| Business and Significant Accounting Policies | Note 1
Business
VIVUS is a specialty pharmaceutical company with three approved therapies (Qsymia®, PANCREAZE® and STENDRA®/SPEDRA) and one product candidate in active clinical development (VI-0106). Qsymia (phentermine and topiramate extended release) is approved by the U.S. Food and Drug Administration (“FDA”) for chronic weight management. In June 2018, the Company acquired the U.S. and Canadian commercial rights for PANCREAZE (pancrelipase), which is indicated for the treatment of exocrine pancreatic insufficiency due to cystic fibrosis or other conditions. STENDRA (avanafil) is approved by FDA for erectile dysfunction (“ED”), and by the European Commission (“EC”) under the trade name SPEDRA, for the treatment of ED. The Company commercializes Qsymia and PANCREAZE in the U.S. through a specialty sales force supported by an internal commercial team. The Company licenses the commercial rights to STENDRA/SPEDRA in the U.S., EU and other countries and to PANCREAZE in Canada. VI-0106 (tacrolimus) is in active clinical development and is being studied in patients with pulmonary arterial hypertension (“PAH”).
At December 31, 2018, the Company’s accumulated deficit was approximately $880.5 million. Management believes that the Company’s existing capital resources combined with anticipated future cash flows will be sufficient to support its operating needs for at least the next twelve months. However, the Company anticipates that it may require additional funding to service its existing debt, pursue development and commercial opportunities, which could come in the form of a license, a co-development agreement, a merger or acquisition or in some other form, or to create a pathway for centralized approval of the marketing authorization application for Qsiva in the EU, conduct post-approval clinical studies for Qsymia, conduct non-clinical and clinical research and development work to support regulatory submissions and applications for its current and future investigational drug candidates, finance the costs involved in filing and prosecuting patent applications and enforcing or defending its patent claims, if any, to fund operating expenses and manufacture quantities of the Company’s investigational drug candidates and to make payments under its existing license agreements and supply agreements
If the Company requires additional capital, it may seek any required additional funding through collaborations, public and private equity or debt financings, capital lease transactions or other available financing sources. Additional financing may not be available on acceptable terms, or at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its commercialization or development programs or obtain funds through collaborations with others that are on unfavorable terms or that may require the Company to relinquish rights to certain of its technologies, product candidates or products that it would otherwise seek to develop on its own.
Management has evaluated all events and transactions that occurred after December 31, 2018, through the date these consolidated financial statements were filed. There were no events or transactions occurring during this period that require recognition or disclosure in these consolidated financial statements. The Company operates in a single segment, the development and commercialization of novel therapeutic products.
Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of VIVUS, Inc., and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Reverse Stock Split
On September 10, 2018, the Company effected a one-for-10 reverse stock split of its common stock. As a result of the reverse stock split, every 10 shares of the Company’s pre-reverse split common stock issued and outstanding was combined and converted into one issued and outstanding share of post-reverse split common stock without any change in the par value of the shares. Accordingly, an amount equal to the par value of the decreased shares resulting from the reverse stock split was reclassified from “Common stock” to “Additional paid-in capital.” No fractional shares were issued as a result of the reverse stock split; any fractional shares that would have resulted were rounded up to the nearest whole share. Proportionate voting rights and other rights of stockholders were not affected by the reverse stock split, other than as a result of the rounding up of potential fractional shares. All stock options, warrants and restricted stock units outstanding and common stock reserved for issuance under the Company’s equity incentive plans immediately prior to the reverse stock split were adjusted by dividing the number of affected shares of common stock by 10 and, where applicable, multiplying the exercise price by 10. All share and per share amounts related to common stock, stock options, warrants and restricted stock units have been restated for all periods to give retroactive effect to the reverse stock split.
Use of Estimates
The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles as set forth in the FASB’s Accounting Standards Codification, with consideration given to the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission. These accounting principles require management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including critical accounting policies or estimates related to the recognition of revenue and related reserves, available‑for‑sale securities, debt instruments, contingencies, litigation, inventories, research and development expenses, income taxes, and share‑based compensation. The Company bases its estimates on historical experience, information received from third parties and on various market specific and other relevant assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from those estimates under different assumptions or conditions.
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities from the date of purchase of three months or less to be cash equivalents. At December 31, 2018 and 2017, all cash equivalents were invested in money market funds or U.S. Treasury securities. These investments are recorded at fair value (see Note 3).
Available‑for‑Sale Securities
The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. Marketable securities have been classified and accounted for as available‑for‑sale. The Company may or may not hold securities with stated maturities greater than 12 months until maturity. In response to changes in the availability of and the yield on alternative investments as well as liquidity requirements, the Company may sell these securities prior to their stated maturities. As these securities are viewed by the Company as available to support current operations, securities with maturities beyond 12 months are classified as current assets.
Debt securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity (deficit), unless the decline in value is deemed to be other than temporary, in which case such securities are written down to fair value and the loss is charged to other‑than‑temporary loss on impaired securities. The Company periodically evaluates its investment securities for other‑than‑temporary declines based on quantitative and qualitative factors. Any losses that are deemed other-than-temporary are recognized as a non-operating loss. To date, the Company has not had any other-than-temporary declines in the value of any of the securities in its investment portfolio. Realized gains or losses on the sale of marketable securities are determined on a specific identification method, and such gains and losses are reflected as a component of interest expense.
Fair Value Measurements
The Company’s financial instruments include cash equivalents, available‑for‑sale securities, accounts receivable, accounts payable, accrued liabilities and debt. Available‑for‑sale securities are carried at fair value. The carrying value of cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the relatively short‑term nature of these instruments. Debt instruments are initially recorded at face value, with stated interest and amortization of debt issuance discounts and costs recognized as interest expense, which currently approximates fair value.
Issuance costs related to the conversion option of the Company’s convertible notes were charged to additional paid‑in capital. The portion of the issuance costs related to the debt component is being amortized and recorded as additional interest expense over the expected life of the convertible notes. In connection with the issuance of the convertible notes, the Company entered into capped call transactions with certain counterparties affiliated with the underwriters.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, available‑for‑sale‑securities, and accounts receivable. The Company has established guidelines to limit its exposure to credit risk by placing investments in high credit quality money market funds, U.S. Treasury securities or corporate debt securities and by placing investments with maturities that maintain safety and liquidity within the Company’s liquidity needs. The Company has also established guidelines for the issuance of credit to existing and potential customers.
Accounts Receivable, Allowances for Doubtful Accounts and Cash Discounts
The Company extends credit to its customers for product sales resulting in accounts receivable. Customer accounts are monitored for past due amounts. Amounts that are determined to be uncollectible are written off against the allowance for doubtful accounts. Allowances for doubtful accounts are estimated based upon past due amounts, historical losses and existing economic factors, and are adjusted periodically. Historically, the Company has not had any significant uncollected accounts. The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. The estimate of cash discounts is recorded at the time of sale. The Company accounts for the cash discounts by reducing revenue and accounts receivable by the amount of the discounts it expects the customers to take. The accounts receivable are reported in the consolidated balance sheets, net of the allowances for doubtful accounts and cash discounts. There is no allowance for doubtful accounts at December 31, 2018 or 2017. The allowance for cash discounts is $152,000 and $195,000 at December 31, 2018 and 2017, respectively.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined using the first‑in, first‑out method using a weighted average cost method calculated for each production batch. Inventory includes the cost of the active pharmaceutical ingredients (“API”), raw materials and third‑party contract manufacturing and packaging services. Indirect overhead costs associated with production and distribution are allocated to the appropriate cost pool and then absorbed into inventory based on the units produced or distributed, assuming normal capacity, in the applicable period.
Inventory costs of product shipped to customers, but not yet recognized as revenue, are recorded within inventories on the consolidated balance sheets and are subsequently recognized to cost of goods sold when revenue recognition criteria have been met.
The Company’s policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. The estimate of excess quantities is subjective and primarily dependent on the Company’s estimates of future demand for a particular product. If the estimate of future demand is inaccurate based on lower actual sales, the Company may increase the write down for excess inventory for that product and record a charge to inventory impairment.
Property and Equipment
Property and equipment is stated at cost and includes computers and software, furniture and fixtures, leasehold improvements and manufacturing equipment. Depreciation is computed using the straight‑line method over the estimated useful lives of two to seven years for computers and software, furniture and fixtures and manufacturing equipment. Leasehold improvements are amortized using the straight‑line method over the shorter of the remaining lease term or the estimated useful lives. Expenditures for repairs and maintenance, which do not extend the useful life of the property and equipment, are expensed as incurred. Gains and losses associated with dispositions are reflected as a non-operating gain or loss in the accompanying consolidated statements of operations.
Long‑lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to an estimate of undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. To date, the Company has had no significant write-offs of long-lived assets.
Debt Issuance Costs
Debt issuance costs, which are presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, are amortized as interest expense using the effective-interest method over the expected term of the debt.
Revenue Recognition
See Note 2.
Cost of Goods Sold
Cost of goods sold for units shipped to customers includes the inventory costs of API, third‑party contract manufacturing costs, packaging and distribution costs, royalties, cargo insurance, freight, shipping, handling and storage costs, and overhead costs of the employees involved with production.
Research and Development Expenses
Research and development (“R&D”) expenses include license fees, related compensation, consultants’ fees, facilities costs, administrative expenses related to R&D activities and clinical trial costs incurred by clinical research organizations or CROs, and research institutions under agreements that are generally cancelable, among other related R&D costs. The Company also records accruals for estimated ongoing clinical trial costs. Clinical trial costs represent costs incurred by CRO and clinical sites and include advertising for clinical trials and patient recruitment costs. These costs are recorded as a component of R&D expenses and are expensed as incurred. Under the Company’s agreements, progress payments are typically made to investigators, clinical sites and CROs. The Company analyzes the progress of the clinical trials, including levels of patient enrollment, invoices received and contracted costs when evaluating the adequacy of accrued liabilities. Significant judgments and estimates must be made and used in determining the accrued balance in any accounting period. Actual results could differ from those estimates under different assumptions. Revisions are charged to expense in the period in which the facts that give rise to the revision become known.
In addition, the Company has obtained rights to patented intellectual properties under several licensing agreements for use in research and development activities. Non‑refundable licensing payments made for intellectual properties that have no alternative future uses are expensed to research and development as incurred.
Advertising Expenses
Advertising expenses are expensed as incurred. The Company incurred advertising and sales promotion costs of $2.1 million, $3.2 million and $3.9 million in 2018, 2017 and 2016, respectively.
Share‑Based Compensation
Compensation expense is recognized for share-based payments, including stock options, restricted stock units and shares issued under the employee stock purchase plan, using a fair‑value based method. The Company estimates the fair value of share‑based payment awards on the date of the grant using the Black‑Scholes option‑pricing model, which requires the Company to estimate the expected term of the award, the expected volatility, the risk-free interest rate and the expected dividends. The expected term, which represents the period of time that options granted are expected to be outstanding, is derived by analyzing the historical experience of similar awards, giving consideration to the contractual terms of the share‑based awards, vesting schedules and expectations of future employee behavior. Expected volatilities are estimated using the historical share price performance over the expected term of the option, which are adjusted as necessary for any other factors which may reasonably affect the volatility of VIVUS’s stock in the future. The risk‑free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for the expected term of the award. The Company does not anticipate paying any dividends in the near future. The Company develops pre‑vesting forfeiture assumptions based on an analysis of historical data and expected future activity.
Income Taxes
The Company makes certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.
As part of the process of preparing the Company’s consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which the Company operates. This process involves the Company estimating its current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheets.
The Company assesses the likelihood that it will be able to recover its deferred tax assets by considering all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If it is not more likely than not that the Company will recover its deferred tax assets, the Company will increase its provision for taxes by recording a valuation allowance against the deferred tax assets that the Company estimates will not ultimately be recoverable. Realization of deferred tax assets by the Company is dependent upon the amount and timing of the generation of future taxable income, if any. As a result of the Company’s analysis of all available evidence, both positive and negative, as of December 31, 2018, it was considered more likely than not that the Company’s deferred tax assets would not be realized. As a result, the Company’s net deferred tax assets have been fully offset by a valuation allowance. Should there be a change in the Company’s ability to recover its deferred tax assets, the Company would recognize a benefit to its tax provision in the period in which the Company determines that it is more likely than not that it will recover its deferred tax assets. The Company will continue to analyze the evidence each quarter during 2019 to determine whether it becomes more likely than not that all or a portion of its deferred tax assets are realizable.
The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of its provision for income taxes.
Foreign Currency Transactions
Transactions in foreign currencies are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated into the Company’s functional currency at the rates prevailing on the balance sheet date. Non‑monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the initial transaction dates.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the profit and loss account for the period. Exchange differences arising on the retranslation of non‑monetary items carried at fair value are included in other expense in the accompanying consolidated statements of operations for the period.
Contingencies and Litigation
The Company is periodically involved in disputes and litigation related to a variety of matters. When it is probable that the Company will experience a loss, and that loss is quantifiable, the Company records appropriate reserves. The Company records legal fees and costs as an expense when incurred.
Intangible Assets
The Company records acquired intangible assets at cost and amortizes them over the estimated useful life of the asset. When events or changes in circumstances indicate that the carrying value of intangible assets may not be recoverable, the Company evaluates such impairment if the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value or discounted estimates of future cash flows attributable to the assets. To date, the Company has recorded no impairment losses on its intangible assets. See Note 8.
Net Income (Loss) Per Share
The Company computes basic net income (loss) per share applicable to common stockholders based on the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is based on the weighted average number of common and common equivalent shares, which represent shares that may be issued in the future upon the exercise of outstanding stock options or upon a net share settlement of the Company’s Convertible Notes. Common share equivalents are excluded from the computation in periods in which they have an anti‑dilutive effect. Stock options for which the price exceeds the average market price over the period have an anti‑dilutive effect on net income (loss) per share and, accordingly, are excluded from the calculation. As discussed in Note 13, the triggering conversion conditions that allow holders of the Convertible Notes to convert have not been met. If such conditions are met and the note holders opt to convert, the Company may choose to pay in cash, common stock, or a combination thereof. However, if this occurs, the Company has the intent and ability to net share settle this debt security; thus the Company uses the treasury stock method for net income (loss) per share purposes. Due to the effect of the capped call instrument purchased in relation to the Convertible Notes, there would be no net shares issued until the market value of the Company’s stock exceeds $20 per share, and thus no impact on diluted net income (loss) per share. Further, when there is a net loss, other potentially dilutive common equivalent shares are not included in the calculation of net loss per share since their inclusion would be anti‑dilutive. The following table presents the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):
2018
2017
2016
Net (loss) income
$
$
$
Basic:
Weighted-average shares outstanding
Basic net (loss) income per share
$
$
$
Diluted:
Weighted-average shares outstanding used in basic calculation
Dilutive potential shares
—
—
58
Weighted-average shares outstanding used in diluted calculation
Diluted net (loss) income per share
$
$
$
For the years ended December 31, 2018, 2017, and 2016, potentially dilutive outstanding stock options and RSUs of 2,168,000, 1,350,000 and 1,012,000, respectively, were not included in the computation of diluted net loss per share because the effect would have been anti‑dilutive.
Recent Accounting Pronouncements Adopted
Beginning January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers . This standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. This new standard supersedes most previously-existing revenue recognition guidance. The Company adopted this standard in January 2018 using the modified retrospective basis. See Note 2 for a further discussion of the Company’s revenue accounting and the impact of the adoption of this standard.
In January 2018, the Company adopted FASB Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments . The standard clarifies how certain cash receipts and cash payments will be presented and classified in the statement of cash flows. The adoption of this standard had no impact on the Company’s consolidated financial statements.
For 2018, the Company adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business , which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses, and applied the new guidance prospectively. See Notes 8 and 12 for further information on intangible assets acquired in 2018.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842), which modifies the accounting by lessees for all leases with a term greater than 12 months. This standard will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The Company will adopt this guidance effective January 1, 2019 using a modified retrospective transition method, not adjusting comparative periods. The Company’s only significant lease is its operating lease for its corporate headquarters, although it has several smaller leases. The adoption of this guidance will have a significant impact on the Company’s balance sheets as it will recognize right of use assets and corresponding lease liabilities for each of its leases. As of January 1, 2019, the Company had $1.5 million of right of use assets and $1.8 million of lease liability. The impact of the adoption on accumulated deficit will be minimal. The Company expects the overall ongoing recognition of expense to be similar to current guidance, though the classification of such expense could be significantly different.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments , which requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument. This standard is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company is evaluating the potential impact of this standard, but does not expect it to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement , which adds disclosure requirements to Topic 820 for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This standard is effective for fiscal years beginning after December 31, 2019 and early adoption is permitted. The Company is evaluating the provisions of this guidance. |
