilities, revenue and operating expenses, discount rates and amounts recoverable under the CARES Act. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to (i) management’s judgments around applying the liquidation basis to the consolidated financial statements and determining the point at which liquidation was imminent, and (ii) the remeasurement of certain assets and liabilities. Also, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) testing management’s process for and evaluating management’s judgments around applying the adoption of the liquidation basis of accounting and the point at which liquidation was imminent; (ii) testing management’s process for developing the estimates and assumptions used in the remeasurement of certain assets and liabilities as of September 1, 2020 and December 31, 2020; (iii) testing the completeness and accuracy of the data used by management in the developing the estimates, and (iv) evaluating the reasonableness of the significant assumptions used by management for certain assets related to (1) the estimated sales proceeds, (2) amounts estimated to be recoverable under the CARES act, (3) the estimated revenue and operating expenses that are projected during dissolution and (4) the discount rates; for certain liabilities related to (1) the amounts estimated to be paid in settlement, (2) the estimatedrevenue and operating expenses that are projected during dissolution, and (3) the discount rates; and (v) evaluating the adequacy of the Company’s disclosures. The work of management’s specialist was used in performing the procedures to evaluate the reasonableness of enterprise values. Evaluating management’s assumptions related to the estimated revenue and operating expenses that are projected during dissolution, estimated proceeds from sales of certain assets, and the estimated amounts to be paid in settlement of certain liabilities involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the Company; (ii) the consistency with external industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of valuation methods and evaluating the reasonableness of the discount rates and amounts recoverable under the CARES Act.
| | | | | | | | | | | |
| | /s/ PricewaterhouseCoopers LLP | |
San Francisco, California
March 26, 2021
We have served as the Company’s auditor since 2014.
PDL BIOPHARMA, INC.
CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
(In thousands)
| | | | | | | | |
| | December 31, |
| | 2020 |
| | (Note 2) |
| | (Under Liquidation Basis of Accounting) |
| Assets | | |
| Current assets: | | |
| Cash and cash equivalents | | $ | 126,842 | |
| | |
| Receivables from asset sales | | 40,574 | |
| | |
| Royalty assets | | 220,023 | |
| Income tax receivable | | 91,753 | |
| Other assets | | 5,768 | |
| Total assets | | $ | 484,960 | |
| | |
| Liabilities | | |
| Current liabilities: | | |
| Accounts payable | | $ | 531 | |
| Uncertain tax positions | | 43,742 | |
| Compensation and benefit costs | | 9,337 | |
| Lease guarantee | | 10,700 | |
| Costs to sell assets | | 3,997 | |
| Other accrued liquidation costs | | 27,268 | |
| Convertible notes payable | | 2,466 | |
| Total liabilities | | $ | 98,041 | |
| | |
| Net assets in liquidation | | $ | 386,919 | |
See accompanying notes.
PDL BIOPHARMA, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
| | | | | | | | | | |
| | | | December 31, |
| | | | 2019 |
| | | | (Note 2) |
| | | | (Under Going Concern Basis of Accounting) |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | | | $ | 168,982 | |
| | | | |
| | | | |
| Accounts receivable, net | | | | 6,559 | |
| Notes receivable | | | | 52,583 | |
| | | | |
| Inventory | | | | 8,061 | |
| Assets held for sale (Note 4) | | | | 70,366 | |
| Prepaid and other current assets | | | | 7,344 | |
| Total current assets | | | | 313,895 | |
| Property and equipment, net | | | | 2,560 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Notes and other receivables, long-term | | | | 827 | |
| | | | |
| Intangible assets, net | | | | 13,186 | |
| | | | |
| Long-term assets held for sale (Note 4) | | | | 377,491 | |
| Other assets | | | | 9,247 | |
| Total assets | | | | $ | 717,206 | |
| | | | |
| Liabilities and Stockholders’ Equity | | | | |
| Current liabilities: | | | | |
| Accounts payable | | | | $ | 2,675 | |
| | | | |
| Accrued liabilities | | | | 11,923 | |
| | | | |
| Liabilities held for sale (Note 4) | | | | 31,095 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total current liabilities | | | | 45,693 | |
| Convertible notes payable | | | | 27,250 | |
| | | | |
| Liabilities held for sale, long-term (Note 4) | | | | 120 | |
| Other long-term liabilities | | | | 50,865 | |
| Total liabilities | | | | 123,928 | |
| | | | |
| Commitments and contingencies (Note 16) | | | | 0 |
| | | | |
| Stockholders’ equity: | | | | |
| Preferred stock, par value $0.01 per share, 10,000 shares authorized; no shares issued and outstanding | | | | 0 | |
| Common stock, par value $0.01 per share, 350,000 shares authorized; 124,303 shares issued and outstanding at December 31, 2019 | | | | 1,243 | |
| Additional paid-in capital | | | | (78,875) | |
| | | | |
| | | | |
| Retained earnings | | | | 670,832 | |
| Total PDL’s stockholders’ equity | | | | 593,200 | |
| Noncontrolling interests | | | | 78 | |
| Total stockholders’ equity | | | | 593,278 | |
| Total liabilities and stockholders’ equity | | | | $ | 717,206 | |
See accompanying notes.
PDL BIOPHARMA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
(In thousands)
| | | | | | | | |
| | (Note 2) |
| | (Under Liquidation Basis of Accounting) |
| Net assets in liquidation, at September 1, 2020 | | $ | 446,553 | |
| | |
| Changes in assets and liabilities in liquidation: | | |
| | |
| Decrease in liquidation value of royalty assets | | (12,696) | |
| Decrease in receivables from asset sales | | (8,328) | |
| Decrease in liquidation value of notes receivable | | (44,920) | |
| Decrease in other assets | | (70,976) | |
| Increase in income tax receivable | | 56,081 | |
| Decrease in estimated costs to sell assets | | 4,058 | |
| Increase in uncertain tax positions | | (4,385) | |
| Increase in accrued liquidation costs | | (12,911) | |
| Decrease in compensation and benefit costs | | 11,882 | |
| Decrease in other liabilities and accounts payable | | 22,561 | |
| Total changes in net assets in liquidation | | (59,634) | |
| | |
| Net assets in liquidation, at December 31, 2020 | | $ | 386,919 | |
See accompanying notes.
PDL BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Eight Months Ended August 31, | | Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (Under Going Concern Basis of Accounting) |
| Revenues | |
| Product revenue, net | $ | 10,946 | | | $ | 22,331 | | | $ | 15,928 | |
| Lease revenue | 2,139 | | | 5,072 | | | 5,903 | |
| Service revenue | 2,126 | | | 3,339 | | | 2,821 | |
| Royalty rights - change in fair value | 0 | | | 0 | | | (30) | |
| Royalties from Queen et al. patents | 0 | | | 9 | | | 4,536 | |
| Interest revenue | 0 | | | 0 | | | 2,337 | |
| License and other | 110 | | | (45) | | | 533 | |
| Total revenues | 15,321 | | | 30,706 | | | 32,028 | |
| Operating expenses | | | | | |
| Cost of product revenue (excluding intangible asset amortization) | 6,626 | | | 17,276 | | | 13,555 | |
| Amortization of intangible assets | 841 | | | 1,290 | | | 1,294 | |
| Severance and retention | 24,713 | | | 0 | | | 0 | |
| General and administrative | 29,695 | | | 38,334 | | | 33,700 | |
| Sales and marketing | 3,322 | | | 6,806 | | | 6,341 | |
| Research and development | 4,374 | | | 7,350 | | | 2,759 | |
| | | | | |
| | | | | |
| Asset impairment loss | 0 | | | 10,768 | | | 8,200 | |
| | | | | |
| | | | | |
| Change in fair value of anniversary payment and contingent consideration | 0 | | | 0 | | | 369 | |
| Total operating expenses | 69,571 | | | 81,824 | | | 66,218 | |
| Operating loss from continuing operations | (54,250) | | | (51,118) | | | (34,190) | |
| Non-operating expense, net | | | | | |
| Interest and other income, net | 608 | | | 6,030 | | | 6,065 | |
| Interest expense | (996) | | | (11,404) | | | (12,157) | |
| | | | | |
| Gain on sale of intangible assets | 0 | | | 3,476 | | | 0 | |
| | | | | |
| (Loss) gain on investments | (5,576) | | | 0 | | | 764 | |
| Loss on exchange and extinguishment of convertible notes | (606) | | | (8,430) | | | 0 | |
| | | | | |
| Total non-operating expense, net | (6,570) | | | (10,328) | | | (5,328) | |
| Loss before income taxes from continuing operations | (60,820) | | | (61,446) | | | (39,518) | |
| Income tax benefit from continuing operations | (17,780) | | | (4,352) | | | (6,753) | |
| Net loss from continuing operations | (43,040) | | | (57,094) | | | (32,765) | |
| Loss from discontinued operations before income taxes | (57,921) | | | (12,294) | | | (16,405) | |
| Income tax (benefit) expense of discontinued operations | (23,006) | | | 1,303 | | | 19,689 | |
| Loss from discontinued operations | (34,915) | | | (13,597) | | | (36,094) | |
| Net loss | (77,955) | | | (70,691) | | | (68,859) | |
| Less: Net loss attributable to noncontrolling interests | (659) | | | (280) | | | 0 | |
| Net loss attributable to PDL’s stockholders | $ | (77,296) | | | $ | (70,411) | | | $ | (68,859) | |
| | | | | |
| 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 shareholders 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 shareholders per diluted share | $ | (0.66) | | | $ | (0.59) | | | $ | (0.47) | |
| Weighted-average shares outstanding | | | | | |
| Basic | 118,001 | | | 118,631 | | | 145,669 | |
| Diluted | 118,001 | | | 118,631 | | | 145,669 | |
| | | | | |
See accompanying notes.
PDL BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Eight Months Ended August 31, | | Year Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| | (Under Going Concern Basis of Accounting) |
| Net loss | | $ | (77,955) | | | $ | (70,691) | | | $ | (68,859) | |
| | | | | | |
| Other comprehensive loss, net of tax | | | | | | |
| Change in unrealized losses on investments in available-for-sale securities: | | | | | | |
| Change in fair value of investments in available-for-sale securities, net of tax | | 0 | | | 0 | | | (578) | |
| Adjustment for net (gains) losses realized and included in net loss, net of tax | | 0 | | | 0 | | | (603) | |
Total change in unrealized losses on investments in available-for-sale securities, net of tax(a) | | 0 | | | 0 | | | (1,181) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Comprehensive loss | | (77,955) | | | (70,691) | | | (70,040) | |
| Less: Comprehensive loss attributable to noncontrolling interests | | (659) | | | (280) | | | 0 | |
| Comprehensive loss attributable to PDL’s stockholders | | $ | (77,296) | | | $ | (70,411) | | | $ | (70,040) | |
(a) Net of tax of ($314) for the year ended December 31, 2018.
See accompanying notes.
PDL BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| PDL’s Stockholders Equity | | | | |
| Common Stock | | Treasury Stock | | Additional
Paid-In
Capital | | Retained Earnings | | Accumulated
Other Comprehensive
Income (Loss) | | Non-controlling Interest | | Total
Stockholders’ Equity |
| Shares | | Amount | | | | | |
| (Under Going Concern Basis of Accounting) |
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| Balance at December 31, 2017 | 153,774,756 | | | $ | 1,538 | | | $ | — | | | $ | (102,443) | | | $ | 945,614 | | | $ | 1,181 | | | $ | 0 | | | $ | 845,890 | |
| Issuance of common stock, net of forfeitures | (601,668) | | | (6) | | | — | | | 6 | | | 58 | | | — | | | — | | | 58 | |
| Stock-based compensation expense | — | | | — | | | — | | | 4,407 | | | — | | | — | | | — | | | 4,407 | |
| | | | | | | | | | | | | | | |
| Repurchase and retirement of common stock | (16,660,566) | | | (167) | | | (2,103) | | | — | | | (48,266) | | | — | | | — | | | (50,536) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Comprehensive loss: | | | | | | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | — | | | (68,859) | | | — | | | — | | | (68,859) | |
| Change in unrealized gains and losses on investments in available-for-sale securities, net of tax | — | | | — | | | — | | | — | | | — | | | (1,181) | | | — | | | (1,181) | |
| | | | | | | | | | | | | | | |
| Total comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (70,040) | |
| Balance at December 31, 2018 | 136,512,522 | | | 1,365 | | | (2,103) | | | (98,030) | | | 828,547 | | | 0 | | | 0 | | | 729,779 | |
| Issuance of common stock, net of forfeitures | 729,191 | | | 7 | | | — | | | (7) | | | 8 | | | — | | | — | | | 8 | |
| Stock-based compensation expense | — | | | — | | | — | | | 6,907 | | | — | | | — | | | — | | | 6,907 | |
| | | | | | | | | | | | | | | |
| Repurchase and retirement of common stock | (26,321,293) | | | (263) | | | 2,103 | | | — | | | (87,312) | | | — | | | — | | | (85,472) | |
| Transfer of subsidiary shares to non-controlling interest | — | | | — | | | — | | | 426 | | | — | | | — | | | 358 | | | 784 | |
| Exchange of convertible notes | — | | | — | | | — | | | (36,963) | | | — | | | — | | | — | | | (36,963) | |
| Issuance of common stock in connection with repurchase of convertible notes | 13,382,196 | | | 134 | | | — | | | 45,767 | | | — | | | — | | | — | | | 45,901 | |
| Capped call transactions | — | | | — | | | — | | | 3,025 | | | — | | | — | | | — | | | 3,025 | |
| Comprehensive loss: | | | | | | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | — | | | (70,411) | | | — | | | (280) | | | (70,691) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (70,691) | |
| Balance at December 31, 2019 | 124,302,616 | | | 1,243 | | | 0 | | | (78,875) | | | 670,832 | | | 0 | | | 78 | | | 593,278 | |
| Issuance of common stock, net of forfeitures | 2,131,730 | | | 22 | | | — | | | 438 | | | — | | | — | | | — | | | 460 | |
| Stock-based compensation expense | — | | | — | | | — | | | 15,527 | | | — | | | — | | | — | | | 15,527 | |
| | | | | | | | | | | | | | | |
| Repurchase and retirement of common stock | (12,322,988) | | | (124) | | | — | | | — | | | (39,245) | | | — | | | — | | | (39,369) | |
| Noncash liquidating distribution (0.11591985 shares of Evofem Biosciences, Inc. common stock distributed per share of the Company’s common stock ) | — | | | — | | | — | | | — | | | (64,400) | | | — | | | — | | | (64,400) | |
| Transfer of subsidiary shares to non-controlling interest | — | | | — | | | — | | | 683 | | | — | | | — | | | 100 | | | 783 | |
| | | | | | | | | | | | | | | |
| Extinguishment of convertible notes | — | | | — | | | — | | | (3,911) | | | — | | | — | | | — | | | (3,911) | |
| Capped call transactions | — | | | — | | | — | | | 801 | | | — | | | — | | | — | | | 801 | |
| Comprehensive loss: | | | | | | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | — | | | (77,296) | | | — | | | (659) | | | (77,955) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (77,955) | |
| Balance at August 31, 2020 | 114,111,358 | | | $ | 1,141 | | | $ | 0 | | | $ | (65,337) | | | $ | 489,891 | | | $ | 0 | | | $ | (481) | | | $ | 425,214 | |
See accompanying notes.
PDL BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | | |
| Eight Months Ended August 31, | | Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (Under Going Concern Basis of Accounting) |
| Cash flows from operating activities | | | | | |
| Net loss | $ | (77,955) | | | $ | (70,691) | | | $ | (68,859) | |
| Less: Loss from discontinued operations | (34,915) | | | (13,597) | | | (36,094) | |
| Net loss from continuing operations | (43,040) | | | (57,094) | | | (32,765) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
| Amortization of convertible notes conversion options and debt issuance costs | 622 | | | 7,237 | | | 7,609 | |
| Accreted interest on convertible note principal | 44 | | | 79 | | | 0 | |
| Amortization of intangible assets | 841 | | | 1,290 | | | 1,294 | |
| Amortization of right-of-use assets | 497 | | | 729 | | | 0 | |
| | | | | |
| Asset impairment loss | 0 | | | 10,768 | | | 8,200 | |
| Loss on investment | 5,576 | | | 0 | | | (764) | |
| Change in fair value of royalty rights - at fair value | 0 | | | 0 | | | 31 | |
| | | | | |
| Change in fair value of derivative assets | 110 | | | 46 | | | (33) | |
| Change in fair value of anniversary payment and contingent consideration | 0 | | | 0 | | | 369 | |
| Other amortization, depreciation and accretion of embedded derivative | 1,017 | | | 2,691 | | | 3,149 | |
| | | | | |
| | | | | |
| | | | | |
| Loss on exchange and extinguishment of convertible notes | 606 | | | 8,430 | | | 0 | |
| Gain on sale of intangible assets | 0 | | | (3,476) | | | 0 | |
| | | | | |
| Loss on disposal of property and equipment | 331 | | | 0 | | | 66 | |
| | | | | |
| | | | | |
| Stock-based compensation expense | 18,802 | | | 6,834 | | | 4,337 | |
| | | | | |
| | | | | |
| Deferred income taxes | (18,723) | | | (11,303) | | | 11,597 | |
| Changes in assets and liabilities: | | | | | |
| Accounts receivable | 3,344 | | | (1,686) | | | 234 | |
| | | | | |
| Prepaid and other current assets | (29,875) | | | 2,764 | | | (1,629) | |
| | | | | |
| Inventory | (8,062) | | | (4,744) | | | (889) | |
| Other assets | 306 | | | (165) | | | (2,142) | |
| Accounts payable | 371 | | | 109 | | | 796 | |
| | | | | |
| Accrued liabilities | 5,762 | | | 4,845 | | | (5,380) | |
| | | | | |
| Accrued income taxes | 0 | | | 0 | | | (28) | |
| | | | | |
| Other long-term liabilities | 1,030 | | | 4,967 | | | (462) | |
| Net cash used in operating activities - continuing operations | (60,441) | | | (27,679) | | | (6,410) | |
| Net cash provided by (used in) operating activities - discontinued operations | 28,318 | | | (4,765) | | | (7,015) | |
| Cash flows from investing activities | | | | | |
| | | | | |
| | | | | |
| | | | | |
| Settlement agreement cash received | 7,500 | | | 0 | | | 0 | |
| Payment of contingent consideration | 0 | | | 0 | | | (858) | |
| Proceeds from sales of available-for-sale securities | 0 | | | 0 | | | 4,116 | |
| | | | | |
| Proceeds from royalty rights - at fair value | 0 | | | 0 | | | 366 | |
| Purchase of intangible assets | 0 | | | (1,700) | | | 0 | |
| | | | | |
| Proceeds from the sale of intangible assets | 0 | | | 5,000 | | | 0 | |
| | | | | |
| | | | | |
| Purchase of property and equipment | (221) | | | (763) | | | (1,117) | |
| Net cash provided by investing activities - continuing operations | 7,279 | | | 2,537 | | | 2,507 | |
| Net cash provided by investing activities - discontinued operations | 38,966 | | | 19,273 | | | 54,197 | |
| Cash flows from financing activities | | | | | |
| | | | | |
| | | | | |
| Repurchase of convertible notes | (18,845) | | | (97,889) | | | 0 | |
| | | | | |
| Repayment of convertible notes | 0 | | | 0 | | | (126,447) | |
| | | | | |
| | | | | |
| Payment to exchange convertible notes | 0 | | | (7,451) | | | 0 | |
| | | | | |
| Capped call transactions | 801 | | | 3,025 | | | 0 | |
| | | | | |
| Payment of contingent consideration | 0 | | | (1,071) | | | 0 | |
| | | | | |
| Repurchase of Company common stock | (39,373) | | | (86,898) | | | (49,109) | |
| Cash dividends paid | 0 | | | (9) | | | (48) | |
| Proceeds from the exercise of stock options | 461 | | | 0 | | | 0 | |
| Net settlement of stock-based compensation awards | (3,462) | | | (143) | | | (232) | |
| | | | | |
| Net cash used in financing activities - continuing operations | (60,418) | | | (190,436) | | | (175,836) | |
| Net cash used in financing activities - discontinued operations | (359) | | | (69) | | | (119) | |
| Net decrease in cash and cash equivalents | (46,655) | | | (201,139) | | | (132,676) | |
| Cash and cash equivalents at beginning of period | 193,451 | | | 394,590 | | | 527,266 | |
| Cash and cash equivalents at end of period | 146,796 | | | 193,451 | | | 394,590 | |
| Less: Cash and cash equivalents of discontinued operations at end of period | 25,060 | | | 24,469 | | | 28,910 | |
| Cash and cash equivalents of continuing operations at end of period | $ | 121,736 | | | $ | 168,982 | | | $ | 365,680 | |
See accompanying notes
PDL BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
| | | | | | | | | | | | | | | | | |
| Eight Months Ended August 31, | | Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (Under Going Concern Basis of Accounting) |
| Supplemental cash flow information for continuing and discontinued operations | | | | | |
| Cash (refunded) paid for income taxes | $ | (4) | | | $ | (2,689) | | | $ | 3,805 | |
| Cash paid for interest | $ | 298 | | | $ | 4,265 | | | $ | 6,654 | |
| Supplemental schedule of non-cash investing and financing activities for continuing and discontinued operations | | | | | |
| Noncash liquidating distribution | $ | 64,400 | | | $ | 0 | | | $ | 0 | |
| Convertible notes due December 2021 exchanged for convertible notes due December 2024 | $ | 0 | | | $ | 86,053 | | | $ | 0 | |
| Common stock used to settle convertible notes payable | $ | 0 | | | $ | 45,901 | | | $ | 0 | |
| Assets held for sale reclassified from other assets to intangible assets | $ | 0 | | | $ | 0 | | | $ | 1,811 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
See accompanying notes
PDL BIOPHARMA, INC.
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 information, see “Criticalevolution 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 4 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 Estimates-Lease Guarantee” above.its subsidiaries (collectively, the “Company” or “PDL”) have been prepared in accordance with Generally Accepted Accounting Principles (United States) (“GAAP”).
Purchase CommitmentsCertain 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 4 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 Noden Transaction, Noden enteredadoption 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 unconditional purchase obligationexercise 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 Novartisthe contractual terms of the credit agreement, to acquire all localthe 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 1 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 2 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 0 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:
| | | | | | | | |
| Leasehold improvements | | Lesser of useful life or term of lease |
| Manufacturing equipment | | 3-5 years |
| Computer and office equipment | | 3 years |
| Transportation equipment | | 3 years |
| Furniture and fixtures | | 7 years |
| Equipment under lease | | Greater of lease term or 5-10 years |
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 certain countries uponcash 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 applicablerelated 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 country.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 purchase is payable within 60 days afterprofit transfer terminated upon the transfer of the marketing authorization rights. The agreement does not specify quantities but details pricing terms.
In addition, Noden andfrom Novartis entered into a supply agreement pursuant to which Novartis will manufacture and supply to Noden a finished form ofDAC in each country. For the period from October 5, 2016 to August 31, 2017, Novartis continued to distribute the Noden Products and bulk drug formoutside 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 specifiedthe 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 transferspin-off of manufacturing responsibilitiesLENSAR 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 Noden Productssale 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 another manufacturer.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 agreement commits Nodenfor 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 minimum purchase obligationgain of approximately $74.2$0.2 million and $105.8a 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 next twelvelease 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 thirty-sixnon-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 respectively. Noden expectsended 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 meetpurchase 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 requirement.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:
LENSARAccounts and Coherent, Inc.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 an Original Equipment Manufacturer agreement pursuantagreements with 23 customers through which LENSAR agreed to which Coherent, Inc. will manufacturewaive monthly rental and supplyminimum monthly license fees ranging from one to LENSAR Staccato Lasers by December 31, 2018. The supply agreement commits LENSAR to a minimum purchase obligation of approximately $1.3 million over the next twelve months. LENSAR expects to meet this requirement.
Escrow Receivable
On September 21, 2017, we 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 we sold our entire interest in the notes issued by Accel 300, LLC (“Accel 300”) pursuant to that certain Indenture, dated as of April 1, 2014, by and between Accel 300 and U.S. Bank National Association, as the current trustee of the notes described therein (the “kaléo Note”).
Pursuant to the kaléo Note Sale Agreement, the kaléo Purchaser paid to us an amount equal to 100% of the then outstanding principal, a premium of 1% of such amount and accrued interest under the kaléo Notes,four months for an aggregate cash purchase price of $141.7 million.
$1.4$0.9 million of revenue for the aggregate purchase price was deposited into an escrow account as a potential payment against certain contingencieseight 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 18 months, after whichthese concessions the escrow agent is required to release any funds remaining in the escrow account to us.
We do not believe that it will be subject to claims contemplated under the escrow agreement. However, in the event that such a claim is made, and if successful, the amount of such a claim up to $1.4 million would be released from the escrow to the kaléo Purchaser, which may reduce the amount ultimately returned to us when the 18 month escrow period has ended. As of December 31, 2017, we are not aware of any claimsrelated contracts were extended by the kaléo Purchasersame 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 would reduceis a service contract with the escrow receivable.
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 PronouncementsBasis of Presentation
See Note 2, “SummaryThe accompanying Consolidated Financial Statements of Significant Accounting Policies” in Item 8, “Financial StatementsPDL Biopharma, Inc. and Supplementary Data” of this Annual Report for information regarding recently issued accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our investment portfolio was approximately $422.4 million at December 31, 2017, and $95.0 million at December 31, 2016, and consisted of investments in Rule 2a-7 money market funds and a corporate security. If market interest rates were to have increased by 1% in either of these years, there wouldits 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 material impacteffect on the fair valuereported results of our portfolio.operations.
The aggregate fair valueLiquidation Basis of our convertible notesAccounting
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 estimateddetermined 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 $274.2 milliongenerated from the remaining assets until the anticipated date of sale; (ii) sales proceeds to be received for these assets at December 31, 2017,the time of sale; (iii) operating expenses to be incurred; and $246.0 million at December 31, 2016, based(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 available pricing information. At December 31, 2017 and 2016, our convertible notes consistedthe 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 February 2018 Notes, with a fixed interest rateCompany and its wholly-owned and majority-owned subsidiaries up to their date of 4.0%,sale or distribution. All significant intercompany balances and the December 2021 Notes, with a fixed interest rate of 2.75%. These obligations are subject to interest rate risk because the fixed interest rates under these obligations may exceed current interest rates.transactions have been eliminated upon consolidation.
The following table presents information about our material debt obligations that are sensitive to changes in interest rates. The table presents principal amounts and related weighted-average interest rates by year of expected maturity for our debt obligations or the earliest yearA subsidiary is an entity in which the holders may putCompany, directly or indirectly, controls more than one half of the debtvoting power; has the power to us. Our convertibleappoint 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 may be convertedreceivable 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 priorand 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 maturity date.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 4 reportable segments: Medical Devices, Strategic Positions, Pharmaceutical and Income Generating Assets.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2018 | | 2019 | | 2020 | | 2021 | | Total | | Fair Value | |
| Convertible notes | | | | | | | | | | | | | |
| Fixed Rate | | $ | 126,447 |
| | $ | — |
| | $ | — |
| | $ | 150,000 |
| | $ | 276,447 |
| | $ | 274,159 |
| (1) |
| Average Interest Rate | | 2.80 | % | | 2.75 | % | | 2.75 | % | | 2.75 | % | | | | | |
_________________________
| |
(1) | The fair value of the remaining payments under our February 2018 Notes and the December 2021 Notes was estimated based on the trading value of these notes at December 31, 2017.
|
Foreign Exchange Risk
Foreign currency exchange rates also impact our reported revenues. Our revenues may fluctuate dueAfter the Company announced its monetization strategy, it recognized that its ability to changesexecute 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 foreign currency exchange rateswhich the Company’s executive officers and are subject to foreign currency exchange risk. While foreign currency conversion terms vary by license agreement, generally most agreements require that royalties first be calculatedother employees who were participants in the currencyCompany’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 then converted into U.S. dollars usingcustomary for sales of such assets; (3) an active program to locate a buyer and other actions required to complete the average daily exchange rates for that currencyplan 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 specifiedprice 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 calendar quarter. Accordingly, when the U.S. dollar weakens against other currencies, the converted amount is greater than it wouldperiod, 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 been had the U.S. dollar not weakened.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of PDL BioPharma, Inc.
Opinionsa major effect on the FinancialCompany’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 Internal Control over Financial Reportingcash equivalents with high credit quality financial institutions and, by policy, limits the amount of credit exposure in any one financial instrument.
We have auditedAccounts Receivable
Under the accompanying consolidated balance sheets of PDL BioPharma, Inc. and its subsidiariesGoing Concern Basis the Company concluded that an allowance for doubtful accounts was not required as of December 31, 2017 and2019. 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, 2016, and2020, the related consolidated statementsCompany had an investment in a privately held company AEON BioPharma, Inc., including its ownership of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectivelyAlphaeon 1, LLC, (formerly collectively referred to as the “consolidated financial statements”“Alphaeon” and currently and collectively referred to as “AEON”). We also have auditedAs of December 31, 2019, the Company's internal control overCompany’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, 2017, based2020 and on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the CompanyCompany’s Consolidated Balance Sheet as Other long-term assets as of December 31, 20172019.
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 December 31, 2016,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 results of their operationsCompany expected repayment to be provided solely by the collateral. Impairment assessments required significant judgments and their cash flows for eachwere based on significant assumptions related to the borrower’s credit risk, financial performance, expected sales, and estimated fair value of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.collateral.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,Company recorded interest on an accrual basis and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Companyrecognized it was earned in accordance with the U.S. federal securities laws and applicable rules and regulationscontractual terms of the Securitiescredit 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 Exchange Commissionother obligations due would be collected in full, the Company generally placed the note receivable or loan on an impaired status and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards requireceased recognizing interest income on that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to errornote receivable or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to errorloan. Any interest payments received for notes receivable or fraud, and performing procedures that respond to those risks. Such procedures included examining,loans on an impaired status were recognized as interest income on a test basis, evidence regardingcash basis.
The Company did not recognized any interest revenue for the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control basedCareView Communications, Inc. (“CareView”) note receivable while on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded LENSAR, Inc. from its assessment of internal control over financial reporting as of December 31, 2017, because it was acquired by the Company in a purchase business combinationimpaired status. The last interest payments were received during the year ended December 31, 2017. We have also2018, 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 1 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 2 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 0 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:
| | | | | | | | |
| Leasehold improvements | | Lesser of useful life or term of lease |
| Manufacturing equipment | | 3-5 years |
| Computer and office equipment | | 3 years |
| Transportation equipment | | 3 years |
| Furniture and fixtures | | 7 years |
| Equipment under lease | | Greater of lease term or 5-10 years |
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 LENSAR, Inc. from our audit of internalrevenue.
Shipping and handling costs associated with outbound freight after control over financial reporting.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 Inc. is® 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 whose totalof the Company, granted an exclusive license related to certain Direct Flow Medical, Inc. assets in exchange for $0.5 million in cash and totalup 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 excludedwhen 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 management’s assessmentits 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 our auditits legal settlement. Under the terms of internal control over financial reporting represent 2.4%the legal settlement between Genentech, Inc. (“Genentech”) and 4.7%the Company, the first quarter of 2016 was the last period for which Genentech paid royalties to the Company for Avastin®, respectively,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 statement amountsstatements 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, 2017.
Definition2018 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 Limitationsoperating lease liabilities of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed$2.1 million, primarily related to provide reasonable assurance regardingcorporate office leases, based on the reliabilitypresent value of financial reportingthe future lease payments on the date of adoption. Changes to lessor accounting focused on conforming with certain changes made to lessee accounting and the preparationrecently adopted revenue recognition guidance. The adoption of financial statementsASC 842 did not materially change how the Company accounted for external purposeslessor 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 accordancea lessor contract all taxes assessed by a governmental authority that are both imposed on and concurrent with generally accepted accounting principles. A company’s internal controla 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 financial reporting includes those policiesthe 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 procedures that (i) pertainnon-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 maintenance of records that, in reasonable detail, accuratelylease and fairly reflectnon-lease components on a relative standalone selling price basis using the transactions and dispositions of
the assetsCompany’s best estimate of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparationstandalone selling price of financial statementseach distinct product or service in accordance withthe contract. Lease elements generally accepted accounting principles,included a LENSAR Laser System, while non-lease elements generally included extended warranty services, PIDs and that receiptsprocedure licenses. The stand-alone selling prices for the extended warranty services, PIDs and expendituresprocedure 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 company are being made only in accordance with authorizations of management and directorstransaction price was determined at the inception of the company; and (iii) provide reasonable assurance regarding prevention or timely detectionlease arrangement. The Company’s leases primarily consisted of unauthorized acquisition,leases with fixed lease payments. For those leases with variable lease payments, the variable lease payment was typically based upon use or disposition of the company’s assetsleased 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 financial statements.Consolidated Financial Statements on the adoption date and no adjustment to prior year Consolidated Financial Statements was required.
BecauseIn 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject toimplementing a cloud computing service arrangement and aligns the riskrequirements for capitalizing implementation costs incurred in a hosting arrangement that controls may become inadequate because of changes in conditions, or that the degree of complianceis a service contract with the policies
requirements for capitalizing implementation costs incurred to develop or procedures may deteriorate.
|
| | | |
| | /s/ PRICEWATERHOUSECOOPERS LLP | |
San Jose, California
March 16, 2018
We have served as the Company’s auditor since 2014.
PDL BIOPHARMA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 527,266 |
| | $ | 147,154 |
|
| Short-term investments | 4,848 |
| | 19,987 |
|
| Accounts receivable, net | 31,183 |
| | 40,120 |
|
| Notes receivable | 53,613 |
| | 111,182 |
|
| Investments-other | — |
| | 75,000 |
|
| Inventory | 9,147 |
| | 2,884 |
|
| Prepaid and other current assets | 14,386 |
| | 1,704 |
|
| Total current assets | 640,443 |
| | 398,031 |
|
| Property and equipment, net | 7,222 |
| | 38 |
|
| Royalty rights - at fair value | 349,223 |
| | 402,318 |
|
| Notes and other receivables, long-term | 17,124 |
| | 159,768 |
|
| Long-term deferred tax assets | 2,432 |
| | 19,257 |
|
| Intangible assets, net | 215,823 |
| | 228,542 |
|
| Other assets | 10,856 |
| | 7,433 |
|
| Total assets | $ | 1,243,123 |
| | $ | 1,215,387 |
|
| | | | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 19,785 |
| | $ | 7,016 |
|
| Accrued liabilities | 45,881 |
| | 30,575 |
|
| Accrued income taxes | 1,377 |
| | 4,723 |
|
| Anniversary payment | — |
| | 88,001 |
|
| Convertible notes payable | 126,066 |
| | — |
|
| Total current liabilities | 193,109 |
| | 130,315 |
|
| Convertible notes payable | 117,415 |
| | 232,443 |
|
| Contingent consideration | 42,000 |
| | 42,650 |
|
| Other long-term liabilities | 44,709 |
| | 54,556 |
|
| Total liabilities | 397,233 |
| | 459,964 |
|
| | | | |
| Commitments and contingencies (Note 13) |
| |
|
| | | | |
| Stockholders’ equity: | | | |
| Preferred stock, par value $0.01 per share, 10,000 shares authorized; no shares issued and outstanding | — |
| | — |
|
| Common stock, par value $0.01 per share, 350,000 shares authorized; 153,775 and 165,538 shares issued and outstanding at December 31, 2017 and 2016, respectively | 1,538 |
| | 1,655 |
|
| Additional paid-in capital | (102,443 | ) | | (107,628 | ) |
| Accumulated other comprehensive income | 1,181 |
| | — |
|
| Retained earnings | 945,614 |
| | 857,116 |
|
| Total PDL’s stockholders’ equity | 845,890 |
| | 751,143 |
|
| Noncontrolling interests | — |
| | 4,280 |
|
| Total stockholders’ equity | 845,890 |
| | 755,423 |
|
| Total liabilities and stockholders’ equity | $ | 1,243,123 |
| | $ | 1,215,387 |
|
See accompanying notes.
PDL BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Revenues: | | | | | |
| Royalties from Queen et al. patents | $ | 36,415 |
| | $ | 166,158 |
| | $ | 485,156 |
|
| Royalty rights - change in fair value | 162,327 |
| | 16,196 |
| | 68,367 |
|
| Interest revenue | 17,744 |
| | 30,404 |
| | 36,202 |
|
| Product revenue, net | 84,123 |
| | 31,669 |
| | — |
|
| License and other | 19,451 |
| | (126 | ) | | 723 |
|
| Total revenues | 320,060 |
| | 244,301 |
| | 590,448 |
|
| Operating expenses | | | | | |
| Cost of product revenue, (excluding intangible amortization) | 30,537 |
| | 4,065 |
| | — |
|
| Amortization of intangible assets | 24,689 |
| | 12,028 |
| | — |
|
| General and administrative | 45,641 |
| | 39,790 |
| | 36,090 |
|
| Sales and marketing | 17,683 |
| | 538 |
| | — |
|
| Research and development | 7,381 |
| | 3,820 |
| | — |
|
| Change in fair value of anniversary payment and contingent consideration | 349 |
| | (3,716 | ) | | — |
|
| Asset impairment loss | — |
| | 3,735 |
| | — |
|
| Acquisition-related costs | — |
| | 3,564 |
| | — |
|
| Loss on extinguishment of notes receivable | — |
| | 51,075 |
| | 3,979 |
|
| Total operating expenses | 126,280 |
| | 114,899 |
| | 40,069 |
|
| Operating income | 193,780 |
| | 129,402 |
| | 550,379 |
|
| Non-operating expense, net | | | | | |
| Interest and other income, net | 1,659 |
| | 588 |
| | 368 |
|
| Interest expense | (20,221 | ) | | (18,267 | ) | | (27,059 | ) |
| Gain on bargain purchase | 9,309 |
| | — |
| | — |
|
| Gain (loss) on extinguishment of debt | — |
| | (2,353 | ) | | 6,450 |
|
| Total non-operating expense, net | (9,253 | ) | | (20,032 | ) | | (20,241 | ) |
| Income before income taxes | 184,527 |
| | 109,370 |
| | 530,138 |
|
| Income tax expense | 73,826 |
| | 45,711 |
| | 197,343 |
|
| Net income | 110,701 |
| | 63,659 |
| | 332,795 |
|
| Less: Net income/(loss) attributable to noncontrolling interests | (47 | ) | | 53 |
| | — |
|
| Net income attributable to PDL’s stockholders | $ | 110,748 |
| | $ | 63,606 |
| | $ | 332,795 |
|
| | | | | | |
| Net income per share | | | | | |
| Basic | $ | 0.71 |
| | $ | 0.39 |
| | $ | 2.04 |
|
| Diluted | $ | 0.71 |
| | $ | 0.39 |
| | $ | 2.03 |
|
| Weighted average shares outstanding | | | | | |
| Basic | 155,394 |
| | 163,805 |
| | 163,386 |
|
| Diluted | 156,257 |
| | 164,192 |
| | 163,554 |
|
| Cash dividends declared per common share | $ | — |
| | $ | 0.10 |
| | $ | 0.60 |
|
See accompanying notes.
PDL BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | | | | | |
| Net income | | $ | 110,701 |
| | $ | 63,659 |
| | $ | 332,795 |
|
| | | | | | | |
| Other comprehensive income (loss), net of tax | | |
| | |
| | |
| Change in unrealized gains on investments in available-for-sale securities: | | | | | | |
| Change in fair value of investments in available-for-sale securities, net of tax | | 1,181 |
| | 122 |
| | 783 |
|
| Adjustment for net (gains) losses realized and included in net income, net of tax | | — |
| | (557 | ) | | (712 | ) |
Total change in unrealized gains on investments in available-for-sale securities, net of tax(a) | | 1,181 |
| | (435 | ) | | 71 |
|
| Change in unrealized gains (losses) on cash flow hedges: | | | | | | |
| Change in fair value of cash flow hedges, net of tax | | — |
| | — |
| | 4,626 |
|
| Adjustment to royalties from Queen et al. patents for net (gains) losses realized and included in net income, net of tax | | — |
| | (1,821 | ) | | (5,390 | ) |
Total change in unrealized losses on cash flow hedges, net of tax(b) | | — |
| | (1,821 | ) | | (764 | ) |
| Total other comprehensive income (loss), net of tax | | 1,181 |
| | (2,256 | ) | | (693 | ) |
| Comprehensive income | | 111,882 |
| | 61,403 |
| | 332,102 |
|
| Less: Comprehensive income/(loss) attributable to noncontrolling interests | | (47 | ) | | 53 |
| | — |
|
| Comprehensive income attributable to PDL’s stockholders | | $ | 111,929 |
| | $ | 61,350 |
| | $ | 332,102 |
|
(a) Net of tax of $314, ($234) and $38 for the years ended December 31, 2017, 2016 and 2015, respectively.
(b) Net of tax of zero, ($981) and ($411) for the years ended December 31, 2017, 2016 and 2015, respectively.
See accompanying notes.
PDL BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | PDL’s Stockholders Equity | | | | |
| | Common Stock | | Additional
Paid-In Capital | | Retained Earnings | | Accumulated
Other Comprehensive Income (Loss) | | Non-controlling Interest | | Total
Stockholders’ Equity |
| | Shares | | Amount | | | | | |
| Balance at December 31, 2014 | 162,186,482 |
| | $ | 1,622 |
| | $ | (119,874 | ) | | $ | 575,740 |
| | $ | 2,949 |
| | $ | — |
| | $ | 460,437 |
|
| Issuance of common stock, net | 758,533 |
| | 8 |
| | (8 | ) | | — |
| | — |
| | — |
| | — |
|
| Extinguishment of convertible debt | 1,341,600 |
| | 13 |
| | 87 |
| | — |
| | — |
| | — |
| | 100 |
|
| Stock-based compensation expense | — |
| | — |
| | 2,045 |
| | — |
| | — |
| | — |
| | 2,045 |
|
| Tax benefit from stock options | — |
| | — |
| | (233 | ) | | — |
| | — |
| | — |
| | (233 | ) |
| Dividends declared | — |
| | — |
| | — |
| | (98,499 | ) | | — |
| | — |
| | (98,499 | ) |
| Comprehensive income: | | | | | | | | | | | | | |
| Net income | — |
| | — |
| | — |
| | 332,795 |
| | — |
| | — |
| | 332,795 |
|
| Change in unrealized gains and losses on investments in available-for-sale securities, net of tax | — |
| | — |
| | — |
| | — |
| | 71 |
| | — |
| | 71 |
|
| Changes in unrealized gains and losses on cash flow hedges, net of tax | — |
| | — |
| | — |
| | — |
| | (764 | ) | | — |
| | (764 | ) |
| Total comprehensive income | | | | | | | | | | | | | 332,102 |
|
| Balance at December 31, 2015 | 164,286,615 |
| | 1,643 |
| | (117,983 | ) | | 810,036 |
| | 2,256 |
| | — |
| | 695,952 |
|
| Issuance of common stock, net | 1,251,832 |
| | 12 |
| | (12 | ) | | — |
| | — |
| | — |
| | — |
|
| Issuance of convertible debt | — |
| | — |
| | 25,465 |
| | — |
| | — |
| | — |
| | 25,465 |
|
| Purchase of purchased call options, net of tax | — |
| | — |
| | (14,400 | ) | | — |
| | — |
| | — |
| | (14,400 | ) |
| Sale of subsidiary shares to non-controlling interest | — |
| | — |
| | (3,977 | ) | | — |
| | — |
| | 4,227 |
| | 250 |
|
| Stock-based compensation expense | — |
| | — |
| | 3,741 |
| | — |
| | — |
| | — |
| | 3,741 |
|
| Tax benefit from stock options | — |
| | — |
| | (462 | ) | | — |
| | — |
| | — |
| | (462 | ) |
| Dividends declared | — |
| | — |
| | — |
| | (16,526 | ) | | — |
| | — |
| | (16,526 | ) |
| Comprehensive income: | | | | | | | | | | | | |
|
|
| Net income | — |
| | — |
| | — |
| | 63,606 |
| | — |
| | 53 |
| | 63,659 |
|
| Change in unrealized gains and losses on investments in available-for-sale securities, net of tax | — |
| | — |
| | — |
| | — |
| | (435 | ) | | — |
| | (435 | ) |
| Changes in unrealized gains and losses on cash flow hedges, net of tax | — |
| | — |
| | — |
| | — |
| | (1,821 | ) | | — |
| | (1,821 | ) |
| Total comprehensive income | | | | | | | | | | | | | 61,403 |
|
| Balance at December 31, 2016 | 165,538,447 |
| | 1,655 |
| | (107,628 | ) | | 857,116 |
| | — |
| | 4,280 |
| | 755,423 |
|
| Issuance of common stock, net | 1,582,698 |
| | 16 |
| | (16 | ) | | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation expense | — |
| | — |
| | 3,138 |
| | — |
| | — |
| | — |
| | 3,138 |
|
| Repurchase and retirement of common stock | (13,346,389 | ) | | (133 | ) | | — |
| | (29,867 | ) | | — |
| | — |
| | (30,000 | ) |
| Acquisition of Noden common stock | — |
| | — |
| | 2,063 |
| | — |
| | — |
| | (4,233 | ) | | (2,170 | ) |
| Cumulative effect from change in accounting principles | — |
| | — |
| | — |
| | 7,617 |
| | — |
| | — |
| | 7,617 |
|
| Comprehensive income: | | | | | | | | | | | | | |
| Net income | — |
| | — |
| | — |
| | 110,748 |
| | — |
| | (47 | ) | | 110,701 |
|
| Change in unrealized gains and losses on investments in available-for-sale securities, net of tax | — |
| | — |
| | — |
| | — |
| | 1,181 |
| | — |
| | 1,181 |
|
| Total comprehensive income | | | | | | | | | | | | | 111,882 |
|
| Balance at December 31, 2017 | 153,774,756 |
| | $ | 1,538 |
| | $ | (102,443 | ) | | $ | 945,614 |
| | $ | 1,181 |
| | $ | — |
| | $ | 845,890 |
|
See accompanying notes.
PDL BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities | | | | | |
| Net income | $ | 110,701 |
| | $ | 63,659 |
| | $ | 332,795 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Amortization of convertible notes and term loan offering costs | 11,038 |
| | 10,009 |
| | 12,963 |
|
| Amortization of intangible assets | 24,689 |
| | 12,028 |
| | — |
|
| Asset impairment loss | — |
| | 3,735 |
| | — |
|
| Change in fair value of royalty rights - at fair value | (162,327 | ) | | (16,196 | ) | | (68,367 | ) |
| Change in fair value of derivative asset | 49 |
| | 906 |
| | (985 | ) |
| Change in fair value of anniversary payment and contingent consideration | 349 |
| | (3,716 | ) | | — |
|
| Other amortization, depreciation and accretion of embedded derivative | 2,366 |
| | 18 |
| | 40 |
|
| Inventory write-down | 2,012 |
| | 342 |
| | — |
|
| Allowance for doubtful accounts | 76 |
| | — |
| | — |
|
| Loss on extinguishment of notes receivable | — |
| | 51,075 |
| | 3,979 |
|
| (Gain) loss on extinguishment of convertible notes | — |
| | 2,353 |
| | (6,450 | ) |
| Gain on sale of available-for-sale securities | (108 | ) | | (882 | ) | | (997 | ) |
| Escrow receivable | (1,400 | ) | | — |
| | — |
|
| Bargain purchase gain | (9,309 | ) | | — |
| | — |
|
| Stock-based compensation expense | 3,138 |
| | 3,742 |
| | 2,045 |
|
| Deferred income taxes | 39,172 |
| | (10,676 | ) | | 17,251 |
|
| Changes in assets and liabilities: | | | | | |
| Accounts receivable | 5,877 |
| | (34,120 | ) | | — |
|
| Receivables from licensees and other | 5,055 |
| | (6,000 | ) | | 300 |
|
| Prepaid and other current assets | (9,100 | ) | | (1,526 | ) | | (42 | ) |
| Accrued interest on notes receivable | 1,475 |
| | (2,764 | ) | | (2,246 | ) |
| Inventory | (1,120 | ) | | (3,227 | ) | | — |
|
| Other assets | (1,400 | ) | | (757 | ) | | (865 | ) |
| Accounts payable | 10,840 |
| | 6,621 |
| | 76 |
|
| Accrued liabilities | 13,120 |
| | 22,729 |
| | (1,048 | ) |
| Accrued income taxes | (3,346 | ) | | 1,352 |
| | 79 |
|
| Deferred tax liability | — |
| | (787 | ) | | — |
|
| Other long-term liabilities | (1,223 | ) | | 3,800 |
| | 12,937 |
|
| Net cash provided by operating activities | 40,624 |
| | 101,718 |
| | 301,465 |
|
| Cash flows from investing activities | | | | | |
| Acquisition of business, net of cash | — |
| | (109,938 | ) | | — |
|
| Purchases of investments | (23,213 | ) | | (22,952 | ) | | — |
|
| Purchase of investments - other | — |
| | (75,000 | ) | | — |
|
| Maturities of investments-other | 75,000 |
| | — |
| | — |
|
| Proceeds from sales of available-for-sale securities | 39,956 |
| | 4,680 |
| | 1,947 |
|
| Purchase of royalty rights - at fair value | — |
| | (59,500 | ) | | (115,000 | ) |
| Proceeds from royalty rights - at fair value | 107,253 |
| | 72,582 |
| | 43,407 |
|
| Sale of royalty rights - at fair value | 108,169 |
| | — |
| | — |
|
| Purchase of notes receivable | — |
| | (9,010 | ) | | (35,235 | ) |
| Repayment of notes receivable | 144,829 |
| | 54,653 |
| | 25,242 |
|
| Proceeds from sales of assets held for sale | 8,190 |
| | — |
| | — |
|
| Purchase of property and equipment | (1,297 | ) | | (25 | ) | | (9 | ) |
| Net cash provided by (used in) investing activities | 458,887 |
| | (144,510 | ) | | (79,648 | ) |
| Cash flows from financing activities | | | | | |
| Proceeds from term loan | — |
| | — |
| | 100,000 |
|
| Repayment of term loan | — |
| | (25,000 | ) | | (75,000 | ) |
| Repurchase of convertible notes | — |
| | (120,000 | ) | | (220,397 | ) |
| Payment of debt issuance costs | — |
| | (3,204 | ) | | (607 | ) |
| Proceeds from issuance of convertible notes | — |
| | 150,000 |
| | — |
|
| Purchase of call options | — |
| | (14,400 | ) | | — |
|
| Payment of anniversary payment | (87,007 | ) | | — |
| | — |
|
| Cash received from noncontrolling interest holder | — |
| | 250 |
| | — |
|
| Cash paid for purchase of noncontrolling interest | (2,170 | ) | | — |
| | — |
|
| Repurchase and retirement of common stock | (30,000 | ) | | — |
| | — |
|
| Cash dividends paid | (222 | ) | | (16,583 | ) | | (98,307 | ) |
| Net cash used in financing activities | (119,399 | ) | | (28,937 | ) | | (294,311 | ) |
| Net increase (decrease) in cash and cash equivalents | 380,112 |
| | (71,729 | ) | | (72,494 | ) |
| Cash and cash equivalents at beginning of the year | 147,154 |
| | 218,883 |
| | 291,377 |
|
| Cash and cash equivalents at end the year | $ | 527,266 |
| | $ | 147,154 |
| | $ | 218,883 |
|
See accompanying notes
PDL BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Supplemental cash flow information | | | | | |
| Cash paid for income taxes | $ | 43,366 |
| | $ | 50,000 |
| | $ | 168,000 |
|
| Cash paid for interest | $ | 9,286 |
| | $ | 11,410 |
| | $ | 16,987 |
|
| Supplemental schedule of non-cash investing and financing activities | | | | | |
| Stock issued to settle debt | $ | — |
| | $ | — |
| | $ | 9,794 |
|
| Conversion of notes receivable to common stock investment | $ | — |
| | $ | — |
| | $ | 6,567 |
|
| Warrants received for notes receivable | $ | — |
| | $ | 2,342 |
| | $ | — |
|
| Accrued Anniversary Payment associated with the acquisition of a business | $ | — |
| | $ | 87,007 |
| | $ | — |
|
| Accrued contingent consideration associated with the acquisition of a business | $ | — |
| | $ | 47,360 |
| | $ | — |
|
| Asset held for sale reclassified from notes receivable to other assets | $ | 10,000 |
| | $ | — |
| | $ | — |
|
| Extinguishment of notes receivable | $ | 43,909 |
| | $ | — |
| | $ | — |
|
See accompanying notes
PDL BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
1. Organization and Business
PDL BioPharma, Inc. and its subsidiaries (collectively, the “Company”) seeks to provide a significant return for its stockholders by acquiring and managing a portfolio of companies, products, royalty agreements and debt facilities in the biotechnology, pharmaceutical and medical device industries. In 2012, the Company began providing alternative sources of capital through royalty monetizations and debt facilities, and in 2016, the Company began acquiring commercial-stage products and launching specialized companies dedicated to the commercialization of these products. To date, the Company has consummated seventeen of such transactions, of which nine are active and outstanding. At December 31, 2017, one debt transaction is outstanding, representing deployed capital of $20.0 million: CareView Communications, Inc. (“CareView”); one hybrid royalty/debt transaction is outstanding, representing deployed capital of $44.0 million: Wellstat Diagnostics, LLC (a/k/a/ Defined Diagnostics, LLC (“Wellstat Diagnostics”); and five royalty transactions are outstanding, representing deployed capital of $396.1 million, respectively: KYBELLA®, AcelRx Pharmaceuticals, Inc. (“AcelRx”), The Regents of the University of Michigan (“U-M”), Viscogliosi Brothers, LLC (“VB”) and Depomed, Inc. and Depo DR Sub, LLC (together, “Depomed”)obtain internal-use software (and hosting arrangements that include an internal use software license). The Company’s equityCompany 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 loan investments in Noden Pharma DAC, Inc. and Noden Pharma USA, Inc. (together, and including their respective subsidiaries, “Noden”) represent deployed capital of $179.0 million, respectively, and its converted equity and loan investment in LENSAR, Inc. (“LENSAR”) represents deployed capital of $40.0 million.no adjustment to prior year Consolidated Financial Statements was required.
The Company operates in three segments designated as Income Generating Assets, Pharmaceutical and Medical Devices.
The Company’s Income Generating Assets segment consists of revenue derived from (i) notes and other long-term receivables, (ii) royalty rights - at fair value, (iii) equity investments and (iv) royalties from issued patents in the United States and elsewhere, covering the humanization of antibodies, which the Company refers to as the Queen et al. patents. The Company’s Pharmaceutical segment consists of revenue derived from branded prescription medicine product sold under the name Tekturna® and Tekturna HCT® in the United States and Rasilez® and Rasilez HCT® in the rest of the world (collectively, the “Noden Products” or “Tekturna”) sales. The Company’s Medical Devices segment consists of revenue derived from the LENSAR® Laser System sales.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements of PDL Biopharma, Inc. and its subsidiaries (collectively, the Company“Company” or “PDL”) have been prepared in accordance with U.S. 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 subsidiaries.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 directorsdirectors; 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 Accounting Standard Codification (“ASC”)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. TheWhile 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 includeinclude: 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 - at fair value,rights; product revenue recognition and allowanceallowances for customer credits,rebates; the valuation of inventory,notes receivable and inventory; the assessment of recoverability of goodwill and intangible assets and their estimated useful lives,lives; the valuation and recognition of share-based compensation,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 contingent consideration estimates.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. TheUnder the Going Concern Basis, the Company has evaluated its operating segments in accordance with ASC 280, and hashad identified three4 reportable segments: Medical Devices, Strategic Positions, Pharmaceutical and Income Generating Assets, PharmaceuticalAssets.
Severance and Medical Devices atretention
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, 2017.2020, 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, limitlimits 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, 2017 and 2016,2020, the Company had $76,000an investment in a privately held company AEON BioPharma, Inc., including its ownership of Alphaeon 1, LLC, (formerly collectively referred to as “Alphaeon” and zero allowancecurrently 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 doubtful accounts, respectively.equity method accounting given its prior percentage ownership in Evofem and the ability to exercise significant influence. The Company provides an allowance for doubtful accounts based on experience and specifically identified risks. Accounts receivable are carried atelected the fair value and charged off againstmethod to account for its investment in Evofem as it believed it better reflected economic reality, the allowance for doubtful accounts whenfinancial reporting of the Company determines that recovery is unlikelyinvestment and the Company cease collection efforts.
Investments
The Company’s investments include available-for-sale investments, equity method investments and cost method investmentscurrent value of the asset. Changes in certain publicly traded companies and privately-held companies.
All marketable securities are classified as available-for-sale. Available-for-sale securities are carried at fair value based on quoted market prices and observable inputs, with unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. The Company classify marketable securities thatthe Evofem equity investment are available for use in current operations as current assetspresented in the Consolidated Balance Sheets. Realized gains and losses and declinesStatements of Operations as discontinued operations. All shares of common stock of Evofem owned by PDL were distributed to the Company’s stockholders in value judged to be other than temporary for available-for-sale securities are included in “Interest and other income, net.” The costMay 2020. As of securities sold is based onDecember 31, 2020, the specific identification method.
On July 1, 2016, Noden Pharma DAC enteredCompany held 3.3 million warrants convertible into Evofem common stock at an asset purchase agreement (“Noden Purchase Agreement”) where by it purchased from Novartis Pharma AG (“Novartis”)exercise price of $6.38 per share. Under the exclusive worldwide rights to manufacture, market, and sell the Noden Products and certain related assets and assumed certain related liabilities (the “Noden Transaction”). Upon the consummation of the Noden Transaction, a noncontrolling interest holder acquired a 6% equity interest in Noden. The equity interest of the noncontrolling interest holder was subject to vesting and repurchase rights over a four-year period. In May 2017, such equity interest was repurchased for $2.2 million in cash by the Company. The Company accounted for the repurchase in accordance with ASC 810 and recognized the difference betweenGoing Concern Basis, the fair value of the consideration paidwarrants was estimated using recently quoted market prices of the underlying equity security and the amount by whichBlack-Scholes option pricing model. In addition to these inputs, under the noncontrolling interestLiquidation Basis, a discount is adjusted for in equity attributableapplied to the Company.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 consolidates Noden underevaluated the voting interest modelfair 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, 20172020 and 2016. For additional information abouton the consolidationCompany’s Consolidated Balance Sheet as Other long-term assets as of Noden see Note 21.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. TheUnder 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 market prices in active markets for similaridentical assets and liabilities, usingquoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are or can be corroborated by observable market based inputsdata for substantially the full term of the assets or unobservable market based inputs corroborated by market data,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
TheUnder the Going Concern Basis, the Company accountsaccounted for its notes receivable at amortized cost, net of unamortized origination fees, if any, and adjusted for any allowance for loanimpairment losses. Interest iswas accreted or accrued to “Interest revenue” using the effective interest method. When and if supplemental payments arewere received from certain of these notes and other long-term receivables, an adjustment to the estimated effective interest rate iswas affected prospectively.
The Company evaluatesevaluated the collectability of both interest and principal for each note receivable and loan to determine whether it is impaired. A note receivable or loan iswas 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 iswas considered to be impaired, the amount of loss iswas 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 iswas collateralized and the Company expectsexpected repayment to be provided solely by the collateral. Impairment assessments requirerequired significant judgments and arewere based on significant assumptions related to the borrower’s credit risk, financial performance, expected sales, and estimated fair value of the collateral.
The Company recordsrecorded interest on an accrual basis and recognizesrecognized it aswas earned in accordance with the contractual terms of the credit agreement, to the extent that such amounts arewere expected to be collected. When a note receivable or loan becomesbecame past due, or if management otherwise doesdid not expect that principal, interest, and other obligations due willwould be collected in full, the Company will generally placeplaced the note receivable or loan on non-accrualan impaired status and ceaseceased recognizing interest income on that note receivable or loan until all principal andloan. Any interest due has been paidpayments received for notes receivable or until such time thatloans 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 believesrecognized $2.3 million of interest revenue for the borrower has demonstratedCareView note receivable as a result of cash interest payments made during the ability to repay its current and future contractual obligations. Any uncollected interest related to prior periods is reversed from income inyear.
As of December 31, 2020, the period that collectionCompany had 1 note receivable investment with a Liquidation Basis value of approximately $0.7 million. At December 31, 2019, under the interestGoing Concern Basis, the Company had 2 note receivable isinvestments, which were determined to be doubtful. However, the Company may make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection.
At December 31, 2017, the Company had three notes receivable investments on non-accrual statusimpaired, with a cumulative investment cost and fair value of approximately $70.7$52.1 million and $71.3$57.3 million, respectively, compared to four note receivable investments on non-accrual atas of this date. During the eight months ended August 31, 2020 and the years ended December 31, 2016 with a cumulative investment cost2019, and fair value2018, the Company did not recognize any losses on extinguishment of approximately $105.3 million and $107.4 million, respectively.notes receivable.
There were 0 impairment losses on notes receivable for the eight months ended August 31, 2020. During the years ended December 31, 2017, 20162019 and 2015,2018, the Company recognized lossesrecorded an impairment loss of zero, $51.1$10.8 million and $4.0$8.2 million, respectively, on extinguishment of notesrelated to the CareView note receivable. For additional information about the year ended December 31, 2017, the Company recognized $3.1 million of interest revenue forimpairment loss recorded on the CareView note receivable, investment as result of cash interest payments made during fiscal year of 2017. For the years ended December 31, 2016see Note 9, Notes and 2015, the Company did not recognize any interest for note receivable investments on non-accrual status.Other Long-Term Receivables.
Inventory
Under the Going Concern Basis, Inventory, which consistsconsisted of raw material,materials, work-in-process and finished goods, iswas stated at the lower of cost or marketnet realizable value. The Company determinesdetermined cost using the first-in, first-out method. Inventory levels arewere analyzed periodically and written down to their net realizable value if they havehad become obsolete, havehad a cost basis in excess of its expected net realizable value or arewere in excess of expected requirements. The Company evaluates for potential excess inventory by analyzinganalyzed current and future product demand relative to the remaining product shelf life.life to identify potential excess inventory. The Company buildsbuilt demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. The Company classifiesclassified inventory as current on the Consolidated Balance SheetsSheet when the Company expectsexpected inventory to be consumed for commercial use within the next twelve months.
During the years ended December 31, 2017 and 2016, the Company recognized an inventory write-down of $2.0 million and $0.3 million for the Noden Products that the Company would not be able to sell prior to their expiration. There were no inventory write-downs related to excess and obsolete inventory recorded in the year ended December 31, 2015.
Intangible Assets
IntangibleUnder the Going Concern Basis, intangible assets with finite useful lives consistconsisted primarily of acquired product rights andcustomer relationships, acquired technology and aretrademarks. They were amortized on a straight-line basis over their estimated useful lives, over 10ranging from five years to 15 years. The estimated useful lives associated with finite-lived intangible assets are20 years, which was consistent with the estimated lives of the associated products and may be modified when circumstances warrant.products. Such assets arewere reviewed for impairment when events or circumstances indicateindicated that the carrying value of an asset maywas not be recoverable. An impairment loss would bewas recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition arewere less than its carrying amount. The amount of any impairment iswas measured as the difference between the carrying amount and the fair value of the impaired asset.
Goodwill represents the excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed. The annual test for goodwill impairment is a two-step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step indicates impairment, then, in the second step, the loss is measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of the fair value of the reporting unit over the fair value of all identified assets and liabilities. The Company tests goodwill for impairment annually in December and when events or changes in circumstances indicate that the carrying value may not be recoverable. After completing the Company’s impairment review for the Noden reporting unit during the fourth quarter of 2016, the Company concluded that the goodwill of the Noden reporting unit was impaired. The Company recognized a goodwill impairment loss of $3.7 million as of December 31, 2016.
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:
|
| | | | | | | |
| Leasehold improvements | | Lesser of useful life or term of lease |
| Manufacturing equipment | | 3-5 years |
| Computer and office equipment | | 3 years |
| Transportation equipment | | 3 years |
| Furniture and fixtures | | 7 years |
| Equipment under lease | | Greater of lease term or 5-10 years |
Convertible Notes
The Company has previously issued the February 2018 Notesconvertible notes with a net share settlement feature, meaningfeatures that upon any conversion, the principal amount will be settled in cash and the remaining amount, if any, will be settled in shares of the Company’s common stock. The Company issued the December 2021 Notes with a settlement feature that allowsallow 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 ourits common stock, at the Company’s election, although it is the current intention that they will be net-share settled.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
CostsUnder the Going Concern Basis, costs associated with obtaining long-term debt arewere deferred and amortized over the term of the related debt using the effective interest method. Such costs are presented as a direct deductionreductions from the carrying amount of the long-term debt liability, consistent with debt discounts, on the Company’s Consolidated Balance Sheets.Sheet.
Revenue Recognition
Product The reported results under the Going Concern Basis reflected the application of ASC 606, Revenue from Contracts with Customers (“ASC 606”).
GeneralPolicy Elections and Practical Expedients Taken
TheUpon 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 recognizes revenue from the sale of its products when (i) delivery has occurred, (ii) titlea customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control over a product has transferred (iii) the selling price is fixed or determinable, (iv) collectability is reasonably assuredto a customer are accounted for as a fulfillment cost and the Company has no further performance obligations. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company exercises judgment in determining that collectability is reasonably assured or that services have been delivered in accordance with the arrangement. The Company assesses collectability based primarily on the customer’s payment history and on the creditworthiness of the customer.
Revenues from LENSAR product sales contain multiple elements, including LENSAR® Laser system(s), disposable consumables, procedures, training, installation, warranty and maintenance services. The LENSAR® Laser system, training and installation services is one unit of accounting. All other elements are separate units of accounting. Disposable consumables, warranty and maintenance services are also sold on a stand-alone basis.
For multiple-element arrangements, revenue is allocated to each unit of accounting based on their relative selling prices. Relative selling prices are based first on vendor specific objective evidence of fair value (“VSOE”), then on third-party evidence of selling price (“TPE”) when VSOE does not exist, and then on management's best estimate of the selling price (“ESP”) when VSOE and TPE do not exist.
Because the Company has neither VSOE nor TPE for the LENSAR® Laser systems, the allocation of revenue is based on ESP for the systems sold. The objective of ESP is to determine the price at which the Company would transact a sale, had the product been sold on a stand-alone basis. The Company determines ESP for the LENSAR® Laser systems by considering multiple factors, including, but not limited to, features and functionality of the system, geographies, type of customer, and market conditions. The Company regularly reviews ESP and maintain internal controls over establishing and updating these estimates.
Revenues from Noden Products sales are recognized when shipped to the customer, which includes wholesalers, distributors and pharmacies. Revenues are recorded net of allowances for customer credits, including estimated chargebacks, rebates, discounts, returns, distribution service fees, patient assistance programs, and government rebates, such as Medicare Part D coverage gap reimbursements in the United States and other deductions and returns in the same period the related sales are recorded. Product shipping and handling costs are included in cost of product revenues.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 transfertransfers of the marketing authorization rights were pending. TheDuring this time, the Company presentspresented revenue under the Novartis transition arrangement on a “net” basis and established a reserve for retroactive adjustment to the profit splittransfer with Novartis. As of the third quarter of 2018, Noden Pharma DAC completed the marketing authorization transfers for all territories.
ForIn the periodUnited States, the duration of the profit transfer ran from July 1, 2016 through October 4, 2016. Beginning on October 5, 2016, to December 31, 2017, Noden Pharma USA, Inc. distributed the Noden Products in the United States. TheAt 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 allowances.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 productsProducts 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. The Company presents revenueOutside the United States, the profit transfer ended in the first quarter of 2018.
Except for Noden Products sold by Novartisthe 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 “net”gross basis.
ProvisionsNoden 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 Credits: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 arewere offered various forms of consideration, including allowances, service fees and prompt payment discounts. The Company expects theexpected customers willwould earn prompt payment discounts and, therefore, the Company deductsdeducted the full amount of these discounts from total product sales when revenues arewere recognized. Service fees arewere also deducted from total product sales as they arewere earned.
Rebates and Discounts:Discounts: Allowances for rebates includeincluded 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 iswas based
on statutorynegotiated discount rates and expected utilization as well as historical data. The Company’s estimatesEstimates for expected utilization of rebates arewere based on data received from the customers. Rebates arewere 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. If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.
Chargebacks: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, purchasepurchased directly from the Company’s wholesalers. Contracted customers generally purchasepurchased the product at a discounted price. The wholesalers, in turn, chargescharged 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 maintainsmaintained an accrual for chargebacks based on the estimated contractual discounts on products sold for which the inventory levels on hand in the distribution channel. If actual future chargebacks vary from these estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.chargeback had not been billed.
Medicare Part D Coverage Gap: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. The Company’s estimatesEstimates for the expected Medicare Part D coverage gap arewere based on historical invoices received and in part from data received from the Company’s customers. Funding of the coverage gap iswas 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. If actual future funding varies from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.arrears.
Co-payment Assistance: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: Returns arewere generally estimated and recorded based on historical sales and returns information. Products that exhibitexhibited unusual sales or return patterns due to dating, competition or other marketing matters arewere specifically investigated and analyzed as part of the accounting for sales returns.
Reserves for chargebacks, discounts, rebates, sales allowances and product returns accruals.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 patents covering the humanization of antibodies, which it refers to as the Queen et al. patents, the Company receivesreceived 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 receivesreceived 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 recognizesrecognized royalty revenues when it cancould reliably estimate such amounts and collectability iswas reasonably assured. Under this accounting policy, the royalty revenues the Company reports arereported were not based upon estimates, and such royalty revenues arewere typically reported in the same period in which the Company receivesreceived 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 and Perjeta.®. Other products from the Queen et al. patent licenses, such as Tysabri®, entitleentitled 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. (“Biogen”) that product supply for Tysabri® that was manufactured prior to patent expiry and for which the Company would receive royalties, on, had been extinguished in the United States and was rapidly being reduced in other countries. As a result, the Company anticipates royalties from product sales of Tysabri to be substantiallywere consecutively lower in 2018 and are expected to cease after the first quarter of 2019.2019 during which time they ceased.
Royalty Rights - At Fair Value
Currently,Under the Going Concern Basis, the Company accountsaccounted 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 iswas determined by using a discounted cash flow analysis related to the expected future cash flows to be received. These assets arewere classified as Level 3 assets within the fair value hierarchy, as the
Company’s valuation estimates utilizeutilized significant unobservable inputs, including estimates as to the probability and timing of future sales of the related products. Transaction-related fees and costs arewere expensed as incurred.
TheUnder the Going Concern Basis, the changes in the estimated fair value from investments in royalty rights along with cash receipts in each reporting period arewere presented together on the Company’s Consolidated Statements of IncomeOperations as a component of revenue underLoss from discontinued operations before income taxes.
Under the caption, “Royalty rights - change in fair value.”
RealizedGoing Concern Basis, realized gains and losses on royalty rights arewere recognized as they arewere earned and when collection iswas reasonably assured. Royalty Rights revenue iswas recognized over the respective contractual arrangement period. Critical estimates may includeincluded product demand and market growth assumptions, inventory target levels, product approval, pricing assumptions and pricing assumptions.the impact of competition from other branded or generic products. Factors that could cause a change in estimates of future cash flows includeincluded 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 and a change in the number of treatments. 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.
Foreign Currency HedgingResearch and Development
From time to time,Under the Going Concern Basis, the Company may enter into foreign currency hedgesexpensed research and development costs as incurred. Research and development expenses consisted primarily of engineering, product development, clinical studies to manage exposures arising indevelop and support the normal course of businessCompany’s products, regulatory expenses, and not for speculative purposes.
The Company hedged certain Euro-denominated currency exposures related to royaltiesother costs associated with its licensees’ product sales with Euro forward contracts. In general, those contracts are intended to offset the underlying Euro market riskproducts and technologies that were in the Company’s royalty revenues. The last of those contracts expired in the fourth quarter of 2015development. Research and was settled in the first quarter of 2016. The Company designated foreign currency exchange contracts used to hedge royalty revenues based on underlying Euro-denominated licensee product sales as cash flow hedges.development expenses included employee compensation, including stock-based compensation, supplies, consulting, prototyping, testing, materials, travel expenses, and depreciation.
The fair value of the Euro forward contracts was estimated using pricing models with readily observable inputs from actively quoted markets and was disclosed on a gross basis. The aggregate unrealized gains or losses, net of tax, on the effective component of the hedge was recorded in stockholders’ equity as “Accumulated other comprehensive income.” Realized gains or losses on cash flow hedges are recognized as an adjustment to royalty revenue in the same period that the hedged transaction impacts earnings as royalty revenue. Any gain or loss on the ineffective portion of these hedge contracts is reported in “Interest and other income, net” in the period the ineffectiveness occurs.
Foreign Currency Translation
TheUnder the Going Concern Basis, the Company usesused the U.S. dollar predominately as the functional currency of its foreign subsidiaries. For foreign subsidiaries where the U.S. dollar iswas the functional currency, gains and losses from remeasurement of foreign currency balances into U.S. dollars are included in the Consolidated Statements of Income.Operations. The aggregate net (losses) gains (losses) resulting from foreign currency transactions and remeasurement of foreign currency balances into U.S. dollars that were included in the Consolidated Statements of Income was insignificantOperations amounted to a gain of $0.2 million and a loss of $0.5 million and $0.7 million for all periods presented.the eight months ended August 31, 2020 and the years ended December 31, 2019 and 2018, respectively.
Comprehensive Income (Loss)Loss
Comprehensive income (loss) comprisesUnder the Going Concern Basis, comprehensive loss was comprised of net incomeloss adjusted for other comprehensive income (loss),loss, using the specific identification method, which includes the changes in unrealized gains and losses on cash flow hedges and changes inincluded unrealized gains and losses on the Company’s investments in available-for-sale securities, all net of tax, which are excluded from the Company’s net income.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.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 2017 Tax Cuts Act made significant changes toCompany adopted ASC 842, Leases, on January 1, 2019 using the Internal Revenue Code. These changes include a federal corporate tax rate decrease from a top ratemodified retrospective method for all leases not substantially completed as of 35% to a flat ratethe date of 21%adoption. The reported results for tax years beginning afterthe eight months ended August 31, 2020 and the year ended December 31, 2017,2019 reflect the transitionapplication of U.S. international taxation from a worldwide tax system to a partial territorial system, and temporary full expensing of certain business assets. The Company recognized in its Consolidated Financial StatementsASC 842 guidance while the reported results for the year ended December 31, 2017 estimated tax impacts2018 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 revaluation of deferred tax assets and liabilities. The ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions the Company has made and additional regulatory guidance that may be issued. The accounting is expected to be complete when the Company’s 2017 U.S. corporate income tax return is filed in 2018.
Business Combination
The Company applies ASC 805, Business combinations, pursuant to which the cost of an acquisition is measured as the aggregatepresent value of the fair values atfuture lease payments on the date of exchangeadoption. 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 assets given, liabilities incurred,economic benefits from the use of the identified asset and equity instruments issued.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 directly attributable to the acquisition are expensedfor any existing leases.
The Company adopted a policy of expensing short-term leases, defined as 12 months or less, as incurred. Identifiable
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 contingentOther long-term liabilities acquired or assumedin 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 measured separatelyrecognized at their fairthe commencement date based on the present value asof lease payments over the lease term. The Company used the implicit rate when readily determinable at lease inception. As most of the acquisitionCompany’s leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at the commencement date irrespective ofin determining the extent of any noncontrolling interests. The excess of the (i) the total of cost of acquisition, fairpresent value of lease payments. The Company’s remaining lease terms may include options to extend or terminate the noncontrolling interests and acquisition date fair value of any previously held equity interest inlease when it is reasonably certain that the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recordedCompany will exercise that option. Lease expense for lease payments was recognized on a straight-line basis as goodwill. If the cost of an acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directlyoperating expense in the Consolidated Statements of Income.Operations over the lease term.
Lease AccountingFor lease arrangements with lease and Lease Guaranteenon-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 accounts forleased medical device equipment to customers in operating leases by recording rent expenselease 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 straight-linerelative standalone selling price basis overusing 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 lifecost plus a margin approach. Allocation of the lease, commencing on the date the Company gains possession of leased property. The Company includes tenant improvement allowances and rent holidays received from landlords and the effect of any rent escalation clauses as adjustments to straight-line rent expense over the expected life of the lease.
Capital leases are reflected as a liabilitytransaction 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 if lower,exceeds substantially all of the fair value of the property. Assets under capitalleased 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, arerental income was recognized on a straight-line basis over the lease term. The cost of customer-leased equipment was recorded in propertywithin Property and equipment, net on the Company’s Consolidated Balance Sheets and depreciated in a manner similar to other property and equipment.
Upon the Spin-Off, the Company’s facility leases in Redwood City, California were assigned to Facet. In April 2010, Abbott Laboratories acquired Facet and later renamed the entity AbbVie Biotherapeutics, Inc. (“AbbVie”). However, if AbbVie were to default on its lease obligations, the Company has in substance guaranteed the lease payments for this facility. The Company would also be responsible for lease-related payments including utilities, property taxes, and common area maintenance, which may be as much as the actual lease payments. As of December 31, 2017, the total remaining lease payments, which run through December 2021, were $45.1 million. The carrying value of this lease guarantee was $10.7 million as of December 31, 2017 and is reflected in other long-term liabilities in the Company’saccompanying Consolidated Balance Sheet (see Note 15).
Adopted Accounting Pronouncements
In March 2016,and depreciated over the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, intended to improveequipment’s estimated useful life. Depreciation expense associated with the accounting for share-based payment transactions as partleased equipment under operating lease arrangements was reflected in Cost of its simplification initiative. The ASU requires entities to record all excess tax benefits and tax deficiencies as an income tax benefit or expenseproduct revenue in the statementaccompanying Consolidated Statements of income. The recognition of excess tax benefitsOperations for the eight months ended August 31, 2020 and deficiencies and changes to diluted earnings per share are to be applied prospectively. For tax benefits that were not previously recognized because the related tax deduction had not reduced taxes payable, the Company recorded a $7.7 million cumulative-effect adjustment in retained earnings as of the beginning of 2017, the year of adoption. The Company applied the presentation changes for excess tax benefits from financing activities to operating activities in the statement of cash flows using a prospective transition method. The guidance allows for an election to recognize forfeitures as they occur rather than on an estimated basis. The Company will continue to account for forfeitures on an estimated basis. During the year ended December 31, 2017, there were $0.3 million excess tax benefits recognized2019. 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 Consolidated Statementequipment through pricing and the term of Incomethe 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 classified as an operating activity inrecognized over the Consolidated Statement of Cash Flows.lease term.
Adopted Accounting Pronouncements
In January 2017,June 2016, the FASB issued ASU No. 2017-01, Clarifying the Definition2016-13, Financial Instruments - Credit Losses: Measurement of a Business, included in ASC 805, Business Combinations, which revises the definition of a business. The revised definition clarifies that outputs must be the result of inputs and substantive processes that provide goods or services to customers, other revenue, or investment income.Credit Losses on Financial Instruments. The guidance will be effective foramended the Company's annual and interim reporting periods beginning January 1, 2018, and early adoption is permitted.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 the new definitionASU No. 2016-13 on January 1, 2020 using a modified retrospective approach. The adoption of a business during the first quarter of 2017, and itthis 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 business practices, financial condition, resultscollateral-dependent notes receivable. Estimated credit losses are based on the fair value of operations,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 disclosures.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.
On February 14,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 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). Under current accountingNo. 2018-13, Fair Value Measurement. The new guidance the income tax effects for changes in income tax rates and certain other transactions are recognized in income from continuing operations resulting in income tax effects recognized in accumulated other comprehensive income that don’t reflect the current tax rate of the entity (“stranded tax effects”). ASU 2018-02 allows the Company the option to reclassify these stranded tax effectsmodifies 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 change in the federal income tax rate as a result of the Tax Cuts and Jobs Act to retained earnings.
We adopted the provisions of ASU 2018-02 in the fourth quarter of 2017 and elect to reclassify the stranded tax effects related to the Tax Cuts and Job Act from accumulated comprehensive income to retained earnings in the year ended December 31, 2017. As a result ofConsolidated 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 2018-02,No. 2018-15 on January 1, 2020 using the Company’s retained earningsprospective transition option. The adoption did not have an effect on the Consolidated Financial Statements on the adoption date and accumulated other comprehensive loss increased by approximately $0.2 million.no adjustment to prior year Consolidated Financial Statements was required.
Recently Issued Accounting Pronouncements
In May 2014,December 2019, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers2019-12, Income Taxes: Simplifying the Accounting for Income Taxes. This guidance requires quantitativeremoves certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and qualitative disclosures covering the nature, amount, timingrecognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and uncertaintysimplifies other areas of revenue and cash flows arising from customer contracts, including disclosures on significant judgments made when applying the guidance. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of adopting the guidance being recognized at the date of initial application (modified retrospective method). The new standardASC 740. This ASU will be effective as of January 1, 2018for public companies for fiscal years, and will be adopted using the modified retrospective method.
Based on an assessment performed, the Company concluded that for the Income Generating Asset segment revenue from financial instruments which are accounted for in accordance with ASC 825, Fair Value Option, and will not be subject to the application of ASU 2014-09. As a result, the Company believes that Royalty Rights - At Fair Value are financial instruments that continue to beinterim periods within the scope of Subtopic 825 and will be specifically exempted from the new revenue standard. Further, revenue from note receivable investments which are accounted for in accordance with ASC 310, Receivables, will not be subject to the application of ASU 2014-09. As a result, the Company believes that note receivable investments are contractual rights and obligations that continue to be within the scope of Subtopic 310 and will be specifically exempted from the new revenue standard.
For the Pharmaceutical segment, the Company will accelerate the recognition of revenues that have been recognized on a sell through method to the periods in which the sales occur, subject to the constraint on variable consideration. Except for transactions with third party logistic providers, the change is not expected to have a material impact on the Company’s Consolidated Financial Statements.
The Company continues to evaluate the impact of the new guidance to the Medical Devices segment.
The Company expects the new disclosure requirements to have an impact to the Company’s existing disclosures, as well as require new disclosures, which will impact the information reported in the Company’s Consolidated Financial Statements.
The Company is currently finalizing its evaluation of the effect of the guidance on the Company’s historical financial statements and disclosures. The Company will finalize its accounting assessment and quantitative impact of the adoption of the guidance during the first quarter of fiscal year 2018. As the Company completes its evaluation of this new standard, new information may arise that could change the Company’s current understanding of the impact to revenue and expense recognized and required disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which seeks to increase transparency and comparability among organizations by, among other things, recognizing lease assets and lease liabilities on the balance sheet for leases classified as operating leases under previous GAAP and disclosing key information about leasing arrangements. ASU No. 2016-02 becomes effective forthose fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early
adoption permitted. The Company is currently evaluating the provisions of ASU No. 2016-02 and assessing the impact, it may have on the Company’s Consolidated Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The new guidance amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses. ASU No. 2016-13 has an effective date of the fiscal years beginning December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating ASU 2016-13 and assessing the impact, it may have to the Company’s consolidated results of operations, financial position and cash flows.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The new standard provides for specific guidance how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods with those years, beginning after December 15, 2017.2020. Early adoption is permitted. The Company is currently evaluating ASU 2016-15 and assessing the impact, it may have to the Company’s Consolidated Statement of Cash Flows.
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires companies to account for the income tax effects of intercompany sales and transfers of assets other than inventoryCertain amendments in the period in which the transfer occurs. The new standard is effective for public business entities for annual periods beginning after December 15, 2017 (i.e. 2018 for a calendar-year entity). Early adoption is permitted for all entities as of the beginning of an annual period. The guidance is tothis update must be applied usingon a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective approach withbasis through a cumulative catch-upeffect adjustment to opening retained earningsearnings/(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 currently analyzingvalued as the impactsum of ASU No. 2016-16its 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 12 equal quarterly installments from January 2021 to October 2023. An additional $3.9 million will be paid in 4 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:
| | | | | | | | | | | | | | | | | | | | |
| | 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 | | 0 | | | (41) | | | 196 | |
| Impairment of intangible assets | | 0 | | | 22,490 | | | 152,330 | |
| Change in fair value of anniversary payment and contingent consideration | | 0 | | | 0 | | | (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 | | | 0 | |
| Loss on classification as held for sale | | (28,904) | | | 0 | | | 0 | |
| Total non-operating (expense) income, net | | (54,269) | | | 36,402 | | | 0 | |
| 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 Financial Statements.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 | |
In November 2016,
The carrying amounts of the FASBmajor 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 ASU No. 2016-18, Restrictedwarrants 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, which requires entities to show and Cash Equivalents
As of December 31, 2020 and 2019, the changesCompany had invested its excess cash balances primarily in totalcash and money market funds. The fair values of cash cash equivalents restricted cash and restricted cash equivalents inapproximate their carrying values due to the statementshort-term nature of cash flows. As a result, entities will no longer present transfers betweensuch financial instruments.
The following table summarizes the Company’s cash and cash equivalents by significant investment category reported as cash and restricted cash inequivalents on the statementConsolidated 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 flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line itemat 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 the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions on the balance sheet. The reconciliation can either be presented either on the face of the statement of cash flows or in the notes to the consolidated financial statements. The new standard is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods therein and is to be applied retrospectively. Early adoption is permitted. The Company is currently analyzing the impact of ASU No. 2016-18 on the Company’s Consolidated Financial Statements.October 1, 2020.
3. Net Income per Share
|
| | | | | | | | | | | |
| Net Income per Basic and Diluted Share | Year Ended December 31, |
| (in thousands, except per share amounts) | 2017 | | 2016 | | 2015 |
| Numerator | | | | | |
| Income attributable to the Company’s stockholders used to compute net income per diluted share | $ | 110,748 |
| | $ | 63,606 |
| | $ | 332,795 |
|
| | | | | | |
| Denominator | | | | | |
| Total weighted-average shares used to compute net income per basic share | 155,394 |
| | 163,805 |
| | 163,386 |
|
| Effect of dilutive stock options | — |
| | — |
| | 16 |
|
| Restricted stock awards | 863 |
| | 387 |
| | 152 |
|
| Shares used to compute net income per diluted share | 156,257 |
| | 164,192 |
| | 163,554 |
|
| | | | | | |
| Net income per basic share | $ | 0.71 |
| | $ | 0.39 |
| | $ | 2.04 |
|
| Net income per diluted share | $ | 0.71 |
| | $ | 0.39 |
| | $ | 2.03 |
|
The Company computes net income per diluted share usingrecognized approximately $0.8 million of gains on sales of available-for-sale securities in the sumyear 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 weighted-average numberfollowing:
| | | | | | | | | | |
| (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 common and common equivalent shares outstanding. Common equivalent shares used in the computationinventory at Noden classified as held for sale as of net income per diluted share include shares that may be issued pursuant to outstanding stock options and restricted stock awards, the 4.0% Convertible Senior Notes due February 1, 2018 (the “February 2018 Notes”) and the 2.75% Convertible Senior Notes due December 1, 2021 (the “December
2021 Notes”), in each case, on a weighted average basis for the period that the notes were outstanding, including the effect of adding back interest expense and the underlying shares using the if converted method.
February 2018 Notes Purchased Call Option and Warrant Potential Dilution
The Company excluded from its calculation of net income per diluted share 12.2 million, 12.2 million and 23.8 million shares for the years ended December 31, 2017, 2016 and 2015, for warrants issued in February 2014, because the exercise price of the warrants exceeded the volume-weighted average share price (“VWAP”) of the Company’s common stock and conversion of the underlying February 2018 Notes is not assumed, therefore no stock would be issuable upon conversion; however, these securities could be dilutive in future periods. The purchased call options, issued in February 2014, will always be anti-dilutive; therefore 13.8 million, 13.8 million and 26.9 million shares were excluded from the Company’s calculation of net income per diluted share for the years ended December 31, 2017, 2016 and 2015 (see Note 14).
December 2021 Notes Capped Call Potential Dilution
In November 2016, the Company issued $150.0 million in aggregate principal of 2.75% Convertible Senior Notes due December 1, 2021 (the “December 2021 Notes”), which provide in certain situations for the conversion of the outstanding principal amount of the December 2021 Notes into shares of the Company’s common stock at a predefined conversion rate.2019. See Note 14, “Convertible Notes and Term Loans”4, Discontinued Operations Classified as Assets Held for Sale, for additional information on the conversion rates on the Company’s convertible debt. In conjunction with the issuanceinformation. Noden was sold in September 2020.
(2) The table above includes amounts held by LENSAR as of the December 2021 Notes, the Company entered into capped call transaction, with certain counterparties. The capped call transaction is 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. The Company has excluded the capped call transaction from the diluted EPS computation as such securities would have an antidilutive effect and those securities should be considered separately rather than in the aggregate in determining whether their effect on diluted EPS would be dilutive or antidilutive. For additional information regarding the capped call transaction related to the Company’s December 2021 Notes; see Note 14.
Anti-Dilutive Effect of Stock Options and Restricted Stock Awards
For the years ended December 31, 2017, 2016 and 2015, the Company excluded approximately 502,000, zero and 41,000 shares underlying outstanding stock options, respectively, calculated2019. LENSAR was spun-off on a weighted-average basis, from the Company’s net income per diluted share calculations because their effect was anti-dilutive. For the years ended December 31, 2017, 2016 and 2015, the Company excluded approximately 1,830,000, 1,107,000, and 450,000 shares, respectively, underlying restricted stock awards, calculated on a weighted-average basis, from the Company’s net income per diluted share calculations because their effect was anti-dilutive.October 1, 2020.
4.
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 or exit price.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 market prices in active markets for similaridentical assets and liabilities, usingquoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable market-based inputs or unobservable market-based inputscan be corroborated by observable market data;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: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 | | | $ | 0 | | | $ | 0 | | | $ | 131,264 | |
Corporate securities (1) | | | | | | | | | | 82,267 | | | 0 | | | 0 | | | 82,267 | |
Warrants (2) | | | | | | | | | | 0 | | | 14,152 | | | 0 | | | 14,152 | |
Royalty rights - at fair value (3) | | | | | | | | | | 0 | | | 0 | | | 266,196 | | | 266,196 | |
| Total | | | | | | | | | | $ | 213,531 | | | $ | 14,152 | | | $ | 266,196 | | | $ | 493,879 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
| (in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Financial assets: | | | | | | | | | | | | | | | | |
| Money market funds | | $ | 417,563 |
| | $ | — |
| | $ | — |
| | $ | 417,563 |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | 4 |
|
| Certificates of deposit | | — |
| | — |
| | — |
| | — |
| | — |
| | 75,000 |
| | — |
| | 75,000 |
|
| Corporate securities | | 4,848 |
| | — |
| | — |
| | 4,848 |
| | — |
| | — |
| | — |
| | — |
|
| Commercial paper | | — |
| | — |
| | — |
| | — |
| | — |
| | 19,987 |
| | — |
| | 19,987 |
|
| Warrants | | — |
| | 29 |
| | — |
| | 29 |
| | — |
| | 78 |
| | — |
| | 78 |
|
| Royalty rights - at fair value | | — |
| | — |
| | 349,223 |
| | 349,223 |
| | — |
| | — |
| | 402,318 |
| | 402,318 |
|
| Total | | $ | 422,411 |
| | $ | 29 |
| | $ | 349,223 |
| | $ | 771,663 |
| | $ | 4 |
| | $ | 95,065 |
| | $ | 402,318 |
| | $ | 497,387 |
|
| | | | | | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | | | | | | | |
| Anniversary payment | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 88,001 |
| | $ | 88,001 |
|
| Contingent consideration | | — |
| | — |
| | 42,000 |
| | 42,000 |
| | — |
| | — |
| | 42,650 |
| | 42,650 |
|
| Total | | $ | — |
| | $ | — |
| | $ | 42,000 |
| | $ | 42,000 |
| | $ | — |
| | $ | — |
| | $ | 130,651 |
| | $ | 130,651 |
|
(1) Corporate securities are classified as “Long-term assets held for sale” on the December 31, 2019 Consolidated Balance Sheet.
As(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, 2016,2019.
(3) Royalty rights are classified as “Long-term assets held for sale” on the Company held $75.0 million in a short-term certificateConsolidated Balance Sheet as of deposit, which was designated asDecember 31, 2019.
Money Market Funds - The fair values of cash collateral for the letter of credit issued with respectequivalents approximate their carrying values due to the anniversary payment under the Noden Purchase Agreement (as defined in Note 21 below). On July 3, 2017, the anniversary paymentshort-term nature of $89.0 million was paid pursuant to the Noden Purchase Agreement and on July 31, 2017, the certificate of deposit matured.such financial instruments.
There have been no transfers between levels during the years ended December 31, 2017 and 2016. The Company recognizes transfers between levels on the date of the event or change in circumstances that caused the transfer.
Certificates of Deposit
The fair value of the certificates of deposit was determined using quoted market prices for similar instruments and non-binding market prices that were corroborated by observable market data.
Corporate Securities
- Corporate securities consist primarilyconsisted of U.S. corporate equity holdings. The fair valuecommon stock shares of corporate securities is estimated using market quoted prices.Evofem. For additional information, see Note 4, Discontinued Operations Classified as Assets Held for Sale, and Note 5, Investment in Evofem Biosciences, Inc.
Commercial Paper
Commercial paper securities consisted primarily of U.S. corporate debt holdings. The fair value of commercial paper securities was estimated using recently executed transactions or market quoted prices, where observable. Independent pricing sources were also used for valuation.
Warrants
- Warrants consist primarily of purchased call optionsrights to buy U.S. corporate equity holdingspurchase shares of common stock in Evofem and derivative assets acquiredCareView, see Note 4, Discontinued Operations Classified as part of note receivable investments.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 estimated usingbased upon recently quoted market prices or estimated fair value of the underlying equity security and the Black-Scholes option pricing model.model and adjusted by an estimated discount to sell.
Royalty Rights - At Fair Value
DepomedDuring 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 “Depomed“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 DepomedAssertio 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 DepomedAssertio and $0.8 million in transaction costs.
The rights acquired include Depomed’sincluded Assertio’s royalty and milestone payments accruing from and after October 1, 2013: (a) from Santarus, Inc. (“Santarus”) (which, which was subsequently acquired by Salix Pharmaceuticals, Inc. (“Salix”), 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 recently approved fixed-dose combination of Invokana® (canagliflozin) (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 Depomed’sAssertio’s license agreement with Boehringer Ingelheim, including its recently approved products, Jentadueto XR® and Synjardy XR®; and (e) from LG Life SciencesChem, Ltd. and ValeantBausch Health for sales of extended-release metformin tablets in Korea and Canada, respectively.
UnderThe Company determined that its royalty purchase interest in Depo DR Sub, LLC represented a variable interest in a variable interest entity. However, the termsCompany 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 DepomedCompany 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 receiveswould have received all royalty and milestone payments due under license agreements between DepomedAssertio and its licensees until the Company has received payments equal to two times the cash payment it made to Depomed,Assertio, or approximately $481.0 million, after which all net payments received by Depomed will beAssertio would have been shared evenlyequally between the Company and Depomed.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 DepomedAssertio 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, 2017 and 2016,2018, in conjunction with the amendment described above, 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 does not havewas provided the power to direct the activities of Depo DR Sub, that most significantly impact Depo DR Sub, LLC’s economic performanceLLC and is not the primary beneficiary of Depo DR Sub, LLC; therefore, Depo DR Sub, LLC is not 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. The fair value ofUnder the financial asset acquired was determined by using a discounted cash flow analysis related to the expected future cash flows to be generated by each licensed product. ThisGoing 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 arewere based upon expected royalties from sales of licensed products over approximately a nine-yearnine-year period. Significant judgment is required in selecting appropriate discount rates. The discount rates utilized range from 10% to 24%. Significant judgment is required in selecting appropriate discount rates. At December 31, 2017, an evaluation was performed to assess those rates and general market conditions potentially affecting the fair market value of the financial asset. Should these discount rates increase or decrease by 2.5%, the fair value of the asset could decrease by $14.1 million or increase by $16.2 million, respectively. A third-party expert was engaged to assist management develop its original estimate of the expected future cash flows. The estimated fair value of the asset is subject to variation should those cash flows vary significantly from those estimates. The Company periodically assesses the expected future cash flows and to the extent such payments are greater or less than its initial estimates, or the timing of such payments is materially different than the original estimates, the Company will adjust the estimated fair value of the asset. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $5.8 million or decrease by $5.8 million, respectively.
When the Company acquired the Depomed royalty rights, Glumetza was marketed by Santarus. In January 2014, Salix acquired Santarus and assumed responsibility for commercializing Glumetza, which was generally perceived to be a positive development because of Salix’s larger sales force and track record in the successful commercialization of therapies. In late 2014, Salix made a number of disclosures relating to an excess of supply at the distribution level of Glumetza and other drugs that it commercialized and the practices leading to this excess of supply which were under review by Salix’s audit committee in relation to the related accounting practices. Because of these disclosures and the Company’s lack of direct access to information as to the levels of inventory of Glumetza in the distribution channels, the Company commenced a review of all public statements by Salix, publicly available historical third-party prescription data, analyst reports and other relevant data sources. The Company also engaged a
third-party expert to specifically assess estimated inventory levels of Glumetza in the distribution channel and to ascertain the potential effects those inventory levels may have on expected future cash flows. Salix was acquired by Valeant in early April 2015. In mid-2015, Valeant implemented two price increases on Glumetza. At year-end 2015, a third-party expert was engaged by the Company to assess the impact of the Glumetza price adjustments and near-term market entrance of generic equivalents to the expected future cash flows. Based on the analysis performed, management revised the underlying assumptions used in the discounted cash flow analysis at year-end 2015. In February and August of 2016, a total of three generic equivalents to Glumetza were approved to enter the market. In February 2016, Lupin Pharmaceuticals, Inc. and in August 2017, Teva Pharmaceutical Industries Ltd., launched a generic equivalent approved product. To date, the third generic equivalent to Glumetza has not launched.
In May 2017, the Company received notification that a subsidiary of Valeant had launched an authorized generic equivalent product in February 2017, and the Company received royalties on such authorized generic equivalent product under the same terms as the branded Glumetza product, retroactive to February 2017.
At December 31, 2017, management re-evaluated, with assistance of a third-party expert, the market share data, the gross-to-net revenue adjustment assumptions and Glumetza demand data, including the delay in launch of additional generic equivalent products and the entry of an authorized generic product by Valeant. These data and assumptions are based on available but limited information. At December 31, 2017, management updated the expected future cash flows based on the current period demand and supply data of Glumetza and the authorized generic equivalent product launched by Valeant.
As of December 31, 2017, the Company’s discounted cash flow analysis reflects its expectations as to the amount and timing of future cash flows up to the valuation date, including future cash flows for the authorized generic equivalent product. The Company continues to monitor whether the generic competition further affects sales of Glumetza and thus royalties on such sales paid to the Company, and the impact of the launched authorized generic equivalent. Due to the uncertainty around Valeant’s marketing and pricing strategy, as well as the recent generic competition and limited historical demand data after generic market entrance, the Company may need to further evaluate future cash flows in the event of more rapid reduction or increase in market share of Glumetza and its authorized generic equivalent product and/or a further erosion in net pricing. In February 2016, at the Company’s request and pursuant to the Depomed Royalty Agreement, Depomed exercised its audit right with respect to Glumetza royalties. The independent auditor engaged to perform the royalty audit completed it in July 2017, and based upon the results of the audit, Depomed, on behalf of the Company, filed a lawsuit on September 7, 2017, against Valeant and one of its subsidiaries, claiming damages for unpaid royalties, fees and interest. Valeant, Depomed and the Company entered into a settlement agreement on October 27, 2017 whereby the parties agreed to dismiss the litigation, with prejudice, and Valeant agreed to pay to Depomed $13.0 million. The full amount of the settlement payment was transferred to the Company2020, under the terms ofLiquidation Basis, the Depomed Royalty Agreement in November of 2017.
On May 31, 2016, the Company obtained a notification indicating that the U.S. Food and Drug Administration (“FDA”) approved Jentadueto XR for use in patients with Type 2 diabetes. In June 2016, the Company received a $6.0 million FDA approval milestone pursuant to the terms of the Depomed Royalty Agreement. The product approval was earlier than initially expected. Based on the FDA approval and anticipated timing of the product launch, the Company adjusted the timing of futureexpected cash flows and discount rate used in the discounted cash flow model at June 30, 2016. At year-end 2017, management re-evaluated, with assistance of a third-party expert, the cash flow assumptions for Jentadueto XR and revised the discounted cash flow model. As of December 31, 2017, the Company’s discounted cash flow analysis reflects its expectations as to the amount and timing of future cash flows up to the valuation date.
On September 21, 2016, the Company obtained a notification indicating that the FDA approved Invokamet XR for use in patients with Type 2 diabetes. The product approval triggered a $5.0 million approval milestone payment to the Company pursuant to the terms of the Depomed Royalty Agreement. Based on the FDA approval and timing of the product launch, the Company adjusted the timing of future cash flows and discount rate used in the discounted cash flow model at December 31, 2017.
On December 13, 2016, the Company obtained a notification indicating that the FDA approved Synjardy XR for use in patients with Type 2 diabetes. The product approval triggered a $6.0 million approval milestone payment to the Company pursuant to the terms of the Depomed Royalty Agreement. Based on the FDA approval and the April 2017 launch of Synjardy XR by Boehringer Ingelheim, the Company adjusted the timing of future cash flows and discount rate used in the discounted cash flow model at December 31, 2017.
As of December 31, 2017, the fairrealizable value of the Assertio royalty asset acquired as reportedwas $204.5 million and included in the Company’s Consolidated Balance Sheet was $232.0 million and“Royalty assets” in the maximum loss exposure was $232.0 million.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 VB,Viscogliosi Brothers, LLC (“VB”) whereby VB conveyed to the Company the right to receive royalties payable on sales of a spinal implant that has 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 includesincluded royalties accruing from and after April 1, 2014. Under the terms of the VB Royalty Agreement, the Company receiveswas eligible to receive all royalty payments due to VB pursuant to certain technology transfer agreements between VB and Paradigm Spine until the Company has received payments equal to 2.3 times the cash payment made to VB, after which all rights to receive royalties willwould be returned to VB. VB mayVB’s ability to repurchase the royalty right at any time on or before June 26, 2018, for a specified amount. The chief executive officeramount expired on June 26, 2018.
In August 2020, the Company sold the royalty rights to a third-party for $4.2 million. NaN gain or loss was recognized on the date of Paradigm Spine is one ofsale due to an adjustment to the owners of VB. The Paradigm Spine Credit Agreement and the VB Royalty Agreement were negotiated separately.
Theroyalty rights fair value of the royalty right at December 31, 2017, was determined by using a discounted cash flow analysis related to the expected future cash flows to be received. This asset is 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 discounted cash flow was based upon expected royalties from sales of licensed product over a ten-year period. The discount rate utilized was 15.0%. Significant judgment is required in selecting the appropriate discount rate. Should this discount rate increase or decrease by 2.5%, the fair value of this asset could decrease by $1.4 million or increase by $1.7 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $0.4 million or decrease by $0.4 million, respectively. A third-party expert was engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. The fair value of the asset is subject to variation should those cash flows vary significantly from the Company’s estimates. At each reporting period, an evaluation is performed to assess those estimates, discount rates utilized and general market conditions affecting fair market value.
As of December 31, 2017, the fair value of the asset acquired as reported in the Company’s Consolidated Balance Sheetprior quarter that was $14.4 million and the maximum loss exposure was $14.4 million.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 U-M’sthe 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 European UnionEU and Japan, national pricing and reimbursement decisions are delayed in some countries. At December 31, 2017, a third party expert was engaged by the Company to assess the impact of the delayed pricing and reimbursement decisions to Cerdelga’s expected future cash flows. Based on the analysis performed, management revised the underlying assumptions used in the discounted cash flow analysis at December 31, 2017.
The estimated fair value of the royalty right at December 31, 2017,2019, was determined by using a discounted cash flow analysis related to the expected future cash flows to be received. ThisUnder the Going Concern Basis, this asset iswas 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 four-yearthree-year period. The discount rate utilized was approximately 12.8%. Significant judgment is required in selecting the appropriate discount rate. Should thisThe discount rate increase or decrease by 2.5%, the fair value of this asset could decrease by $1.4 million or increase by $1.6 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $0.7 million or decrease by $0.7 million, respectively. A third-party expert is engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. The fair value of the asset is subject to variation should those cash flows vary significantly from the Company’s estimates. An evaluation of those estimates, discount rates utilized and general market conditions affecting fair market value is performed in each reporting period.was approximately 12.8%.
As of December 31, 2017,2020, under the fairLiquidation Basis, the expected cash realizable value of the Cerdelga royalty asset acquired as reportedwas $15.5 million and included in the Company’s Consolidated Balance Sheet was $26.8 million and“Royalty assets” in the maximum loss exposure was $26.8 million.
ARIAD Royalty Agreement
On July 28, 2015, the Company entered into the revenue interest assignment agreement (the “ARIAD Royalty Agreement”) with ARIAD, whereby the Company acquired the rightsStatement of Net Assets in Liquidation. Refer to receive royalties from ARIAD’s net revenues generated by the sale, distribution or other use of Iclusig® (ponatinib), a cancer medicine for the treatment of adult patients with chronic myeloid leukemia,Note 3, Net Assets in exchange for up to $200.0 million in cash payments. The purchase price of $100.0 million was payable in two tranches of $50.0 million each, with the first tranche having been funded on July 28, 2015 and the second tranche having been funded on July 28, 2016. Upon the occurrence of certain events, including a change of control of ARIAD, the Company had the right to require ARIAD to repurchase the royalty rightsLiquidation, for a specified amount. The Company electeddiscussion of the fair value option to account forvaluation of the hybrid instrument in its entirety. Any embedded derivative shall not be separated from the host contract. The asset acquired pursuant to the ARIADU-M Royalty Agreement represents a single unit of accounting.
In February 2017, Takeda Pharmaceutical Company Limited (“Takeda”) acquired ARIAD and the Company exercised its put option on the same day, which resulted in an obligation by Takeda to pay the Company a 1.2x multiple of the $100.0 million funded by the Company under the ARIAD Royalty Agreement, less royalty payments already received by the Company.Liquidation Basis.
On March 30, 2017, Takeda fulfilled its obligations under the put option and paid the Company the repurchase price of $108.2 million for the royalty rights under the ARIAD Royalty Agreement.
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 ownedwholly-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 European Union,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 willwas 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.
As of December 31, 2017 and 2016,In August 2020, the Company determined that itssold the asset to a third-party for 0 consideration. NaN gain or loss was recognized on the date of sale, due to an adjustment to the royalty rights underfair value in the AcelRx Royalty Agreement represented a variable interest in a variable interest entity. However,prior quarter that resulted from the Company does not havenotification that the power to direct the activities of ARPI LLC that most significantly impact ARPI LLC’s economic performance and is not the primary beneficiary of ARPI LLC; therefore, ARPI LLC is not subject to consolidationlicense agreement was terminated by the Company.
The fair valuemarketer of the royalty right at December 31, 2017, was determined by using a discounted cash flow analysis related to the expected future cash flows to be received. This asset is 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 discounted cash flow was based upon expected royalties from sales of licensed product over a fourteen-year period. The discount rate utilized was approximately 13.4%. Significant judgment is required in selecting the appropriate discount rate. Should this discount rate increase or decrease by 2.5%, the fair value of this asset could decrease by $9.9 million or increase by $12.2 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $1.8 million or decrease by $1.8 million, respectively. A third-party expert is engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. The fair value of the asset is subject to variation should those cash flows vary significantly from the Company’s estimates. At year-end 2017, management performed an evaluation of those estimates, discount rates utilized and general market conditions affecting fair market value. Based on the number of treated patients to date, management adjusted the timing of the expected future cash flows used in the discounted cash flow model at December 31, 2017.
As of December 31, 2017, the fair value of the asset acquired as reported in the Company’s Consolidated Balance Sheet was $72.9 million and the maximum loss exposure was $72.9 million.
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.
TheIn August 2020, the Company sold the asset to a third-party for $0.2 million. NaN gain or loss was recognized on the date of sale, due to an adjustment to the royalty rights fair value of the royalty right at December 31, 2017, was determined by using a discounted cash flow analysis related to the expected future cash flows to be received. This asset is 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 discounted cash flow was based upon expected royalties from sales of a licensed product over an eight-year period. The discount rate utilized was approximately 14.4%. Significant judgment is required in selecting the appropriate discount rate. Should this discount rate increase or decrease by 2.5%, the fair value of this asset could decrease by $0.2 million or increase by $0.3 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $69,000 or decrease by $69,000, respectively. A third-party expert is engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. The fair value of the asset is subject to variation should those cash flows vary significantly from the Company’s estimates. At each reporting period, an evaluation of those estimates, discount rates utilized and general market conditions affecting fair market value is performed in each reporting period. Management re-evaluated the cash flow projections during the current period, concluding that lower demand data resulted in a reduction of expected future cash flows, which warranted a revision of the assumptions used in the discounted cash flow model at December 31, 2017.prior quarter that was informed by bids received.
As of December 31, 2017, the fair value of the asset acquired as reported in the Company’s Consolidated Balance Sheet was $2.7 million and the maximum loss exposure was $2.7 million.
The following tables summarize the changes in Level 3 assetsRoyalty Right Assets and the gains and losses included in earnings for the yeareight months ended DecemberAugust 31, 2017:2020 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 | |
|
| | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) - Royalty Rights Assets |
| | | | | | | |
| (in thousands) | | | Royalty Rights - At Fair Value |
| Fair value as of December 31, 2016 | | | $ | 402,318 |
|
| | | | | | | |
| | Financial instruments settled | | | (108,169 | ) |
| | Total net change in fair value for the period | | | |
| | | Change in fair value of royalty rights - at fair value | | $ | 162,327 |
| |
| | | Proceeds from royalty rights - at fair value | | $ | (107,253 | ) | |
| | | | Total net change in fair value for the period | | | 55,074 |
|
| | | | | | | |
| Fair value as of December 31, 2017 | | | $ | 349,223 |
|
|
| | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) - Royalty Rights Assets |
| | | Fair Value as of | | Change of | | Royalty Rights - | | Fair Value as of |
| (in thousands) | | December 31, 2016 | | Ownership | | Change in Fair Value | | December 31, 2017 |
| Depomed | | $ | 164,070 |
| | $ | — |
| | $ | 67,968 |
| | $ | 232,038 |
|
| VB | | 14,997 |
| | — |
| | (617 | ) | | 14,380 |
|
| U-M | | 35,386 |
| | — |
| | (8,617 | ) | | 26,769 |
|
| ARIAD | | 108,631 |
| | (108,169 | ) | | (462 | ) | | — |
|
| AcelRx | | 67,483 |
| | — |
| | 5,411 |
| | 72,894 |
|
| Avinger | | 1,638 |
| | — |
| | (1,242 | ) | | 396 |
|
| KYBELLA | | 10,113 |
| | — |
| | (7,367 | ) | | 2,746 |
|
| | | $ | 402,318 |
| | $ | (108,169 | ) | | $ | 55,074 |
| | $ | 349,223 |
|
|
| | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) - Liabilities |
| (in thousands) | | Anniversary Payment | | Contingent Consideration |
| Fair value as of December 31, 2016 | | $ | (88,001 | ) | | $ | (42,650 | ) |
| | | | | | | | |
| | Total net change in fair value for the period | | (999 | ) | | 650 |
|
| | Settlement of financial instrument | | 89,000 |
| | — |
|
| | | | | | | | |
| Fair value as of December 31, 2017 | | $ | — |
| | $ | (42,000 | ) |
The fair valuetable 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 | | | $ | 0 | | | $ | (18,209) | | | $ | 200,463 | |
| VB | | 13,590 | | | (4,182) | | | (9,408) | | | 0 | |
| U-M | | 20,398 | | | 0 | | | (2,948) | | | 17,450 | |
| | | | | | | | |
| AcelRx | | 12,952 | | | 0 | | | (12,952) | | | 0 | |
| | | | | | | | |
| KYBELLA | | 584 | | | (168) | | | (416) | | | 0 | |
| | $ | 266,196 | | | $ | (4,350) | | | $ | (43,933) | | | $ | 217,913 | |
_______________
(1) In August 2020 the contingent consideration was determined using an income approach derived fromCompany sold the Noden Products (as defined in Note 21 below) revenue estimatesroyalty rights to VB, AcelRx, and KYBELLA to a probability assessment with respectthird-party.
(2) Excludes the aggregate remaining estimated costs to the likelihoodsell of achieving (a) the level of net sales or (b) generic product launch that would trigger the milestone payments. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones being achieved. The fair value of the contingent consideration is remeasured each reporting period, with changes in fair value recorded in the Consolidated Statements of Income. The change in fair value of the contingent consideration during the year ending December 31, 2017 is due primarily to the passage of time and a reduction in probability to achieve the generic milestone payments as determined during the current period.$4.6 million.
Gains and losses from changes in Level 3 assets are included in earnings for each periodunder the Going Concern Basis and are presented inas “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 gainsRecorded at Fair Value on a Nonrecurring Basis
The Company remeasures the fair value of certain assets and lossesliabilities 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 changes in Level 3 liabilitiesAEON, 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 earningsOther 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 each period are presenteda 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 “Changecarrying 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 anniversary paymentapproximately 17%, and contingent consideration”included level 3 inputs. For information on the sale of the business in September 2020, see Note 4, Discontinued Operations Classified as follows:Assets Held for Sale.
|
| | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2017 | | 2016 |
| | | | | |
| Total change in fair value for the period included in earnings for royalty right assets held at the end of the reporting period | | $ | 162,327 |
| | $ | 16,196 |
|
| | | | | |
| Total change in fair value for the period included in earnings for liabilities held at the end of the reporting period | | $ | (349 | ) | | $ | 3,716 |
|
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 | | | 0 | | | 1,200 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
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| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| CareView note receivable | | | | | | | | 690 | | | 0 | | | 690 | |
| Total | | | | | | | | $ | 52,081 | | | $ | 0 | | | $ | 57,279 | |
| Liabilities: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| December 2021 Notes | | | | | | | | $ | 16,950 | | | $ | 20,978 | | | $ | 0 | |
| December 2024 Notes | | | | | | | | 10,300 | | | 12,953 | | | 0 | |
| | | | | | | | | | | | |
| Total | | | | | | | | $ | 27,250 | | | $ | 33,931 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
| (in thousands) | | Carrying Value | | Fair Value Level 2 | | Fair Value Level 3 | | Carrying Value | | Fair Value Level 2 | | Fair Value Level 3 |
| Assets: | | | | | | | | | | | | |
| Wellstat Diagnostics note receivable | | $ | 50,191 |
| | $ | — |
| | $ | 51,308 |
| | $ | 50,191 |
| | $ | — |
| | $ | 52,260 |
|
| Hyperion note receivable | | 1,200 |
| | — |
| | 1,200 |
| | 1,200 |
| | — |
| | 1,200 |
|
LENSAR note receivable (1) | | — |
| | — |
| | — |
| | 43,909 |
| | — |
| | 43,900 |
|
Direct Flow Medical note receivable (2) | | — |
| | — |
| | — |
| | 10,000 |
| | — |
| | 10,000 |
|
kaléo note receivable (3) | | — |
| | — |
| | — |
| | 146,685 |
| | — |
| | 142,539 |
|
| CareView note receivable | | 19,346 |
| | — |
| | 18,750 |
| | 18,965 |
| | — |
| | 19,200 |
|
| Total | | $ | 70,737 |
| | $ | — |
| | $ | 71,258 |
| | $ | 270,950 |
| | $ | — |
| | $ | 269,099 |
|
| Liabilities: | | | | | | | | | | | | |
| February 2018 Notes | | $ | 126,066 |
| | $ | 126,131 |
| | $ | — |
| | $ | 121,595 |
| | $ | 123,918 |
| | $ | — |
|
| December 2021 Notes | | 117,415 |
| | 148,028 |
| | — |
| | 110,848 |
| | 122,063 |
| | — |
|
| Total | | $ | 243,481 |
| | $ | 274,159 |
| | $ | — |
| | $ | 232,443 |
| | $ | 245,981 |
| | $ | — |
|
__________________
(1) As a result ofThere were 0 impairment losses on notes receivable in the eight months ended August 31, 2020. During the years ended December 31, 2019 and 2018 the Company receiving 100%recorded impairment losses of LENSAR’s equity interests in exchange$10.8 million and $8.2 million, respectively, for the cancellation of the Company’s claims as a secured creditor in the Chapter 11 case (as defined in Note 21 of these consolidated financialnote receivable with CareView.
statements), LENSAR became a wholly-owned subsidiary of theThe Company on May 11, 2017. For further discussion of the LENSAR transaction and the Chapter 11 case, see Note 21.
(2) As a result of the foreclosure proceedings, the Company obtained ownership of most of the Direct Flow Medicalhad 2 notes receivable assets through the Company’s wholly-owned subsidiary, DFM, LLC. Those assets are held for sale and carried at the lower of carrying amount or fair value, less estimated selling cost, as of December 31, 2017. For further discussion on this topic, see Note 8.
(3) On September 21, 2017,2019 under the Company entered into a note purchase agreement whereby it sold to a third party the kaléo, Inc. note receivable for an aggregate cash purchase price of $141.7 million, subject to an 18-months escrow hold back of $1.4 million against certain potential contingencies.
As of December 31, 2017 and 2016, the estimated fair values of the Hyperion Catalysis International, Inc. note receivable and CareView noteGoing Concern Basis. The notes receivable were determined using one or more discounted cash flow models, incorporating expected payments andclassified under the interest rate extended on the notes receivable, with fixed interest rates and incorporating expected payments for notes receivable with a variable rate of return. As of December 31, 2016, the estimated fair values of the kaléo, Inc. note receivable, LENSAR, Inc. note receivable, and Direct Flow Medical note receivable were also determined using the same method.
When deemed necessary the Company engages a third-party valuation expert to assistGoing Concern Basis as Level 3 in evaluating its investments and the related inputs needed to estimate the fair value of certain investments. The Company determined its notes receivable assets are Level 3 assetshierarchy as the Company’s valuations utilized significant unobservable inputs, including estimates of future revenues, discount rates, expectations about settlement, terminal values, required yield and required yield. To provide support for the estimatedvalue 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 measurements,of certain investments.
As of December 31, 2019 under the Company considered forward-looking performance related toGoing Concern Basis, the investment and current measures associated with high yield indices, and reviewed the terms and yields of notes placed by specialty finance and venture firms both across industries and in similar sectors.
The CareView note receivable is secured by substantially all assets and equity interests in CareView Communications, Inc. The Wellstat Diagnostics note receivable is supported by a guaranty from the Wellstat Diagnostics Guarantors. The estimated fair value of the collateral assetsCareView 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 was adjusted to consider estimated costs to sell the assets.asset.
On December 31, 2017, the carrying values of several of the
The Company’s notes receivable differed from their estimated fair value. This is the result of discount rates used when performing a discounted cash flow forliabilities not subject to fair value valuation purposes. The Company determined these notes receivable to be Level 3 assets, asrecognition under the Going Concern Basis consist of its valuations utilized significant unobservable inputs, estimates of future revenues, expectations about settlement2021 and required yield. To provide support for the fair value measurements, the Company considered forward-looking performance, and current measures associated with high yield and published indices, and reviewed the terms and yields of notes placed by specialty finance and venture firms both across industries and in a similar sector.
2024 convertible notes. The fair values of the Company’s convertible senior notes were determined using quoted market pricing or dealer quotes.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 impaired notes receivable investments:
|
| | | | | | | | |
| Asset | | Valuation Technique | | Unobservable Input | | December 31, 2017 | | December 31, 2016 |
| | | | | | | | | |
| Wellstat Diagnostics | | | | | | | | |
| Wellstat Guarantors Intellectual Property | | Income Approach | | | | | | |
| | | | | Discount rate | | 12% | | 13% |
| | | | | Royalty amount | | $21 million | | $55-74 million |
| Settlement Amount | | Income Approach | | | | | | |
| | | | | Discount rate | | 15% | | - |
| | | | | Settlement amount | | $32 million | | - |
| Real Estate Property | | Market Approach | | | | | | |
| | | | | Annual appreciation rate | | 4% | | 4% |
| | | | | Estimated realtor fee | | 6% | | 6% |
| | | | | Estimated disposal date | | 6/30/2019 | | 12/31/2017 |
| | | | | | | | | |
| CareView | | | | | | | | |
| Note receivable cash flows | | Income Approach | | | | | | |
| | | | | Discount rate | | 17.5% | | N/A |
| | | | | | | | | |
| Direct Flow Medical | | | | | | | | |
| All Assets | | Income Approach Market Approach | | | | | | |
| | | | | Discount rate | | N/A | | 27% |
| | | | | Implied revenue multiple | | N/A | | 6.9 |
| LENSAR | | | | | | | | |
| All Assets | | Income Approach | | | | | | |
| | | | | Discount rate | | N/A | | 25% |
| | | | | Implied revenue multiple | | N/A | | 2.5 |
At December 31, 2017, the Company had three notes receivable investments on non-accrual status with a cumulative investment cost and fair value of approximately $70.7 million and $71.3 million, respectively, compared to four note receivable investments on non-accrual status at December 31, 2016 with a cumulative investment cost and fair value of approximately $105.3 million and $107.4 million, respectively. For the year ended December 31, 2017, the Company recognized $3.1 million of interest revenue for the CareViewWellstat Diagnostics note receivable investment as result of cash payments made during fiscal 2017. Forunder the years ended December 31, 2016 and 2015, the Company did not recognize any interest for note receivable investments on non-accrual status. During the years ended December 31, 2017, 2016 and 2015, the Company recognized losses on extinguishment of notes receivable of zero, $51.1 million and $4.0 million, respectively.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 | | 0% | | |
| | | | Estimated realtor fee | | 6% | | |
| | | | Undiscounted market value | | $16 million | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
5. Cash, Cash Equivalents and Short-term Investments
As of December 31, 2017, the Company had invested its excess cash balances primarily in money market funds and corporate equity securities, and as of December 31, 2016, the Company had invested its excess cash balances primarily in money market funds and commercial paper. The Company’s securities are classified as available-for-sale and are carried at estimated fair value, with unrealized gains and losses reported in “Accumulated other comprehensive income” in stockholders’ equity, net of estimated taxes (for fair value information, see Note 4). The cost of securities sold is based on the specific identification method. To date, the Company has not experienced credit losses on investments in these instruments, and it does not require collateral for its investment activities.
The following tables summarize the Company’s cash and available-for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category reported as cash and cash equivalents, or short-term investments as of December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Reported as: |
Summary of Cash and Available-For-Sale Securities (in thousands) | | Adjusted Cost | | Unrealized Gains | | Fair Value | | Cash and Cash Equivalents | | Short-Term Investments |
| December 31, 2017 | | | | | | | | | | |
| Cash | | $ | 109,703 |
| | $ | — |
| | $ | 109,703 |
| | $ | 109,703 |
| | $ | — |
|
| Money market funds | | 417,563 |
| | — |
| | 417,563 |
| | 417,563 |
| | — |
|
| Corporate securities | | 3,353 |
| | 1,495 |
| | 4,848 |
| | — |
| | 4,848 |
|
| Total | | $ | 530,619 |
| | $ | 1,495 |
|
| $ | 532,114 |
| | $ | 527,266 |
| | $ | 4,848 |
|
| | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | |
| Cash | | $ | 147,150 |
| | $ | — |
| | $ | 147,150 |
| | $ | 147,150 |
| | $ | — |
|
| Money market funds | | 4 |
| | — |
| | 4 |
| | 4 |
| | — |
|
| Commercial paper | | 19,987 |
| | — |
| | 19,987 |
| | — |
| | 19,987 |
|
| Total | | $ | 167,141 |
| | $ | — |
| | $ | 167,141 |
| | $ | 147,154 |
| | $ | 19,987 |
|
The Company recognized approximately zero and $882,000, respectively, of gains on sales of available-for-sale securities in the years ended December 31, 2017 and 2016.
The unrealized gain on investments included in “Other comprehensive income (loss), net of tax,” was approximately $1.2 million and zero as of December 31, 2017 and 2016, respectively.
6. Customer Concentration
The percentage of total revenue earned from net sales, which individually accounted for 10% or more of the Company’s total revenues, was as follows:
|
| | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Income Generating Assets: | | | | | | |
| Genentech | | — |
| | 43 | % | | 70 | % |
| Biogen | | 11 | % | | 24 | % | | 9 | % |
| Depomed | | 52 | % | | 13 | % | | 9 | % |
Total revenues by geographic area are based on the country of domicile of the counterparty to the agreement, and are as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| United States | | $ | 291,448 |
| | $ | 157,327 |
| | $ | 339,596 |
|
| Europe | | 16,144 |
| | 82,534 |
| | 250,852 |
|
| Rest of World | | 12,468 |
| | 4,440 |
| | — |
|
| Total revenues | | $ | 320,060 |
| | $ | 244,301 |
| | $ | 590,448 |
|
The following tables presents total receivables from licensee and other, which individually account for 10% or more of the Company’s total receivables from licensee and other asset balance:
|
| | | | | | | | |
| | | December 31, |
| (in thousands) | | 2017 | | 2016 |
| Depomed | | $ | — |
| | $ | 6,000 |
|
| Cardinal Health | | $ | 3,847 |
| | $ | 7,663 |
|
| McKesson | | $ | — |
| | $ | 9,135 |
|
| AmerisourceBergen | | $ | 2,982 |
| | $ | 8,039 |
|
7. Foreign Currency Hedging
The Company designates the foreign currency exchange contracts used to hedge its royalty revenues based on underlying Euro-denominated sales as cash flow hedges. Euro forward contracts are presented on a net basis on the Company’s Consolidated Balance Sheets as it has entered into a netting arrangement with the counterparty. As of December 31, 2015, all outstanding Euro forward contracts were classified as cash flow hedges and settled during the first quarter of 2016. There were no Euro forward contracts outstanding as of December 31, 2017.
The effect of the Company’s derivative instruments in its Consolidated Statements of Income and its Consolidated Statements of Comprehensive Income were as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| | | | | | | |
Net gain (loss) recognized in OCI, net of tax (1) | | $ | — |
| | $ | — |
| | $ | 4,626 |
|
Gain (loss) reclassified from accumulated OCI into “Queen et al. royalty revenue,” net of tax (2) | | $ | — |
| | $ | 1,821 |
| | $ | 5,390 |
|
_________________________
(1) Net change in the fair value of the effective portion of cash flow hedges classified in Other Comprehensive Income (“OCI”)
(2) Effective portion classified as royalty revenue
8.9. 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 arewere 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 (the “Wellstat Diagnostics Borrower Notice”) 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 (the “Wellstat Diagnostics Guarantor 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, (the “Wellstat Diagnostics Petition”), 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 pending the outcome of the matters under consideration at the hearing.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 litigation has beenproceeding 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. This case is currently pending and in the pre-trial phase.
On October 14, 2016, the Company sent a notice of default and reference to foreclosure proceedings to certain of the Wellstat Diagnostics Guarantors which arewere 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 haswas not been re-scheduled yet.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 Supreme Court 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. In October 2017, the Company filed a motion with the New York Supreme Court requesting an attachment of a potential $55.8 million damages award, plus interest, entered against BTG International, Inc. in favor of Wellstat Therapeutics in Delaware Chancery Court on September 19, 2017. The New York Supreme Court has not yet considered the Company’s motion. On February 6, 2018, the NYSupreme 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 NYSupreme 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 is currently pendingwas joined for all purposes, including discovery and the Supreme Court has instructed the Parties to coordinate this casetrial, and consolidated with the then pending case filed by the Company againstCompany. 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’ discussed above with respect to pre-trial activities.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 as of December 31, 2017,under previous Going Concern reporting periods, it has beenwas determined that an allowance on the carrying value of the note was not necessary, as the Company believesbelieved the value of the collateral securing Wellstat Diagnostics’ obligations exceedsexceeded the carrying value of the asset and iswas sufficient to enable the Company to recover the current carrying value of $50.2 million. Thevalue.
In August 2020, the Company continuesentered 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 closely monitor the timing and expected recovery of amounts due, including litigation and other matters relatedloans made to Wellstat Diagnostics Guarantors’ assets. There can be no assurance thatby the Company. Wellstat paid the company an allowance onamount of $7.5 million upon the carrying valuesigning of the notes receivable investment will not be necessarySettlement 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 a future period depending on future developments.
Hyperionfull by July 26, 2021 as required under the terms of the Settlement Agreement,
On January 27, 2012, the Company is authorized to record and Hyperion Catalysis International, Inc. (“Hyperion”) (which is also aconfess judgment against the Wellstat Diagnostics Guarantor) entered intoParties for an agreement whereby Hyperion sold toamount of $92.5 million or such lesser amount as may be owed under the Company the royalty streams due from SDK related to a certain patent license agreement between Hyperion and SDK dated December 31, 2008.Settlement Agreement as of that date. The agreement assigned the patent license agreement royalty stream accruing from January 1, 2012 through December 31, 2013, to$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 lump sum paymentawards, damages, recoveries, judgments or other property or value awarded to Hyperion of $2.3 million. In exchange for the lump sum payment,or received by the Company wason or after the date of the Agreement pursuant to receive two equal payments of $1.2 million on each of March 5, 2013 and 2014. The first payment of $1.2 million was paid on March 5, 2013, but Hyperion has not made the second payment that was due on March 5, 2014. Effective as of this date andor as a result of (i) the event of default,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 ceased to accruegranted Epps a security interest revenue. As of December 31, 2017, the estimated fair value of the collateral was determined to be in excess of the carrying value. There can be no assurance that this will be true in the eventCompany’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 foreclosure onobligations under the collateral, nor can there be any assurance of realizing value from such collateral.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 receivesreceived 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 receivablepayable 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 has accounted for the royalty rights in accordance with the fair value option.
LENSAR Credit Agreement
On October 1, 2013, the Company entered into a credit agreement with LENSAR, pursuant to which the Company made available to LENSAR up to $60.0 million to be used by LENSAR in connection with the commercialization As of its currently marketed LENSAR™ Laser System. Of the $60.0 million available to LENSAR, an initial $40.0 million, net of fees, was funded by the
Company at the close of the transaction. The remaining $20.0 million was never funded. Outstanding borrowings under the loans bore interest at the rate of 15.5% per annum, payable quarterly in arrears.
On May 12, 2015, the Company entered into a forbearance agreement with LENSAR, pursuant to which the Company agreed to refrain from exercising certain remedies available to it resulting from the failure of LENSAR to comply with a liquidity covenant and make interest payments due under the credit agreement. Under the forbearance agreement, the Company agreed to provide LENSAR with up to an aggregate of $8.5 million in weekly increments through the period ended September 30, 2015 plus employee retention amounts of approximately $0.5 million in the form of additional loans, subject to LENSAR meeting certain milestones related to LENSAR obtaining additional capital to fund the business or sell the business and repay outstanding amounts under the credit agreement. In exchange for the forbearance, LENSAR agreed to additional reporting covenants, the engagement of a chief restructuring officer and an increase on the interest rate to 18.5%, applicable to all outstanding amounts under the credit agreement.
On September 30, 2015, the Company agreed to extend the forbearance agreement until October 9, 2015 and provide for up to an additional $0.8 million in funding while LENSAR negotiated a potential sale of its assets. On October 9, 2015, the forbearance agreement expired, but the Company agreed to fund LENSAR’s operations while LENSAR continued to negotiate a potential sale of its assets.
On November 15, 2015, LENSAR, LLC (“LENSAR/Alphaeon”), a wholly owned subsidiary of Alphaeon Corporation (“Alphaeon”), and LENSAR entered into the Asset Purchase Agreement whereby LENSAR/Alphaeon agreed to acquire certain assets of LENSAR and assumed certain liabilities of LENSAR. The acquisition was consummated on December 15, 2015.
In connection with the closing of the acquisition, LENSAR/Alphaeon entered into an amended and restated credit agreement with the Company, assuming $42.0 million in loans as part of the borrowings under the Company’s prior credit agreement with LENSAR. In addition, Alphaeon issued 1.7 million shares of its Class A common stockApril 18, 2018, there were no further obligations owed to the Company.
The Company has estimated a fair value of $3.84 per share for the 1.7 million shares of Alphaeon Class A common stock received in connection with the transactions and recognized this investment as a cost-method investment of $6.6 million included in other long-term assets. The Alphaeon Class A common stock is subject to other-than-temporary impairment assessments in future periods. There is no other-than-temporary impairment charge incurred as of December 31, 2017.
In December 2016, LENSAR, re-acquired the assets from LENSAR/Alphaeon and the Company entered into a second amended and restated credit agreement with LENSAR whereby LENSAR assumed all obligations under the amended and restated credit agreement with LENSAR/Alphaeon. Also in December, LENSAR filed for a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11 case”) with the support of the Company. In January 2017, the Company agreed to provide debtor-in-possession financing of up to $2.8 million in new advances to LENSAR so that it could continue to operate its business during the Chapter 11 case. LENSAR filed a Chapter 11 plan of reorganization with the Company’s support under which LENSAR would issue 100% of its equity interests to the Company in exchange for the cancellation of the Company’s claims as a secured creditor in the Chapter 11 case, other than with respect to the debtor-in-possession financing, and would thereby become an operating wholly-owned subsidiary of the Company. On April 26, 2017, the bankruptcy court approved the plan of reorganization.
Pursuant to the plan of reorganization, LENSAR emerged from bankruptcy on May 11, 2017 as a wholly-owned subsidiary of the Company, and the Company started to consolidate LENSAR’s financial statements under the voting interest model beginning May 11, 2017.
For additional information on LENSAR please refer to Note 11 under “Intangible Assets,” Note 21 under “Business Combinations” and Note 22 under “Segment Information.”
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, an initialthe first tranche of $35.0 million, (tranche one), 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 thean additional $15.0 million (in a second tranchetranche) 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 arewere held for sale and carried at the lower of carrying
amount or fair value, less estimated selling costs, which iswas 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, the CompanyDFM, LLC and HaisThera Advisors Co., Limited (“HaisThera”) entered into a license agreement whereby the CompanyDFM, LLC granted HaisThera Advisors Co., Limited an exclusive license to develop, manufacture and commercialize percutaneously implanting stentless aortic valve.valves in the EU. The consideration for the license agreement was $500,000 upfront and up to $2.0 million in royalty payments.
The Company is exploring alternatives to further monetize In August 2019, the remaining assets heldof DFM, LLC were sold for sale of Direct Flow Medical and has ascribed a carrying value of $1.8 million at December 31, 2017.$5.0 million.
Paradigm Spine Credit Agreement
On February 14, 2014, the Company entered into the Credit Agreement (the “Paradigm Spine Credit Agreement”) with Paradigm Spine, LLC (“Paradigm Spine”), under which it made available to Paradigm Spine up to $75.0 million to be used by Paradigm Spine to refinance its existing credit facility and expand its domestic commercial operations. Of the $75.0 million available to Paradigm Spine, an initial $50.0 million, net of fees, was funded by the Company at the close of the transaction. The second and third tranches of up to an additional $25.0 million in the aggregate, net of fees, are no longer available under the terms of the Paradigm Spine Credit Agreement.
On October 27, 2015, the Company and Paradigm Spine entered into an amendment to the Paradigm Spine Credit Agreement to provide additional term loan commitments of up to $7.0 million payable in two tranches, of which the first tranche of $4.0 million was drawn on the closing date of the amendment, net of fees. Paradigm Spine chose not to draw down the second tranche of $3.0 million and such tranche is no longer available. Borrowings under the credit agreement bore interest at the rate of 13.0% per annum, payable quarterly in arrears.
On August 26, 2016, the Company received $57.5 million in connection with the prepayment of the loans under the Paradigm Spine Credit Agreement, which included a repayment of the full principal amount outstanding of $54.7 million, plus accrued interest and a prepayment fee.
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 100%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. For a further discussionThe escrow period ended on this topic, see Note 13.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. Under the terms of the credit agreement, the first tranche of $20.0 million, net of fees, was funded by the Company uponeach, subject to CareView’s attainment of a specified milestonemilestones relating to the placement of CareView Systems®, on October 7, 2015.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.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 would bewas not funded upondue to CareView’s attainment of specifiedfailure to achieve the related funding milestones relating to the placement of CareView Systems and consolidated earnings before interest, taxes, depreciation and amortization, to be accomplished no later than June 30, 2017. Such milestones were not achieved, and there is no additional funding obligation due from the Company. Outstanding borrowings under the credit agreement will bearinitially bore interest at the rate of 13.5% per annum and are payable quarterly in arrears.
As part of the transaction,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. At each reporting periodUnder the Going Concern Basis, the warrant is markedwas market to market for changeschanged in fair value.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. At December 31, 2017, the Company determined an estimated fair value of the warrant to be less than $0.1 million.
In February 2018, the Company entered into a modification agreement with CareView (the “February 2018 Modification Agreement”) whereby the Company agreed, effective as of 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 modification agreementFebruary 2018 Modification Agreement, the Company agreed that (i) a lower liquidity covenant would be applicable and (ii) principal repayment would be delayed for a period of up tountil 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 reducedrepriced 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.
Effective October 1, 2017, and as As a result of the modification agreement,February 2018 Modification Agreement, the Company determined the loan to be impaired and it ceased to accrue interest revenue.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. 9. Inventories
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.
Inventories
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 | | 0 | |
| 2024 | | 0 | |
| 2025 | | 0 | |
| Thereafter | | 0 | |
| Total operating lease payments | | 75 | |
| Less: imputed interest | | 0 | |
| 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 | |
|
| | | | | | | | |
| | | December 31, |
| (in thousands) | | 2017 | | 2016 |
| Raw materials | | $ | 1,717 |
| | $ | — |
|
| Work in process | | 1,119 |
| | 1,625 |
|
| Finished goods | | 6,311 |
| | 1,259 |
|
| Total inventories | | $ | 9,147 |
| | $ | 2,884 |
|
As(1) The amounts above exclude $3.0 million of December 31, 2017Property and 2016, the Company deferred approximately $1.3 million and $0.1 million, respectively, of costs associated with inventory transfer made under the Company’s third party logistic provider (“3PL”) service arrangement. These costs have been recordedEquipment at Noden classified as other assets on the Company’s Consolidated Balance Sheetsheld for sale as of December 31, 20172019. 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 2016. The Company will recognizeequipment amounted to $1.0 million, $2.7 million and $3.1 million for the cost of product sold as inventory is transferred from 3PL to the Company’s customers.
Duringeight months ended August 31, 2020 and the years ended December 31, 20172019 and 2016,2018, 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 recognizedis 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 inventoryappropriate 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 respectively, predominately related to Noden Products thatmilestone payment and royalties upon the Company would not be able to sellcompletion of certain events, which were met prior to its expiration.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.
10. Property and Equipment
LENSAR was spun-off on October 1, 2020.
The following table provides details of the property and equipment, net:
|
| | | | | | | | |
| | | December 31, |
| (in thousands) | | 2017 | | 2016 |
| Leasehold improvements | | $ | 321 |
| | $ | 153 |
|
| Manufacturing equipment | | 1,393 |
| | — |
|
| Computer and office equipment | | 10,141 |
| | 8,995 |
|
| Furniture and fixtures | | 137 |
| | 60 |
|
| Equipment under lease | | 6,700 |
| | — |
|
| Total | | 18,692 |
| | 9,208 |
|
| Less accumulated depreciation | | (11,474 | ) | | (9,170 | ) |
| Construction in progress | | 4 |
| | — |
|
| Property and equipment, net | | $ | 7,222 |
| | $ | 38 |
|
11. Intangible Assets
Intangible Assets, Net
The components of intangible assets as of December 31, 2017 and 20162019 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
| (in thousands) | | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
| Finite-lived intangible assets: | | | | | | | | | | | | |
Acquired products rights (1) | | $ | 216,690 |
| | $ | (32,503 | ) | | $ | 184,187 |
| | $ | 216,690 |
| | $ | (10,834 | ) | | $ | 205,856 |
|
Customer relationships (1) (2) | | 26,080 |
| | (3,729 | ) | | 22,351 |
| | 23,880 |
| | (1,194 | ) | | 22,686 |
|
Acquired technology (2) | | 9,200 |
| | (409 | ) | | 8,791 |
| | — |
| | — |
| | — |
|
Acquired trademarks (2) | | 570 |
| | (76 | ) | | 494 |
| | — |
| | — |
| | — |
|
| | | $ | 252,540 |
| | $ | (36,717 | ) | | $ | 215,823 |
| | $ | 240,570 |
| | $ | (12,028 | ) | | $ | 228,542 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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)1 The Company acquired certain intangible assets as part of the Noden Transaction (see Note 21). They areits acquisition of LENSAR in May 2017. These assets were being amortized on a straight-line basis over a weighted average period of 10 years.
(2) The Company acquired certain intangible assets as part of the LENSAR transaction (see Note 21). They are amortized over a weighted averageweighted-average period of 15 years. The intangible assets for acquired technology and trademarks are being amortized over their estimated useful lives using the straight-line method of amortization. The intangible assets for customer relationships arewere 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 yeareight months ended DecemberAugust 31, 20172020 and 2016 was $24.7 million and $12.0 million, respectively.
Based on the intangible assets recorded at December 31, 2017, and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated amortization expense is expected to be as follows (in thousands):
|
| | | | |
| Fiscal Year | | Amount |
| 2018 | | $ | 24,990 |
|
| 2019 | | 24,969 |
|
| 2020 | | 24,951 |
|
| 2021 | | 24,934 |
|
| 2022 | | 24,843 |
|
| Thereafter | | 91,136 |
|
| Total remaining estimated amortization expense | | $ | 215,823 |
|
12. Accrued Liabilities
The following table provides details of the accrued liabilities - short-term:
|
| | | | | | | | |
| | | December 31, |
| (in thousands) | | 2017 | | 2016 |
| Compensation | | $ | 6,043 |
| | $ | 3,131 |
|
| Interest | | 2,451 |
| | 2,554 |
|
| Deferred revenue | | 9,741 |
| | — |
|
| Refund to manufacturer | | 647 |
| | 8,909 |
|
| Accrued rebates, chargebacks and other revenue reserves | | 19,613 |
| | 12,338 |
|
| Dividend payable | | 79 |
| | 21 |
|
| Customer advances | | 3,198 |
| | — |
|
| Legal | | 595 |
| | 1,594 |
|
| Other | | 3,514 |
| | 2,028 |
|
| Total | | $ | 45,881 |
| | $ | 30,575 |
|
The following table provides a summary of activity with respect to our sales allowances and accruals for the year ended December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Discount and Distribution Fees | | Government Rebates and Chargebacks | | Assistance and Other Discounts | | Product Return | | Total |
| Balance at January 1, 2017: | | $ | 2,475 |
| | $ | 5,514 |
| | $ | 2,580 |
| | $ | 1,769 |
| | $ | 12,338 |
|
| Allowances for current period sales | | 8,952 |
| | 19,541 |
| | 8,934 |
| | 3,691 |
| | 41,118 |
|
| Allowances for prior period sales | | — |
| | 253 |
| | — |
| | — |
| | 253 |
|
| Credits/payments for current period sales | | (5,530 | ) | | (10,823 | ) | | (5,256 | ) | | (1,145 | ) | | (22,754 | ) |
| Credits/payments for prior period sales | | (2,475 | ) | | (5,776 | ) | | (2,080 | ) | | (1,011 | ) | | (11,342 | ) |
| Balance at December 31, 2017 | | $ | 3,422 |
| | $ | 8,709 |
| | $ | 4,178 |
| | $ | 3,304 |
| | $ | 19,613 |
|
13. Commitments and Contingencies
Operating Leases
The Company currently occupies a leased facility in Incline Village, Nevada, with a lease term through May 2020, a leased facility in Dublin, Ireland, with a lease term through September 2025 with the option to terminate the lease in September 2021, and a leased facility in Orlando, Florida, with a lease term through July 2021. The Company also leases certain office equipment under operating leases. Rental expense under these arrangements totaled $0.8 million, $0.3 million and $0.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Future minimum operating lease payments for the years ended December 31, were as follows (in thousands):2019 and 2018 was $0.8 million, $1.3 million and $1.3 million, respectively.
13. Accrued Liabilities
|
| | | | |
| Fiscal Years | | Amount |
| 2018 | | $ | 1,133 |
|
| 2019 | | 1,140 |
|
| 2020 | | 1,006 |
|
| 2021 | | 565 |
|
| 2022 | | — |
|
| Thereafter | | — |
|
| Total | | $ | 3,844 |
|
Lease Guarantee
In connection withAccrued liabilities under the spin-off by the Company of Facet Biotech Corporation (“Facet”) (the “Spin-Off”) 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 us for all matters related to the leases attributable to the period after the Spin-Off date. As of December 31, 2017, the total lease payments for the durationGoing Concern Basis consisted of the guarantee, which runs through December 2021, are approximately $45.1 million. 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 befollowing:
| | | | | | | | | | |
| (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 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.
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 on its Consolidated Balance Sheetssale as of December 31, 20172019. 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 2016,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 this guarantee. Inoperating the business through dissolution and settlement of future periods, the Company may adjust this liability for any changesliabilities. 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 the ultimate outcome of this matter that are both probable and estimable.Liquidation.
Irrevocable Letters of Credit
On June 30, 2016, the Company purchased a $75.0 million certificate of deposit, which is designated as cash collateral for the $75.0 million letter of credit issued on July 1, 2016 with respect to the first anniversary payment under the Noden Purchase Agreement. In addition, the Company provided an irrevocable and unconditional guarantee to Novartis, to pay up to $14.0 million of the remaining amount of the first anniversary payment not covered by the letter of credit. The Company concluded that both guarantees are contingent obligations and shall be accounted for in accordance with ASC 450, Contingencies. Further, it was concluded that both guarantees do not meet the conditions to be accrued at June 30, 2016 and December 31, 2016. On July 3, 2017, the first anniversary payment of $89.0 million was paid pursuant to the Noden Purchase Agreement and the $14.0 million guarantee expired. On July 31, 2017, the $75.0 million certificate of deposit matured, and on August 1, 2017, the letter of credit terminated.
Purchase Commitments
In connection with the Noden Transaction, Noden entered into an unconditional purchase obligation with Novartis to acquire all local finished goods inventory in certain countries upon transfer of the applicable marketing authorization rights in such country. The purchase is payable within 60 days after the transfer of the marketing authorization rights. The agreement does not specify minimum quantities but details pricing terms.
In addition, Noden and Novartis entered into a supply agreement pursuant to which Novartis will manufacture and supply to Noden a finished form of the Noden Products and bulk drug form of the Noden Products for specified periods of time prior to the transfer of manufacturing responsibilities for the Noden Products to another manufacturer. The supply agreement commits the Noden to a minimum purchase obligation of approximately $74.2 million and $105.8 million over the next twelve and thirty-six months, respectively. The Company expects Noden to meet this requirement
In June 2016, LENSAR and Coherent, Inc. entered into an Original Equipment Manufacturer agreement pursuant to which Coherent, Inc. will manufacture and supply to LENSAR Staccato Lasers by December 31, 2018. The supply agreement commits LENSAR to a minimum purchase obligation of approximately $1.3 million over the next three months. The Company expects LENSAR to meet this requirement.
14. Convertible Notes and Term Loans
Convertible Notes and Term Loan activity for the years ended December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| (in thousands) | | February 2018 Notes | | December 2021 Notes | | Term Loan | | Total |
| Balance at December 31, 2015 | | $ | 228,862 |
| | $ | — |
| | $ | 24,966 |
| | $ | 253,828 |
|
| Issuance and exchange | | — |
| | 150,000 |
| | — |
| | 150,000 |
|
| Payment | | — |
| | — |
| | (25,000 | ) | | (25,000 | ) |
| Repurchase | | (120,000 | ) | | — |
| | — |
| | (120,000 | ) |
| Non-cash Discount | | — |
| | (3,204 | ) | | — |
| | (3,204 | ) |
| Non-cash conversion feature | | — |
| | (36,653 | ) | | — |
| | (36,653 | ) |
| Amortization | | 12,733 |
| | 705 |
| | 34 |
| | 13,472 |
|
| Balance at December 31, 2016 | | 121,595 |
| | 110,848 |
| | — |
| | 232,443 |
|
| Amortization | | 4,471 |
| | 6,567 |
| | — |
| | 11,038 |
|
| Balance at December 31, 2017 | | $ | 126,066 |
| | $ | 117,415 |
| | $ | — |
| | $ | 243,481 |
|
Series 2012Senior Notes
In January 2012, the Company issued and exchanged $169.0 million aggregate principal of new Series 2012 Notes for an identical principal amount of the February 2015 Notes, plus a cash payment of $5.00 for each $1,000 principal amount tendered, totaling approximately $845,000. The cash payment was allocated to deferred issue costs of $765,000, additional paid-in capital of $52,000 and deferred tax assets of $28,000. The deferred issue costs were recognized over the life of the Series 2012 Notes as interest expense. In February 2012, the Company entered into separate privately negotiated exchange agreements under which the Company issued and exchanged an additional $10.0 million aggregate principal amount of the Series 2012 Notes for an identical principal amount of the February 2015 Notes. In August 2013, the Company entered into a separate privately negotiated exchange agreement under which it retired the final $1.0 million aggregate principal amount of the outstanding February 2015 Notes. Pursuant to the exchange agreement, the holder of the February 2015 Notes received $1.0 million aggregate principal amount of the Series 2012 Notes. Immediately following the exchange, no principal amount of the February 2015 Notes remained outstanding and $180.0 million principal amount of the Series 2012 Notes is outstanding.
On February 6, 2014, the Company entered into exchange and purchase agreements with certain holders of approximately $131.7 million aggregate principal amount of outstanding Series 2012 Notes. The exchange agreement provided for the issuance by the Company of shares of common stock and a cash payment for the Series 2012 Notes being exchanged, and the purchase agreement provided for a cash payment for the Series 2012 Notes being repurchased. The total consideration given was approximately $191.8 million. The Company issued to the participating holders of the Series 2012 Notes a total of approximately 20.3 million shares of its common stock with a fair value of approximately $157.6 million and made an aggregate cash payment of approximately $34.2 million pursuant to the exchange and purchase agreements. Of the $34.2 million cash payment, $2.5 million
is attributable to an inducement fee, $1.8 million is attributable to interest accrued through the date of settlement and $29.9 million is attributable to the repurchase of the Series 2012 Notes. It was determined that the exchange and purchase agreement represented an extinguishment of the related notes. As a result, a loss on extinguishment of $6.1 million was recorded. The $6.1 million loss on extinguishment included the de-recognition of the original issuance discount of $5.8 million and a $0.3 million charge resulting from the difference of the face value of the notes and the fair value of the notes. Immediately following the exchange, $48.3 million principal amount of the Series 2012 Notes was outstanding with approximately $2.1 million of remaining original issuance discount that was amortized over the remaining life of the Series 2012 Notes.
On October 20, 2014, the Company entered into a privately negotiated exchange agreement under which it retired approximately $26.0 million in principal of the outstanding Series 2012 Notes. The exchange agreement provided for the issuance, by the Company, of shares of common stock and a cash payment for the Series 2012 Notes being exchanged. The Company issued approximately 1.8 million shares of its common stock and paid a cash payment of approximately $26.2 million. Immediately following the exchange, $22.3 million principal amount of the Series 2012 Notes was outstanding with approximately $0.1 million of remaining original issuance discount to be amortized over the remaining life of the Series 2012 Notes.
The Series 2012 Notes were due February 17, 2015, and bore interest at a rate of 2.875% per annum, payable semi-annually in arrears on February 15 and August 15 of each year. On February 17, 2015, the Company retired the remaining $22.3 million of aggregate principal of its Series 2012 notes at their stated maturity for $22.3 million, plus approximately 1.34 million shares of its common stock.
Interest expense for the Series 2012 Notes on the Company’s Consolidated Statements of Income was as follows:
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Contractual coupon interest | | $ | — |
| | $ | — |
| | $ | 80 |
|
| Amortization of debt issuance costs | | — |
| | — |
| | 13 |
|
| Amortization of debt discount | | — |
| | — |
| | 76 |
|
| Total | | $ | — |
| | $ | — |
| | $ | 169 |
|
May 2015 Notes
On May 16, 2011, the Company issued $155.3 million in aggregate principal amount, at par, of the May 2015 Notes in an underwritten public offering, for net proceeds of $149.7 million. The May 2015 Notes were due May 1, 2015, and the Company paid interest at 3.75% on the May 2015 Notes semiannually in arrears on May 1 and November 1 of each year, beginning November 1, 2011. Proceeds from the May 2015 Notes, net of amounts used for purchased call option transactions and provided by the warrant transactions described below, were used to redeem the Series 2012 Notes.
On May 1, 2015, the Company retired of the remaining $155.1 million of aggregate principal of its May 2015 Notes at their stated maturity for $155.1 million, plus approximately 5.2 million shares of its common stock for the excess conversion value.
Interest expense for the May 2015 Notes on the Consolidated Statements of Income was as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Contractual coupon interest | | $ | — |
| | $ | — |
| | $ | 1,938 |
|
| Amortization of debt issuance costs | | — |
| | — |
| | 435 |
|
| Amortization of debt discount | | — |
| | — |
| | 1,815 |
|
| Total | | $ | — |
| | $ | — |
| | $ | 4,188 |
|
Purchased Call Options and Warrants
In connection with the issuance of the May 2015 Notes, the Company entered into purchased call option transactions with two hedge counterparties. The Company paid an aggregate amount of $20.8 million, plus legal fees, for the purchased call options with terms substantially similar to the embedded conversion options in the May 2015 Notes. The Company exercised the purchased call options upon conversion of the May 2015 Notes on May 1, 2015, which required the hedge counterparties to deliver shares to the Company. The hedge counterparties delivered approximately 5.2 million shares of the Company’s common
stock to the Company, which was the amount equal to the shares required to be delivered by the Company to the note holders for the excess conversion value.
In addition, the Company sold to the hedge counterparties warrants exercisable, on a cashless basis, for the sale of rights to receive up to 27.5 million shares of common stock underlying the May 2015 Notes. The Company received an aggregate amount of $10.9 million for the sale from the two counterparties. Under the terms of the warrant agreement, the warrant counterparties had the option to exercise the warrants on their specified expiration dates through the 120 scheduled trading days beginning on July 30, 2015 and ended on January 20, 2016. Because the VWAP of the Company’s common stock never exceeded the strike price of the warrants, the Company did not deliver any common stock to the warrant counterparties.
The purchased call option transactions and warrant sales effectively served to reduce the potential dilution associated with conversion of the May 2015 Notes.
Because the share price was above $5.72 but below $6.73, upon conversion of the Company’s May 2015 Notes, the purchased call options offset the share dilution, and the Company received shares on exercise of the purchased call options equal to the shares that the Company delivered to the note holders.
While the purchased call options reduced the potential equity dilution upon conversion of the May 2015 Notes, prior to the conversion or exercise, the May 2015 Notes and the warrants had a dilutive effect on the Company’s earnings per share to the extent that the price of the Company’s common stock during a given measurement period exceeds the respective exercise prices of those instruments.
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 arewere due February 1, 2018, and the Company payspaid 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 Series 2012 Notes. Upon the occurrence of a fundamental change, as defined in the indenture, holders have the option to require the Company to repurchase theirCompany’s 2.975% Convertible Senior Notes due February 2018 Notes at a purchase price equal to 100% of the principal, plus accrued interest.17, 2016.
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 shall 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 the original issuance discount of $3.1 million, outstanding deferred issuance costs of $0.9 million and agent fees of $0.1 million. Immediately following the repurchase, $246.4 million principal amount of the February 2018 Notes was outstanding with $14.1 million of remaining original issuance discount and $4.1 million of debt issuance costs to be amortized over the remaining life of the February 2018 Notes.
In connection with the repurchase of the February 2018 Notes, the Company and the counterparties agreed to unwind a portion of the purchased call options. As a result of the unwind transaction of the purchased call option, the Company received $270,000 in cash. The payments received have been recorded as an increase to APIC. In addition, the Company and the counterparties agreed to unwind a portion of the warrants for $170,000 in cash, payable by the Company. The payments have been recorded as a decrease to APIC.
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 shall be accounted for as an extinguishment. The extinguishment included the de-recognition of the original issuance discount of $4.3 million and outstanding deferred issuance costs of $1.3 million. Immediately following the repurchase, $126.4 million principal amount of the February 2018 Notes was outstanding with $4.6 million of remaining original issuance discount and $1.4 million of debt issuance costs to be amortized over the remaining life of the February 2018 Notes. As of December 31, 2017, the February 2018 Notes are convertible. At December 31, 2017, the if-converted value of the February 2018 Notes did not exceed the principal amount. On their maturity date, February 1, 2018, the Company repaid the outstanding principal of the February 2018 Notes plus accrued and unpaid interest for $129.0 million.
In connection with the repurchase of the February 2018 Notes, the Company and the counterparties agreed to unwind a portion of the purchased call options. The unwind transaction of the purchased call option did not result in any cash payments between the parties. In addition, the Company and the counterparties agreed to unwind a portion of the warrants, which also did not result in any cash payments between the parties. At December 31, 2017, the Company concluded that the remaining purchased call options and warrants continue to meet all criteria for equity classification.
The February 2018 Notes are convertible under any of the following circumstances:
During any fiscal quarter ending after the quarter ending June 30, 2014, if the last reported sale price of the Company’s common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 130% of the conversion price for the notes on the last day of such preceding fiscal quarter;
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 the Company’s common stock and the conversion rate for the notes for each such day;
Upon the occurrence of specified corporate events as described further in the indenture; or
At any time on or after August 1, 2017.
The initial conversion rate for the February 2018 Notes is 109.1048 shares of the Company’s common stock per $1,000 principal amount of February 2018 Notes, which is equivalent to an initial conversion price of approximately $9.17 per share of common stock, subject to adjustments upon the occurrence of certain specified events as set forth in the indenture. Upon conversion, the Company will be required to pay cash and, if applicable, deliver shares of the Company’s common stock as described in the indenture.
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 reflectsreflected 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 representsrepresented the estimated market interest rate for a similar nonconvertible instrument available to usthe 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 iswas being amortized to interest expense over the term of the February 2018 Notes and increasesincreased 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%. As of December 31, 2017, the remaining discount amortization period is 0.1 years.
The carrying value and unamortized discount of the February 2018 Notes were as follows:
|
| | | | | | | | |
| (in thousands) | | December 31, 2017 | | December 31, 2016 |
| Principal amount of the February 2018 Notes | | $ | 126,447 |
| | $ | 126,447 |
|
| Unamortized discount of liability component | | (381 | ) | | (4,852 | ) |
| Net carrying value of the February 2018 Notes | | $ | 126,066 |
| | $ | 121,595 |
|
Interest expense for the February 2018 Notes on the Company’s Consolidated Statements of Income was as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Contractual coupon interest | | $ | 5,058 |
| | $ | 9,338 |
| | $ | 11,786 |
|
| Amortization of debt issuance costs | | 1,022 |
| | 2,863 |
| | 2,980 |
|
| Amortization of debt discount | | 3,449 |
| | 9,870 |
| | 10,160 |
|
| Total | | $ | 9,529 |
| | $ | 22,071 |
| | $ | 24,926 |
|
Purchased Call Options and Warrants
In connection with the issuance of the February 2018 Notes, the Company entered into purchased call option transactions with two2 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 cover,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 CompanyCompany’s common stock. The Company may exercise theOutstanding purchased call options upon conversion of the February 2018 Notes and require the hedge counterparty to deliver shares to the Company in an amount equal to the shares required to be delivered by the Company to the note holder for the excess conversion value. The purchased call options expireexpired on February 1, 2018, or the last day any of the February 2018 Notes remain outstanding.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 that will initially underlieunderlying the February 2018 Notes at a strike price of $10.3610 per share, which representsrepresented 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 warrant transactions could have a dilutive effect to the extent that the market price of the Company’s common stock exceeds the applicable strike price of the warrants on the date of conversion. The Company received an aggregate amount of $11.4 million for the sale from the two counterparties. The warrant counterparties may exercise the warrants on their specified expiration dates that occur over a period of time. If the VWAP of the Company’s common stock, as defined in the warrants, exceeds the strike price of the warrants, the Company will deliver to the warrant counterparties shares equal to the spread between the VWAP on the date of exercise or expiration and the strike price. If the VWAP is less than the strike price, neither party is obligated to deliver anything to the other.
The purchased call option transactions and warrant sales effectively serve to reduce the potential dilution associated with conversion of the February 2018 Notes. The strike price is subject to further adjustment in the event that future quarterly dividends exceed $0.15 per share.
The purchased call options and warrants arewere considered indexed to the Company stock, requirerequired net-share settlement and met all criteria for equity classification at inception and at December 31, 2017 and 2016.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, waswere recorded as adjustments to additional paid-in capital. Subsequent changes
On November 20, 2015, the Company’s agent initiated the repurchase of $53.6 million in fair value will notaggregate 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 recognizedaccounted for as long asa 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, continuewhich 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 meet the criteriacustodian, 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 equity classification.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 the2.75% Convertible Senior Notes due December 1, 2021 Notes(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, werewas 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.
ThePrior to the delisting of its common stock, the December 2021 Notes arewere convertible into PDL common stock upon the occurrence of specified corporate events as described in the December 2021 Notes Indenture or under anyeither of the following circumstances: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 ending March 31,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; orday.
UponThe December 2021 Notes remain convertible upon the occurrence of specified corporate events as described in the indenture.events.
The initial conversion rate for the December 2021 Notes iswas 262.2951 shares of the Company’s common stock per $1,000 principal amount of December 2021 Notes, which iswas 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 indenture.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 andwith the fair valueremainder of the common stock conversion feature.consideration being allocated to the equity component. Using an assumed borrowing rate of 9.5%, which representsrepresented the estimated market interest rate for a similar nonconvertible instrument
available to usthe Company on the date of issuance, the Company recorded a total debt discount of $4.3 million, allocated $23.8 million to additionalAdditional paid-in capital for the conversion feature and allocated $12.8 million to deferred tax liability.
The debt discount, isincluding 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 increasesincreased, until such time, interest expense during the term offor the December 2021 Notes from the 2.75% cash coupon interest rate to an effective interest rate of 3.4%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, 2017,2020, $1.9 million par value of these notes remained outstanding pending final settlement, the remaining discount amortization periodoffset of which is 3.9 years.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 | | 0 | | | (2,220) | |
| Expected settlement premium under Liquidation Basis | | 132 | | | 0 | |
| Net carrying value of the December 2021 Notes | | $ | 2,462 | | | $ | 16,950 | |
|
| | | | | | | | |
| (in thousands) | | December 31, 2017 | | December 31, 2016 |
| Principal amount of the December 2021 Notes | | $ | 150,000 |
| | $ | 150,000 |
|
| Unamortized discount of liability component | | (32,585 | ) | | (39,152 | ) |
| Net carrying value of the December 2021 Notes | | $ | 117,415 |
| | $ | 110,848 |
|
Interest expense for the December 2021 Notes onincluded in the Company’s Consolidated Statements of IncomeOperations 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 | | | |
|
| | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2017 | | 2016 |
| Contractual coupon interest | | $ | 4,125 |
| | $ | 447 |
|
| Amortization of debt issuance costs | | 74 |
| | 10 |
|
| Amortization of debt discount | | 526 |
| | 75 |
|
| Amortization of conversion feature | | 5,967 |
| | 620 |
|
| Total | | $ | 10,692 |
| | $ | 1,152 |
|
As of December 31, 2017 and 2016,2020, the December 2021 Notes are not convertible. At December 31, 2017 and 2016, the if-converted value of the December 2021 Notes did not exceed the principal amount.
Capped Call Transaction
In conjunctionconnection 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$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, whichtransaction. 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 theyit should be accounted for as a separate transactionstransaction 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.
March 2015 Term LoanIn 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 March 30, 2015,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 credit agreement amongprivately-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 lenders party theretoprincipal 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 Royal Bankconversion rate of Canada,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 administrative agent. 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 credit agreement consistedCompany 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 term loandecrease 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 $100.0the 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.
The interest rates per annum applicable to amounts outstanding under the term loan were, at the Company’s option, either (a) the alternate base rate (as defined in the credit agreement) plus 0.75%, or (b) the adjusted Eurodollar rate (as defined in the credit agreement) plus 1.75% per annum.
As of December 31, 2015, the interest rate, based upon the adjusted Eurodollar rate, was 2.17%. Interest payments under the credit agreement were due on the interest payment dates specified in the credit agreement.
The credit agreement required amortization of the term loan in the form of scheduled principal payments on June 15, September 15 and December 15 of 2015, with the remaining outstanding balance due on February 15, 2016. This principal balance and outstanding interest was paid in full on February 12, 2016.
As of December 31, 2017,2020, the future minimum principal payments under the February 2018 NotesDecember 2021 and December 20212024 Notes were:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | December 2021 Notes | | December 2024 Notes | | Total |
| | | | | | |
| 2021 | | $ | 405 | | | $ | 0 | | | $ | 405 | |
| 2022 | | 0 | | | 0 | | | 0 | |
| 2023 | | 0 | | | 0 | | | 0 | |
| 2024 | | 0 | | | 0 | | | 0 | |
| 2025 | | 0 | | | 0 | | | 0 | |
| Thereafter | | 0 | | | 0 | | | 0 | |
| Total | | $ | 405 | | | $ | 0 | | | $ | 405 | |
|
| | | | | | | | | | | | |
| (in thousands) | | February 2018 Notes | | December 2021 Notes | | Total |
| 2018 | | $ | 126,447 |
| | $ | — |
| | $ | 126,447 |
|
| 2019 | | — |
| | — |
| | — |
|
| 2020 | | — |
| | — |
| | — |
|
| 2021 | | — |
| | 150,000 |
| | 150,000 |
|
| 2022 | | — |
| | — |
| | — |
|
| Thereafter | | — |
| | — |
| | — |
|
| Total | | $ | — |
| | $ | 150,000 |
| | $ | 150,000 |
|
15. Other Long-Term Liabilities
The following table provides detailsOther long-term liabilities under the Going Concern Basis consisted of the accruedfollowing:
| | | | | | | | | | |
| (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: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
|
| | | | | | | | |
| | | December 31, |
| (in thousands) | | 2017 | | 2016 |
| Accrued lease liability | | $ | 10,700 |
| | $ | 10,700 |
|
| Long-term incentive | | 1,729 |
| | 1,995 |
|
| Deferred tax liability | | 1,208 |
| | — |
|
| Uncertain tax position | | 30,682 |
| | 41,591 |
|
| Dividend payable | | 47 |
| | 270 |
|
| Other | | 343 |
| | — |
|
| Total | | $ | 44,709 |
| | $ | 54,556 |
|
Lease Guarantee
In connection with the Spin-Off,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 usthe Company for all matters related to the leases attributable to the period after the Spin-Offspin-off date. ShouldIn 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, 2017,2020, the total lease payments for the duration of the guarantee, which runs through December 2021 and is non-extendible, are approximately $45.1$11.3 million. If Facet were
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 couldreceived 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 responsible for lease-related costs including utilities, property taxes and common area maintenance that may be as much as the actual lease payments. 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 Balance SheetsStatements of Comprehensive Loss.
The balance of “accumulated other comprehensive loss,” net of tax, was as of December 31, 2017 and 2016, related to this guarantee.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 | | 0 | | | | | | | 0 | |
| | | | | | | | |
| Activity for the year ended December 31, 2019 | | 0 | | | | | | | 0 | |
| Ending Balance at December 31, 2019 | | 0 | | | | | | | 0 | |
| | | | | | | | |
| Activity for the eight months ended August 31, 2020 | | 0 | | | | | | | 0 | |
| Ending Balance at August 31, 2020 | | $ | 0 | | | | | | | $ | 0 | |
16.
19. Stock-Based Compensation
The Company recognizespreviously 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 a fair-valuethe Black-Scholes option-pricing model. Expected volatility was based method for costs associated with all share-based awards issuedon 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 directors, employees and outside consultants under itscommon stock plan. on the grant date.
The fair value of the portion of the award
that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periodsCompany’s stock options granted in the Company’s Consolidated Statements of Income.
The Company has adopted the simplified method to calculate the beginning balance of the additional paid-in capital pool of the excess tax benefiteight months ended August 31, 2020 and to determine the subsequent effect on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that were outstanding upon adoption.
The Company calculates stock-based compensation expense based on the number of awards ultimately expected to vest, net of estimated forfeitures. The Company estimates forfeiture rates at the time of grant and revise such rates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The stock-based compensation expense was determined using the Black-Scholes option pricing model.
Stock-based compensation expense for employees and directors and non-employees for the years ended December 31, 2017, 20162019 and 2015, is presented below: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% | | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| Stock-based Compensation | | 2017 | | 2016 | | 2015 |
| (in thousands) | | | | | | |
| Employees and directors | | $ | 3,138 |
| | $ | 3,679 |
| | $ | 1,952 |
|
| Non-employees | | — |
| | 63 |
| | 93 |
|
| Total | | $ | 3,138 |
| | $ | 3,742 |
| | $ | 2,045 |
|
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 currently hashad one active stock-based incentive plan under which it may grantpreviously granted stock-based awards to the Company’s employees, directors and non-employees.
The total number of shares of common stock authorized for issuance, shares of common stock issued upon exercise of options or grant of restricted stock, shares of common stock subject to outstanding awards and available for grant under this plan as of December 31, 2017, is as follows:
|
| | | | | | | | | | | | |
| Title of Plan | | Total Shares of Common Stock Authorized | | Total Shares of Common Stock Issued | | Total Shares of Common Stock
Subject to Outstanding Awards | | Total Shares of Common Stock Available for Grant |
2005 Equity Incentive Plan(1) | | 6,200,000 |
| | 4,110,197 |
| | — |
| | 2,089,803 |
|
_________________________
| |
(1) | As of December 31, 2017, there were 2,065,232 shares of unvested restricted stock awards outstanding as issued from the 2005 Equity Incentive Plan.
|
Under the Company’s Amended and Restated 2005 Equity Incentive Plan effective May 28, 2015June 8, 2018 (the “2005 Equity Incentive Plan”), the Company iswas 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 iswas determined using the fair market value of the Company’s common stock on the date of the grant, and the compensation expense iswas recognized ratably over the vesting period. Under the Company’s restricted stock plans, restricted stock awards typically vestvested over one to five years. 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 behave been subject to the achievement of specified performance goals set by the Compensation Committee. If the performance goals arewere not met, no compensation expense iswas recognized and any previously recognized compensation expense iswas reversed.
A summary ofThe following table summarizes the Company’s restricted stock award activity is presented below: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 | 0 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Number of shares (in thousands) | | Weighted-average grant-date fair value per share | | Number of shares (in thousands) | | Weighted-average grant-date fair value per share | | Number of shares (in thousands) | | Weighted- average grant-date fair value per share |
| Unvested at beginning of year | 1,472 |
| | $ | 3.96 |
| | 586 |
| | $ | 7.13 |
| | 277 |
| | $ | 8.39 |
|
| Awards granted | 1,917 |
| | $ | 2.15 |
| | 1,264 |
| | $ | 3.31 |
| | 522 |
| | $ | 6.40 |
|
| Awards vested | (749 | ) | | $ | 3.78 |
| | (366 | ) | | $ | 6.65 |
| | (173 | ) | | $ | 8.38 |
|
| Forfeited | (575 | ) | | $ | 3.00 |
| | (12 | ) | | $ | 7.10 |
| | (40 | ) | | $ | 7.79 |
|
| Unvested at end of year | 2,065 |
| | $ | 2.61 |
| | 1,472 |
| | $ | 3.96 |
| | 586 |
| | $ | 7.13 |
|
Stock-based compensation expense associated with the Company’sThe total fair value of restricted stock forawards vested during the years ended December 31, 2017, 20162020, 2019 and 2015,2018 was $2.7approximately $9.0 million, $3.5$1.4 million and $2.0$2.1 million, respectively. As of
The weighted-average grant date fair value for restricted stock awards granted under the 2005 Equity Incentive Plan for the years end December 31, 2017, the aggregate intrinsic value of non-vested2020, 2019 and 2018 was $3.10, $3.62 and $2.61, respectively.
At December 31, 2020, there was 0 unrecognized compensation expense related to stock options or restricted stock was $5.7 million. Total unrecognized compensation costs associated with non-vested restricted stock as of December 31, 2017, was $3.1 million, excluding forfeitures, whichawards granted under the Company expects to recognize over a weighted-average period of 2.1 years.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 nonstatutorynon-statutory inducement stock option grant pursuant to a nonstatutorynon-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
DuringAs 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, 2017, there were a total of 961,0002020, the remaining 80,067 shares of restricted stock options granted with an exercise price of $3.21 per share.awarded under the non-statutory inducement restricted stock agreement were vested. The Company’s determination of thetotal fair value of the stock-based paymentrestricted stock awards on the date of grant using an option-pricing model is affected by the Company’ stock price, as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, the following:
Expected term (in years): 3.7
Risk-free interest rate: 1.77-1.96%
Weighted-average grant-date fair value: $1.51
As of December 31, 2017, all awards were outstanding and not exercisable. The weighted average remaining contractual life of stock options outstanding was 9.7 years and the aggregate intrinsic value was $1.5 million. Unrecognized compensation cost related to non-vested stock options was $1.2 million and will be recognized over a weighted-average period of 1.9 years.
Inducement Restricted Stock
Duringvested during the year ended December 31, 2017,2020 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 were a total of 240,200 shares ofwas 0 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 grant dateCompany 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 | | | 0 | | | 433 | | | 0 | |
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 | | $ | 0 | | | $ | 3,512 | | | $ | 3,512 | |
| Contract assets recognized | | 0 | | | (6,730) | | | (6,730) | |
| Payments received | | 0 | | | 8,562 | | | 8,562 | |
| Contract assets disposed of | | 0 | | | (5,344) | | | (5,344) | |
| Contract assets at December 31, 2020 | | $ | 0 | | | $ | 0 | | | $ | 0 | |
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 | | $ | 0 | | | $ | 0 | | | $ | 0 | |
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 | | 0 | | | 0 | |
| Pharmaceutical | | 0 | | | 0 | |
| 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) | | | 0 | |
| 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 $3.22 per share. At December 31, 2017, all awardswarrants 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 | | | | | 0 | |
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 outstandingprimarily located in the United States and vest annually over a three year period.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 | | 0 | % | | 0 | % | | 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, 2017, all awards were outstanding and unvested. The aggregate intrinsic value of the restricted awards was $0.7 million. Unrecognized compensation cost related to unvested restricted awards was $0.7 million and will be recognized over a weighted-average period of 1.5 years.2019.
17.23. Income Taxes
For financial reporting purposes, incomeLoss 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 | | 0 | | | 0 | | | 0 | |
| Total | | $ | (60,820) | | | $ | (61,446) | | | $ | (39,518) | |
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| United States | | $ | 195,865 |
| | $ | 103,656 |
| | $ | 530,138 |
|
| Foreign | | (11,338 | ) | | 5,714 |
| | — |
|
| Total | | $ | 184,527 |
| | $ | 109,370 |
| | $ | 530,138 |
|
The provision for income taxes from continuing operations for the eight months ended August 31, 2020 and the years ended December 31, 2017, 20162019 and 20152018 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 | | 0 | | | 0 | | | 0 | |
| Total current | | (13,265) | | | 5,796 | | | 762 | |
| Deferred income tax (benefit) expense | | | | | | |
| Federal | | (4,340) | | | (10,978) | | | (7,932) | |
| State | | (175) | | | 830 | | | (615) | |
| Foreign | | 0 | | | 0 | | | 1,032 | |
| Total deferred | | (4,515) | | | (10,148) | | | (7,515) | |
| Total provision | | $ | (17,780) | | | $ | (4,352) | | | $ | (6,753) | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Current income tax expense | | | | | | |
| Federal | | $ | 31,338 |
| | $ | 49,582 |
| | $ | 168,164 |
|
| State | | 2,843 |
| | 3,103 |
| | 12,112 |
|
| Foreign | | 529 |
| | 2,455 |
| | — |
|
| Total current | | 34,710 |
| | 55,140 |
| | 180,276 |
|
| Deferred income tax expense (benefit) | | | | | | |
| Federal | | 36,911 |
| | (8,476 | ) | | 16,910 |
|
| State | | 2,591 |
| | 147 |
| | 157 |
|
| Foreign | | (386 | ) | | (1,100 | ) | | — |
|
| Total deferred | | 39,116 |
| | (9,429 | ) | | 17,067 |
|
| Total provision | | $ | 73,826 |
| | $ | 45,711 |
| | $ | 197,343 |
|
A reconciliation of the income tax provisionbenefit from continuing operations computed using the U.S. statutory federal income tax rate compared to the income tax provisionbenefit for income from continuing operations included in the Consolidated Statements of IncomeOperations 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 | | 0 | | | 1,513 | | | 809 | |
| | | | | | |
| | | | | | |
| | | | | | |
| True-ups | | 0 | | | 249 | | | (27) | |
| CARES Act refund | | (5,406) | | | 0 | | | 0 | |
| Other | | 3,504 | | | 731 | | | 286 | |
| Total | | $ | (17,780) | | | $ | (4,352) | | | $ | (6,753) | |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Tax at U.S. statutory rate on income before income taxes | | $ | 64,589 |
| | $ | 38,279 |
| | $ | 185,548 |
|
| Change in valuation allowance | | 1,807 |
| | (744 | ) | | 2,286 |
|
| State taxes | | 1,496 |
| | 74 |
| | 1 |
|
| Change in uncertain tax positions | | 681 |
| | 2,184 |
| | 8,717 |
|
| Foreign income | | 3,231 |
| | 5,668 |
| | — |
|
| Foreign rate differential | | 1,356 |
| | (1,445 | ) | | — |
|
| Change in tax rate reform | | 716 |
| | — |
| | — |
|
| Other | | (50 | ) | | 1,695 |
| | 791 |
|
| Total | | $ | 73,826 |
| | $ | 45,711 |
| | $ | 197,343 |
|
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 | | 0 | | | (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) | |
|
| | | | | | | | |
| | | December 31, |
| (in thousands) | | 2017 | | 2016 |
| Deferred tax assets: | | | | |
| Net operating loss carryforwards | | $ | 6,276 |
| | $ | 4,197 |
|
| Research and other tax credits | | 1,414 |
| | 1,833 |
|
| Intangible assets | | 1,453 |
| | 494 |
|
| Stock-based compensation | | 547 |
| | 835 |
|
| Accruals | | 4,667 |
| | 1,966 |
|
| Capital loss carryforward | | 2,027 |
| | 1,543 |
|
| Other | | 5,878 |
| | 13,020 |
|
| Total deferred tax assets | | 22,262 |
| | 23,888 |
|
| Valuation allowance | | (2,046 | ) | | (1,543 | ) |
| Total deferred tax assets, net of valuation allowance | | 20,216 |
| | 22,345 |
|
| Deferred tax liabilities: | | | | |
| Deferred gain on repurchase of convertible notes | | (117 | ) | | (382 | ) |
| Debt modifications | | (1,197 | ) | | (122 | ) |
| Intangible assets | | (16,932 | ) | | (2,584 | ) |
| Other | | (427 | ) | | — |
|
| Unrealized gain on foreign currency hedge contracts and investments | | (320 | ) | | — |
|
| Total deferred tax liabilities | | (18,993 | ) | | (3,088 | ) |
| Net deferred tax assets | | $ | 1,223 |
| | $ | 19,257 |
|
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, 20172020 and 2016,2019, the Company had federal net operating lossNOL carryforwards of $117.3$103.3 million and $34.0$108.6 million, respectively. As of December 31, 20172020 and 2016,2019, the Company also had state net operating lossNOL carryforwards of $299.9$63.7 million and $63.9 million, respectively, excluding $215.5 million respectively.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 net operating lossand state NOL carryforwards will begin expiring in the year 2023, and the California net operating loss carryforwards will begin expiring by 2018, if not utilized. Other states net operating losses will begin expiring by 2023 if not utilized. As of December 31, 20172020 and 2016,2019, 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 and $19.3 million, respectively, of state tax credit carryforwards that do not expire.
Utilization of the federal and state net operating lossNOL 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 net operating lossesNOLs and credits before utilization. The Company hasOf the Company’s $103.3 million of federal NOL carryforwards as of December 31, 2020, $26.9 million are subject to an annual limitation on the utilization of our federal operating losses of $1.8 million for each of the years ending December 31, 20172021 to 2022, and $1.3 million for the year ending December 31, 2023. As of December 31, 2017,2020, the Company estimates that at least $22.0 million of federal net operating lossNOL carryforwards will expire unutilized and zeronone of the $18.7 million state net operating lossesNOLs 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,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.years if additional losses are generated post 2017.
As of December 31, 2020, the Company determined that isit was more likely than not that certain deferred tax carryforward assets from continuing operations would not be realized in the near future. Asfuture and had a result, $2.0$21.1 million valuation allowance against deferred tax assets was established as of December 31, 2017.assets. The net change in total valuation allowance for each of the years ending December 31, 20172020 and 2016,2019, was an increase of $0.5$13.6 million and $0.7$5.8 million, respectively. The$2.9 million of the valuation allowance at December 31, 2017,2020, is related to capital losses that have limited carryback and 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.
As a result $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 Company recordedexisting U.S. corporate income tax benefit of $0.4 million due tolaws by, among other things, lowering the re-measurement of its net deferredcorporate tax assets at a U.S. federal statutory rate that was reduced from(from a top rate of 35% to a flat rate of 21%. Based), implementing elements of a territorial tax system, and imposing a one-time deemed repatriation transition tax on information available, the Company estimated the cumulative undistributed foreign earnings, to be immaterial. For the GILTI provisions of the 2017 Tax Act, a provisional estimate could not be made asfor which the Company hashad not yet completed its assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred. In accordance with SEC guidance, provisional amounts may be refined as a result of additional guidance from, and interpretations by,previously paid U.S. regulatory and standard-setting bodies, and changes in assumptions. In the subsequent period, provisional amounts will be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by the U.S. Department of the Treasury. The effects of the 2017 Tax Act may be subject to changes for items that were previously reported as provisional amounts, as well as any element of the 2017 Tax Act that a provisional estimate could not be made, such as for executive compensation, GILTI and BEAT impact.taxes.
A reconciliation of the Company’s unrecognized tax benefits, excluding accrued interest and penalties, for 2017, 20162020, 2019 and 20152018 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 | | 0 | | | 3,927 | | | 1,604 | |
| | | | | | |
| Increases related to tax positions taken during current fiscal year | | 8,412 | | | 0 | | | 0 | |
| Decreases related to tax positions from prior fiscal years | | (6,867) | | | (497) | | | 0 | |
| Balance at the end of the year | | $ | 85,758 | | | $ | 84,213 | | | $ | 80,783 | |
|
| | | | | | | | | | | | |
| | | December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Balance at the beginning of the year | | $ | 59,429 |
| | $ | 57,125 |
| | $ | 47,146 |
|
| Increases related to tax positions from prior fiscal years | | 783 |
| | 436 |
| | — |
|
| Increases related to tax positions taken during current fiscal year | | 18,967 |
| | 1,868 |
| | 9,979 |
|
| Expiration of statute of limitations for the assessment of taxes from prior fiscal years | | — |
| | — |
| | — |
|
| Balance at the end of the year | | $ | 79,179 |
| | $ | 59,429 |
| | $ | 57,125 |
|
The future impact of the unrecognized tax benefit of $79.2$85.8 million, if recognized, is as follows: $23.7$32.6 million would affect the effective tax rate and $55.5$53.2 million would result in adjustments to deferred tax assets.assets and valuation allowances. The Company periodically evaluates its exposures associated with our tax filing positions. As noted below, theThe Company is currently under audit by the California Franchise Tax Board.CA FTB. The timing of the audit resolution and the amount to be ultimately paid (if any) is uncertain. The outcome of these auditsthe 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 our reserves in a future period. The outcome of these audits could result in the payment of tax amounts that differ from the amounts we have 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, or 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 IncomeOperations by $1.0 million $1.0 million and $2.3during the eight months ended August 31, 2020, $1.6 million during the yearsyear ended December 31, 2017, 20162019 and 2015, respectively. In general, our income tax returns are subject to examination by U.S. federal, state and local tax authorities for tax years 1996 forward.$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 $7.0$11.2 million, $9.7 million, and $6.0$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 and 2016, respectively.forward, In May 2012, the Company received a “no-change” letter from the IRS upon completion of an examination ofgeneral, the Company’s 2008 federalstate and local income tax return.returns are subject to examination by tax authorities for tax years 2000 forward. The Company is currently under income tax examination inby the state of CaliforniaCA FTB for the tax years 2009 through 2015. 2018.
18. Stockholders’ Equity
24. Net Loss per Share
Stock Repurchase Program
| | | | | | | | | | | | | | | | | |
| 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) | |
On March
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, 2017,2018, the Company’s boardDecember 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 directors authorized the repurchasenotes 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 March 2018which it exchanged a portion of issuedthe 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 having an aggregate valueat a predefined conversion rate. In conjunction with the issuance of up to $30.0 millionthe 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 share repurchase program.hedge counterparty. The repurchases undercapped call transactions are expected generally to reduce the share repurchase program were made from timepotential dilution, and/or offset, to time inan extent, 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 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 commission.
On September 25, 2017, the Company’s board of directors 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 new share repurchase program. As of March 12, 2018, this plan has not been implemented due to prohibitions on trading during black-out periods. Once implemented, under the new share repurchase program, purchases of the Company’s shares may be made from time to time in the open market or in privately negotiated transactions and are to be funded from the Company’s working capital. The amount and timing of such repurchases are dependent upon the price and availability of shares, general market conditions and the availability of cash. Repurchases may also be made under a Rule 10b5-1 trading plancash payments the Company may implement when it is not otherwisechoose to make in a trading black-out period. Such a planexcess 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 permit shareshave 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 be repurchased when the Company might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. All shares of common stock repurchased under the Company’s new share repurchase program are expected to be retired and restored to authorized but unissued shares of common stock. The repurchase program may be suspended or discontinued at any time without notice.
19. Cash Dividends
On August 3, 2016, the Company’s board of directors decided to eliminate the quarterly cash dividend payment.
On May 2, 2016, the Company’s board of directors declared a quarterly dividend of $0.05 per share of common stock to stockholders of record on June 6, 2016. On June 13, 2016, the Company paid $8.2 million in connection with such dividend payment. Unvested restricted stock awards (“RSAs”) as of the record date are also entitled to dividends, which will only be paid when the RSAs vest and are released.
On January 26, 2016, the Company’s board of directors declared a quarterly dividend of $0.05 per share of common stock to stockholders of record on March 4, 2016. On March 11, 2016, the Company paid $8.2 million in connection with such dividend payment. Unvested RSAs as of the record date are also entitled to dividends, which will only be paid when the RSAs vest and are released.
On January 27, 2015, the Company’s board of directors declared a regular quarterly dividend of $0.15 per share of common stock, which were paid on March 12, June 12, September 11December 2021 Notes and December 11 of 2015 to stockholders of record on March 5, June 5, September 4 and December 4 of 2015, the record dates for each of the dividend payments, respectively. The Company paid $98.3 million in dividends in 2015.
20. Accumulated Other Comprehensive Income (Loss)
Comprehensive income is comprised of net income and other comprehensive income (loss). The Company includes unrealized net gains on investments held in its available-for-sale securities and unrealized gains (losses) on its cash flow hedges in other comprehensive income (loss), and present the amounts net of tax. The Company’s other comprehensive income (loss) is included in the Company’s Consolidated Statements of Comprehensive Income.
The balance of “Accumulated other comprehensive income (loss),” net of tax, was as follows:
|
| | | | | | | | | | | | |
| (in thousands) | | Unrealized gain (loss) on available-for- sale securities | | Unrealized gain (loss) on cash flow hedges | | Total Accumulated Other Comprehensive Income (Loss) |
| | | | | | | |
| Beginning Balance at December 31, 2014 | | $ | 364 |
| | $ | 2,585 |
| | $ | 2,949 |
|
| Activity for the year ended December 31, 2015 | | 71 |
| | (764 | ) | | (693 | ) |
| Balance at December 31, 2015 | | 435 |
| | 1,821 |
| | 2,256 |
|
| | | | | | | |
| Activity for the year ended December 31, 2016 | | (435 | ) | | (1,821 | ) | | (2,256 | ) |
| Balance at December 31, 2016 | | — |
| | — |
| | — |
|
| | | | | | | |
| Activity for the year ended December 31, 2017 | | 1,181 |
| | — |
| | 1,181 |
|
| Ending Balance at December 31, 2017 | | $ | 1,181 |
| | $ | — |
| | $ | 1,181 |
|
21. Business Combinations
NODEN TRANSACTION
Description of the Noden Transaction
On July 1, 2016, Noden Transaction was consummated for cash consideration of $110.0 million that was paid to Novartis on July 1, 2016, the closing date of the acquisition. In addition, pursuant the terms of the Noden Purchase Agreement, Noden Pharma DAC committed to pay Novartis the following amounts in cash: $89.0 million payable on the first anniversary of the closing date, and up to an additional $95.0 million contingent on achievement of sales targets and the date of the launch of a generic drug containing the pharmaceutical ingredient aliskiren.
On July 1, 2016, upon the consummation of the Noden Transaction, a noncontrolling interest holder acquired a 6% equity interest in Noden. In May 2017, such equity interest was repurchased for $2.2 million in cash by the Company. The Company accounted for the repurchase in accordance with ASC 810 and recognized the difference between the fair value of the consideration paid and the amount by which the noncontrolling interest is adjusted for in equity attributable to the Company.
The Company determined that Noden shall be consolidated under the voting interest model as of December 31, 2017 and 2016.
On July 3, 2017, Noden made the $89.0 million anniversary payment to Novartis pursuant to the terms of the Noden Purchase Agreement, of which $32.0 million was funded by the company in the form of an equity contribution. The Company expects to make additional equity contributions to Noden of at least $38.0 million to fund a portion of certain milestone payments under the Noden Purchase Agreement, subject to the occurrence of such milestones.
Fair Value of Consideration Transferred
The fair value of consideration transferred totals $244.3 million, which consists of $216.7 million in acquired product rights, $23.9 million in customer relationships, $47.4 million in contingent consideration and $87.0 million in anniversary payments. Contingent consideration includes the future payments that the Company may pay to Novartis based on achieving certain milestones.
The contingent consideration was measured at fair value and recognized as of the acquisition date. The Company determined the acquisition date fair value of the contingent consideration obligation based on an income approach derived from the Noden Products revenue estimates and a probability assessment with respect to the likelihood of (a) achieving the level of net sales or (b) there being no generic product launch that would trigger the milestone payments. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones being achieved. At each reporting date, the Company will re-measure the contingent consideration obligation to estimated fair value. Any changes in the fair value of contingent consideration will be recognized in operating expenses until the contingent consideration arrangement is settled.
As of the effective time of the acquisition, the identifiable intangible assets are required to be measured at fair value and these assets could include assets that are not intended to be used or sold or that are intended to be used in a manner other than their highest and best use. For purposes of the valuation, it is assumed that all assets will be used in the manner that represents the highest and best use of those assets, but it is not assumed that any market synergies will be achieved. The consideration of synergies has been excluded because they are not considered to be factually supportable.
The fair value of identifiable assets is determined primarily using the “income method,” which starts with a forecast of all expected future cash flows. Some of the more significant assumptions inherent in the development of intangible asset values, from the perspective of a market participant, include, among other factors: the amount and timing of projected future cash flows (including net revenue, cost of product sales, research and development costs, sales and marketing expenses, income tax expense, capital expenditures and working capital requirements) and estimated contributory asset charges; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset.
The following table presents a summary of the total fair value of consideration transferred for the Noden Products acquisition:
|
| | | | |
| (in thousands) | | |
| Consideration paid in cash at closing | | $ | 109,938 |
|
| Discounted anniversary payment | | 87,007 |
|
| Fair value of contingent consideration | | 47,360 |
|
| Total fair value of consideration transferred | | $ | 244,305 |
|
Assets Acquired and Liabilities Assumed
In accordance with the authoritative guidance for business combinations, the Noden Transaction was determined to be a business combination and is expected to be accounted for using the acquisition method of accounting.
The following table summarizes the fair values of the identifiable intangible assets acquired and liabilities assumed at the acquisition date:
|
| | | | |
| (in thousands) | | |
| Acquired product rights | | $ | 216,690 |
|
| Customer relationships | | 23,880 |
|
| Goodwill | | 3,735 |
|
| Net intangible assets | | $ | 244,305 |
|
The acquired product rights represent developed technology of products approved for sales in the market, which the Company refers to as marketed products, and have finite useful lives. They are amortized on a straight line basis over a weighted average of 10 years.
LENSAR TRANSACTION
Description of the LENSAR Transaction
In December 2016, LENSAR filed the Chapter 11 case with the support of the Company, as its largest senior secured creditor under a credit agreement, as amended, that the Company and LENSAR had entered into in 2013. For a further discussion of the LENSAR transaction and the Chapter 11 case,2024 Notes; see Note 8. In January 2017,14, Convertible Senior Notes.
Anti-Dilutive Effect of Restricted Stock Awards and Stock Options
For the Company agreed to provide debtor-in-possession financing of up to $2.8 million in new advances to LENSAR so that it could continue to operate its business during the remainder of the Chapter 11 case. As part of the Chapter 11 case, LENSAR filed a Chapter 11 plan of reorganization, with the Company’s support, under which LENSAR would issue 100% of its equity interests to the Company in exchange for the cancellation of the Company’s claims as a secured creditor in the Chapter 11 case.
On April 26, 2017, the bankruptcy court approved the plan of reorganizationeight months ended August 31, 2020, and on May 11, 2017, LENSAR emerged from bankruptcy. Pursuant to the plan of reorganization, the Company obtained control of 100% of the outstanding voting shares of LENSAR, making it a wholly-owned subsidiary of the Company. All assets of the LENSAR bankruptcy estate re-vested in reorganized LENSAR free and clear of all liens, claims or charges. The consummation of the plan of reorganization related transactions effect binding and valid transfers to reorganized LENSAR with all rights, title and interest in the acquired assets. Upon consummation of the plan of reorganization, all debt owed to the Company was eliminated other than the debtor-in-possession financing, which was carried over into a new exit facility provided by the Company. Liabilities to other creditors, including general unsecured creditors, were satisfied through the plan of reorganization.
The Company concluded that the LENSAR transaction shall be accounted in accordance with ASC 805, Business Combinations, that do not involve a transfer of consideration (“combinations by contract”) by applying the acquisition method.
Fair Value of Consideration Transferred
Contemporaneously with the cancellation of the Company’s notes receivable with a carrying value of $43.9 million, the Company acquired 100% equity interests in LENSAR, at fair value, for $31.7 million resulting in a net loss on extinguishment of notes receivable of $10.6 million. The fair value of the equity interest in LENSAR was determined primarily using the “income method,” which starts with a forecast of all expected future cash flows of the acquired business. The acquisition resulted in a gain
on bargain purchase because the fair value of assets acquired and liabilities assumed exceeded the total of the fair value of the equity interest in LENSAR by approximately $9.3 million, net of loss on extinguishment of notes receivable, which was recorded in the Consolidated Statement of Income for the period ended December 31, 2017.
Assets Acquired and Liabilities Assumed
The following table summarizes the fair values of the identifiable intangible assets acquired and liabilities assumed at the acquisition date (in thousands):
|
| | | | |
| (in thousands) | | |
| Cash | | $ | 1,983 |
|
| Tangible assets | | 18,647 |
|
Intangible assets (1) | | 11,970 |
|
| Net deferred tax assets | | 25,723 |
|
Total identifiable assets
| | 58,323 |
|
| Current liabilities | | (6,673 | ) |
| Total liabilities assumed | | (6,673 | ) |
| | | |
| Net loss on derecognition of notes receivables | | (10,615 | ) |
| Gain on bargain purchase, net of loss on extinguishment of notes receivable | | (9,309 | ) |
| Total fair value of consideration | | $ | 31,726 |
|
______________
(1) As of the effective date of the transaction, identifiable intangible assets are required to be measured at fair value. The fair value measurement is based on significant inputs that are unobservable in the market and thus represents a Level 3 measurement. The Company used an income approach to estimate the preliminary fair value of the intangibles which includes technology, trademarks and customer relationships. The assumptions used to estimate the cash flows of the business included a discount rate of 16%, estimated gross margins ranging from 37-72%, income tax rate of 35%, and operating expenses consisting of direct costs based on the anticipated level of revenues. The intangible assets have a weighted-average useful life of approximately 15.0 years. The intangible assets for acquired technology and trademarks are being amortized over their estimated useful lives using the straight-line method of amortization. The intangible assets for customer relationship are being amortized using a double-declining method of amortization as such method better represents the economic benefits to be obtained.
Pro Forma Impact of Business Combination
The following table represents the unaudited consolidated financial information for the Company on a pro forma basis for the years ended December 31, 20172019 and 2016, assuming that2018, the Noden Transaction had closedCompany excluded approximately 0.2 million, 1.0 million, and 1.1 million shares, respectively, underlying restricted stock awards, calculated on January 1, 2015 and the LENSAR transaction had closed on January 1, 2016. The historical financial information has been adjusted to give effect to pro forma items that are directly attributable to the acquisition and are expected to have a continuing impact on the consolidated results. Additionally, the following table sets forth unaudited financial information and has been compiledweighted-average basis, from historical financial statements and other information, but is not necessarily indicative of the results that actually would have been achieved had the transactions occurred on the dates indicated or that may be achieved in the future.
|
| | | | | | | | |
| | | Year Ended |
| | | December 31, |
| (in thousands, except per share amounts) | | 2017 | | 2016 |
| Pro forma revenues | | $ | 325,605 |
| | $ | 335,112 |
|
| Pro forma net income | | $ | 107,193 |
| | $ | 55,897 |
|
| Pro forma net income per share - basic | | $ | 0.69 |
| | $ | 0.34 |
|
| Pro forma net income per share - diluted | | $ | 0.69 |
| | $ | 0.34 |
|
The unaudited pro forma consolidated results include historical revenues and expenses of assets acquired in the Noden Transaction with the following adjustments:
Adjustment to recognize incremental amortization expense based on the fair value of intangibles acquired;
Eliminate non-recurring charges directly related to the acquisition that were included in the historical results of operations for the Company; and
Adjustment to recognize pro forma income tax based on income tax benefit on the amortization of intangible asset at the statutory tax rate of Ireland (12.5%), and the income tax benefit on the interest expense at the statutory tax rate of the United States (35.0%).
22. Segment Information
Information regarding the Company’s segments fornet loss per diluted share calculations because their effect was anti-dilutive.
For the yeareight months ended August 31, 2020, and years ended December 31, 20172019 and 2016 is as follows:
|
| | | | | | | | |
| Revenues by segment | | Year Ended |
| | | December 31, |
| (in thousands) | | 2017 | | 2016 |
| Income Generating Assets | | $ | 235,937 |
| | $ | 212,632 |
|
| Pharmaceutical | | 69,032 |
| | 31,669 |
|
| Medical Devices | | 15,091 |
| | — |
|
| Total revenues | | $ | 320,060 |
| | $ | 244,301 |
|
|
| | | | | | | | |
| Net income (net loss) by segment | | Year Ended |
| | | December 31, |
| (in thousands) | | 2017 | | 2016 |
| Income Generating Assets | | $ | 125,759 |
| | $ | 59,085 |
|
| Pharmaceutical | | (5,755 | ) | | 4,521 |
|
| Medical Devices | | (9,256 | ) | | — |
|
| Total net income | | $ | 110,748 |
| | $ | 63,606 |
|
|
| | | | | | | | |
| Long-lived assets by segment | | Year Ended |
| | | December 31, |
| (in thousands) | | 2017 | | 2016 |
| Income Generating Assets | | $ | 137 |
| | $ | 38 |
|
| Pharmaceutical | | 822 |
| | — |
|
| Medical Devices | | 6,263 |
| | — |
|
| Total long-lived assets | | $ | 7,222 |
| | $ | 38 |
|
The operations for2018, 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 Pharmaceutical and Medical Devices segments are primarily located in Ireland and the United States, respectively.net loss per diluted share calculations because their effect was anti-dilutive.
23.25. Legal Proceedings
PDL BioPharma, Inc. v Merck Sharp & Dohme, Corp.
On January 22, 2016, the Company filed a complaint against Merck Sharp & Dohme, Corp (“Merck”) for patent infringement in the United States District Court for the District of New Jersey. In the complaint, the Company alleged that manufacture and sales of certain of Merck’s Keytruda product infringed one or more claims of the Company’s U.S. Patent No. 5,693,761 (the “761 Patent”). The Company requested judgment that Merck infringed the 761 Patent, an award of damages due to the infringement, a finding that such infringement was willful and deliberate and trebling of damages therefore, and a declaration that the case is exceptional and warrants an award of attorney’s fees and costs.
On April 21, 2017, the Company entered into a settlement agreement with Merck to resolve the patent infringement lawsuit between the parties pending in the U.S. District Court for the District of New Jersey related to Merck’s Keytruda humanized antibody product. Under the terms of the agreement, Merck paid the Company a one time, lump-sum payment of $19.5 million,
and the Company granted Merck a fully paid-up, royalty free, non-exclusive license to certain of the Company’s rights to issued patents in the United States and elsewhere, covering the humanization of antibodies (the “Queen et al. patent”) for use in connection with Keytruda as well as a covenant not to sue Merck for any royalties regarding Keytruda. In addition, the parties agreed to dismiss all claims in the relevant 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 has beenwas remanded to the Supreme Court for further proceedings on the merits. The proceeding ishas 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 Pharmaceuticals, Inc. (“Anchen”) and Par Pharmaceutical (“Par”) for infringement of U.S. Patent No. 8,617,595 based on their submission of an Abbreviated New Drug Application (“ANDA”)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 is proceedingwas 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 hydrochlorthiazidehydrochlorothiazide 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 Pharma DAC intends to continue to take appropriate legal action to protect its intellectual property in Tekturna® and Tekturna HCT®.
Noden Pharma DAC is aware that Novartis received Paragraph IV certifications from Par for Tekturna HCT and Anchen on December 31, 2013. Novartis did not file a responsive patent infringement suit related to these certifications. However, to Noden Pharma DAC’s knowledge, neither Par nor Anchen have in the meantime commercialized generic aliskiren products.
Depomed, Inc. vs. Valeant Pharmaceuticals, Inc.
On October 27, 2017, Valeant, Depomed and the Company entered into a settlement agreement (“Depomedthe Settlement Agreement”) to resolve all matters addressed in the lawsuit.Agreement. Under the terms of the Depomed Settlement Agreement, the litigation will be dismissed,parties agreed to file a stipulation of dismissal with prejudice, and Valeant will paythe court to Depomed a one-time, lump-sum payment of $13.0 million. In addition, Depomed and the Company released Valeant and its subsidiary from any and all claims against them as a resultfacilitate dismissal of the audit, Valeant’s obligationlitigation 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 pay additional royalties undermanufacture and commercialize in the commercialization agreement and/orUnited 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 litigation; and Valeant released Depomed and the Company against any and all claims against them as a result of the audit and/or the litigation. The settlement payment was transferred‘595 Patent which closely relate to the Company undercommercial formulation of Tekturna marketed by Noden. The Settlement Agreement includes a release by each party for liabilities associated with the terms oflitigation and an acknowledgment from Anchen that the Depomed Royalty Agreement in November of 2017.‘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.
24.
26. Subsequent Events
MaturityDissolution
In January 2021, the Company filed a certificate of dissolution in Delaware and will proceed to wind-down and dissolve the February 2018Company in accordance with Delaware General Corporate Law. Also in January 2021, the Company’s common stock was formally delisted by Nasdaq.
Convertible Senior Notes
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.
CareView Modification Agreement
In February 2018,connection with the Company entered into a modification agreement with CareView, pursuant to whichFundamental Change Repurchase Right resulting from the Company agreed, effective assuspension of 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 modification agreement the Company agreed that (i) a lower liquidity covenant would be applicable and (ii) principal repayment would be delayed for a period of up to December 31, 2018. In exchange for agreeing to these modifications, among other things, the exercise pricetrading of the Company’s warrants to purchase 4.4 million shares of common stock of CareView was reduced and, subjecton Nasdaq prior to the occurrenceopening of certain events, CareView agreedbusiness 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 grant the Companyopening 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 equity interests.amendments.
25.27. 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 data) | | December 31, 2017 | | September 30, 2017 | | June 30, 2017 | | March 31, 2017 |
| Total revenues | | $ | 68,036 |
| | $ | 62,749 |
| | $ | 143,835 |
| | $ | 45,440 |
|
| Net income attributable to PDL’s stockholders | | $ | 22,336 |
| | $ | 20,732 |
| | $ | 60,439 |
| | $ | 7,241 |
|
| Net income per basic share | | $ | 0.15 |
| | $ | 0.14 |
| | $ | 0.39 |
| | $ | 0.04 |
|
| Net income per diluted share | | $ | 0.15 |
| | $ | 0.14 |
| | $ | 0.39 |
| | $ | 0.04 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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.
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| (in thousands, except per share data) | | December 31, 2016 | | September 30, 2016 | | June 30, 2016 | | March 31, 2016 |
| Total revenues | | $ | 66,492 |
| | $ | 53,638 |
| | $ | 21,047 |
| | $ | 103,124 |
|
| Net income attributable to PDL’s stockholders | | $ | (10,336 | ) | | $ | 13,907 |
| | $ | 4,148 |
| | $ | 55,887 |
|
| Net income per basic share | | $ | (0.06 | ) | | $ | 0.08 |
| | $ | 0.03 |
| | $ | 0.34 |
|
| Net income per diluted share | | $ | (0.06 | ) | | $ | 0.08 |
| | $ | 0.03 |
| | $ | 0.34 |
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, we haveThe Company’s management has evaluated, under the supervision and with the participation of our management, including ourthe chief executive officer and the chief financial officer, the effectiveness of the design and operation of ourCompany’s disclosure controls and procedures (as defined in Rules 13a-15(b)Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended)(Exchange Act)) as of the end of the period covered by this Annual Report. Our disclosure controls and procedures are designed to provide reasonable assurancereport. Based on this evaluation, management concluded that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our chief executive officer and chief financial officer have concluded that ourCompany’s disclosure controls and procedures were effective as of December 31, 2017 at the reasonable assurance level.2020.
Inherent Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. We continue to improve and refine our internal controls and our compliance with existing controls is an ongoing process.
Our independent registered public accountants, PricewaterhouseCoopers LLP, audited the Consolidated Financial Statements included in this Annual Report and have issued an audit report on the effectiveness of our internal control over financial reporting. The report on the audit of internal control over financial reporting, and the report on the audit of the Consolidated Financial Statements appears in Item 8, “Financial Statements and Supplementary Data.”
Management’s Report on Internal Control over Financial Reporting
ManagementThe Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s management, including the chief executive officer and chief financial officer, conducted an evaluation of 1934, as amended. Management has assessed the effectiveness of ourthe Company’s internal control over financial reporting as of December 31, 2017 based on criteria established in the Internal Control-IntegratedControl - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a resultCommission (COSO). Based on the results of this assessment,evaluation, the Company’s management concluded that as of December 31, 2017, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliabilityas of financial reporting and the preparationDecember 31, 2020.
This annual report does not include an attestation report of the consolidated financial statements for external purposes in accordance with generally acceptedCompany’s registered public accounting principles. We excluded LENSAR, Inc. (“LENSAR”) from our assessment offirm regarding internal control over financial reporting asreporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of December 31, 2017 because it was acquiredthe Securities and Exchange Commission that permit the Company to provide only management’s report in a business combination during 2017. LENSAR is a fully owned subsidiary whose total assets represent approximately 2.4% of consolidated total assets as of December 31, 2017, and whose total revenues represent approximately 4.7% of consolidated total revenues for the year ended December 31, 2017. This exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from the scope in the year of acquisition.this Annual Report.
PricewaterhouseCoopers LLP has independently assessed the effectiveness of our internal control over financial reporting and its report is included under Item 8, “Financial Statements and Supplementary Data”.
Changes in Internal Control over Financial Reporting
On May 11, 2017, we acquired LENSAR. We areDuring the quarter ended December 31, 2020, there were no changes in the process of integrating the acquired LENSAR entity and our management is in the process of evaluating any related changes to ourCompany’s internal control over financial reporting as a result of this integration. Except for any changes relating to this integration, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the year ended December 31, 2017, that have materially affected, or isare reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K and is incorporated herein by reference to our definitive Proxy Statement for our next Annual Meeting of Stockholders (the “Proxy Statement”), which we intend to file pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, within 120 days after December 31, 2017.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
TheInformation Regarding Directors
Certain information required by this Item 10 will be contained inwith respect to the Proxy Statement forcurrent directors on the Board of Directors (“Board”) of the Company is set forth below. There are no family relationships among any of our 2018directors or executive officers.
As previously disclosed, on August 19, 2020, at the 2020 Annual Meeting of Stockholders, the stockholders of the Company, upon the recommendation of the Board, approved amendments to the Company’s Restated Certificate of Incorporation (the “Certificate”) in order to phase out the classification of the Board and to provide for the annual election of all directors, as described below. The amendments to the Certificate (the “Declassification Amendment”) became effective upon filing with the Office of the Secretary of State of the State of Delaware (the “Delaware Secretary of State”) on August 26, 2020. Specifically, the Declassification Amendment provides for the annual election of directors beginning at the 2021 annual meeting of stockholders, and that the declassification of the Board will be phased in over a period of three years. Beginning with the 2023 annual meeting of stockholders, the declassification of the Board will be complete and all directors will be subject to annual election for one year terms.
Directors Continuing in Office until the 2021 Annual Meeting of Stockholders
John P. McLaughlin, age 69, was first appointed a director of the Company in October 2008. Mr. McLaughlin was our Chief Executive Officer from December 2008 until his retirement in December 2018. From November 2008 to December 2008 he served as a Senior Advisor to the Company. He was the Chief Executive Officer and a director of Anesiva, Inc., formerly known as Corgentech, Inc., a publicly-traded biopharmaceutical company, from January 2000 to June 2008. From December 1997 to September 1999, Mr. McLaughlin was President of Tularik Inc., a biopharmaceutical company. From September 1987 to December 1997, Mr. McLaughlin held a number of senior management positions at Genentech, Inc., a biopharmaceutical company, including Executive Vice President and General Counsel. From January 1985 to September 1987, Mr. McLaughlin was a partner at a Washington, D.C. law firm specializing in food and drug law. Prior to that, Mr. McLaughlin served as counsel to various subcommittees of the United States House of Representatives, where he drafted numerous measures that became Food and Drug Administration laws. Mr. McLaughlin co-founded and served as Chairman of the Board of Eyetech Pharmaceuticals, Inc., a publicly-traded biopharmaceutical company subsequently bought by OSI Pharmaceuticals, Inc., co-founded and served as a director of Peak Surgical, Inc., a private medical device company, until it was acquired by Medtronic in 2011, served as a director of AxoGen, Inc., a publicly-traded biopharmaceutical company until 2014, served as a director of Adverum Biotechnologies, Inc., a publicly-traded biopharmaceutical company, until 2016 and served as a director of Seattle Genetics, Inc. (now Seagen Inc.), a publicly-traded biopharmaceutical company, until 2016. Currently, he serves on the board of directors of Rockwell Medical Inc. and LENSAR, Inc. He received a B.A. from the University of Notre Dame and a J.D. from Catholic University of America.
Mr. McLaughlin possesses a strong understanding of the biotechnology industry and has experience in development and commercialization of antibodies, corporate licensing and patent litigation that the Company values.
Dominique Monnet, age 62, was first appointed as a director of the Company in December 2018. Mr. Monnet joined the Company in September 2017 as our President and was promoted to President and Chief Executive Officer effective December 31, 2018. Before joining the Company, Mr. Monnet served as senior vice president and chief marketing officer of Alexion Pharmaceuticals from May 2014 to October 2015 where he was responsible for commercial operations in the United States and Latin America and oversaw new products and global business operations functions. From August 2013 to May 2014 he was a managing director at Biotech Advisors International, LLC, a biotechnology consulting firm. Prior to that, from July 2002 through July 2013, he was a senior executive at Amgen Inc. (“Amgen”) where he served in a number of key commercial leadership positions in the United States and internationally. Most recently he acted as vice president and general manager for Amgen’s Inflammation Business Unit from August 2011 until July 2013, where he was responsible for accelerating the growth of the Enbrel® franchise in the highly competitive U.S. market. Prior to this, he served as vice president and head of Amgen’s Global Marketing and Commercial Development, where he led the marketing strategies and global launches of new products across a range of therapeutic areas. From July 2002 through 2006, Mr. Monnet was based in Zug, Switzerland, where he served as Amgen’s vice president of International Marketing and Business Operations, building Amgen’s international commercial capability and leading the creation of its successful international franchises in oncology and nephrology. Before joining Amgen, Mr. Monnet held positions of increasing responsibility in line commercial management and global marketing over 19 years at Schering-Plough - including General Manager of its affiliate in the UK and Republic of Ireland - Ciba-Geigy and Alza Corporation. Mr. Monnet holds a business degree from EDHEC Business School in Lille, France, and an M.B.A. from INSEAD in Fontainebleau, France.
Mr. Monnet brings the Board a strong understanding of the pharmaceutical and biotechnology industries and experience in the commercialization of pharmaceutical products. In addition, Mr. Monnet provides strategic guidance to our management team and the Board.
Directors Continuing in Office until the 2022 Annual Meeting
Alan Bazaar, age 51, was appointed as a director of the Company in February 2020. Mr. Bazaar is currently the Chief Executive Officer of Hollow Brook Wealth Management LLC, a position he has held since November 2013, where he is responsible for firm-wide operations, investment research, and portfolio management. Mr. Bazaar served as a director of Hudson Global Inc. from June 2015 to May 2019 and a director of Sparton Corp. from May 2016 until the completion of its sale in March 2019. Mr. Bazaar served as a director of LoJack Corporation from March 2015 until the completion of its sale in March 2016. Mr. Bazaar was formerly a director of NTS, and served from December 2012 until the completion of its sale in June 2014. From 2004 until April 2008, Mr. Bazaar served as a director of Media Sciences International, Inc., which manufactured and distributed business color printer supplies and industrial ink applications in the United States. From July 1999 until December 2009, Mr. Bazaar was a Managing Director and Portfolio Manager at Richard L. Scott Investments, LLC where he co-managed the public equity portfolio and was responsible for all elements of due diligence. Previously, Mr. Bazaar served as a director of Airco Industries, Inc., a privately held manufacturer of aerospace products, and was employed by Arthur Andersen LLP in the Assurance and Financial Buyer’s Practices group and in the Business Fraud and Investigation Services Unit. Mr. Bazaar received an undergraduate degree in History from Bucknell University and a Master of Business Administration from the Stern School of Business at New York University. He is a Certified Public Accountant (inactive).
Mr. Bazaar brings significant financial, operational and transactional experience to the Board from his roles as both a chief executive officer and a director on the boards of several public companies.
Natasha A. Hernday, age 48, was first elected as a director of the Company in June 2019. Ms. Hernday has served as a member of the leadership team of Seagen Inc. (“Seagen”), a publicly-traded biotechnology company, since January 2011. She is currently its Executive Vice President, Corporate Development. At Seagen, Ms. Hernday built and led the business development team responsible for sourcing, evaluating and negotiating licensing deals, acquisitions and partnerships. From July 1994 until January 2011, Ms. Hernday served in various roles of increasing responsibility at Amgen, including Director, Mergers & Acquisitions and Director, Out-Partnering. Currently, she serves on the board of directors of Xoma Corporation and Alpine Immune Sciences, Inc. Ms. Hernday received her B.A. in microbiology from the University of California at Santa Barbara and her M.B.A. from Pepperdine University.
Ms. Hernday provides approximately 25 years of biotechnology experience to the Board with particular expertise in corporate development and corporate strategy. Her experience and perspective are extremely valuable to the Board and the Company’s leadership team.
Directors Continuing in Office until the 2023 Annual Meeting
Elizabeth G. O’Farrell, age 57, was first appointed as a director of the Company in June 2018, and currently serves as the Chairperson of the Board. Ms. O’Farrell previously served 24 years with Eli Lilly and Company (“Eli Lilly”), most recently as Chief Procurement Officer from 2012 to 2017, until her retirement. At Eli Lilly, she advanced through various executive management positions, including Senior Vice President, Policy and Finance; Senior Vice President, Finance; Chief Financial Officer, Lilly USA; Chief Financial Officer, Lilly Canada; and General Auditor. Before joining Eli Lilly, Ms. O’Farrell was an accountant with Boise Cascade Office Products and auditor at Whipple & Company and Price Waterhouse. Currently, she serves on the board of directors of Geron Corporation, Inhibikase Therapeutics, Inc. and LENSAR, Inc. Ms. O’Farrell served as a board member of the YMCA of Greater Indianapolis from 2006 until 2017, including as its chairperson from 2014 to 2016. She is a member of the Finance Committee of the United Way of Brevard, in Brevard County, FL., and previously served on the Boards of the Washington Township Schools Foundation and Keep Indianapolis Beautiful. Ms. O’Farrell holds a B.S. in accounting with honors and an M.B.A. in management information systems, both from Indiana University.
Ms. O’Farrell provides the Board with extensive experience as a senior executive of a major pharmaceutical company with global operations. In addition, Ms. O’Farrell has been determined by the Board to be an “audit committee financial expert” (as defined in applicable SEC rules) for the Company.
Information Regarding Executive Officers
Certain information with respect to our current executive officers is set forth below. Under the Bylaws, each executive officer is appointed annually by the Board, and each holds office until such officer resigns, is removed, is otherwise disqualified to serve or such officer’s successor is elected and qualified. There are no family relationships among any of our directors or executive officers.
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| Name | | Age | | Position |
| Dominique Monnet | | 62 | | President and Chief Executive Officer |
| Christopher Stone | | 56 | | Vice President, General Counsel and Secretary |
| Edward Imbrogno | | 56 | | Vice President, Chief Financial Officer and Chief Accounting Officer |
Dominique Monnet, please see discussion under “Directors Continuing in Office until the 2021 Annual Meeting of Stockholders” for biographical information about Mr. Monnet.
Christopher Stone joined the Company in February 2009 as our Vice President, General Counsel and Secretary. He brings more than 30 years of legal experience to the role. Before joining PDL, Mr. Stone served as Vice President of Legal Affairs and Corporate Secretary at LS9, an advanced biofuels development company, where his work included a focus on intellectual property protection and licensing. Prior to that time, he was Vice President of Intellectual Assets USA at Danisco A/S, a global producer of food ingredients, enzymes and bio-based solutions. From 1994 to 2005, Mr. Stone was with Genencor International, a biotechnology company that was acquired by Danisco in 2005, most recently as Vice President of Intellectual Property and General Patent Counsel. At Genencor, he handled all intellectual property matters, including developing and implementing an overall strategy for its domestic and international patent estate of approximately 3,700 patents and patent applications, and managed multiple litigation and interference proceedings and numerous European patent oppositions. Mr. Stone received a J.D. from the National Law Center at George Washington University and a B.S. in Biochemistry from the University of Massachusetts. He is an active member of the District of Columbia Bar, Nevada Bar (company counsel) and California Bar, and was admitted to practice before the United States Patent & Trademark Office in 1992.
Edward Imbrogno joined the Company in October 2018 as our Vice President, Finance. In July 2019, he was appointed as Chief Accounting Officer, in October 2019, he was appointed as Acting Chief Financial Officer and in March 2020, he was appointed Chief Financial Officer. From May 2017 to October 2018, Mr. Imbrogno was Senior Director and Corporate Controller for BioDelivery Sciences International, Inc., a Nasdaq-listed specialty pharmaceutical company. From June 2016 to April 2017, Mr. Imbrogno provided accounting and financial reporting consulting services. From September 2013 to May 2014, Mr. Imbrogno was Vice President, Financial Reporting for International Lease Finance Corporation, the world’s largest independent aircraft lessor, until its acquisition by AerCap Holdings N.V. Mr. Imbrogno remained with AerCap through March 2016 assisting with post-acquisition financial reporting transition, primarily at AerCap’s headquarters in Amsterdam, Netherlands. From 2006 to 2013, he was Director, Accounting for Amgen, a Nasdaq-listed multinational biopharmaceutical company. Prior to Amgen, Mr. Imbrogno held positions at several companies with increasing financial accounting and reporting responsibilities. Mr. Imbrogno began his career in public accounting with Ernst & Young LLP culminating as an Audit Manager where he provided audit and related financial services to public and private companies. Mr. Imbrogno holds a B.S. in accounting from Pennsylvania State University and an M.B.A. from Wake Forest University. He is a licensed Certified Public Accountant and is incorporated hereina member of the American Institute of Certified Public Accountants.
Code of Ethics
The Company has adopted a Code of Business Conduct (the “Conduct Code”) that applies to all officers, directors and employees. A stockholder can obtain a copy of the Code of Conduct from the Company without charge, by reference.requesting it by telephone at (775) 832-8500 or in writing to the following address:
59 Damonte Ranch Parkway, Suite B-375
Reno, Nevada 89521
Candidates for Nomination
Before we filed a certificate of dissolution with the Secretary of State of Delaware and also voluntarily delisted our common stock from the Nasdaq Global Stock Market in January 2021, the Nominating and Governance Committee of the Board had adopted a policy to evaluate any recommendation for director nominee proposed by a stockholder, and our Bylaws also permit stockholders to nominate directors for consideration at an annual meeting, subject to certain conditions. Other than the Board disbanding the Nominating and Governance Committee and assuming its duties, there have been no changes to these procedures since the Company’s disclosures of these procedures in its definitive proxy statement for the 2020 annual meeting of stockholders filed with the SEC on July 7, 2020.
Audit Committee Information
The Audit Committee of the Board was established by the Board in accordance with Section 3(a)(58)(A) of the Exchange Act to oversee the Company’s corporate accounting and financial reporting processes and audits of our financial statements. As of December 31, 2020, the Audit Committee was comprised of Mr. Gryska, Ms. O’Farrell and Mr. Bazaar. Mr. Gryska was the chairperson of the Audit Committee until his resignation from the Board on December 31, 2020. Following the Company’s delisting from Nasdaq in January 2021, the Audit Committee was disbanded, at which point the Board assumed the duties of the Audit Committee.
The Board determined that all members of the Audit Committee were independent directors in 2020 as defined in the Nasdaq qualification standards and by Section 10A of the Exchange Act. In addition, Mr. Gryska and Ms. O’Farrell each were determined by the Board to be an “audit committee financial expert” as defined by applicable SEC rules.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Overview
This Compensation Discussion and Analysis describes our compensation program as it relates to our named executive officers set forth below in “Executive Officer Compensation-Summary Compensation Table.” Our named executive officers for 2020 include Dominique Monnet, our President and Chief Executive Officer; Christopher Stone, our Vice President, General Counsel and Secretary; Edward Imbrogno, our Vice President, Chief Financial Officer and Chief Accounting Officer; and Jill Jene, our former Vice President, Business Development.
We present our Compensation Discussion and Analysis in the following sections:
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| 1. | Executive Summary. In this section, we describe certain aspects of our business, highlight our 2020 corporate performance, and summarize certain governance aspects of our executive compensation program. | p. | |
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| 2. | Executive Compensation Program Philosophy, Objectives and Process. In this section, we describe our executive compensation philosophy and objectives and the process the Compensation Committee follows in deciding how to compensate our named executive officers and the material elements of our executive compensation program. | p. | |
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| 3. | Compensation Program Elements. In this section, we present a brief overview of the specific elements of our compensation program and a detailed discussion and analysis of the Compensation Committee’s specific decisions about the compensation of our named executive officers for fiscal year 2020. | p. | |
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| 4. | Other Executive Compensation Matters. In this section, we summarize our other compensation policies, review the accounting and tax treatment of compensation and the relationship between our compensation program and risk. | p. | |
This Compensation Discussion and Analysis contains forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. The actual compensation programs that we adopt in the future may differ materially from currently planned programs as summarized in this discussion.
Executive Summary
Fiscal 2020 Business Overview
In September of 2019, our Board and management decided to initiate a strategic review process of the Company’s business and growth strategy with the assistance of certain independent financial advisors, during which we suspended our growth strategy. In December of 2019, we announced that the Board had completed the strategic review process and, as a result, we decided to halt the execution of our growth strategy, cease additional strategic investments and pursue a formal process to unlock value by monetizing our assets and returning net proceeds to our stockholders.
Over the subsequent months, the Board and management analyzed, together with outside financial and legal advisors, how to best capture value pursuant to our monetization strategy and best return the significant intrinsic value of the assets in our portfolio to our stockholders. In February 2020, the Board adopted a plan of complete liquidation (the “Plan of Liquidation”). Adopting the Plan of Liquidation was an important first step for any distributions to our stockholders pursuant to that plan to qualify as liquidating distributions, which are eligible for potentially preferable tax treatment under U.S. federal tax law. There can be no assurance any such distributions will in fact be made or that they will ultimately be determined to be liquidating distributions.
Pursuant to our monetization strategy and Plan of Liquidation, we explored a variety of potential transactions, including a whole Company sale, divestiture of assets, spin-offs of operating entities, merger opportunities or a combination thereof. In addition, we analyzed, and continue to analyze, optimal mechanisms for returning value to stockholders in a tax-efficient manner, including share repurchases, cash dividends and other distributions of assets. Despite the challenges of COVID-19, we made significant progress in our monetization strategy during 2020, including monetizing most of our key assets and resolving a longstanding legal issue, as further discussed below.
In May 2020 we distributed all of the common stock of Evofem Biosciences, Inc. held by us to our stockholders.
In August 2020, we entered into a settlement agreement with the Wellstat Parties (the “Wellstat Settlement Agreement”) resolving previously reported litigation relating to loans we made to Wellstat Diagnostics. Pursuant to the Settlement Agreement we received $7.5 million upon the signing, and the Settlement Agreement further provided for additional payments of 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, we were 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.
Also in August 2020, the Company sold 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.
In September 2020, the Company closed the sale of its previously wholly-owned subsidiaries, Noden Pharma DAC and Noden Pharma USA, Inc. to CAT Capital Bidco Limited, an indirect, wholly-owned subsidiary of Stanley Capital Limited for consideration of up to $52.8 million, including a payment at closing of $12.2 million. The Company is also entitled to (i) recover $0.5 million related to value-added tax for inventory purchases from Novartis, (ii) an additional $33.0 million to be paid in twelve equal quarterly installments from January 2021 to October 2023, (iii) an additional $3.9 million to be paid in four equal quarterly installments from January 2023 to October 2023 and (iv) additional contingent payments of up to $3.2 million based on the occurrence of certain events.
In October 2020, the Company completed the previously announced spin-off of its subsidiary LENSAR, Inc. into a new, independent publicly traded company, through a distribution of all outstanding shares of LENSAR common stock owned by the Company to its stockholders on a pro rata basis.
In December 2020, the Company entered into a Capital Provision Agreement with Epps Investments LLC (“Epps”) by which it sold all rights to awards, damages, recoveries, judgments or other property or value awarded to or received by the Company pursuant to or as a result of the Wellstat Settlement Agreement or any underlying claim resolved by such settlement agreement for approximately $51.3 million (the “Wellstat Settlement Sale”).
In early January 2021, in connection with our Plan of Dissolution, we filed a certificate of dissolution with the Secretary of State of Delaware and also voluntarily de-listed our common stock from the Nasdaq Global Stock Market. Also in January 2021, we filed a Form 15 notifying the SEC of deregistration of our common stock under Section 12(g) of the Exchange Act and suspension of our duty to file reports under Sections 13 and 15(d) of the Exchange Act.
Fiscal 2020 Executive Compensation
Emphasis on “At Risk”, Performance Based Compensation
The Compensation Committee is focused on linking both cash and equity compensation to Company performance and making a significant portion of such compensation variable or “at risk.” “At risk” pay is tied to the achievement of corporate goals, individual objectives and/or stock price performance. Since 2014, all cash and equity compensation earned by executive officers has been “at risk” under the annual bonus and long-term incentive plans devised by the Compensation Committee; the only component of compensation not “at risk” has been base salary.
Key 2020 Compensation Decisions Affecting our Chief Executive Officer:
•Base Salary and Target Annual Bonus for Chief Executive Officer Position in 2020: For 2020, Mr. Monnet received a salary of $650,875, an increase of 2.5% in comparison to his annual salary in 2019, and had a target bonus equal to 80% of his annual salary, which was unchanged from 2019.
•Target Annual Bonus Payout for Chief Executive Officer in 2020: For 2020, Mr. Monnet received an annual bonus payout equal to 100% of his target bonus based on the Company's performance relative to the corporate objectives established by the Compensation Committee for 2020 annual bonus purposes.
Changes to Annual Bonus Plan
For the Company’s 2020 annual bonus plan, the Compensation Committee eliminated the individual goal scoring portion for executive officers (other than the Company’s chief executive officer, whose goals have always been based 100% on corporate goals) and the Company’s employees. The Compensation Committee determined that, in order to appropriately align each participant’s incentives with the Plan of Liquidation, all payments under the 2020 annual bonus plan should be based solely on the achievement of the corporate goals under the plan with no individual goal component. In addition, the corporate goals were designed to be aligned with the Plan of Liquidation.
Wind Down Retention Plan
After we announced our strategy to monetize our assets and distribute net proceeds to our stockholders, we recognized that our ability to execute on our monetization plan and optimize returns to our stockholders depended to a large extent on our ability to retain the necessary expertise to effectively transact with respect to our assets. Due to the unique diverse nature of our assets, we believe that effectively transacting our assets requires a significant level of expertise and engagement. Accordingly, 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 key employees were eligible to participate. We believe that the Wind Down Retention Plan was a necessary component for both efficiently implementing our monetization strategy and also to fully optimize asset value and subsequent stockholder returns.
Under the Wind Down Retention Plan, participants were eligible to earn a retention benefit in consideration for their continued employment with the Company. The Wind Down Retention benefits were equivalent to previously disclosed compensation payments contemplated in connection with a change in control under the Company’s existing Severance Plan. For our Chief Executive Officer, the retention benefit was a lump sum cash payment equal to three times the sum of his base salary and target bonus, plus an amount equal to the cost of 12 months of health insurance continuation under COBRA. For other named executive officers, the retention benefit was equal to two times the sum of their base salary and target bonus, plus an amount equal to the cost of 12 months of health insurance continuation under COBRA. Under the Wind Down Retention Plan, payment of the retention benefit to any participant would occur 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 benefit, if paid, would be in lieu of (and not in addition to) any other severance compensation that could become payable to the participant under the Company’s Severance Plan. The Wind Down Retention Plan, during its term, superseded any inconsistent terms or duplicative benefits that would apply from the Company’s preexisting severance program.
The Wind Down Retention Plan also provided that, consistent with the existing terms of the Amended and Restated 2005 Equity Incentive Plan (the “Equity Plan”), the vesting of all outstanding equity awards held by participants would be 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 will be extended until their expiration date.
In February 2020, a change in control was triggered under the Wind Down Retention Plan and the Equity Plan by the Board’s adoption of the Plan of Liquidation, which resulted in the vesting of substantially all equity awards held by our named executive officers.
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 stockholders in the event one or more cash or other distributions become payable to stockholders. Consistent with the existing terms of the Equity Incentive Plan, in the event one or more cash or other distributions are paid to stockholders, 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 distributions 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.
The terms of the Wind Down Retention Plan provide that the plan may not be amended or terminated without the written consent of each affected participant.
Given the previously disclosed decision to file for dissolution on January 4, 2021 and in order to realize certain potential tax benefits for the Company, the Compensation Committee and the Board approved the accelerated payment of the retention benefits under the Wind Down Retention Plan in December 2020.
Stockholder Engagement and Response to 2020 Say-on-Pay Vote
In July 2020, we reached out to our top 25 stockholders, who in the aggregate owned approximately 70% of our outstanding common stock at such time, to determine if such stockholders had any issues or questions regarding the voting proposals in the 2020 proxy statement. An overwhelming majority of the votes cast (above 91%) at our annual meeting held in August 2020 were in favor of each of the proposals, including the “say-on-pay” proposal. In reviewing our executive compensation program, the Compensation Committee considered, among other things, the 2020 vote results and other feedback we received from stockholders.
Selected Compensation Governance Highlights
Our executive compensation program consists of an array of compensation governance features and controls. Below we summarize certain executive compensation-related practices that were in effect during 2020 and that we believe serve our stockholders’ long-term interests.
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| What We Do |
| ü | | The Compensation Committee is comprised solely of independent directors. |
| ü | | We structure a substantial portion of officer pay opportunities in the form of “at-risk” performance-based compensation. |
| ü | | Our executive officers’ annual cash bonus is 100% attributable to the achievement of corporate goals set by the Compensation Committee and ratified by the Board and is fully at risk of non-payment in the event of unsatisfactory performance, thereby putting a substantial portion of our executive officers’ total annual cash compensation (comprised of base salary and an annual cash bonus opportunity) at risk and tied to the Company’s annual performance. |
| ü | | We conduct an annual say-on-pay vote. |
| ü | | We seek input from, listen to and respond to stockholders. |
| ü | | We have adopted a clawback policy to prevent executive officers involved in certain wrongful conduct from unjustly benefiting from such conduct, and to remove the financial incentives to engage in such conduct. |
| ü | | We enforce robust stock ownership guidelines for executive officers and directors. |
| ü | | We strictly prohibit our directors and executive officers from “short sales,” hedging and other monetization transactions (such as zero-cost collars and forward sale contracts), holding the Company’s securities in margin accounts and pledging the Company’s securities as collateral for loans. |
| ü | | The Compensation Committee retained an independent compensation consultant. |
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What We Do Not Do |
| �� | | We do not provide gross-up tax payments for our named executive officers. |
| û | | We do not provide guaranteed bonuses. |
| û | | We do not re-price underwater awards and do not provide discount stock options or stock appreciation rights. |
Executive Compensation Program Philosophy, Objectives and Process
Philosophy and Objectives
The Compensation Committee has structured our executive compensation program to take into account our unique business model, leveraged headcount and location. In 2020, given our monetization strategy adopted by our Board, the Compensation Committee structured executive compensation to incentivize our executives to maximize net proceeds under the Plan of Liquidation for purposes of maximizing distributions to be made to the Company’s stockholders.
The Compensation Committee structured our executive compensation program in a manner that it believes does not promote inappropriate risk taking by our executive officers, and encourages them to take a balanced approach, focused on achieving our corporate goals and enhancing stockholder return. A more complete discussion regarding the risk assessment process can be found at “Risk Assessment of Compensation Policies” above.
Process
When making executive compensation program decisions, the Compensation Committee reviewed: (i) the Company’s competitive market compensation data, (ii) our performance against our corporate goals and objectives, (iii) our performance relative to our comparator companies, and (iv) the unique circumstances of the Company, most significantly, the monetization strategy adopted by our Board at the end of 2019. To accomplish these reviews, the Compensation Committee engaged Board Advisory to provide advice on competitive market practice and recommendations for structuring our named executive officers’ compensation for fiscal year 2020. Board Advisory reports, and is accountable, to the Compensation Committee, and may not conduct any other work for us without the authorization of the Compensation Committee. Board Advisory did not provide any services to us in 2020 beyond its engagement as an advisor to the Compensation Committee on compensation matters. After review and consultation with Board Advisory, the Compensation Committee has determined that Board Advisory is independent and there is no conflict of interest resulting from retaining Board Advisory currently or during the year ended December 31, 2020. In reaching these conclusions, the Compensation Committee considered the factors set forth in Exchange Act Rule 10C-1 and Nasdaq Stock Market (“Nasdaq”) listing standards.
Our chief executive officer aided the Compensation Committee by providing annual recommendations regarding the compensation of all executive officers, other than himself. Each named executive officer, in turn, participates in an annual performance review with the chief executive officer to provide input about his or her contributions to the Company’s success for the period being assessed. The performance of our chief executive officer and executive team as a group is reviewed annually by the Compensation Committee.
Comparator Companies
Due to the Company’s unique business model and the monetization strategy adopted by the Board, the Compensation Committee found it difficult to establish an appropriate group of peer companies for the purposes of evaluating our compensation practices. The Compensation Committee, in consultation with Board Advisory, determined that companies in the pharmaceutical industry remained the most appropriate peers for executive compensation comparison purposes in 2020 because (i) all of our revenues, income generating assets and products were derived from the healthcare industry and (ii) it is the sector from which we primarily drew our existing management. To that end, the Compensation Committee directed Board Advisory to analyze companies in the pharmaceutical industry with the same Global Industry Classification Standard code, or GICS code, and revenues between 0.4x and 2.5x the Company’s annual revenue, or between $56 million to $350 million, and in particular comparable small, profitable pharmaceutical companies, to recommend a peer group for purposes of analyzing the Company’s compensation practices.
The list of comparator companies is reviewed and updated annually as the previous year’s companies may no longer fit the most appropriate parameters for the Company. The list of comparator companies was selected based in part on the Company’s size in terms of revenues based on information available to the Compensation Committee in the fall of 2019. The following list of comparator companies for 2020 compensation decisions demonstrates the Compensation Committee’s focus on selecting companies relatively similar in industry sector and size (after taking into account that the Company is unique in its business model and circumstances):
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| Amphastar Pharmaceuticals, Inc. | Ironwood Pharmaceuticals, Inc. |
| ANI Pharmaceuticals, Inc. | Ligand Pharmaceuticals Inc. |
| Avadel Pharmaceuticals plc | Osmotica Pharmaceuticals plc |
| Collegium Pharmaceutical, Inc. | Pacira BioSciences, Inc. |
| Corcept Therapeutics, Inc. | Retrophin, Inc. |
| Eagle Pharmaceuticals, Inc. | Spectrum Pharmaceuticals, Inc. |
| Halozyme Therapeutics, Inc. | Supernus Pharmaceuticals, Inc. |
| Innoviva, Inc. | Teligent, Inc. |
| Intersect ENT, Inc. | Vanda Pharmaceuticals Inc. |
Competitive Market Data
Each year, Board Advisory surveys the compensation practices of the comparator companies to assess the competitiveness of our compensation programs. Although we maintain the peer group for executive compensation and performance reference purposes, the comparator company compensation data is limited to publicly available information and therefore does not necessarily provide comparisons for all officers. By contrast, survey data has the advantage of including data on executive positions beyond what is available in public filings but may not be specific to the selected companies in the peer group. In light of this, Board Advisory analyzed (i) the compensation levels of the comparator companies referenced above and (ii) the 2019 Radford Global Life Sciences Survey for biotechnology companies with annual revenues in a range between $50 million and less than $499 million (the “2019 Radford Compensation Survey”). With respect to the survey data presented to the Compensation Committee, the identities of the individual companies included in the survey were not provided to the Compensation Committee, and the Compensation Committee did not refer to individual compensation information for such companies.
We believe that by utilizing both publicly available comparator company data and the survey data, we are able to develop the best set of robust competitive data reasonably available for use in making compensation decisions. The Compensation Committee, when making compensation adjustments to the named executive officers, reviews the publicly available comparator company group data and the survey data to ensure that, following any compensation adjustment, the total compensation of named executive officers falls within our guidelines.
The Compensation Committee uses the 50th percentile of comparator companies as a benchmark, or starting point, for decisions regarding target total direct compensation (comprised of base salary, annual bonus opportunity and long-term incentive opportunity) of the Company’s executive officers. However, in order to attract and retain the executive talent necessary to lead the Company, the Compensation Committee does not establish compensation levels based solely on benchmarking. The Compensation Committee instead relies on the judgment of its members in making compensation decisions regarding base salaries, target bonus levels and long-term equity incentive awards after reviewing our performance and carefully evaluating each named executive officer’s performance during the year, leadership qualities, business responsibilities, career with our Company,
current compensation arrangements and long-term potential to enhance stockholder value. The Compensation Committee does not guarantee that any executive will receive a specific market-derived compensation level.
Qualifications and Unique Company Existence
In addition to analyzing market compensation and performance data, the Compensation Committee considers each individual’s qualifications, experience and contribution to the Company when making compensation decisions, as well as our unique business model and the difficulty in locating experienced and qualified executive officer candidates willing to relocate to the remote area surrounding our headquarters. The only named executive officer not required to be located proximate to our headquarters in Nevada was our former Vice President of Business Development whose responsibilities include extensive travels and is domiciled in the San Francisco Bay Area, close to key stakeholders and potential target companies.
No Delegation of Compensation Decisions
The Compensation Committee has not delegated any of its exclusive power to determine matters of executive compensation and benefits. Our chief executive officer and an independent compensation consultant assist the Compensation Committee by presenting proposals and recommendations to the Compensation Committee, information on the Company and individual performance of our named executive officers and management’s perspective and recommendations on compensation matters (our chief executive officer recuses himself from that portion of the Compensation Committee meetings involving deliberation and decision-making pertaining to his own compensation). The Compensation Committee reports to the Board on the major items covered at each Compensation Committee meeting.
Compensation Program Elements
In 2020, the annual compensation payable to our named executive officers was comprised of five primary elements which were designed together to motivate our named executive officers to achieve our strategic goals. These five elements were: (i) base salary, (ii) annual cash bonus, (iii) long-term incentive compensation, (iv) wind-down retention benefits, and (v) employee benefits.
In addition, we provide other limited perquisites and benefits, but such perquisites and benefits are generally available to all of our employees on the same terms as to our named executive officers.
Each element, and why we pay it, is discussed below.
Base Salary
Base salary is the fundamental, fixed element of our named executive officers’ compensation and the foundation for each named executive officer’s total compensation.
Base salaries are reviewed annually and may be adjusted by the Compensation Committee to take into account the individual performance of the named executive officer as well as that of the Company as a whole.
For fiscal year 2020, the Compensation Committee reviewed the base salary and performance of each of our named executive officers, the performance of the Company and Board Advisory’s analysis and summary of the market practice of the comparator companies. Based on this review, the Compensation Committee determined to increase the base salary of the named executive officers by 2.5% for 2020.
The fiscal year 2020 base salaries for our named executive officers are set forth in the table below:
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| Name | | Title | | 2020
Base Salary | | % Increase or Decrease
from 2019
Base Salary |
| Dominique Monnet | | President and Chief Executive Officer | | $ | 650,875 | | | 2.5% |
| Christopher Stone | | Vice President, General Counsel and Secretary | | $ | 509,927 | | | 2.5% |
| Dr. Jill Jene | | Former Vice President, Business Development | | $ | 358,955 | | (1) | 2.5% |
| Edward Imbrogno | | Vice President, Chief Financial Officer and Chief Accounting Officer | | $ | 354,650 | | | 2.5% |
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(1) Dr. Jene separated from the Company, effective August 15, 2020.
Annual Cash Bonus
The second component of our named executive officers’ total compensation is the annual cash bonus.
Fiscal Year 2020 Annual Bonus Evaluation
For fiscal year 2020, the Compensation Committee established the 2020 Annual Bonus Plan. The 2020 Annual Bonus Plan is comprised of cash compensation that is entirely at risk, depending on performance. In the event of underperformance, the Compensation Committee may elect to award no bonus. In the event of performance that exceeds the Compensation Committee’s performance expectations, the bonus amount is capped at a maximum of 200% of the target amount.
As part of the 2020 Annual Bonus Plan, the Compensation Committee reviewed, and recommended to the Board for approval, the Company’s corporate goals for 2020 that would be measured in determining the bonuses of our named executive officers for fiscal year 2020.
Given the monetization strategy adopted by our Board in late 2019 and the importance of maximizing net proceeds from the strategy that could be distributed to our stockholders, for 2020, the Compensation Committee determined to eliminate the individual performance goals for our named executive officers, making 100% of the payments under the 2020 Annual Bonus plan subject to achievement of corporate goals.
In connection with the annual cash bonus, the Compensation Committee reviewed the target bonus (as a percentage of base salary) of each named executive officer and Board Advisory’s analysis and summary of the market practice of the comparator companies.
The target and maximum bonus (as a percentage of base salary) and the ratio of corporate to individual goals for each named executive officer are set forth in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Title | | 2019 Target
Bonus | | 2020 Target
Bonus | | 2020 Maximum
Bonus |
| Dominique Monnet | | President and Chief Executive Officer | | 80% | | 80% | | 160% |
| Christopher Stone | | Vice President, General Counsel and Secretary | | 75% | | 75% | | 150% |
| Jill Jene | | Former Vice President, Business Development | | 75% | | 75% | | 150% |
| Edward Imbrogno | | Vice President, Chief Financial Officer and Chief Accounting Officer | | 75% | | 75% | | 150% |
Corporate Goals
For 2020, the Compensation Committee determined the corporate goals should be aligned with our monetization strategy and Plan of Liquidation. To that end, the Compensation Committee developed the corporate goals keeping in mind the two most likely outcomes of the monetization strategy -- either the monetization of individual assets or the sale of the entire company that would
be approved by our stockholders. Our corporate goals for 2020 and the relative weight ascribed to them are set forth in the table below:
| | | | | | | | | | | |
| 2020 Corporate Goals | | Weight |
| Alternative 1: | | |
| Maximize proceeds from asset monetization | | 75% |
| Sale of royalty assets | | |
| Monetization of LENSAR | | |
| Monetization of Evofem shares | | |
| Sale of Noden business | | |
| Execute monetization in a cost and tax efficient manner | | 10% |
| Finalize Plan of Liquidation to enable tax efficient dividend distributions | | |
| Control expenses not to exceed 2020 G&A budget | | |
| Complete monetization of key assets (royalties, LENSAR, Evofem shares, Noden) by December 31, 2020 and/or be in position to file for dissolution by year end | | 15% |
| | | |
| Total | | | 100% |
| | | |
| OR | | | |
| | | |
| Alternative 2: | | |
| Sell whole company | | 100% |
At the time the Compensation Committee set the goals for 2020, it believed that each of the 2020 annual bonus plan goals was achievable, but only with significant effort. The Compensation Committee monitored the achievement of the 2020 corporate goals throughout the year.
2020 Performance Evaluations and Bonus Amounts
In December 2020, the Compensation Committee evaluated the Company's performance against the 2020 corporate goals. The Compensation Committee determined that 100% of the 2020 corporate goals established for the 2020 Annual Bonus Plan had been achieved, as further described below. The Compensation Committee based its decision on the following factors:
•Maximize proceeds from asset monetization. The Company entered into several transactions in 2020 whereby it was able to sell its Noden business, certain of its royalty assets and distribute its ownership of LENSAR and Evofem directly to its stockholders. While the Company was not able to sell its Assertio royalty asset, this was offset by potential tax benefits that the Company will likely be able to realize under the CARES Act and the receipt of approximately $59 million in relation to its Wellstat dispute between the initial $7.5 million received upon the signing of the Wellstat Settlement Agreement and the approximately $51.4 received for the Wellstat Settlement Sale. The Compensation Committee used its discretion to conclude that the Company had performed at a level of 75% versus the target level of 75%.
•Execute monetization in a cost and tax efficient manner. The Board adopted the Plan of Liquidation in February 2020, which should enable stockholders to realize tax efficient distributions. The Company’s G&A expenses for 2020 were consistent with the 2020 budget. Based on the substantial achievement of the goal, the Compensation Committee concluded that the Company had performed at a level of 10% versus the target level of 10%.
•Complete monetization of key assets (royalties, LENSAR, Evofem shares, Noden) by December 31, 2020 and/or be in position to file for dissolution by year end. The Company completed the monetization process for the assets that needed to be divested prior to filing for dissolution. The Board was able to make a determination to delist the Company’s stock from trading on Nasdaq on December 31, 2020 and file for dissolution with the State of Delaware on January 4, 2021. Based on the substantial achievement of the goal, the Compensation Committee concluded that the Company had performed at a level of 15% versus the target level of 15%.
Following this review, the Compensation Committee approved bonus payments to each of our named executive officers based on the above determinations:
| | | | | | | | | | | | | | |
| Name | | Title | | 2020 Annual
Bonus |
| Dominique Monnet | | President and Chief Executive Officer | | $ | 520,700 | |
| Christopher Stone | | Vice President, General Counsel and Secretary | | $ | 382,445 | |
Jill Jene(1) | | Former Vice President, Business Development | | $ | 167,708 | |
| Edward Imbrogno | | Vice President, Chief Financial Officer and Chief Accounting Officer | | $ | 265,988 | |
___________________
(1) Because she separated from the Company on August 15, 2020, Dr. Jene received a pro-rated portion of her bonus under the 2020 Annual Bonus Plan.
Long-Term Incentives
The third component of our compensation strategy is long-term incentive awards. In 2020, our long-term incentive award program was comprised solely of restricted stock awards, which we believe best aligned the interests of management and stockholders in relation to the Company’s monetization strategy. Specifically, our named executive officers received the following restricted stock awards in 2020:
| | | | | | | | | | | | | | |
| Name | | Title | | Number of Shares of Restricted Stock Granted in 2020 |
| Dominique Monnet | | President and Chief Executive Officer | | 1,233,766 |
| Christopher Stone | | Vice President, General Counsel and Secretary | | 422,078 |
| Jill Jene | | Former Vice President, Business Development | | 194,805 |
| Edward Imbrogno | | Vice President, Chief Financial Officer and Chief Accounting Officer | | 292,208 |
The restricted stock awards were granted in January 2020 and vest over a three-year period, with 40% vesting on the first anniversary of the grant date and 2.5% vesting monthly thereafter. The vesting of all restricted stock is subject to: (i) continuous service with the Company as of such vesting date and (ii) accelerated vesting in the event of a change of control.
In February 2020, in connection with the Board adopting the Plan of Liquidation, all of the stock options and restricted stock granted to our employees and executive officers accelerated and vested under the change in control definition in the Equity Plan, other than the outstanding awards under the 2016/20 LTIP (as discussed below).
2016/20 LTIP Payments in 2020
Under our long-term incentive plans in place prior to 2018, each named executive officer was granted awards consisting of: (i) restricted stock and (ii) a cash payment.
Subject to the acceleration provisions set forth in the long-term incentive plans described below, each cash award and restricted stock award vested at the times specified in each plan, provided that the named executive officer remains employed by the Company through such date. In 2020, one long-term incentive plan was still effective, the 2016/20 long-term incentive plan (the “2016/20 LTIP”). Mr. Stone was the only remaining named executive officer that was a participant in the 2016/20 LTIP. Under such long-term incentive plan, in addition to remaining employed by the Company through the applicable vesting dates, the Company must meet minimum performance goals described over the applicable performance periods for the restricted stock and cash awards to vest and/or be paid.
Dividend payments and other distributions made on the restricted stock during the vesting periods of the restricted stock will accrue through the vesting periods and will be paid, plus interest, to the named executive officer upon vesting of the restricted stock award. If the minimum performance goals for the long-term incentive plan’s restricted stock awards are not met, the accrued dividend payments and other distributions will be forfeited.
In December 2020, the Compensation Committee determined, that consistent with other outstanding equity grants, the 2016/20 LTIP should vest and be paid in accordance with the 66% performance achievement level that was awarded with respect to the initial vesting period. Upon vesting, Mr. Stone received the awards set forth in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Title | | Target Cash | |
Cash
Awarded | | Target Value of Restricted Stock Award at Grant(1) | | Target Number of Shares Underlying Restricted Stock Award at Grant(2) | | Number of Shares Vested under Restricted Stock Award |
| Christopher Stone | | Vice President, General Counsel and Secretary | | $ | 255,154 | | | $ | 168,372 | | | $ | 109,332 | | | 33,954 | | 22,410 |
| | | | | | | | |
| (1) | Target Value of Restricted Stock Award at Grant is the value of the restricted stock on the date granted assuming 100% of the award is achieved. The realized value of such restricted stock may be more or less based on: (i) the value of our common stock when the restricted stock actually vests over the life of the 2016/20 LTIP and (ii) the number of shares that actually vest. |
| (2) | A price of $3.22 per share was used to determine the initial number of shares granted in 2016, which reflected the closing price of the Company’s shares on January 26, 2016, as per the terms of the 2016/20 LTIP. |
Wind Down Retention Benefits
As discussed in more detail above, our Wind Down Retention Plan enabled participants to a cash retention payment in consideration for their continued employment with the Company. For our Chief Executive Officer, the cash retention payment was a lump sum cash payment equal to three times the sum of his base salary and target bonus, plus an amount equal to the cost of 12 months of health insurance continuation under COBRA. For other named executive officers, the cash retention payment was equal to two times the sum of their base salary and target bonus, plus an amount equal to the cost of 12 months of health insurance continuation under COBRA. The cash retention payment was in lieu of (and not in addition to) any other severance compensation that could become payable to the participant.
Given the previously disclosed decision to file for dissolution on January 4, 2021 and in order to realize certain potential tax benefits for the Company, the Compensation Committee and the Board approved the accelerated payment of the cash retention payment under the Wind Down Retention Plan in December 2020. In 2020, the following cash retention payments were paid to our named executive officers:
| | | | | | | | | | | | | | |
| Name | | Title | | Wind-Down Retention Benefits Paid in 2020 |
| Dominique Monnet | | President and Chief Executive Officer | | $ | 3,514,725 | |
| Christopher Stone | | Vice President, General Counsel and Secretary | | $ | 1,784,745 | |
| Jill Jene | | Former Vice President, Business Development | | $ | 1,266,443 | |
| Edward Imbrogno | | Vice President, Chief Financial Officer and Chief Accounting Officer | | $ | 1,241,275 | |
Dr. Jene’s benefits under the Wind Down Retention Plan were paid in August 2020 upon her separation from the Company.
Employee Benefits
The final component of the Company’s compensation strategy is the inclusion of certain employee benefits. We provide our employees, including our named executive officers, with customary benefits, including medical, dental, vision and life insurance coverage, short-term and long-term disability coverage and the ability to participate in our 401(k) plan, which provides for a Company matching contribution up to certain limits. The costs of our insurance coverage benefits are largely borne by us; however, employees pay portions of the premiums for some of these benefits. We think that these benefits are of the type customarily offered to employees by our peer group and in our industry.
This element of compensation is intended to provide assurance of financial support in the event of illness or injury and encourage retirement savings through a 401(k) plan.
All Other Compensation
Due to the Company’s unique business model, the difficulty in locating experienced and qualified executive officer candidates in the remote area surrounding the Company’s headquarters and the fact that in most cases we require our named executive officers to be located proximate to the Company’s headquarters in Nevada, the Compensation Committee decided to provide housing assistance in 2020 to Mr. Monnet ($4,000 per month) and Mr. Imbrogno ($4,000 per month). We generally do not offer any other perquisites to our named executive officers.
Other Executive Compensation Matters
Stock Ownership Guidelines
The Board has determined that ownership of our common stock by our officers promotes a focus on long-term growth and aligns the interests of our officers with those of our stockholders. As a result, the Board has adopted stock ownership guidelines stating that our chief executive officer and our other five most-highly-compensated officers (based on annual base salary), should maintain certain minimum ownership levels of our common stock.
Our stock ownership guidelines require the following levels of ownership among our named executive officers not later than five years after the date the person is initially appointed to the applicable position:
| | | | | | | | |
| Title | | Ownership Threshold |
| Chief Executive Officer | | Three times (3x) base salary |
| Chief Financial Officer and General Counsel | | One times (1x) base salary |
| Other Executives | | 50% of base salary |
As of December 31, 2020, all of our named executive officers were in compliance with this requirement.
The Board is permitted, in its discretion, to waive the application of our stock ownership guidelines to any covered individual if it determines that, as a result of the individual’s personal circumstances, application of our stock ownership guidelines would result in a hardship.
Hedging and Pledging Prohibition
Our Trading Compliance Policy prohibits our directors, officers, and other individuals designated as having access to material non-public information, both during their service with us and following their termination of service, from engaging in the following transactions: (i) short sales in our securities, (ii) hedging transactions, including zero-cost collars and forward sale contracts, that limit economic losses from holding our securities, (iii) holding our securities in a margin account, and (iv) pledging our securities. Other employees are strongly discouraged from engaging in these transactions. We prohibit and/or discourage our directors, officers and employees from engaging in hedging transactions because it is our view that such transactions detract from the alignment of our directors, officers and employees with our stockholders, signal to the market that individuals engaging in these transactions have no confidence in us or in our short-term prospects, and may reduce applicable individual’s incentive to improve our performance.
Clawback Policy
The Board has adopted a policy for recoupment of incentive compensation, or the clawback policy. The Board adopted the clawback policy to prevent executive officers involved in certain wrongful conduct from unjustly benefiting from that conduct, and to remove the financial incentives to engage in such conduct. The clawback policy generally requires an executive officer who is involved in wrongful conduct that results in a restatement of the Company’s financial statements to repay to the Company up to the full amount of any incentive compensation based on the financial statements that were subsequently restated. Incentive compensation includes bonuses or awards under the Company’s annual cash bonus plans, long-term incentive plans and equity incentive plans.
Tax and Accounting Considerations
In determining executive compensation, the Compensation Committee also considers, among other factors, the possible tax consequences to the Company and to our executive officers. The Compensation Committee has determined that our interests are best served in certain circumstances by providing compensation that is not deductible under Section 162(m) of the Code and,
accordingly, may grant such compensation that may be subject to the $1,000,000 annual limit on deductibility, including base salary, annual cash bonuses and long-term incentive awards.
Sections 280G and 4999 of the Code provide that executive officers, persons who hold significant equity interests and certain other highly-compensated service providers may be subject to an excise tax if they receive payments or benefits in connection with a change in control of the Company that exceeds certain prescribed limits, and that the Company (or a successor) may forfeit a deduction on the amounts subject to this additional tax. Further, Section 409A of the Code imposes certain additional taxes on service providers who enter into certain deferred compensation arrangements that do not comply with the requirements of Section 409A of the Code. We have not agreed to pay any named executive officer a “gross-up” or other reimbursement payment for any tax liability that he or she might owe as a result of the application of Section 280G, 4999 or 409A of the Code.
The Compensation Committee also considers the accounting consequences to the Company of different compensation decisions and the impact of certain arrangements on stockholder dilution. However, neither of these factors by themselves will compel a particular compensation decision.
Compensation Committee Report
Following the Company’s delisting from Nasdaq in January 2021, the Compensation Committee was disbanded, at which point the Board assumed the duties of the Compensation Committee. The Board has reviewed and discussed with management the Compensation Discussion and Analysis contained in this Annual Report on Form 10-K. Based on this review and discussion, the Board has decided to include the Compensation Discussion and Analysis in this Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Respectfully Submitted By:
The Board
Elizabeth O’Farrell (chairperson)
Alan Bazaar
Natasha Hernday
John McLaughlin
Dominique Monnet
Summary Compensation Table
The compensation earned by our chief executive officer, chief financial officer, the other individual serving as an executive officer as of the end of 2020 and our former vice president, business development (the named executive officers) for the last three fiscal years is set forth in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Title | | Year | | Salary | | Bonus | | Stock Awards(1) | | Option Awards(2) | | Non-Equity
Incentive Plan
Compensation | | All Other
Compensation | | Total |
| Dominique Monnet | | 2020 | | $ | 650,875 | | | $ | — | | | $ | 3,800,000 | | | $ | — | | | $ | 520,700 | | (3) | $ | 3,574,125 | | (4) | $ | 8,545,700 | |
| President and Chief | | 2019 | | $ | 635,000 | | | $ | — | | | $ | 1,678,000 | | | $ | 3,822,000 | | | $ | 508,000 | | | $ | 58,000 | | | $ | 6,701,000 | |
| Executive Officer | | 2018 | | $ | 525,000 | | | $ | — | | | $ | — | | | $ | 1,568,740 | | | $ | 346,500 | | | $ | 58,000 | | | $ | 2,498,240 | |
| | | | | | | | | | | | | | | | |
| Edward Imbrogno | | 2020 | | $ | 354,650 | | | $ | — | | | $ | 900,000 | | | $ | — | | | $ | 265,988 | | (3) | $ | 1,300,675 | | (5) | $ | 2,821,313 | |
| Vice President, Chief Financial Officer and Chief Accounting Officer | | 2019 | | $ | 294,200 | | | $ | — | | | $ | 82,500 | | | $ | 167,500 | | | $ | 211,943 | | | $ | 58,000 | | | $ | 814,143 | |
| | | | | | | | | | | | | | | | |
| Christopher Stone | | 2020 | | $ | 509,927 | | | $ | — | | | $ | 1,300,000 | | | $ | — | | | $ | 550,817 | | (6) | $ | 1,796,145 | | (7) | $ | 4,156,889 | |
| Vice President, General | | 2019 | | $ | 497,490 | | | $ | — | | | $ | — | | | $ | 1,300,000 | | | $ | 645,129 | | | $ | 10,000 | | | $ | 2,452,619 | |
| Counsel and Secretary | | 2018 | | $ | 483,000 | | | $ | — | | | $ | — | | | $ | 1,137,555 | | | $ | 500,940 | | | $ | 10,000 | | | $ | 2,131,495 | |
| | | | | | | | | | | | | | | | |
| Jill Jene | | 2020 | | $ | 224,347 | | | $ | — | | | $ | 600,000 | | | $ | — | | | $ | 167,708 | | (3) | $ | 1,277,843 | | (8) | $ | 2,269,898 | |
| Former Vice President, Business Development | | 2019 | | $ | 350,200 | | | $ | — | | | $ | — | | | $ | 600,000 | | | $ | 280,707 | | | $ | 10,000 | | | $ | 1,240,907 | |
| 2018 | | $ | 210,139 | | | $ | 50,000 | | (9) | $ | — | | | $ | 400,000 | | | $ | 108,000 | | | $ | 3,063 | | | $ | 771,202 | |
_______________
(1)Amounts in this column represent the grant date fair value of restricted stock awards granted in the relevant fiscal year, calculated in accordance with FASB ASC Topic 718. The amounts shown disregard estimated forfeitures. Assumptions used in the calculation of these amounts for awards are included in Note 19 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
(2)Amounts in this column represent the grant date fair value of stock options granted in the relevant fiscal year, calculated in accordance with FASB ASC Topic 718. The amounts shown disregard estimated forfeitures. Assumptions used in the calculation of these amounts are included in Note 19 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Mr. Stone was granted stock options on August 29, 2017, subject to the approval of the stockholders of the Company. As a result, pursuant to SEC rules and FASB ASC Topic 718, since the stock option grants were subject to stockholder approval, the grant date of such awards for purposes of FASB ASC Topic 718 and SEC disclosure rules was June 8, 2018, the date such option grants were approved by the stockholders. This date was also used to determine the grant date fair value of these stock options for purposes of FASB ASC Topic 718, which was $777,555. In addition, during 2018 Mr. Stone was granted additional stock options with a grant date fair value of $360,000. Assumptions used in the calculation of these amounts are included in Note 19 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
(3)Consists of a payment under the 2020 Annual Bonus Plan.
(4)Consists of: (a) matching contributions we made to our 401(k) plan - $11,400, (b) the housing allowance paid to Mr. Monnet - $48,000 and (c) retention benefits under the Wind Down Retention Plan - $3,514,725.
(5)Consists of: (a) matching contributions we made to our 401(k) plan - $11,400, (b) the housing allowance paid to Mr. Imbrogno - $48,000 and (c) retention benefits under the Wind Down Retention Plan - $1,241,275.
(6)Consists of: (a) payment under the 2020 Annual Bonus Plan - $382,445 and (b) the performance-based cash payment under the 2016/20 LTIP - $168,372.
(7)Consists of: (a) matching contributions we made to our 401(k) plan - $11,400 and (b) retention benefits under the Wind Down Retention Plan - $1,813,646.
(8)Consists of: (a) matching contributions we made to our 401(k) plan - $11,400 and (b) retention benefits under the Wind Down Retention Plan - $1,266,443.
(9)Consists of a signing bonus paid in connection with Dr. Jene’s employment with the Company.
Grants of Plan-Based Awards During 2020
The following table lists each grant of plan-based awards made by the Company during 2020 to our named executive officers:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards ($)(1) | | Estimated Future Payouts Under Equity Incentive Plan Awards (#)(2) | | All Other Stock Awards: Number of Shares of Stock or Units (#) | | Grant Date Fair Value of Stock Awards ($)(3) |
| Name | | Approval Date | | Grant Date | | Threshold | | Target | | Maximum | | Threshold | | Target | | |
| Dominique Monnet | | 1/8/2020 | | 1/8/2020 | | — | | — | | — | | — | | 1,233,766 | | | — | | $ | 3,800,000 | |
| | — | | — | | — | | $ | 520,700 | | | $ | 1,041,400 | | | — | | — | | | — | | |
| Edward Imbrogno | | 1/8/2020 | | 1/8/2020 | | — | | — | | — | | — | | 292,208 | | | — | | $ | 900,000 | |
| | — | | — | | — | | $ | 265,988 | | | $ | 531,976 | | | — | | — | | | — | | |
| Christopher Stone | | 1/8/2020 | | 1/8/2020 | | — | | — | | — | | — | | 422,078 | | | — | | $ | 1,300,000 | |
| | — | | — | | — | | $ | 382,445 | | | $ | 764,890 | | | — | | — | | | — | | |
| Jill Jene | | 1/8/2020 | | 1/8/2020 | | — | | — | | — | | — | | 194,805 | | | — | | $ | 600,000 | |
| | — | | — | | — | | $ | 269,216 | | | $ | 538,432 | | | — | | — | | | — | | |
_______________________
(1)The amounts in the below columns relate to the Company’s 2020 Annual Bonus Plan. Actual amounts paid in December 2020 under the 2020 Annual Bonus Plan were based on the Compensation Committee’s review of corporate performance and are included in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
(2)Reflects shares of restricted stock granted to our named executive officers in 2020. 40% of the restricted stock was scheduled to vest on the first anniversary of the grant date, with 2.5% vesting monthly thereafter. In February 2020, in connection with the Board adopting the Plan of Liquidation, all of the restricted stock accelerated and vested under the change in control definition in the Equity Plan.
(3)Amounts in this column represent the grant date fair value of restricted stock granted in 2020, calculated in accordance with FASB ASC Topic 718. The amounts shown disregard estimated forfeitures. Assumptions used in the calculation of these amounts are included in Note 19 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Outstanding Equity Awards at December 31, 2020
The following table sets forth information concerning stock options held by the named executive officers as of December 31, 2020 (there are no outstanding restricted stock awards as of such date):
| | | | | | | | | | | | | | | | | | | | | |
| Name | | Number of Securities Underlying Unexercised Options (#) Exercisable(1) | | Option Exercise Price ($)(2) | | Option Expiration Date | |
| Dominique Monnet | | 961,000 | | $1.85 | | 9/10/2027 |
| | 1,479,944 | | $1.16 | | 9/25/2028 | |
| | 2,450,000 | | $2.36 | | 3/28/2029 | |
| Edward Imbrogno | | 288,611 | | $1.32 | | 12/20/2028 | |
| | 108,766 | | $2.33 | | 3/25/2029 | |
| Christopher Stone | | 700,500 | | $1.58 | | 8/28/2027 |
| | 339,623 | | $1.16 | | 9/25/2028 |
| | 833,333 | | $2.36 | | 3/28/2029 |
| Jill Jene | | 384,615 | | $2.36 | | 3/28/2029 |
_____________________
(1)All stock options vested in February 2020 per the terms of the Equity Plan.
(2)Represents stock option exercise price, as adjusted on a dollar-for-dollar basis to reflect the per share value of the distributions of LENSAR common stock and Evofem common stock that occurred in 2020.
Option Exercises and Stock Vested in 2020
The following table sets forth (i) the number of options exercised by the named executive officers during 2020 and (ii) restricted shares granted to our named executive officers that vested during 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Exercised | | Stock Awards | |
| Name | | Number of Options Exercised (#) | | Value Realized on Exercise ($) | | Number of Shares Acquired on Vesting (#) | | Value Realized on Vesting ($) | |
| Dominique Monnet | | — | | $ | — | | | 1,764,908 | | | $ | 6,194,827 | | (1) |
| Edward Imbrogno | | — | | $ | — | | | 314,565 | | | $ | 1,104,123 | | (1) |
| Christopher Stone | | — | | $ | — | | | 444,488 | | | $ | 1,538,191 | | (2) |
| Jill Jene | | 377,358 | | $ | 407,547 | | (3) | 194,805 | | | $ | 683,766 | | (1) |
________________
(1)Value based on the “closing” price of the shares on the vesting date, February 7, 2020 ($3.51).
(2)Value based on the “closing” price of the shares on (i) the vesting date, February 7, 2020 ($1,481,494) with respect to 422,078 shares and (ii) the vesting date December 2, 2020 ($56,697) with respect to 22,410 shares.
(3)Value based on the difference between the exercise price ($1.16) and the “closing” price of the shares on the date of exercise, November 5, 2020 ($2.24).
Potential Payments upon Termination or Change in Control
Severance Arrangements with Named Executive Officers
Wind Down Retention Plan
After we announced our strategy to monetize our assets and distribute net proceeds to our stockholders, on December 21, 2019, the Compensation Committee of the Board adopted the Wind Down Retention Plan in which the Company’s executive officers and other employees who are participants in the Company’s Severance Plan are eligible to participate. All payments and other benefits paid out under the Wind Down Retention Plan are in lieu of, and not in addition to, the payments under the Severance Plan. For a further description of the Wind Down Retention Plan, see "--Wind Down Retention Plan" above.
Potential Payments Upon Termination or Change in Control
The terms of the Wind Down Retention Plan superseded any other severance arrangements with respect to any cash retention payments to be paid upon termination or a Change in Control. In addition, all outstanding equity awards vested in February and December of 2020 under the Wind Down Retention Plan. There are no further cash retention payments payable to any named executive officers as a result of termination or a Change in Control as of December 31, 2020 under the Wind Down Retention Plan or any other severance arrangements between the Company and any executive officer.
Jill Jene Separation Agreement
On August 15, 2020, we entered into a Confidential Severance Agreement and Release of All Claims with Jill Jene, Ph.D., our former Vice President, Business Development, which agreement is a condition under the Wind Down Retention Plan for the payment of the cash retention payment. Under the severance agreement, Dr. Jene agreed to a general release of claims in our favor and a covenant not to sue, among other promises. In consideration for her release of claims and covenants, Dr. Jene received a one-time payment of $1,266,443. In addition, Dr. Jene was retained as a consultant for the four-month period following her resignation, which was effective as of August 15, 2020.
CEO Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information regarding the relationship of the annual total compensation of our employees and the annual total compensation of Dominique Monnet, our President and Chief Executive Officer (our “CEO”) during 2020. The pay ratio included in this information is a reasonable estimate calculated in a manner that is intended to be consistent with Item 11402(u) of Regulation S-K.
For 2020, our last completed fiscal year:
•the median of the annual total compensation of all employees of our company (other than our CEO) was $710,082; and
•the annual total compensation of our CEO, as reported in the Summary Compensation Table included above, was $8,545,700.
Based on this information, for 2020, the ratio of the median of the total compensation of all employees of the Company to the annual total compensation of our CEO during 2020, was 1 to 12.
Determining the Median Employee
We determined that, as of December 31, 2020, our employee population consisted of ten individuals (not including our CEO), with all of these individuals located in the United States. Our employee workforce on such date consisted of full-time employees only.
For purposes of measuring the compensation of our employees, we selected total annual cash compensation for 2020 as the most appropriate measure of compensation, which was consistently applied to all our employees included in the calculation. We did not make any cost-of-living adjustments in identifying the “median employee”. With respect to the total annual compensation of the “median employee,” we identified and calculated the elements of such employee’s compensation for fiscal year 2020 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annual total compensation of $710,082.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 2020, each of Mr. Bazaar, Ms. O’Farrell, Ms. Hernday and Mr. Sandman served on the Compensation Committee for at least a portion of the year. None of the members of the Compensation Committee was an officer or an employee of the Company at any time during 2020. None of our executive officers serve as a member of the board of directors or compensation committee of any other entity that has one or more executive officers serving as a member of the Board or Compensation Committee. Our chief executive officer assists the Compensation Committee by presenting proposals and recommendations to the Compensation Committee, information on Company and individual performance of the named executive officers and management’s perspective and recommendations on compensation matters. Our chief executive officer recuses himself from that portion of the Compensation Committee meetings involving deliberation and decision making of his own compensation.
COMPENSATION OF OUR DIRECTORS
The Board has established its compensation policy for outside directors, which was most recently amended in April 2020, primarily in consultation with the Compensation Committee’s current compensation consultant, Board Advisory. Members of the Board who are also employees of the Company are not entitled to any compensation with respect to their service as Board members.
Cash Compensation
Prior to April 1, 2020, each outside director received amounts under a retainer based on a per annum rate of $100,000, except for the Chairperson who received a retainer based on a per annum rate of $115,000, for his or her service on the Board. Each outside director also received annual cash retainers for service on Board committees, as follows:
•Each member of the Audit Committee received a retainer of $17,500 per year, except for the chairperson of the Audit Committee who received a retainer of $30,000 per year, for his or her service on the Audit Committee.
•Each member of the Compensation Committee received a retainer of $15,000 per year, except for the chairperson of the Compensation Committee who received a retainer of $22,500 per year, for his or her service on the Compensation Committee.
•Each member of the Litigation Committee received a retainer of $10,000 per year, except for the chairperson of the Litigation Committee who received a retainer of $20,000 per year, for his or her service on the Litigation Committee.
•Each member of the Nominating and Governance Committee received a retainer of $2,500 per year, except for the chairperson of the Nominating and Governance Committee who received a retainer of $5,000 per year, for his or her service on the Nominating and Governance Committee.
Effective April 1, 2020, the Board reduced the retainer from $100,000 per year to $50,000 per year, applicable to all outside directors, for service on the Board. It also increased the retainer for membership and chairpersonship of the Nominating and Governance Committee to $5,000 per year and $10,000 per year, respectively, to be aligned with the 50th percentile of the Company’s peer group. In addition, in connection with the Cost Committee that was formed in February 2020, the Board established a retainer of $5,000 per year for each member’s service and $10,000 per year for the chairperson’s service.
All cash compensation paid to outside directors for their service on the Board and its committees is paid on a quarterly basis in arrears.
We also reimburse our directors for their reasonable travel expenses for Board and committee meetings, although there were no in-person Board or committee meetings requiring travel expenses in 2020.
Equity Compensation
We provide our outside directors with equity awards as a portion of their total compensation to ensure that our outside directors own common stock in the Company and their interests are aligned with our stockholders. In 2020, given the change in the Company’s strategy to liquidate its assets and a cooperation agreement with one of the Company’s stockholders, the Compensation Committee and the Board revised the structure of equity compensation for our outside directors. The Board agreed to align its equity compensation in form and amount with the 50th percentile of the Company’s peer group. In doing so, it increased the amount of the annual equity compensation to awards with a grant date value of $187,500, which value was granted 50% in the form of restricted stock awards and 50% in the form of stock options.
Such grants were made to each current outside director annually after the conclusion of our annual general meeting of stockholders in August 2020. Each grant of restricted stock or stock options, as the case may be, was scheduled to vest on the first anniversary of the grant date so long as the director continues to serve on the Board on the vesting date. In the case of restricted stock, during the vesting period, our outside directors have the right to vote their restricted stock and to receive any dividends or distributions paid on their restricted stock, except that dividends or distributions are accumulated and paid on the earlier of the vesting of the underlying stock in accordance with the vesting conditions of the original award or March 15th of the year following the payment of such dividend or distribution to all stockholders. Such grants were also subject to acceleration upon the date the Board approved the filing of a certificate of dissolution with the State of Delaware, which occurred on November 5, 2020.
Any outstanding stock options held by directors are subject to equitable adjustments to ensure such directors realize the same benefits provided to stockholders in the event one or more cash or other distributions become payable to stockholders. Consistent with the existing terms of the Equity Incentive Plan, in the event one or more cash or other distributions are paid to stockholders,
the exercise price of outstanding stock options will be containedreduced on a dollar-for-dollar basis to reflect the per share value of such distributions. I the event that the Company declares cash or other distributions that, in the Proxy Statementaggregate, 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 distributions 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 shall be paid with respect to a post-dissolution cash or other distributions with respect to a stock-option that was not exercised prior to dissolution.
2020 Compensation of Directors
In 2020, our outside directors who served on the Board during 2020 earned the compensation set forth in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Director | | Fees Earned | | Stock Awards(1) | | Option Awards(1) | | All Other Compensation | | Total |
| Elizabeth O’Farrell | | $ | 128,750 | | | $ | 93,750 | | | $ | 93,750 | | | $ | — | | | $ | 316,250 | |
Alan Bazaar(2) | | $ | 58,885 | | | $ | 117,111 | | $ | 117,111 | | | $ | — | | | $ | 293,107 | |
David W. Gryska(3) | | $ | 96,875 | | | $ | 93,750 | | | $ | 93,750 | | | $ | — | | | $ | 284,375 | |
| Natasha Hernday | | $ | 85,377 | | | $ | 93,750 | | | $ | 93,750 | | | $ | — | | | $ | 272,877 | |
| John P. McLaughlin | | $ | 70,000 | | | $ | 93,750 | | | $ | 93,750 | | | $ | 97,500 | | (4) | $ | 355,000 | |
Paul W. Sandman(5) | | $ | 77,527 | | | $ | — | | | $ | — | | | $ | — | | | $ | 77,527 | |
Shlomo Yanai(6) | | $ | 30,834 | | | $ | — | | | $ | — | | | $ | 10,000 | | (7) | $ | 40,834 | |
_______________
(1)Amounts in this column represent the grant date fair value of the stock options and restricted stock granted to our outside directors, as determined in accordance with FASB ASC Topic 718. The amounts shown disregard estimated forfeitures. Assumptions used in the calculation of these amounts for awards are included in Note 19 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
As of December 31, 2020, Ms. O’Farrell held 244,721 outstanding stock options; Messrs. Gryska and Bazaar and Ms. Hernday held 118,671 outstanding stock options; Mr. McLaughlin held 2,166,821 outstanding stock options and Mr. Sandman held 126,050 outstanding stock options.
(2)Mr. Bazaar was appointed to the Board in February 2020 pursuant to the Engine Cooperation Agreement.
(3)Mr. Gryska resigned from the Board effective December 31, 2020.
(4)Includes the following compensation for Mr. McLaughlin: (i) $60,000 earned under a consulting agreement for services provided in connection with the transition after he retired as the Company’s chief executive officer at the end of 2018 and (ii) $37,500 in connection with his service as a director for LENSAR, Inc., while it was a subsidiary of the Company.
(5)Mr. Sandman resigned from the Board effective August 19, 2020.
(6)Mr. Yanai resigned from the Board effective April 30, 2020.
(7)Fees paid to Mr. Yanai under a consulting agreement for services provided in connection with certain monetization strategies after his resignation.
Stock Ownership Guidelines for Directors
The Board has determined that ownership of our 2018 Annual Meetingcommon stock by our officers and directors promotes a focus on long-term growth and aligns the interests of Stockholdersour officers and directors with those of our stockholders. As a result, the Board adopted stock ownership guidelines stating that our outside directors should maintain certain minimum ownership levels of our common stock.
Our stock ownership guidelines require that each outside director should own shares of common stock with a value of at least three times the annual cash retainer we pay to the outside director not later than five years after the date the person initially becomes an outside director. As of December 31, 2020, all of our outside directors are in compliance with this requirement or are on track to be compliant within the compliance period.
The Board is incorporated herein by reference.permitted, in its discretion, to waive the application of our stock ownership guidelines to any covered individual if it determines that, as a result of the individual’s personal circumstances, application of the ownership guidelines would result in a hardship. No such waivers were approved in 2020 for any of our officers or directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
Following the filing of the certificate of dissolution with the Secretary of State of Delaware in January 2021, the Company can no longer issue any equity securities, including through any equity compensation plans. The following table provides information requiredon our equity compensation plans as of December 31, 2020.
As of December 31, 2020, we had one active stock-based incentive plan in place under which equity awards were outstanding or shares of our common stock were authorized for issuance and stand-alone inducement awards to one employee, detailed as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | (a) | | (b) | | | (c) |
| Equity compensation plans approved by security holders | | 10,180,051 | | (1) | | $ | 1.87 | | (2) | | 8,468,205 | |
Equity compensation plans not approved by security holders (3) | | 961,000 | | | | $ | 1.85 | | (2) | | — | |
_________________
(1)Represents outstanding stock options as of December 31, 2020 under the Amended and Restated 2005 Equity Incentive Plan.
(2)Represents weighted-average stock option exercise price, as adjusted on a dollar-for-dollar basis to reflect the per share value of the distributions of LENSAR common stock and Evofem common stock that occurred in 2020.
(3)As an inducement material to the decision by Dominique Monnet to accept employment with the Company, the Compensation Committee approved the grant of inducement awards to Mr. Monnet as employment inducement awards pursuant to Nasdaq Listing Rule 5635(c)(4). Effective September 11, 2017, Mr. Monnet was granted stock options to purchase 961,000 shares of the Company’s common stock at an exercise price equal to the closing price per share of the Company’s common stock on the date of grant. All of the options vested in February 2020 upon the Board’s adoption of the Plan of Liquidation. For a description of the inducement awards to Mr. Monnet, please see Note 19 to the Consolidated Financial Statements included in this Item 12 will be containedAnnual Report on Form 10-K.
Security Ownership of Certain Beneficial Owners and Management
On December 28, 2020, the Company filed a Form 25 with the SEC notifying the SEC of its intent to voluntarily withdraw its common stock from listing and registration on an exchange. Effective before the market opened on December 31, the Company requested Nasdaq to suspend trading in its common stock in anticipation of filing for dissolution. On January 4, 2020 in accordance with Section 275 of the Proxy StatementDGCL and the Plan of Dissolution, the Company filed a certificate of dissolution with the Secretary of State of Delaware, closed its stock transfer books and discontinued recording transfers of its Common Stock. On January 7, 2020, the Company’s common stock was formally delisted from the Nasdaq Global Select Market. From and after the effectiveness of the filing for our 2018 Annual Meetingdissolution on January 4, 2021, the Company’s stockholders have only such rights and obligation as are provided under the DGCL for stockholders of Stockholders and is incorporated herein by reference.a dissolved corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Procedures for Approval of Related Person Transactions
The information required by this Item 13Audit Committee is responsible for reviewing and approving all related person transactions, including transactions with executive officers and directors, for potential conflicts of interests or other improprieties. Under SEC rules, related person transactions are those transactions where we are or may be a party and the amount involved exceeds $120,000, and where any of our directors or executive officers or any other related person had or will be containedhave a direct or indirect material interest, excluding, among other things, compensation arrangements with respect to employment and Board membership. The Audit Committee
would approve a related person transaction if it determined that the transaction was in the Proxy StatementCompany’s best interests and on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances.
The Audit Committee has adopted a stringent written policy whereby the Audit Committee will review for approval all related person transactions where the amount involved is anticipated to exceed $25,000. Our directors are required to disclose to the Board any potential conflict of interest or personal interest in a transaction that the Board or the Company is considering. Our executive officers are required to disclose any related person transaction to our 2018 Annual MeetingCompliance Officer who would notify the Audit Committee of Stockholdersthe transaction. We poll our directors regularly, but no less frequently than annually, with respect to related person transactions and their service as an officer or director of other entities.
Any director involved in a related person transaction that is incorporated hereinbeing reviewed or approved must recuse himself or herself from participation in any related deliberation or decision. All related person transactions anticipated to exceed $25,000 are reviewed in advance of the transaction being completed.
Related Person Transactions
There were no transactions in 2020 and there is not any currently proposed transaction where we were or are to be a party and the amount involved exceeded $120,000, and where any of our directors or executive officers or any other related person had or will have a direct or indirect material interest, other than the compensation paid to our executive officers with respect to their employment relationship with us and compensation paid to our outside directors for their service as members of the Board, which compensation is disclosed above in “Item 11. Executive Compensation.”
Independence of Directors
As required under the Nasdaq listing standards, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by reference.the board of directors. The Board consults with the Company’s counsel to ensure that the Board’s determinations are consistent with relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in the applicable Nasdaq listing standards, as in effect from time to time.
Prior to the Company’s voluntary delisting from Nasdaq, consistent with these considerations, after review of all relevant transactions or relationships between each director, or any of his or her family members, and the Company, its senior management and its independent auditors, the Board affirmatively determined that the following five directors were independent directors within the meaning of the applicable Nasdaq listing standards during their service on the Board after January 1, 2020: Ms. O’Farrell, Mr. Bazaar, Ms. Hernday, Mr. Gryska and Mr. Sandman. In making these determinations, the Board found that none of these directors or nominees for director had a material or other disqualifying relationship with the Company. Mr. McLaughlin, the Company’s former Chief Executive Officer, and Mr. Monnet, the Company’s President and Chief Executive Officer, were not independent directors by virtue of their employment history with the Company.
The Board also determined that each member of each of the Compensation Committee, the Nominating and Governance Committee and the Audit Committee was independent during 2020.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Principal Independent Registered Public Accounting Firm Fees and Services
The informationaggregate fees billed to the Company for the fiscal years ended December 31, 2020 and 2019, by PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm:
| | | | | | | | | | | | | | |
| (in thousands) | | 2020 | | 2019 |
| Fee Category | | | | |
Audit Fees(1) | | $ | 4,330 | | | $ | 2,812 | |
Audit-related Fees(2) | | — | | | — | |
Tax Fees(3) | | — | | | — | |
All Other Fees(4) | | 3 | | | 2 |
| Total Fees | | $ | 4,333 | | | $ | 2,814 | |
_______________
(1)Audit fees consist of fees for professional services rendered for the audit of our consolidated financial statements, attestation services surrounding the effectiveness of our internal control environment and review of the interim condensed consolidated financial statements included in quarterly reports. It also includes services that normally would be provided in connection with statutory and regulatory filings or engagements and services that generally only the principal auditor reasonably can provide to a client, such as comfort letters, attestation services (except those not required by this Item 14 will be containedstatute or regulation), procedures related to audit of income tax provisions and related reserves, consents and assistance with and review of documents filed with the SEC.
(2)Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees.”
(3)Tax fees consist of fees for tax compliance, tax advice and tax planning.
(4)All other fees include any fees billed that are not audit, audit related or tax fees. In 2020 and 2019, these fees included a license to an accounting research database and an accounting disclosure checklist.
The Audit Committee pre-approves all audit services provided by the independent registered public accounting firm and permissible non-audit services in excess of a certain de minimis amount provided by the Proxy Statementindependent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. The Audit Committee has a policy for our 2018 Annual Meetingthe pre-approval of Stockholdersservices provided by the independent registered public accounting firm. Under the policy, any pre-approval is detailed as to the particular service or category of services and is incorporated herein by reference.includes an estimate of the related fees. The Audit Committee may delegate pre-approval authority to one or more of its members. Such a member must report any decisions to the Audit Committee at the next scheduled meeting. During fiscal years 2020 and 2019, the Audit Committee approved all of the fees described above.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| |
(a) | The following documents are filed as part of this Annual Report on Form 10-K: |
| |
(1) | Financial Statements - See Index to Consolidated Financial Statements at Item 8 of this Annual Report on Form 10-K. |
(a)The following documents are filed as part of this Annual Report on Form 10-K:
(1)Financial Statements - See Index to Consolidated Financial Statements at Item 8 of this Annual Report on Form 10-K.
| |
(2) | Financial Statement Schedules |
(2)Financial Statement Schedules
The financial statement schedules are omitted because the information is not applicable, not required under the instructions, or the information requested is set forth in our Consolidated Financial Statements or related notes thereto.
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(3) | Exhibits required by Item 601 of Regulation S-K |
(3)Exhibits required by Item 601 of Regulation S-K
The information required by this Section (a)(3) of Item 15 is set forth on the exhibit index that precedes the Signatures page of this Annual Report on Form 10-K.
ITEM 16. FORM 10-K SUMMARY
None.
EXHIBIT INDEX
| | | | | |
Exhibit
Number | Exhibit Title |
| |
Exhibit
Number | Exhibit Title |
| |
| 2.1 | |
| |
| 2.2 | |
| |
| 3.1 | Restated Certificate of Incorporation effective March 23, 1993 (incorporated by reference to Exhibit 3.1 to Annual Report on Form 10-K filed March 31, 1993) |
| |
| 3.2 | |
| |
| 3.3 | |
| |
| 3.4 | |
| |
| 3.5 | |
| |
| 3.6 | |
| |
4.13.7 | |
| |
4.2 | |
| |
4.3 | |
| |
4.44.1 | |
| |
4.5 | |
| |
4.64.2 | |
| |
4.74.3 | |
| |
4.84.4 | |
| |
4.94.5 | |
| |
10.1*4.6 | |
| |
10.2*4.7 | |
| |
10.3* | |
| |
|
| |
10.4*4.8# | |
| |
10.5*10.1* | |
| |
10.6* | Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-1 filed December 16, 1991) |
| |
10.7* | |
| |
10.810.2 | |
| |
| | | | | |
10.910.3 | |
| |
10.1010.4 | |
| |
10.1110.5 | |
| |
10.1210.6 | |
| |
10.1310.7 | |
| |
10.1410.8 | |
| |
10.15*10.9* | |
| |
10.1610.10 | |
| |
10.1710.11 | |
| |
10.1810.12 | |
| |
10.19*10.13 | |
| |
10.20* | |
| |
10.21 | |
| |
10.22 | |
| |
10.2310.14 | |
| |
10.24 | |
| |
|
| |
10.25*10.15 | |
| |
10.26* | |
| |
10.27 | |
| |
10.2810.16 | |
| |
10.2910.17 | |
| |
10.30 | |
| |
10.31 | |
| |
10.3210.18 | |
| |
10.3310.19 | |
| |
10.3410.20 | |
| |
10.3510.21* | |
| |
10.36* | |
| |
10.3710.22 | |
| |
10.3810.23 | |
| |
| | | | | |
10.3910.24 | |
| |
10.40 | |
| |
10.41 | |
| |
10.4210.25 | |
| |
10.4310.26 | |
| |
10.44 | |
| |
|
| |
10.4510.27* | |
| |
10.46* | |
| |
10.47* | |
| |
10.48*10.28 | |
| |
10.49* | |
| |
10.50 | |
| |
10.51*10.29* | |
| |
10.52* | |
| |
10.53* | |
| |
10.5410.30 | |
| |
10.55 | |
| |
10.56*10.31* | |
| |
10.57* | |
| |
10.5810.32 | |
| |
10.5910.33 | |
| |
10.6010.34 | |
| |
10.61 | |
| |
10.6210.35 | |
| |
10.6310.36 | |
| |
10.64 | |
| |
10.65 | |
| |
|
| |
10.6610.37 | |
| |
10.6710.38* | |
| |
10.6810.39* | |
| |
10.6910.40* | |
| |
10.7010.41 | |
| |
| 10.42* | |
| |
| 10.43* | |
| |
| 10.44* | |
| | | | | |
| |
| 10.45* | |
| |
| 10.46 | |
| |
| 10.47* | |
| |
| 10.48* | |
| |
| 10.49 |
|
| |
| 10.50* | |
| |
| 10.51* | |
| |
| 10.52† | |
| |
| 10.53* | |
| |
| 10.54 | |
| |
| 10.55 | |
| |
| 10.56* | |
| |
| 10.57* | |
| |
| 10.58* | |
| |
| 10.59* | |
| |
| 10.60* | |
| |
| 10.61* | |
| |
| 10.62* | |
| |
| 10.63* | |
| |
| 10.64* | |
| |
| 10.65* | |
| |
| 10.66 | |
| |
| 10.67* | |
| |
| 10.68 | |
| | | | | |
| |
| 10.69 | Settlement and Mutual Release Agreement among the Company, Samuel J. Wohlstadter, Nadine H. Wohlstadter, Hyperion Catalysis International, Wellstat Vaccines, LLC, Wellstat Immuno Therapeutics, 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., and Defined Diagnostics, LLC (f/k/a Wellstat Diagnostics, LLC, effective as of August 11, 2020 (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed November 13, 2020) |
| |
| 10.70 | |
| |
10.71#10.71* | |
| |
| 10.72 | |
| |
| 10.73 | |
| |
| 10.74 | |
| |
12.1#10.75# | |
| |
| 21.1# | |
| |
23.1#31.1# | |
| |
31.1# | |
| |
| 31.2# | |
| |
| 32.1#+ | |
| |
101.INS | XBRL Instance Document |
| |
101.SCH | XBRL Taxonomy Extension Schema |
| |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| |
101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| |
101.LAB | XBRL Taxonomy Extension Label Linkbase |
| |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
|
| |
#101.INS | Filed herewith.XBRL Instance Document |
| |
*101.SCH | XBRL Taxonomy Extension Schema |
| |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
| | | | | |
| # | Filed herewith. |
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| * | Management contract or compensatory plan or arrangement. |
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| † | Certain information inPortions of this exhibit hashave been redacted in compliance with Regulation S-K Item 601(b)(10). The omitted information is not material and filed separately withwould likely cause competitive harm to the Securities and Exchange Commission pursuant to a confidential treatment request under 17 C.F.R. Sections 200.80(b)(4) and 24b-2.Company if publicly disclosed. |
| + | The certifications attached as Exhibit 32.1 accompany this Annual Report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| PDL BIOPHARMA, INC. | |
| | | |
| By: | PDL BIOPHARMA, INC. | /S/ DOMINIQUE MONNET | |
| | (Dominique Monnet) | |
By: | | /S/ JOHN P. MCLAUGHLIN | |
| | John P. McLaughlin | |
| | President and Chief Executive Officer | |
| | | |
| Date: | March 16, 201826, 2021 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signature | Title | Date |
| | |
| /S/ DOMINIQUE MONNET | President and Chief Executive Officer (Principal Executive Officer)| March 26, 2021 | | (Dominique Monnet) | | | | | | Signature | Title | Date | | | | /S/ JOHN P. MCLAUGHLINEDWARD A. IMBROGNO | Chief Executive Officer (Principal Executive Officer) | March 16, 2018 | (John P. McLaughlin) | | | | | | /S/ PETER S. GARCIA | Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | March 16, 201826, 2021 | (Peter S. Garcia)Edward A. Imbrogno) | | | | | | /S/ STEFFEN PIETZKE /S/ ALAN BAZAAR | Vice President, Finance and Chief Accounting Officer (Principal Accounting Officer)Director | March 16, 201826, 2021 | (Steffen Pietzke)Alan Bazaar) | | | | | | /S/ PAUL EDICKNATASHA A. HERNDAY | Director | March 16, 201826, 2021 | (Paul Edick)Natasha A. Hernday) | | | | | | /S/ DAVID GRYSKAJOHN P. MCLAUGHLIN | Director | March 16, 201826, 2021 | (David Gryska)John P. McLaughlin) | | | | | | /S/ JODY S. LINDELLELIZABETH O’FARRELL | Director | March 16, 201826, 2021 | (Jody S. Lindell)Elizabeth O’Farrell) | | | | | | /S/ DR. SAMUEL SAKS | Director | March 16, 2018 | (Dr. Samuel Saks) | | | | | | /S/ PAUL W. SANDMAN | Director | March 16, 2018 | (Paul W. Sandman) | | | | | | /S/ HAROLD E. SELICK | Director | March 16, 2018 | (Harold E. Selick) | | |
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