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. launched a generic equivalent approved product. To date, the other two generic equivalent approved products have not launched.

PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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, retroactive to February 2017.

At June 30, 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 September 30, 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 ~~September 30, 2017,~~March 31, 2020, 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 auditors engaged to perform theabove described 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 settlement payment was transferred to the Company under the terms of the Depomed Royalty Agreement in November of 2017 and has been reflected in the Depomed royalty rights asset discounted cashflow valuation as of September 30, 2017.

On May 31, 2016, the Company obtained a notification indicating that the 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 future cash flows and discount rate used in the discounted cash flow model at June 30, 2016. 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 September 30, 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 September 30, 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 expected product launch, the Company adjusted the timing of future cash flows and discount rate used in the discounted cash flow model at September 30, 2017. In April 2017, Boehringer Ingelheim launched Synjardy XR.streams.

As of ~~September 30, 2017,~~March 31, 2020, the fair value of the asset acquired as reported in “Assets held for sale” on the Company’s Condensed Consolidated Balance Sheet was ~~$222.7~~$210.8 million and the maximum loss exposure was ~~$222.7~~$210.8 million, which reflects an estimated cost to sell of $4.7 million.

VBViscogliosi Brothers Royalty Agreement

On June 26, 2014, the Company entered into a Royalty Purchase and Sale Agreement (the “VB Royalty Agreement”) with Viscogliosi Brothers, LLC (“VB”), whereby VB conveyed to the Company the right to receive royalties payable on sales of a spinal implant that 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 ~~includes~~include royalties accruing from and after April 1, 2014. Under the terms of the VB Royalty Agreement, the Company receives 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 will be returned to VB. ~~VB may~~VB’s ability to 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 and the VB Royalty Agreement were negotiated separately.~~amount expired on June 26, 2018.

The estimated fair value of the royalty ~~right~~rights at ~~September 30, 2017,~~March 31, 2020, 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 approximately a ~~nine-year~~ten-year period. The ~~discount rate utilized was approximately 17.5%. Significant judgment is required in selecting the appropriate discount rate. Should this discount rate increase or decrease by 2.5%, the~~estimated fair value of ~~this~~the asset ~~could decrease by $1.2 million~~is subject to variation should those cash flows vary significantly from the Company’s estimates. The Company periodically assesses the expected future cash flows and to the extent such payments are greater or ~~increase by $1.3 million, respectively.~~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. A third-party expert is engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase or decrease by ~~$0.4~~$0.3 million, respectively. ~~A third-party expert~~Significant judgment is required in selecting the appropriate discount rate. The discount rate utilized was ~~engaged to assist management with~~15.0%. Should this discount rate increase or decrease by 2.5%, the ~~development of its estimate of the expected future cash flows, when deemed necessary. The~~ fair value of ~~the~~this 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.could decrease by $1.3 million or increase by $1.5 million, respectively.

As of ~~September 30, 2017,~~March 31, 2020, 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.

As of March 31, 2020, the fair value of the asset acquired as reported in “Assets held for sale” on the Company’s Condensed Consolidated Balance Sheet was ~~$15.4~~$13.5 million and the maximum loss exposure was ~~$15.4~~$13.5 million, which reflects an estimated cost to sell of $0.3 million.

~~U-M~~University of Michigan Royalty Agreement

On November 6, 2014, the Company acquired a portion of all royalty payments of the Regents of the University of Michigan’s (“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’s~~the U-M license agreement with Genzyme Corporation, a Sanofi company (“Genzyme”) until expiration of the licensed patents, excluding any patent term extension. Cerdelga, an oral therapy for adult patients with Gaucher disease type 1, was developed by Genzyme. Cerdelga was approved in the United States onin August ~~19,~~ 2014, in the European Union on(“EU”) in January ~~22,~~ 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 ~~European Union~~United States, the EU and Japan, national pricing and reimbursement decisions are delayed in some countries. ~~At June 30, 2016, 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 period end.~~

The estimated fair value of the royalty right at ~~September 30, 2017~~March 31, 2020 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

PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

discounted cash flow was based upon expected royalties from sales of licensed product over approximately a ~~five-year~~two-year period. The discount rate utilized was approximately 12.8%. 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 $2.0 million or increase by $2.2 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $0.9 million or decrease by $0.9 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. Theestimated 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~~rate utilized and general market conditions affecting fair market value is performed in each reporting period. A third-party expert is engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase or decrease by $0.5 million, respectively. Significant judgment is required in selecting the appropriate discount rate. The discount rate utilized was approximately 12.8%. Should this discount rate increase or decrease by 2.5%, the fair value of this asset could decrease or increase by $0.5 million, respectively. As of March 31, 2020, the Company’s discounted cash flow analysis reflects its expectations as to the amount and timing of future cash flows.

As of ~~September 30, 2017,~~March 31, 2020, the fair value of the asset acquired as reported in “Assets held for sale” on the Company’s Condensed Consolidated Balance Sheet was ~~$35.4~~$18.6 million and the maximum loss exposure was ~~$35.4~~$18.6 million, which reflects an estimated cost to sell of $0.4 million.

~~ARIAD Royalty Agreement~~

On July 28, 2015, the Company entered into the revenue interest assignment agreement (the “ARIAD Royalty Agreement”) with ARIAD Pharmaceuticals, Inc. (“ARIAD”), whereby the Company acquired the rights 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, 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 rights for a specified amount. The Company elected the fair value option to account for the hybrid instrument in its entirety. Any embedded derivative shall not be separated from the host contract. The asset acquired pursuant to the ARIAD Royalty Agreement represents a single unit of accounting.

In January 2017, Takeda Pharmaceutical Company Limited (“Takeda”) announced that it had entered into a definitive agreement to acquire ARIAD. The acquisition was consummated on February 16, 2017 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.

~~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 owned~~wholly-owned subsidiary of AcelRx Pharmaceuticals, Inc. (“AcelRx”), whereby the Company acquired the rights to receive a portion of the royalties and certain milestone payments on sales of Zalviso^® (sufentanil sublingual tablet system) in the ~~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 ~~will receive~~receives 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.

As of ~~September 30, 2017,~~March 31, 2020, and December 31, ~~2016,~~2019, the Company determined that its royalty rights under the AcelRx Royalty Agreement represented a variable interest in a variable interest entity. However, the Company does not have 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 consolidation by the Company.

The estimated fair value of the royalty right at September 30, 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 $10.2 million or increase by $12.6 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase or decrease by $1.9 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 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.

~~As of September 30, 2017, the fair value of the asset acquired as reported in the Company’s Condensed Consolidated Balance Sheet was $74.1 million and the maximum loss exposure was $74.1 million.~~

Dr. Stephen Hoffman is the President of 10x Capital, Inc., a third-party consultant to the Company, and is also a member of the board of directors of AcelRx. Dr. Hoffman recused himself from the AcelRx board of directors with respect to the entirety of its discussions and considerations of the transaction. Dr. Hoffman was compensated for his contribution to consummate this transaction by the Company as part of his consulting agreement with the Company. The Company concluded Dr. Hoffman is not considered a related party in accordance with ASC 850, ~~Related Party Disclosures~~ ~~and SEC Regulation S-X,~~ ~~Related Party Transactions Which Affect the Financial Statements~~.

~~Avinger Credit and Royalty Agreement~~

On April 18, 2013, the Company entered into the Credit Agreement (the “Avinger Credit and Royalty Agreement”) with Avinger, Inc. (“Avinger”), under which the Company made available to Avinger up to $40.0 million (of which only $20.0 million was funded) to be used by Avinger in connection with the commercialization of its lumivascular catheter devices and the development of Avinger’s lumivascular atherectomy device. On September 22, 2015, Avinger elected to prepay the note receivable in whole (including interest and a prepayment fee) for a payment of $21.4 million in cash.

Under the terms of the Avinger Credit and Royalty Agreement, the Company was entitled to receive royalties at a rate of 1.8% on Avinger’s net revenues until the note receivable was repaid by Avinger. Upon the repayment of the note receivable by Avinger, which occurred on September 22, 2015, the royalty rate was reduced to 0.9%, subject to certain minimum payments from the prepayment date until April 2018. The Company has accounted for the royalty rights in accordance with the fair value option. The fair value of the royalty right at September 30, 2017March 31, 2020 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 approximately a ~~one-year~~thirteen-year period. The discount rate utilized was approximately 15.0%. Significant judgment is required in selecting the appropriate discount rate. Should this discount rate increase or decrease by 5%, the fair value of this asset could decrease by $16,000 or increase by $17,000, respectively. Should the expected royalties increase or decrease by 5%, the fair value of the asset could increase or decrease by $43,000, respectively. Management considered the contractual minimum payments when developing its estimate of the expected future cash flows. Theestimated 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~~rate utilized and general market conditions affecting fair market ~~value~~valuation is performed infor each reporting period.

As A third-party expert is engaged to assist management with the development of ~~September 30, 2017,~~its estimate of the expected future cash flows, when deemed necessary. Should the expected royalties increase or decrease by 2.5%, the fair value of the ~~royalty~~ asset could increase or decrease by $0.3 million, respectively. Significant judgment is required in selecting the appropriate discount rate. The discount rate utilized was approximately 13.4%. Should this discount rate increase or decrease by 2.5%, the fair value of this asset could decrease by $1.2 million or increase by $1.4 million, respectively. As of March 31, 2020, 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.

As of March 31, 2020, the fair value of the asset acquired as reported in “Assets held for sale” on the Company’s Condensed Consolidated Balance Sheet was ~~$0.9~~$12.9 million and the maximum loss exposure was ~~$0.9~~$12.9 million, which reflects an estimated cost to sell of $0.3 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.

PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

The estimated fair value of the royalty right at ~~September 30, 2017,~~March 31, 2020, 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~~approximately a six-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 $0.3 million or increase by $0.3 million, respectively. Should the expected royalties increase or decrease by 2.5%, theestimated fair value of the asset ~~could increase by $0.1 million or decrease by $0.1 million, respectively.~~is subject to variation should those cash flows vary significantly from the Company’s estimates. An evaluation of those estimates, discount rate utilized and general market conditions affecting fair market value is performed in each reporting period. 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~~Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase or decrease by less than $0.1 million, respectively. Significant judgment is ~~subject to variation should those cash flows vary significantly from~~required in selecting the ~~Company’s estimates. At each reporting period, an evaluation~~appropriate discount rate. The discount rate utilized was approximately 14.4%. Should this discount rate increase or decrease by 2.5%, the fair value 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 September 30, 2017.this asset could decrease or increase by less than $0.1 million, respectively.

As of ~~September 30, 2017,~~March 31, 2020, 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.

As of March 31, 2020, the fair value of the asset acquired as reported in “Assets held for sale” on the Company’s Condensed Consolidated Balance Sheet was ~~$3.5~~$0.5 million and the maximum loss exposure was ~~$3.5~~$0.5 million, which reflects an estimated cost to sell of less than $0.1 million.

The following tables summarize the changes in Level 3 ~~assets and liabilities~~Royalty Right Assets and the gains and losses included in earnings for the ~~nine~~three months ended ~~September 30, 2017:~~March 31, 2020:

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 for the period
Change in fair value of royalty rights - at fair value $ 132,224

Proceeds from royalty rights - at fair value $ (74,404 )
Total net change in fair value for the period 57,820

Fair value as of September 30, 2017

$ 351,969

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 September 30, 2017
Depomed $ 164,070
$ —
$ 58,625
$ 222,695
VB 14,997
—
440
15,437
U-M 35,386
—
63
35,449
ARIAD 108,631
(108,169 ) (462 ) —
AcelRx 67,483
—
6,582
74,065
Avinger 1,638
—
(777 ) 861
KYBELLA 10,113
—
(6,651 ) 3,462
$ 402,318
$ (108,169 ) $ 57,820
$ 351,969

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 for the period (999 ) (2,350 )
Settlement of financial instrument 89,000
—

Fair value as of September 30, 2017 $ —
$ (45,000 )



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	9,394
		Proceeds from royalty rights	(13,569	)
		Total net change in fair value for the period			(4,175		)

Fair value as of March 31, 2020					$	262,021

The ~~fair value~~table above does not include the aggregate remaining estimated cost to sell the royalty right assets of the contingent consideration was determined using an income approach derived from the Noden Products (as defined in Note 18 below) revenue estimates and a probability assessment with respect to the likelihood 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 Condensed Consolidated Statements of Income. The change in fair value of the contingent consideration during the period ending September 30, 2017 is due primarily to the passage of time, as there have been no significant changes in the key assumptions used in the fair value calculation during the current period.

Gains and losses from changes in Level 3 assets included in earnings for each period are presented in “Royalty rights - change in fair value” and gains and losses from changes in Level 3 liabilities included in earnings for each period are presented in “Change in fair value of anniversary payment and contingent consideration” as follows:$5.8 million.

Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2017 2016 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 $ 35,353
$ 16,085
$ 132,224
$ (11,872 )

Total change in fair value for the period included in earnings for liabilities held at the end of the reporting period $ (700 ) $ (2,083 ) $ (3,349 ) $ (2,083 )



Fair Value Measurements Using Significant Unobservable Inputs (Level 3) - Royalty Right Assets

	Fair Value as of		Royalty Rights -			Fair Value as of
(in thousands)	December 31, 2019		Change in Fair Value			March 31, 2020 ⁽¹⁾

Assertio	$	218,672	$	(3,161	)	$	215,511
VB	13,590		206			13,796
U-M	20,398		(1,391		)	19,007
AcelRx	12,952		200			13,152
KYBELLA	584		(29		)	555
	$	266,196	$	(4,175	)	$	262,021

________________

⁽¹⁾Excludes the aggregate remaining estimated costs to sell of $5.8 million.

PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Assets/Liabilities Measured and Recorded at Fair Value on a Nonrecurring Basis

The ~~following tables present~~Company remeasures the fair value of certain assets and liabilities upon the occurrence of certain events. Such assets consist of long-lived assets, including property and equipment and intangible assets and the shares of Alphaeon Class A 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 Alphaeon common stock as of both March 31, 2020 and December 31, 2019 is $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 Alphaeon is not ~~subject to~~readily determinable as Alphaeon’s shares are not publicly traded. The Company evaluates the fair value ~~recognition~~of this investment by ~~level within~~performing a qualitative assessment each reporting period. If the ~~valuation hierarchy:~~

September 30, 2017 December 31, 2016
Carrying Value
Fair Value
Level 2

Fair Value
Level 3
Carrying Value
Fair Value
Level 2

Fair Value
Level 3
(In thousands)
Assets:
Wellstat Diagnostics note receivable $ 50,191
$ —
$ 52,288
$ 50,191
$ —
$ 52,260
Hyperion note receivable 1,200
—
1,200
1,200
—
1,200
LENSAR note receivable ⁽²⁾
—
—
—
43,909
—
43,900
Direct Flow Medical note receivable ⁽¹⁾
—
—
—
10,000
—
10,000
kaléo note receivable ⁽³⁾
��
—
—
146,685
—
142,539
CareView note receivable 19,245
—
19,900
18,965
—
19,200
Total $ 70,636
$ —
$ 73,388
$ 270,950
$ —
$ 269,099

Liabilities:

February 2018 Notes $ 124,922
$ 126,131
$ —
$ 121,595
$ 123,918
$ —
December 2021 Notes 115,716
163,313
—
110,848
122,063
—
Total $ 240,638
$ 289,444
$ —
$ 232,443
$ 245,981
$ —

~~________________~~

⁽¹⁾ ~~As a result~~results of this qualitative assessment indicate that the ~~foreclosure proceedings,~~fair value is less than the carrying value, the investment is written down to its fair value. There have been no such write downs since the Company ~~obtained ownership of most of~~acquired these shares. This investment is included in Other long-term assets. For additional information on the ~~Direct Flow Medical assets through~~Alphaeon investment, see Note 6, Notes and Other Long-Term Receivables.

During the ~~Company’s wholly-owned subsidiary, DFM, LLC. Those assets are~~quarter ended March 31, 2020 it was determined that Noden met the criteria as an asset held for sale, ~~and carried~~see Note 2, Discontinued Operations Classified as Assets Held for Sale. Assets classified as held for sale are reported at the lower of carrying ~~amount~~value or fair value less ~~estimated selling cost, as of September 30, 2017. For a further discussions on this topic, see Note 7.~~

⁽²⁾costs to sale. As a result of ~~the Company receiving 100%~~our analysis of LENSAR, Inc.’s equity securities in exchange for the cancellation of the Company’s claims as a secured creditor in the Chapter 11 case, LENSAR, Inc. became a wholly-owned subsidiary of the Company on May 11, 2017. For further discussions on this topic, see Note 18.

⁽³⁾ On September 21, 2017, 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-month escrow hold back of $1.4 million against certain potential contingencies.

~~As of~~ ~~September 30, 2017~~ and December 31, 2016, the estimated fair values of the Hyperion Catalysis International, Inc. note receivable, and CareView Communications, Inc. note receivable were determined using one or more discounted cash flow models, incorporating expected payments and 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 assist in evaluating its investments and the related inputs needed to estimate~~ the fair value of ~~certain investments.~~Noden we recorded a loss on classification as held for sale of $6.7 million of which $1.8 million relates to the estimated costs to sell Noden and $4.9 million relates to the difference in carrying value versus fair value. The fair value calculation was made using a discounted cash flow model, utilizing a discount rate of approximately 19%, and included level 3 inputs.

Assets/Liabilities Not Subject to Fair Value Recognition

The Company has two notes receivable assets with an aggregate carrying value of $52.1 million as of March 31, 2020 and December 31, 2019. The estimated fair value of these notes receivable of $57.3 million exceeded the carrying value as of December 31, 2019 and was substantially equivalent to the carrying values as of March 31, 2020. The notes receivable are classified as Level 3 in the fair value hierarchy. The Company determined its notes receivable assets are Level 3 assets 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 ~~estimated~~value of underlying collateral. The Company engages third-party valuation experts when deemed necessary to assist in evaluating its investments and the related inputs needed to estimate the fair value ~~measurements, the Company considered forward-looking performance related to 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.~~certain investments.

~~The CareView note receivable is secured by substantially all assets~~As of March 31, 2020 and ~~equity interests in CareView Communications, Inc. The Wellstat Diagnostics note is supported by a guaranty from~~December 31, 2019, the ~~Wellstat Diagnostics Guarantors. The~~ estimated fair value of the ~~collateral assets~~CareView note receivable was determined using a liquidation analysis. A liquidation analysis considers the asset side of the balance sheet and adjusts the value in accordance with the relative risk associated with the asset and the probable liquidation value. The asset recovery rates varied by asset. As of March 31, 2020 and December 31, 2019, the estimated fair value of the Wellstat Diagnostics and Hyperion Catalysis International, Inc. (“Hyperion”) notes receivable were 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.

The CareView note receivable is secured by substantially all assets of, and equity interests in CareView. The Wellstat Diagnostics note receivable is secured by substantially all assets of Wellstat Diagnostics and is supported by a guaranty from the Wellstat Diagnostics Guarantors (as defined in Note 7, Notes and Other Long-Term Receivables).

On ~~September 30, 2017,~~March 31, 2020, the carrying ~~values~~value of ~~several~~one of the Company’s notes receivable assets differed from ~~their~~its estimated fair value. This is the result of inputs used in estimating the fair value of the collateral, including appraisals, projected cash flows of collateral assets and discount rates used when performing a discounted cash flow ~~for~~analysis.

The Company’s liabilities not subject to fair value ~~valuation purposes. The~~

~~Company determined these notes receivable to be Level 3 assets, as~~recognition consist of its ~~valuations utilized significant unobservable inputs, estimates of future revenues, expectations about settlement~~2021 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 are classified as Level 2 in the fair value hierarchy. The aggregate carrying value of the convertible notes was $13.3 million and $27.3 million as of March 31, 2020 and December 31, 2019, respectively. The aggregate fair values of the convertible notes was $15.9 million and $33.9 million as of March 31, 2020 and December 31, 2019, respectively.

PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

The following table represents significant unobservable inputs used in determining the estimated fair value of ~~impaired notes~~the Wellstat Diagnostics note receivable ~~investments:~~investment:

Asset
Valuation
Technique

Unobservable
Input
September 30, 2017
December 31,
2016

Wellstat Diagnostics
Wellstat Guarantors Intellectual Property Income Approach
Discount rate 12% 13%
Royalty amount $60 million $54-74 million
Real Estate Property Market Approach
Annual appreciation rate 4% 4%
Estimated realtor fee 6% 6%
Estimated disposal date 12/31/2018 12/31/2017
Direct Flow Medical
All Assets Income 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 September 30, 2017, the Company had two notes receivable investments on non-accrual status with a cumulative investment cost and fair value of approximately $51.4 million and $53.5 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 three months ended September 30, 2017 and 2016, the Company did not recognize any interest for note receivable investments on non-accrual status. During the nine months ended September 30, 2017 and 2016, the Company recognized losses on extinguishment of notes receivable of $12.2 million and zero, respectively.

~~4. Cash, Cash Equivalents and Short-term Investments~~

~~As of~~ ~~September 30, 2017, and~~ ~~December 31, 2016~~, the Company had invested its excess cash balances primarily in cash, 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. See Note 3 for fair value measurement information. 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 September 30, 2017, and December 31, 2016:

Reported as:
Amortized Cost Unrealized Gains Estimated Fair Value Cash and Cash Equivalents Short-Term Investments
(In thousands)
September 30, 2017
Cash $ 495,380
$ —
$ 495,380
$ 495,380
$ —
Money market funds 14,705
—
14,705
14,705
—
Commercial paper 2,060
—
2,060
—
2,060
Corporate securities 3,352
997
4,349
—
4,349
Total $ 515,497
$ 997
$ 516,494
$ 510,085
$ 6,409

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 unrealized gains on investments included in "Other comprehensive income (loss), net of tax" was approximately $648,000 and zero as of September 30, 2017, and December 31, 2016, respectively.~~

~~5. Concentration of Credit Risk~~

~~Customer Concentration~~

~~The percentage of total revenue recognized, which individually accounted for 10% or more of the Company’s total revenues, was as follows:~~

Three Months Ended September 30, Nine Months Ended September 30,
Licensee Product Name 2017 2016 2017 2016
Genentech Avastin — % — % — % 22 %
Herceptin — % — % — % 22 %

Biogen
Tysabri^®
2 % 28 % 13 % 24 %

Depomed Glumetza, Janumet XR, Jentadueto XR and Invokamet XR 50 % 18 % 50 % N/A

N/A Tekturna, Tekturna HCT, Rasilez and Rasilez HCT 24 % 26 % 17 % 8 %

~~__________________~~

~~N/A = Not applicable~~

~~6. 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 Condensed Consolidated Balance Sheets as it has entered into a netting arrangement with the counterparty. All Euro forward contracts were classified as cash flow hedges. There were no Euro forward contracts outstanding as of September 30, 2017 or December 31, 2016.

~~The effect of the Company’s derivative instruments in its Condensed Consolidated Statements of Income and its Condensed Consolidated Statements of Comprehensive Income were as follows:~~

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(In thousands)
Gain (loss) reclassified from accumulated OCI into “Queen et al. royalty revenue,” net of tax ⁽²⁾
$ —
$ —
$ —
$ 1,821

~~_______________________________~~

~~(1)~~ ~~Net change in the fair value of cash flow hedges, net of tax.~~

~~(2)~~ ~~Effective portion classified as royalty revenue.~~



Asset	Valuation Technique	Unobservable Input	March 31, 2020	December 31, 2019

Wellstat Diagnostics
Wellstat Guarantors intellectual property	Income Approach
		Discount rate	12%	12%
		Undiscounted royalty amount	$21 million	$21 million
Settlement Amount	Income Approach
		Discount rate	15%	15%
		Undiscounted settlement amount	$25 million	$28 million
Real Estate Property	Market Approach
		Annual appreciation rate	—%	—%
		Estimated realtor fee	6%	6%
		Undiscounted market value	$16 million	$16 million

7. 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 are 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

PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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 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 been 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 are 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 has not been re-scheduled yet. 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. ~~The court has not yet decided~~On February 6, 2018, the

PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Supreme Court of New York issued an order from the bench which enjoins the Wellstat Diagnostics ~~Guarantor motions, but reaffirmed~~Guarantors from selling, encumbering, removing, transferring or altering the collateral pending the outcome of the proceedings before it. The Supreme Court of New York also issued an order precluding the Company from foreclosing on certain of the Wellstat Diagnostics Guarantors’ ~~obligations~~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 ~~maintain~~calculate the ~~status quo~~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 has been made by the hearing officer with respect to ~~their assets.~~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 ~~requesting an attachment~~largely affirmed the September 2017 decision of ~~a potential $55.8 million damages award, plus interest, entered against BTG International, Inc. in favor of Wellstat Therapeutics in~~the Delaware Chancery Court, ~~on September 19, 2017. The~~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 are preserving the BTG Litigation judgment award proceeds consistent with the New York ~~Supreme Court has not yet considered the Company’s motion.~~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 pending~~has been joined for all purposes, including discovery and ~~the Supreme Court has instructed the Parties to coordinate this case~~trial, and consolidated with the pending case filed by the ~~Company against~~Company. The Wellstat Diagnostic Guarantors filed a summary judgment motion with regard to this case, which was also heard by the court at the hearing on May 22, 2019. The court, in its September 11, 2019 decision, denied in its entirety the Wellstat Diagnostics Guarantors’ ~~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 ~~September 30, 2017,~~March 31, 2020, it has been determined that an allowance on the carrying value of the note was not necessary, as the Company believes the value of the collateral securing Wellstat Diagnostics’ obligations ~~exceeds~~is in-line with the carrying value of the asset and is sufficient to enable the Company to recover the current carrying value of $50.2 million. The Company continues to closely monitor the timing and expected recovery of amounts due, including litigation and other matters related to Wellstat Diagnostics Guarantors’ assets. There can be no assurance that an allowance on the carrying value of the notes receivable investment will not be necessary in a future period depending on future developments.

Hyperion Agreement

On January 27, 2012, the Company and Hyperion ~~Catalysis International, Inc. (“Hyperion”)~~ (which is also a Wellstat Diagnostics Guarantor) entered into an agreement whereby Hyperion sold to the Company the royalty streams accruing from January 1, 2012 through December 31, 2013 due from ~~SDK~~Showa Denko K.K. (“SDK”) related to a certain patent license agreement between Hyperion and SDK dated December 31, 2008. ~~The agreement assigned the patent license agreement royalty stream accruing from January 1, 2012 through December 31, 2013, to the Company in~~In exchange for the lump sum payment to Hyperion of $2.3 ~~million. In exchange for the lump sum payment,~~million, in addition to any royalties from SDK, the Company was to receive two equal payments of $1.2 million on ~~each of~~ March 5, 2013 and March 5, 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. The Company completed an impairment analysis~~2014 has not been made by Hyperion. Effective as of ~~September 30, 2017. Effective with this~~such date and as a result of the event of default, the Company ceased to accrue interest revenue. As of ~~September 30, 2017,~~March 31, 2020, 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~~of realizing value from such collateral in the event of the Company’s foreclosure on the ~~collateral, nor can there be any assurance of realizing value from such~~ collateral.

PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

~~Avinger Credit and Royalty Agreement~~

Under the terms of the Avinger Credit and Royalty Agreement, the Company receives 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 receivable prior to its maturity date, the royalty on Avinger’s net revenues reduce by 50%, subject to certain minimum payments from the prepayment date until April 2018. The Company has accounted for the royalty rights in accordance with the fair value option. For a further discussion of the Avinger Credit and Royalty Agreement, see Note 3.

~~LENSAR Credit Agreement~~

On October 1, 2013, the Company entered into a credit agreement with LENSAR, Inc. (“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 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, in the form of a second tranche is no longer available to LENSAR under the terms of the credit agreement. 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 stock 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 September 30, 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 securities 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 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 9 under “Intangible Assets and Goodwill,” Note 18 under “Business Combinations” and Note 19 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 initial $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 the $15.0 million second tranche upon receipt by Direct Flow Medical of a specified minimum amount of proceeds from an equity offering prior to December 31, 2014. In exchange, the parties amended the credit agreement to provide for additional fees associated with certain liquidity events, such as a change of control or the consummation of an initial public offering, and granted the Company certain board of director observation rights. On November 19, 2014, upon Direct Flow Medical satisfying the amended tranche two milestone, the Company funded the $15.0 million second tranche to Direct Flow Medical, net of fees.

Outstanding borrowings under tranche one bore interest at the rate of 15.5% per annum, payable quarterly in arrears, until the occurrence of the second tranche. Upon occurrence of the borrowing of this second tranche, the interest rate applicable to all loans under the credit agreement was decreased to 13.5% per annum, payable quarterly in arrears.

Under the terms of the credit agreement, Direct Flow Medical’s obligation to repay loan principal commenced on the twelfth interest payment date, September 30, 2016. The principal amount outstanding at commencement of repayment was required to be repaid in equal installments until final maturity of the loans. The loans were to mature on November 5, 2018. The obligations under the credit agreement were secured by a pledge of substantially all 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 are held for sale and carried at the lower of carrying amount or fair value, less estimated selling costs, which is 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 nine months ended September 30, 2017. The Company is exploring alternatives to further monetize the remaining assets of Direct Flow Medical and has ascribed a carrying value of $1.8 million to the remaining assets held for sale at September 30, 2017.

~~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 “Purchaser”), pursuant to which the Company sold its entire interest in the kaléo Note.

Pursuant to the kaléo Note Sale Agreement, the Purchaser paid to the Company an amount equal to 100% 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 further discussion on this topic, see Note 11.

The kaléo Note bore interest at 13% per annum, paid quarterly in arrears on principal outstanding. The principal balance of the kaléo Note was to be repaid to the extent that the kaléo Revenue Interests exceed the quarterly interest payment, as limited by a quarterly payment cap. The final maturity of the kaléo Note was June 2029; although, kaléo had the right to redeem the kaléo Note at any time, subject to a redemption premium.

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 upon~~each, subject to CareView’s attainment of a specified ~~milestone~~milestones 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 be~~was not funded ~~upon~~due to CareView’s ~~attainment of specified~~failure 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~~ bear 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 a derivative asset with an offsetting credit as debt discount. At each reporting period the warrant is marked to market for changes in fair value.

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 September 30,~~

In February 2018, the Company entered into a modification agreement with CareView (the “February 2018 Modification Agreement”) whereby the Company agreed, effective December 28, 2017, to modify the credit agreement before remedies could otherwise have become available to the Company under the credit agreement in relation to certain obligations of CareView that would potentially not be met, including the requirement to make principal payments. Under the February 2018 Modification Agreement, the Company agreed that (i) a lower liquidity covenant would be applicable and (ii) principal repayment would be delayed until December 31, 2018. In exchange for agreeing to these modifications, among other things, the exercise price of the Company’s warrants to purchase 4.4 million shares of common stock of CareView was repriced from $0.40 to $0.03 per share and, subject to the occurrence of certain events, CareView agreed to grant the Company additional equity interests. As a result of the February 2018 Modification Agreement, the Company determined the loan to be impaired and it ceased to accrue interest revenue effective October 1, 2017.

In September 2018, the Company entered into an amendment to the February 2018 Modification Agreement with CareView whereby the Company agreed, effective as of September 28, 2018, that a lower liquidity covenant would be applicable. In December 2018, the Company further modified the loan by agreeing that (i) a lower liquidity covenant would be applicable, (ii) the first principal payment would be deferred until January 31, 2019, and (iii) the scheduled interest payment due December 31, 2018 would be deferred until January 31, 2019. In December 2018, and in consideration of the further modification to the credit agreement, the Company completed an impairment analysis and determined that the note was impaired and recorded an impairment loss of $8.2 million. For additional information see Note 6, Fair Value Measurements. As of March 31, 2019, the principal repayment and interest payments were deferred until April 30, 2019. 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 and (ii) the remaining liquidity covenant would be removed. In September 2019, the Company further modified the loan by agreeing that the first principal and interest payments would be deferred, 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 and January 2020, the Company agreed to defer principal and interest payments until April 30, 2020.

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. At March 31, 2020, the Company estimated the fair value of the warrant to be less than $0.1 million.

In April 2020 the Company agreed to a further amendment of the February 2018 Modification Agreement that deferred principal repayment and interest payments until September 30, 2020, which was conditioned upon CareView raising additional financing from third parties.

PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

~~For carrying value and fair value information related to the Company’s Notes and Other Long-term Receivables, see Note 3.~~8. Leases

~~8. Inventories~~Lessor arrangements

~~Inventories consisted~~The Company has operating and sales-type leases for medical device equipment generated from its medical devices segment. The Company’s leases have remaining lease terms of less than one year to five years, some of which include options to extend the leases on a month-to-month basis if the customer does not notify the Company of the ~~following (in thousands):~~intention to return the equipment at the end of the lease term. The Company typically does not offer options to terminate the leases before the end of the lease term.

The components of lease income are as follows:

September 30, December 31,
2017 2016
Raw materials $ 1,204
$ —
Work in process 3,950
1,625
Finished goods 7,062
1,259
Total inventory $ 12,216
$ 2,884

In addition, as of September 30, 2017 and December 31, 2016, the Company deferred approximately $1.1 million and $0.1 million, respectively, of costs associated with inventory transfer made under the Company’s third party logistic provider service arrangement. These costs have been recorded as other assets on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2017 and December 31, 2016. The Company will recognize the cost of product sold as inventory is transferred from its third party logistic provider to the Company’s customers.

During the third quarter of 2017 and fourth quarter of 2016, the Company recognized an inventory write-down of $0.1 million and $0.3 million, respectively, related to Noden Products that the Company would not be able to sell prior to their expiration.



		Three Months Ended
		March 31,
(in thousands)	Classification	2020		2019

Sales-type lease selling price	Product revenue, net	$	—	$	—
Cost of underlying asset		—		—
Operating profit		$	—	$	—

Interest income on the lease receivable	Interest and other income, net	$	14	$	12

Initial direct costs incurred	Operating expense	$	—	$	—

Operating lease Income	Product revenue, net	$	1,087	$	1,237

9. Intangible Assets ~~and Goodwill~~

~~Intangible Assets, Net~~LENSAR

In April 2019, LENSAR acquired certain intellectual property from a third-party for $2.0 million in cash and obligations to pay a $0.3 million milestone payment and royalties upon the completion of certain events.

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 to Research and development expense.

The components of intangible assets as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019 were as follows:


	September 30, 2017							December 31, 2016							March 31, 2020							December 31, 2019
(in thousands)	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Finite-lived intangible assets:
Acquired products rights⁽¹⁾	$	216,690	$	(27,086	)	$	189,604	$	216,690	$	(10,834	)	$	205,856	$	—	$	—		$	—	$	—	$	—		$	—
Customer relationships^{(1) (2)}	26,080		(3,077		)	23,003		23,880		(1,194		)	22,686
Acquired technology⁽²⁾	9,200		(255		)	8,945		—		—			—
Customer relationships^{(1) (2) (3)}															4,045		(966		)	3,079		4,045		(884		)	3,161
Acquired technology^{(2) (4)}															11,500		(1,933		)	9,567		11,500		(1,741		)	9,759
Acquired trademarks⁽²⁾	570		(48		)	522		—		—			—		570		(332		)	238		570		(304		)	266
	$	252,540	$	(30,466	)	$	222,074	$	240,570	$	(12,028	)	$	228,542	$	16,115	$	(3,231	)	$	12,884	$	16,115	$	(2,929	)	$	13,186

________________

~~(1)~~


⁽¹⁾	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.” See Note 2, Discontinued Operations Classified as Assets Held for Sale, for additional information.

PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)


⁽²⁾	The Company acquired certain intangible assets as part of its acquisition of LENSAR in May 2017. They are being amortized on a straight-line basis over a weighted-average period of 15 years. The intangible assets for customer relationships are being amortized using a double-declining method of amortization as such method better represents the economic benefits to be obtained.


⁽³⁾	LENSAR acquired certain intangible assets for customer relationships from PES, which are being amortized using a double-declining method over a period of 20 years.

⁽⁴⁾LENSAR acquired certain intangible assets ~~as part of the Noden Transaction, as described further in Note 18. They~~from a third-party, which are being amortized on a straight-line basis over a ~~weighted average period of 10.0 years.~~

~~(2) The Company acquired certain intangible assets as part of the LENSAR transaction, as described further in Note 18. They are amortized over a weighted 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 are being amortized using a double-declining method of amortization as such method better represents the economic benefits to be obtained.

~~Amortization expense for~~For the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and 2019, amortization expense was ~~$18.4 million.~~

$0.3 million and $0.3 million, respectively.

Based on the intangible assets recorded at ~~September 30, 2017,~~March 31, 2020, 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
2017 (Remaining three months) $ 6,251
2018 24,989
2019 24,969
2020 24,950
2021 24,934
2022 24,843
Thereafter 91,138
Total intangible assets acquired $ 222,074

~~Goodwill~~

Goodwill is the excess of the cost of an acquired entity over the net amounts assigned to tangible and intangible assets acquired and liabilities assumed. The Company applies ASC 350, Goodwill and Other Intangible Assets, which requires testing goodwill for impairment on an annual basis. The Company assesses goodwill for impairment as part of its annual reporting process in the fourth quarter. The Company evaluates goodwill on a reporting unit basis as the Company is organized as a multiple reporting unit.



Fiscal Year	Amount

2020 (Remaining nine months)	$	895
2021	1,165
2022	1,061
2023	997
2024	974
Thereafter	7,792
Total remaining amortization expense	$	12,884

10. Accrued Liabilities

Accrued liabilities consist of the following:


(in thousands)	September 30, 2017		December 31, 2016		March 31, 2020		December 31, 2019

Compensation	$	8,332	$	3,131	$	5,704	$	6,823
Deferred revenue					933		959
Interest	2,218		2,554		136		70
Deferred revenue	3,761		—
Dividend payable	122		21
Legal	585		1,594		929		921
Accrued rebates, chargebacks and other revenue reserves	20,652		12,338		4		5
Refund to manufacturer	693		8,909
Customer advances	13,469		—
Other	1,775		2,028		4,253		3,145
Total	$	51,607	$	30,575
Total ⁽¹⁾					$	11,959	$	11,923

________________

⁽¹⁾The ~~following table provides a summary of activity with respect to the Company’s sales allowances and accruals for the nine months ended September 30, 2017:~~

(in thousands) Discount and Distribution Fees Government Rebates and Chargebacks Assistance and Other Discounts Product Return Total
Balance at December 31, 2016: $ 2,475
$ 5,514
$ 2,580
$ 1,769
$ 12,338
Allowances for current period sales 6,565
14,455
6,625
3,054
30,699
Allowances for prior period sales —
253
—
—
253
Credits/payments for current period sales (3,048 ) (4,720 ) (4,435 ) (1,145 ) (13,348 )
Credits/payments for prior period sales (2,425 ) (4,353 ) (1,488 ) (1,024 ) (9,290 )
Balance at September 30, 2017: $ 3,567
$ 11,149
$ 3,282
$ 2,654
$ 20,652

~~11. Commitments and Contingencies~~

~~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 $19.5amounts above exclude $17.1 million and ~~the Company granted Merck a fully paid-up, royalty free, non-exclusive license to certain~~$16.4 million of ~~the Company’s rights to issued patents in the United States~~accrued liabilities at Noden classified as held for sale as of March 31, 2020 and ~~elsewhere, covering the humanization of antibodies (the “Queen et al. patent”)~~December 31, 2019, respectively. See Note 2, Discontinued Operations Classified as Assets Held for ~~use in connection with Keytruda as well as a covenant not to sue Merck~~Sale, 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 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 will be remanded to the Supreme Court for further proceedings on the merits. The proceeding will be 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.

~~Noden Pharma DAC v Anchen Pharmaceuticals, Inc. et al~~

On June 12, 2017, Noden Pharma DAC (“Noden”) 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”) 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’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, also owned by Noden Pharma DAC. This case is proceeding in the United States District Court for the District of Delaware. Noden Pharma DAC intends to continue to take appropriate legal action to protect its intellectual property in Tekturna^® ~~and Tekturna HCT~~^®.additional information.

Noden 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’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 (“Settlement Agreement”) to resolve all matters addressed in the lawsuit. Under the terms of the Settlement Agreement, the litigation will be dismissed, with prejudice, and Valeant will pay 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 result of the audit, Valeant’s obligation to pay additional royalties under the commercialization agreement and/or 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 to the Company under the terms of the Depomed Royalty Agreement in November of 2017 and has been reflected in the Depomed royalty rights asset discounted cashflow valuation as of September 30, 2017.

~~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.

~~Lease Guarantee~~

In connection with the spin-off (the “Spin-Off”) by the Company of Facet Biotech Corporation (“Facet”), the Company entered into amendments to the leases for the Company’s former facilities in Redwood City, California, under which Facet was added as a co-tenant, and a Co-Tenancy Agreement, under which Facet agreed to indemnify us for all matters related to the leases attributable to the period after the Spin-Off date. As of September 30, 2017, the total lease payments for the duration of the guarantee, which runs through December 2021, are approximately $47.9 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 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.

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 Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, related to this guarantee. In future periods, the Company may adjust this liability for any changes in the ultimate outcome of this matter that are both probable and estimable.

~~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~~previously discussed, during the first ~~anniversary payment under~~quarter of 2020 the ~~Noden Purchase Agreement (as defined in Note 18 below).~~Board approved the Plan of Liquidation. In addition, the Company ~~provided an irrevocable and unconditional guarantee~~has entered into severance agreements with its employees under the Wind Down Retention Plan. The total amount of severance expected to ~~Novartis Pharma AG (“Novartis”), to pay up to $14.0~~be incurred during 2020 will be $13.0 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 September 30, 2017. On July 3, 2017, the first anniversary payment of $89.0~~which $3.0 million was expensed in the three months ended March 31, 2020. The severance amount paid ~~pursuant~~in the three months ended March 31, 2020 was $0.6 million. All severance costs are included in the Income Generating Assets segment, as all corporate personnel salary and benefit costs are allocated to the Noden Purchase Agreement and the $14.0 million guarantee was extinguished. On July 31, 2017, the $75.0 million certification of deposit matured, and on August 1, 2017, the letter of credit terminated and is no longer available to Novartis.this segment.

PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

~~Purchase Obligations~~

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 may be terminated by either party for material breach that remains uncured for a specified time period. The supply agreement commits the Company to a minimum purchase obligation of approximately $17.1 million and $120.7 million over the next twelve and twenty-four months, respectively. The Company expects to meet this requirement. For more information about the Noden Transaction, see Note 18.

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, 2017. The supply agreement commits LENSAR to a minimum purchase obligation of approximately $1.1 million over the next three months. The Company expects that LENSAR will meet this requirement. For more information about the LENSAR transaction, see Note 18.

~~Escrow Receivable~~

~~On September 21, 2017, the Company entered into the kaléo Note Sale Agreement, pursuant to which the Company sold its entire interest in the kaléo Note.~~

Pursuant to the kaléo Note Sale Agreement, the purchaser paid to the Company an amount equal to 100% of the then outstanding principal, a premium of 1% of such amount and accrued interest under the kaléo Notes, for an aggregate cash purchase price of $141.7 million.

Pursuant to the terms of the kaléo Note Sale Agreement, $1.4 million of the aggregate purchase price was deposited into an escrow account as a potential payment against certain contingencies and on the 18th month anniversary of the closing date, the Escrow Agent will release any funds remaining in the escrow account to the Company.

The Company does 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 account, which may reduce the amount ultimately returned to the Company when the 18 months escrow period has ended. As of September 30, 2017, the Company is not aware of any claims by the purchaser that would reduce the escrow receivable.

~~12.~~11. Convertible Senior Notes

Principal Balance Outstanding Carrying Value
September 30, September 30, December 31,
Description Maturity Date 2017 2017 2016
(In thousands)
Convertible Notes
February 2018 Notes February 1, 2018 $ 126,447
$ 124,922
$ 121,595

December 2021 Notes December 1, 2021 $ 150,000
115,716
110,848

Total
$ 240,638
$ 232,443

~~February 2018 Notes~~

On February 12, 2014, the Company issued $300.0 million in aggregate principal amount, at par, of the February 2018 Notes in an underwritten public offering, for net proceeds of $290.2 million. The February 2018 Notes are due February 1, 2018, and the Company pays interest at 4.0% on the February 2018 Notes semiannually in arrears on February 1 and August 1 of each year,

beginning August 1, 2014. A portion of the proceeds from the February 2018 Notes, net of amounts used for purchased call option transactions and provided by the warrant transactions described below, were used to redeem $131.7 million of the Company’s 2.975% Convertible Senior Notes due February 17, 2016. Upon the occurrence of a fundamental change, as defined in the indenture, holders have the option to require the Company to repurchase their February 2018 Notes at a purchase price equal to ~~100%~~ ~~of the principal, plus accrued interest.~~

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 this repurchase of the February 2018 Notes, the Company unwound a 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 portion of the warrants for $0.2 million in cash, payable by the Company. The payments have been recorded as a decrease to additional paid-in-capital. At the time of the transaction, the Company concluded that the remaining purchased call options and warrants continue to meet all criteria for equity classification.

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.

In connection with the repurchase of the February 2018 Notes, the Company unwound 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 the time of the transaction, 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 ended 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 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.

~~As of September 30, 2017, the Company’s February 2018 Notes are convertible. At September 30, 2017, the if-converted value of the February 2018 Notes did not exceed the principal amount.~~

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 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 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 represents the estimated market interest rate for a similar nonconvertible instrument available to the Company on the date of issuance, the Company recorded a total debt discount of $29.7 million, allocated $19.3 million to additional paid-in capital and allocated $10.4 million to deferred tax liability. The discount is being amortized to interest expense over the term of the February 2018 Notes and increases 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 ~~September 30, 2017, the remaining discount amortization period is 0.3 years.~~

~~The carrying value and unamortized discount of the February 2018 Notes were as follows:~~

(In thousands) September 30, 2017 December 31, 2016
Principal amount of the February 2018 Notes $ 126,447
$ 126,447
Unamortized discount of liability component (1,525 ) (4,852 )
Net carrying value of the February 2018 Notes $ 124,922
$ 121,595

~~Interest expense for the February 2018 Notes on the Company’s Condensed Consolidated Statements of Income was as follows:~~

Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2017 2016 2017 2016
Contractual coupon interest $ 1,264
$ 2,465
$ 3,793
$ 7,393
Amortization of debt issuance costs 259
457
758
1,337
Amortization of debt discount 870
1,591
2,569
4,696
Total $ 2,393
$ 4,513
$ 7,120
$ 13,426

~~Purchased Call Options and Warrants~~

In connection with the issuance of the February 2018 Notes, the Company entered into purchased call option transactions with two hedge counterparties. The Company paid an aggregate amount of $31.0 million for the purchased call options with terms substantially similar to the embedded conversion options in the February 2018 Notes. The purchased call options cover, subject to anti-dilution and certain other customary adjustments substantially similar to those in the February 2018 Notes, approximately 13.8 million shares of the Company’s common stock. The Company may exercise the 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 expire on February 1, 2018, or the last day any of the February 2018 Notes remain outstanding.

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 underlie the February 2018 Notes at a strike price of $10.3610 per share, which represents 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 are considered indexed to the Company stock, require net-share settlement, and met all criteria for equity classification at inception and at~~ ~~September 30, 2017~~. 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, was recorded as adjustments to additional paid-in capital. Subsequent changes in fair value will not be recognized as long as the purchased call options and warrants continue to meet the criteria for equity classification.



		Principal Balance Outstanding		Carrying Value
		March 31,		March 31,		December 31,
Description	Maturity Date	2020		2020		2019
(in thousands)
Convertible Senior Notes
December 2021 Notes	December 1, 2021	$	13,805	$	12,402	$	16,950
December 2024 Notes	December 1, 2024	1,000		900		10,300
Total		$	14,805	$	13,302	$	27,250

December 2021 Notes

On November 22, 2016, the Company issued $150.0 million in aggregate principal amount, at par, of ~~the~~2.75% 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~~

In September 2019, the Company entered into privately negotiated exchange agreements with certain holders of ~~the proceeds from the~~approximately $86.1 million aggregate principal amount of outstanding December 2021 Notes. The Company exchanged $86.1 million aggregate principal of December 2021 Notes ~~was used to extinguish $120.0 million~~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 Exchange Transaction”). See “December 2024 Notes” below. The terms of the ~~February 2018 Notes.~~remaining December 2021 Notes remained unchanged. The September Exchange Transaction qualified as a debt extinguishment and the Company recognized a loss on exchange of the convertible notes of $3.9 million in the third quarter of 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.

The December 2021 Notes are convertible under any 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 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;

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; or

Upon the occurrence of specified corporate events as described in the ~~indenture.~~December 2021 Notes Indenture.

The initial conversion rate for the December 2021 Notes is 262.2951 shares of the Company’s common stock per $1,000 principal amount of December 2021 Notes, which is 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.

PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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 ~~and~~with the ~~fair value~~remainder of the ~~common stock conversion feature.~~consideration being allocated to the equity component. Using an assumed borrowing rate of 9.5%, which ~~represents~~represented 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 ~~additional~~Additional paid-in capital for the conversion feature and allocated $12.8 million to deferred tax liability. The debt discount, including the conversion feature and issuance costs allocated to debt, which remained after amortization and the effect of the September Exchange Transaction, is being amortized to interest expense over the term of the December 2021 Notes and increases interest expense during the term of the December 2021 Notes from the 2.75% cash coupon interest rate to an effective interest rate of ~~3.4%~~9.7%. As of ~~September 30, 2017,~~March 31, 2020, the remaining discount amortization period is ~~4.2~~1.7 years.

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 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.

During the three months ended March 31, 2020, the Company repurchased $5.4 million in aggregate principal amount of its December 2021 notes for $6.0 million in cash. 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 $0.1 million was recorded at closing of the transaction.

The carrying value and unamortized discount of the December 2021 Notes were as follows:


(In thousands)	September 30, 2017			December 31, 2016
(in thousands)							March 31, 2020			December 31, 2019

Principal amount of the December 2021 Notes	$	150,000		$	150,000		$	13,805		$	19,170
Unamortized discount of liability component	(34,284		)	(39,152		)	(1,403		)	(2,220		)
Net carrying value of the December 2021 Notes	$	115,716		$	110,848		$	12,402		$	16,950

Interest expense for the December 2021 Notes onincluded in the Company’s Condensed Consolidated Statements of ~~Income~~Operations was as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(In thousands)	2017		2016		2017		2016
(in thousands)									2020		2019

Contractual coupon interest	$	1,031	$	—	$	3,094	$	—	$	123	$	1,031
Amortization of debt issuance costs	18		—		54		—		2		20
Amortization of debt discount	132		—		393		—		17		138
Amortization of conversion feature	1,522		—		4,421		—		234		1,766
Total	$	2,703	$	—	$	7,962	$	—	$	376	$	2,955



Delaware	94-3023969
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)



Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	PDLI	The Nasdaq Stock Market LLC



Large accelerated filer ý¨	Accelerated filer ¨ý	Non-accelerated filer ¨	Smaller reporting company ¨	Emerging growth company ¨
~~(Do not check if a smaller reporting company)~~

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



		Page
PART I - FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS (unaudited)	3

	Condensed Consolidated Statements of ~~Income~~Operations for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	3

	Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	4

	Condensed Consolidated Balance Sheets ~~at September 30, 2017~~as of March 31, 2020 and December 31, ~~2016~~2019	5

	Condensed Consolidated Statements of Stockholders Equity for the Three Months Ended March 31, 2020 and 2019	6

	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	67

	Notes to the Condensed Consolidated Financial Statements	8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	4440

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	5556

ITEM 4.	CONTROLS AND PROCEDURES	5657

PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	5758

ITEM 1A.	RISK FACTORS	5758

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	5760

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	5760

ITEM 4.	MINE SAFETY DISCLOSURES	5760

ITEM 5.	OTHER INFORMATION	5760

ITEM 6.	EXHIBITS	5760

SIGNATURES		5862


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2017			2016			2017			2016			2020			2019
Revenues
Product revenue, net													$	5,985		$	6,726
Royalties from Queen et al. patents	$	1,443		$	14,958		$	31,884		$	150,645		—			3
Royalty rights - change in fair value	35,353			16,085			132,224			(11,872		)
Interest revenue	6,051			8,594			16,968			24,901
Product revenue, net	20,067			14,128			51,477			14,128
License and other	(165		)	(127		)	19,471			7			10			(33		)
Total revenues	62,749			53,638			252,024			177,809			5,995			6,696

Operating expenses
Cost of product revenue (excluding intangible asset amortization)	5,565			—			12,632			—			2,860			3,800
Amortization of intangible assets	6,275			6,014			18,438			6,014			302			318
Severance and retention													18,734			—
General and administrative	11,989			10,396			35,853			27,193			12,869			8,313
Sales and marketing	4,994			11			11,194			11			1,250			1,574
Research and development	605			1,933			6,652			1,933			1,856			910
Change in fair value of anniversary payment and contingent consideration	700			2,083			3,349			2,083
Acquisition-related costs	—			546			—			3,505
Total operating expenses	30,128			20,983			88,118			40,739			37,871			14,915
Operating income	32,621			32,655			163,906			137,070

Operating loss from continuing operations													(31,876		)	(8,219		)
Non-operating expense, net
Interest and other income, net	238			162			726			404			513			1,874
Interest expense	(5,096		)	(4,513		)	(15,082		)	(13,524		)	(474		)	(2,955		)
Gain (loss) on bargain purchase	(2,276		)	—			3,995			—
Equity affiliate - change in fair value													(13,797		)	—
Loss on extinguishment of convertible notes													(606		)	—
Total non-operating expense, net	(7,134		)	(4,351		)	(10,361		)	(13,120		)	(14,364		)	(1,081		)
Loss from continuing operations before income taxes													(46,240		)	(9,300		)
Income tax benefit from continuing operations													(14,473		)	(848		)
Net loss from continuing operations													(31,767		)	(8,452		)
Income from discontinued operations before income taxes (including loss on classification as held for sale of $12,761 for the three months ended March 31, 2020)													75			18,689
Income tax expense of discontinued operations													319			3,620
(Loss) income from discontinued operations													(244		)	15,069
Net (loss) income													(32,011		)	6,617
Less: Net loss attributable to noncontrolling interests													(288		)	(63		)
Net (loss) income attributable to PDL’s shareholders													$	(31,723	)	$	6,680

Income before income taxes	25,487			28,304			153,545			123,950
Income tax expense	4,755			14,400			65,180			50,011
Net income	20,732			13,904			88,365			73,939
Less: Net income/(loss) attributable to noncontrolling interests	—			(3		)	(47		)	(3		)
Net income attributable to PDL’s shareholders	$	20,732		$	13,907		$	88,412		$	73,942

Net income per share
Net (loss) income per share - basic
Net (loss) income from continuing operations													$	(0.26	)	$	(0.07	)
Net (loss) income from discontinued operations													$	0.00		$	0.12
Net (loss) income attributable to PDL’s shareholders													$	(0.26	)	$	0.05
Net (loss) income per share - diluted
Net (loss) income from continuing operations													$	(0.26	)	$	(0.07	)
Net (loss) income from discontinued operations													$	0.00		$	0.12
Net (loss) income attributable to PDL’s shareholders													$	(0.26	)	$	0.05
Weighted-average shares outstanding
Basic	$	0.14		$	0.08		$	0.56		$	0.45		122,896			128,799
Diluted	$	0.14		$	0.08		$	0.56		$	0.45		122,896			128,799
Weighted average shares outstanding
Basic	151,146			163,856			156,802			163,771
Diluted	152,317			164,285			157,529			164,075
Cash dividends declared per common share	$	—		$	—		$	—		$	0.10



ý	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended ~~September 30, 2017~~March 31, 2020



¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For transition period from to



	PDL Stockholders’ Equity
	Common Stock					Treasury Stock			Additional Paid-In Capital			Retained Earnings			Non-controlling Interest			Total Stockholders’ Equity
	Shares		Amount			Treasury Stock			Additional Paid-In Capital			Retained Earnings			Non-controlling Interest			Total Stockholders’ Equity
Balance at December 31, 2019	124,302,616		$	1,243		$	—		$	(78,875	)	$	670,832		$	78		$	593,278
Issuance of common stock, net of forfeitures	1,781,197		18			—			(18		)	—			—			—
Stock-based compensation expense	—		—			—			14,453			—			—			14,453
Repurchase and retirement of common stock	(5,564,841	)	(56		)	(2,244		)	—			(17,978		)	—			(20,278		)
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	—		—			—			—			(31,723		)	(288		)	(32,011		)
Total comprehensive loss	—		—			—			—			—			—			(32,011		)
Balance at March 31, 2020	120,518,972		$	1,205		$	(2,244	)	$	(66,867	)	$	621,131		$	(110	)	$	553,115



	Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities
Net income	$	88,365		$	73,939
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of convertible notes and term loan offering costs	8,195			6,067
Amortization of intangible assets	18,438			6,014
Change in fair value of royalty rights - at fair value	(132,224		)	11,872
Change in fair value of derivative asset	29			875
Change in fair value of anniversary payment and contingent consideration	3,349			2,083
Other amortization, depreciation and accretion of embedded derivative	1,478			16
Gain on sale of available-for-sale securities	(108		)	(881		)
Escrow receivable	(1,400		)	—
Bargain purchase gain	(3,995		)	—
Inventory obsolesence	30			—
Bad debt allowance	22			—
Stock-based compensation expense	3,014			2,649
Deferred income taxes	28,970			(6,013		)
Changes in assets and liabilities, net of affects of business acquired:
Accounts receivable	19,454			(26,035		)
Receivables from licensees and other	5,111			(5,757		)
Prepaid and other current assets	(4,166		)	(470		)
Accrued interest on notes receivable	1,577			(2,745		)
Inventories	(2,285		)	(1,593		)
Other assets	347			30
Accounts payable	1,395			6,740
Accrued liabilities	18,980			10,769
Accrued income taxes	2,432			2,421
Other long-term liabilities	1,055			6,084
Net cash provided by operating activities	58,063			86,065
Cash flows from investing activities
Purchase consideration paid in advance	—			(109,938		)
Purchase of investments	(23,213		)	(7,985		)
Purchase of investments-other	—			(75,000		)
Maturities of investments-other	75,000			—
Proceeds from sales of available-for-sale securities	37,895			1,680
Proceeds from the sale of notes receivables	144,829			��
Purchase of royalty rights - at fair value	—			(59,500		)
Proceeds from royalty rights - at fair value	74,404			47,240
Sale of royalty rights - at fair value	108,169			—
Purchase of notes receivable	—			(8,000		)
Proceeds from sales of assets held for sale	8,142			54,653
Purchase of property and equipment	(1,160		)	—
Net cash provided by / (used in) investing activities	424,066			(156,850		)
Cash flows from financing activities
Payment of debt issuance costs	—			(325		)
Repayment of term loan	—			(25,000		)
Cash received from noncontrolling interest holder	—			250
Payment of anniversary payment	(87,007		)	—
Cash paid for purchase of noncontrolling interest	(2,170		)	—
Cash dividends paid	(21		)	(16,433		)
Repurchase and retirement of common stock	(30,000		)	—
Net cash used in financing activities	(119,198		)	(41,508		)
Net increase (decrease) in cash and cash equivalents	362,931			(112,293		)
Cash and cash equivalents at beginning of the period	147,154			218,883
Cash and cash equivalents at end of period	$	510,085		$	106,590



	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities
Net (loss) income	$	(32,011	)	$	6,617
Less: (Loss) income from discontinued operations	(244		)	15,069
Net loss from continuing operations	(31,767		)	(8,452		)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of convertible notes conversion option and debt issuance costs	280			1,923
Accreted interest on convertible note principal	33			—
Amortization of intangible assets	302			318
Amortization of right-of-use assets	185			153
Change in fair value of equity affiliate	11,334			—
Change in fair value of derivative assets	2,453			33
Loss on extinguishment of convertible notes	606			—
Other amortization and depreciation	509			827
Loss on disposal of property and equipment	300			—
Provision for bad debts	50			—
Stock-based compensation expense	17,769			1,115
Deferred income taxes	(129		)	(602		)
Changes in assets and liabilities:
Accounts receivable	(1,245		)	1,472
Prepaid and other current assets	(14,666		)	1,048
Inventory	(3,900		)	(788		)
Other assets	—			173
Accounts payable	2,554			(65		)
Accrued liabilities	(238		)	570
Other long-term liabilities	316			(28		)
Net cash used in operating activities - continuing operations	(15,254		)	(2,303		)
Net cash (used in) provided by operating activities - discontinued operations	(3,765		)	6,818
Cash flows from investing activities
Purchase of property and equipment	(93		)	(42		)
Net cash used in investing activities - continuing operations	(93		)	(42		)
Net cash provided by investing activities - discontinued operations	13,569			12,620
Cash flows from financing activities
Repurchase of convertible notes	(18,845		)	—
Net receipts for capped call transactions	801			—
Payment of contingent consideration	—			(1,071		)
Repurchase of Company common stock	(19,226		)	(44,288		)
Net settlement of stock-based compensation awards	(3,462		)	—
Net cash used in financing activities - continuing operations	(40,732		)	(45,359		)
Net cash used in financing activities - discontinued operations	(359		)	—
Net decrease in cash and cash equivalents	(46,634		)	(28,266		)
Cash and cash equivalents at beginning of the period	193,451			394,590
Cash and cash equivalents at end of the period	146,817			366,324
Less: Cash and cash equivalents of discontinued operations	21,305			24,469
Cash and cash equivalents of continuing operations at end of period	$	125,512		$	341,855

Supplemental cash flow information
Cash (refunded) paid for income taxes	$	(26	)	$	(2,773	)
Cash paid for interest	$	95		$	—


•	The Company’s Medical Devices segment consists of revenue derived from the LENSAR^® Laser System sales made by the Company’s subsidiary, LENSAR, Inc. (“LENSAR”), which may include equipment, Patient Interface Devices (“PIDs” or “consumables”), procedure licenses, training, installation, warranty and maintenance agreements.


⁽¹⁾	Corporate securities are classified as “Investment in equity affiliate” on the Condensed Consolidated Balance Sheets.


⁽²⁾	Warrants are included in “Other assets” on the Condensed Consolidated Balance Sheets.



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			September 30, 2017
Depomed	$	164,070	$	—		$	58,625		$	222,695
VB	14,997		—			440			15,437
U-M	35,386		—			63			35,449
ARIAD	108,631		(108,169		)	(462		)	—
AcelRx	67,483		—			6,582			74,065
Avinger	1,638		—			(777		)	861
KYBELLA	10,113		—			(6,651		)	3,462
	$	402,318	$	(108,169	)	$	57,820		$	351,969



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 for the period	(999		)	(2,350		)
	Settlement of financial instrument	89,000			—

Fair value as of September 30, 2017		$	—		$	(45,000	)



							Reported as:
	Amortized Cost		Unrealized Gains		Estimated Fair Value		Cash and Cash Equivalents		Short-Term Investments
(In thousands)
September 30, 2017
Cash	$	495,380	$	—	$	495,380	$	495,380	$	—
Money market funds	14,705		—		14,705		14,705		—
Commercial paper	2,060		—		2,060		—		2,060
Corporate securities	3,352		997		4,349		—		4,349
Total	$	515,497	$	997	$	516,494	$	510,085	$	6,409

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



		Three Months Ended September 30,				Nine Months Ended September 30,
Licensee	Product Name	2017		2016		2017		2016
Genentech	Avastin	—	%	—	%	—	%	22	%
	Herceptin	—	%	—	%	—	%	22	%

Biogen	Tysabri^®	2	%	28	%	13	%	24	%

Depomed	Glumetza, Janumet XR, Jentadueto XR and Invokamet XR	50	%	18	%	50	%	N/A

N/A	Tekturna, Tekturna HCT, Rasilez and Rasilez HCT	24	%	26	%	17	%	8	%



Fiscal Year	Amount
2017 (Remaining three months)	$	6,251
2018	24,989
2019	24,969
2020	24,950
2021	24,934
2022	24,843
Thereafter	91,138
Total intangible assets acquired	$	222,074



(in thousands)	Discount and Distribution Fees			Government Rebates and Chargebacks			Assistance and Other Discounts			Product Return			Total
Balance at December 31, 2016:	$	2,475		$	5,514		$	2,580		$	1,769		$	12,338
Allowances for current period sales	6,565			14,455			6,625			3,054			30,699
Allowances for prior period sales	—			253			—			—			253
Credits/payments for current period sales	(3,048		)	(4,720		)	(4,435		)	(1,145		)	(13,348		)
Credits/payments for prior period sales	(2,425		)	(4,353		)	(1,488		)	(1,024		)	(9,290		)
Balance at September 30, 2017:	$	3,567		$	11,149		$	3,282		$	2,654		$	20,652



	Stock Options			Restricted Stock Awards
(In thousands except per share amounts)	Number of Shares Outstanding	Weighted Average Exercise Price		Number of Shares Outstanding		Weighted Average Grant-date Fair Value Per Share
Balance at December 31, 2016	—	$	—	1,472		$	3.96
Granted	961	$	3.21	2,157		$	2.27
Vested or released	—	$	—	(426	)	$	3.52
Forfeited or canceled	—	$	—	(10	)	$	3.12
Balance at September 30, 2017	961	$	3.21	3,193		$	2.88



	Unrealized gains (losses) on available-for-sale securities		Total Accumulated Other Comprehensive Income
(In thousands)
Beginning Balance at December 31, 2016	$	—	$	—
Activity for the nine months ended September 30, 2017	648		648
Ending Balance at September 30, 2017	$	648	$	648



	Stock Options				Restricted Stock Awards
(in thousands, except per share amounts)	Number of Shares Outstanding		Weighted Average Exercise Price		Number of Shares Outstanding		Weighted Average Grant-date Fair Value Per Share

Balance at December 31, 2019	12,613		$	3.13	1,013		$	3.53
Granted	—		$	—	2,870		$	3.08
Exercised / vested	—		$	—	(2,695	)	$	3.12
Forfeited / canceled	(63	)	$	3.00	(1,089	)	$	3.39
Balance at March 31, 2020	12,550		$	3.13	99		$	3.11


⁽¹⁾	The revenue from the Company’s Pharmaceutical segment for the three months ended March 31, 2020 and 2019 is included in (Loss) income from discontinued operations. For additional information, see Note 2, Discontinued Operations Classified as Assets held for sale.


⁽²⁾	The table above does not include lease revenue from the Company’s Medical Devices segment for the three months ended March 31, 2020 and 2019, of $1.1 million and $1.2 million, respectively. For additional information, see Note 8, Leases.



(in thousands)	Medical Devices		Pharmaceutical			Total

Contract assets at December 31, 2019	$	—	$	3,512		$	3,512
Contract assets recognized	—		(2,341		)	(2,341		)
Payments received	—		3,659			3,659
Contract assets at March 31, 2020	$	—	$	4,830		$	4,830



	Nine Months Ended
(in thousands)	December 31, 2020		Thereafter		Total

Medical device sales	$	4,416	$	6,542	$	10,958
Pharmaceutical product sales	$	287	$	3,443	$	3,730



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



Acquired product rights	$	216,690
Customer relationships	23,880
Goodwill	3,735
Net intangible assets	$	244,305



Cash	$	1,983
Tangible assets	18,647
Intangible assets ⁽¹⁾	11,970
Net deferred tax assets	20,411
Total identifiable assets	53,011
Current liabilities	(6,674		)
Total liabilities assumed	(6,674		)
Gain on bargain purchase, net of loss on extinguishment of notes receivable	3,995
Total fair value of consideration	$	31,726


Revenues by segment	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(in thousands)	2017		2016		2017		2016		2020		2019
Income generating assets	$	42,682	$	39,510	$	200,547	$	163,681

Medical Devices									$	5,985	$	6,726
Strategic Positions									—		—
Pharmaceutical	15,104		14,128		43,897		14,128		—		—
Medical devices	4,963		—		7,580		—
Income Generating Assets									10		(30		)
Total revenues	$	62,749	$	53,638	$	252,024	$	177,809	$	5,995	$	6,696



Income (loss) by segment	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2017			2016			2017			2016
Income generating assets	$	25,248		$	14,049		$	98,746		$	74,084
Pharmaceutical	1,082			(142		)	(3,560		)	(142		)
Medical devices	(5,598		)	—			(6,774		)	—
Total net income	$	20,732		$	13,907		$	88,412		$	73,942



(Loss) income by segment	Three Months Ended
	March 31,
(in thousands)	2020			2019

Medical Devices	$	(2,111	)	$	(1,215	)
Strategic Positions	(10,900		)	—
Pharmaceutical ⁽¹⁾	(2,067		)	5,645
Income Generating Assets ⁽¹⁾	(16,645		)	2,250
Net (loss) income attributable to PDL’s shareholders	$	(31,723	)	$	6,680



Long-lived assets by segment
(in thousands)	September 30, 2017		December 31, 2016
Income generating assets	$	145	$	38
Pharmaceutical	860		—
Medical devices	7,125		—
Total long-lived assets	$	8,130	$	38



	Three Months Ended March 31,
	2020 ⁽¹⁾	2019 ⁽¹⁾
LENSAR	100%	100%



	Three Months Ended
	March 31,
Net (Loss) Income per Basic and Diluted Share	2020			2019
(in thousands, except per share amounts)
Numerator
Net loss from continuing operations	$	(31,767	)	$	(8,452	)
(Loss) income from discontinued operations	$	(244	)	$	15,069
Net (loss) income attributable to PDL’s shareholders used to compute net (loss) income per basic and diluted share	$	(31,723	)	$	6,680

Denominator
Total weighted-average shares used to compute net (loss) income attributable to PDL’s shareholders, per basic share	122,896			128,799
Shares used to compute net (loss) income attributable to PDL’s shareholders, per diluted share	122,896			128,799

Net loss from continuing operations	$	(0.26	)	$	(0.07	)
Net (loss) income from discontinued operations	$	0.00		$	0.12
Net (loss) income attributable to PDL’s shareholders per share - basic	$	(0.26	)	$	0.05
Net loss from continuing operations	$	(0.26	)	$	(0.07	)
Net (loss) income from discontinued operations	$	0.00		$	0.12
Net (loss) income attributable to PDL’s shareholders per share - diluted	$	(0.26	)	$	0.05