| Basis of Presentation and Summary of Significant Accounting Policies | Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation The Company’s condensed consolidated financial statements include the financial statements of Ligand and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We have included all adjustments, consisting only of normal recurring adjustments, which we considered necessary for a fair presentation of our financial results. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 . Interim financial results are not necessarily indicative of the results that may be expected for the full year. Significant Accounting Policies The Company describes its significant accounting policies in Note 1 to the financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017. Use of Estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results may differ from those estimates. Accounting Standards Recently Adopted Revenue Recognition - In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”), which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. ASC 606 defines a five-step approach for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current guidance. We adopted this new standard as of January 1, 2018, by using the modified-retrospective method. Financial Instruments - In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall ("Subtopic 825-10"), which requires equity investments (other than those accounted for under the equity method or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income. We have strategic investments, including Viking, that fall under this guidance update. We have adopted ASU 2016-01 effective January 1, 2018 as a cumulative-effect adjustment and reclassified $2.6 million unrealized gains on equity investments, net of tax, from accumulated other comprehensive income to accumulated deficit on our consolidated balance sheet. Effective January 1, 2018, our results of operations include the changes in fair value of these financial instruments. See Viking subsection below for further information on the Viking investment. Statement of Cash Flows - In August 2016 the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies certain aspects of the statement of cash flows, and aims to reduce diversity in practice regarding how certain transactions are classified in the statement of cash flows. This standard was effective January 1, 2018. The Company adopted ASU No. 2016-15 effective January 1, 2018. We have updated our presentation of Payments to CVR holders and other contingency payments to conform to the standard and have revised our prior year cash flows accordingly. Accounting Standards Not Yet Adopted Financial Instruments - In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available for sale debt securities. The ASU is effective for us beginning in the first quarter of 2020, with early adoption permitted. We are currently evaluating the impact of ASU 2016-13 on the consolidated financial statements. We do not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on our consolidated financial statements or disclosures. Revenue Our revenue is generated primarily from royalties on sales of products commercialized by the Company's partners, Captisol material sales, license fees and development and regulatory milestone payments. On January 1, 2018, we adopted ASC 606 which amends the guidance for recognition of revenue from contracts with customers by using the modified-retrospective method applied to those contracts that were not completed as of January 1, 2018. The results for the reporting period beginning January 1, 2018, are presented in accordance with the new standard, although comparative information has not been restated and continues to be reported under the accounting standards and policies in effect for those periods. See Note 1, Summary of significant accounting policies, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017. Upon adoption, we recorded a net decrease of $25.4 million to Accumulated deficit due to the cumulative impact of adopting the new standard—with the impact related primarily to the acceleration of royalty revenue, net of related deferred tax impact. The adoption of this new standard resulted in lower reported total revenues and operating income in the first quarter of 2018 of $11.9 million compared to what reported amounts would have been under the prior standard. Our accounting policies under the new standard were applied prospectively and are noted below. Royalties, License Fees and Milestones We receive royalty revenue on sales by our partners of products covered by patents that we own. We do not have future performance obligations under these license arrangements. We generally satisfy our obligation to grant intellectual property rights on the effective date of the contract. However, we apply the royalty recognition constraint required under the guidance for sales-based royalties which requires a sales-based royalty to be recorded no sooner than the underlying sale. Therefore, royalties on sales of products commercialized by the Company’s partners are recognized in the quarter the product is sold. Our partners generally report sales information to us on a one quarter lag. Thus, we estimate the expected royalty proceeds based on an analysis of historical experience and interim data provided by our partners including their publicly announced sales. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter. Our contracts with customers often will include future contingent milestone based payments. We include contingent milestone based payments in the estimated transaction price when there is a basis to reasonably estimate the amount of the payment. These estimates are based on historical experience, anticipated results and our best judgment at the time. If the contingent milestone based payment is sales-based we apply the royalty recognition constraint and record revenue when the underlying sale has taken place. Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development with our partners will not reach development based milestones or receive regulatory approval, we generally recognize any contingent payments that would be due to us upon or after the development milestone or regulatory approval. Material Sales We recognize revenue when control of Captisol material or intellectual property license rights is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of the product, meaning the customer has the ability to use and obtain the benefit of the Captisol material or intellectual property license right. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. Sales tax and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We expense incremental costs of obtaining a contract when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial. We did not incur any incremental costs of obtaining a contract during the periods reported. Depending on the terms of the arrangement, we may also defer a portion of the consideration received because we have to satisfy a future obligation. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available. We have elected to recognize the cost for freight and shipping when control over Captisol material has transferred to the customer as an expense in cost of sales. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. Except for royalty revenue, we generally receive payment at the point we satisfy our obligation or soon after. Therefore, we do not generally carry a contract asset or contract liability balance. The Company has revenue sharing arrangements whereby certain revenue proceeds are shared with a third party. The revenue standard requires an entity to determine whether it is a principal or an agent in these transactions by evaluating the nature of its promise to the customer. The Company received a $4.6 million milestone payment from a license partner in the first quarter of 2018 of which $3.0 million was paid to a third-party in-licensor. The Company recorded net revenue of $1.6 million as it believes it was an agent in the transaction. Disaggregation of Revenue Under ASC 605, the legacy revenue standard, the Company would have reported total royalty revenue of $32.7 million in the first quarter of 2018, disaggregated as follows: Promacta $24.1 million , Kyprolis $6.5 million , Evomela $1.7 million and Other $0.4 M. In the first quarter of 2017 royalty revenue continues to be reported in accordance with ASC 605 and was $24.7 million or disaggregated as follows: Promacta $16.7 million , Kyprolis $4.6 million , Evomela, $1.9 million and Other $1.1 million . Royalty revenue was $20.8 million in first quarter of 2018 or disaggregated as follows: Promacta $15.6 million , Kyprolis $3.3 million , Evomela $1.6 million and Other $0.4 million . The following table represents disaggregation of Material Sales and License fees, milestone and other (in thousands): Three months ended March 31, 2018 2017 Material Sales Captisol $ 4,391 $ 1,121 License fees, milestones and other License Fees $ 26,955 $ 2,872 Milestone 2,825 1,008 Other 1,166 36 $ 30,946 $ 3,916 Short-term Investments The Company's investments consist of the following at March 31, 2018 and December 31, 2017 (in thousands): March 31, 2018 December 31, 2017 Amortized cost Gross unrealized gains Gross unrealized losses Estimated fair value Amortized cost Gross unrealized gains Gross unrealized losses Estimated fair value Short-term investments Bank deposits $ 94,855 $ 5 $ (97 ) $ 94,763 $ 80,095 $ 6 $ (42 ) $ 80,059 Corporate bonds 73,129 — (216 ) 72,913 55,335 — (96 ) 55,239 Commercial paper 29,977 — (26 ) 29,951 27,933 — (20 ) 27,913 U.S. Government bonds 11,964 — (22 ) 11,942 8,939 — (10 ) 8,929 Agency bonds — — — — 4,991 — (1 ) 4,990 Municipal bonds 2,014 — (12 ) 2,002 2,028 — (13 ) 2,015 Corporate equity securities 181 1,577 — 1,758 207 1,689 — 1,896 $ 212,120 $ 1,582 $ (373 ) $ 213,329 $ 179,528 $ 1,695 $ (182 ) $ 181,041 Inventory Inventory, which consists of finished goods, is stated at the lower of cost or market value. The Company determines cost using the first-in, first-out method. Goodwill and Other Identifiable Intangible Assets Goodwill and other identifiable intangible assets consist of the following (in thousands): March 31, December 31, 2018 2017 Indefinite lived intangible assets IPR&D $ 2,410 $ 7,923 Goodwill 85,961 85,959 Definite lived intangible assets Complete technology 228,413 222,900 Less: Accumulated amortization (26,176 ) (23,301 ) Trade name 2,642 2,642 Less: Accumulated amortization (949 ) (916 ) Customer relationships 29,600 29,600 Less: Accumulated amortization (10,634 ) (10,264 ) Total goodwill and other identifiable intangible assets, net $ 311,267 $ 314,543 Commercial License Rights Commercial license rights consist of the following (in thousands): March 31, December 31, 2018 2017 Aziyo and CorMatrix $ 17,696 $ 17,696 Selexis 8,602 8,602 $ 26,298 $ 26,298 Less: accumulated amortization (6,329 ) (6,772 ) Total commercial rights, net $ 19,969 $ 19,526 Commercial license rights represent a portfolio of future milestone and royalty payment rights acquired from Selexis in April 2013 and April 2015 and CorMatrix in May 2016. Individual commercial license rights acquired are carried at allocated cost and approximate fair value. In May 2017, the Company entered into a Royalty Agreement with Aziyo pursuant to which the Company will receive royalties from certain marketed products that Aziyo acquired from CorMatrix. The Company accounts for the Aziyo commercial license right as a financial asset in accordance with ASC 310 and amortizes the commercial license right using the 'effective interest' method whereby the Company forecasts expected cash flows over the term of the arrangement to arrive at an annualized effective interest. The annual effective interest associated with the forecasted cash flows from the Royalty Agreement with Aziyo as of March 31, 2018 is 26% . Revenue is calculated by multiplying the carrying value of the commercial license right by the effective interest. We elected a prospective approach to account for changes in estimated cash flows and selected a method for determining when an impairment would be recognized and how to measure that impairment. In circumstances where our new estimate of expected cash flows is greater than previously expected, we will update our yield prospectively. While it has not occurred to date, in circumstances where our new estimate of expected cash flows is less than previously expected and below our original estimated yield we will record impairment. Impairment will be recognized by reducing the financial asset to an amount that represents the present value of our most recent estimate of expected cash flows discounted by the original effective interest rate. In circumstances where our new estimate of expected cash flows is less than previously expected, but not below our original estimated yield, we will update our yield prospectively. The Company accounts for commercial license rights related to developmental pipeline products on a non-accrual basis. These developmental pipeline products are non-commercialized, non-approved products that require FDA or other regulatory approval, and thus have uncertain cash flows. The developmental pipeline products are on a non-accrual basis as the Company is not yet able to forecast future cash flows given their pre-commercial stages of development. The Company will prospectively update its yield model under the effective interest method once the underlying products are commercialized and the Company can reliably forecast expected cash flows. Income will be calculated by multiplying the carrying value of the commercial license right by the effective interest rate. Viking The Company's equity ownership interest in Viking decreased in the first quarter of 2018 to approximately 12.4% due to Viking's financing events in February 2018. As a result, in February 2018, the Company has concluded that it does not exert significant influence over Viking and has discontinued accounting for its investment in Viking under the equity method. The market value of the Company's equity investment in Viking was $27.5 million as of March 31, 2018 and as a result the Company recorded an unrealized gain of $21.1 million in Gain (loss) from Viking in its condensed consolidated statement of operations. The Company also has outstanding warrants to purchase 1.5 million shares of Viking's common stock at an exercise price of $1.50 per share and a convertible note receivable with 2.5% fixed rate interest due from Viking with a maturity date of May 21, 2018. The Company recorded the warrants and note receivable at the fair value of $4.6 million and $3.9 million at March 31, 2018 and $3.8 million and $3.9 million at December 31, 2017 , respectively. The following table presents summarized financial information of Viking (in thousands): Three months ended March 31, 2018 2017 Condensed Statement of Operations: Total revenue $ — $ — Gross profit $ — $ — Loss from operations $ 4,805 $ 4,968 Net Loss $ 3,551 $ 5,222 March 31, December 31, 2018 2017 Condensed Balance Sheet: Current assets $ 78,731 $ 21,852 Noncurrent assets 240 270 $ 78,971 $ 22,122 Current liabilities $ 6,339 $ 8,657 Noncurrent liabilities $ — $ — Stockholder's equity $ 72,632 $ 13,465 Accrued Liabilities Accrued liabilities consist of the following (in thousands): March 31, December 31, 2018 2017 Compensation $ 1,455 $ 4,085 Professional fees 497 430 Amounts owed to former licensees 3,417 396 Royalties owed to third parties 1,043 954 Deferred revenue 75 173 Other 1,993 1,339 Total accrued liabilities $ 8,480 $ 7,377 Stock-Based Compensation Stock-based compensation expense for awards to employees and non-employee directors is recognized on a straight-line basis over the vesting period until the last tranche vests. The following table summarizes stock-based compensation expense recorded as components of research and development expenses and general and administrative expenses for the periods indicated (in thousands): Three months ended March 31, 2018 2017 Stock-based compensation expense as a component of: Research and development expenses $ 1,767 $ 3,939 General and administrative expenses 2,788 2,106 $ 4,555 $ 6,045 The fair-value for options that were awarded to employees and directors was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions: Three months ended March 31, 2018 2017 Risk-free interest rate 2.7% 2.1% Dividend yield — — Expected volatility 33% 47% Expected term 5.7 6.9 Lease Obligations The Company describes its operating lease obligations in Note 5 to the financial statements in Item 8 of its Annual Report on Form 10-K for the year ended December 31, 2017. There were no significant changes in the Company's operating lease commitments during the first three months of 2018. Income Per Share Basic income per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of shares issuable under 2019 Convertible Senior Notes and the associated warrants, stock options and restricted stock. The 2019 Convertible Senior Notes have a dilutive impact when the average market price of the Company’s common stock exceeds the applicable conversion price of the notes. The warrants have a dilutive effect to the extent the market price per share of common stock exceeds the applicable exercise price of the warrants. Potentially dilutive common shares from stock options and restricted stock are determined using the average share price for each period under the treasury stock method. In addition, proceeds from exercise of stock options and the average amount of unrecognized compensation expense for restricted stock are assumed to be used to repurchase shares. In loss periods, basic net loss per share and diluted net loss per share are identical because the otherwise dilutive potential common shares become anti-dilutive and are therefore excluded. The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings per share: Three months ended March 31, 2018 2017 Weighted average shares outstanding: 21,208,793 20,937,627 Dilutive potential common shares: Restricted stock 63,959 185,745 Stock options 1,119,611 954,509 2019 Convertible Senior Notes 1,719,099 941,308 Warrants 688,852 — Shares used to compute diluted income per share 24,800,314 23,019,189 Potentially dilutive shares excluded from calculation due to anti-dilutive effect 148,404 3,711,067 |
