| Significant Accounting Policies | (2) Significant Accounting
Policies
Principles of Consolidation
The condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
Accounting estimates are based on historical experience and other
factors that are considered reasonable under the circumstances.
Estimates are used in determining such items as provisions for
sales returns, rebates and incentives, chargebacks, and other sales
allowances; depreciable/amortizable lives; asset impairments;
valuation allowance on deferred taxes; probabilities of achievement
of performance conditions for certain equity awards; amounts
recorded for licensing revenue; contingencies and accruals; and
valuations of derivative and long-term debt instruments. Because of
the uncertainties inherent in such estimates, actual results may
differ from these estimates. Management periodically evaluates
estimates used in the preparation of the condensed consolidated
financial statements for continued reasonableness.
Use of Forecasted Financial Information in Accounting
Estimates
The use of forecasted financial information is inherent in many of
the Company’s accounting estimates including, but not limited
to, determining the estimated fair values of derivatives, debt
instruments and intangible assets, and evaluating the need for
valuation allowances for deferred tax assets. Such forecasted
financial information is comprised of numerous assumptions
regarding the Company’s future revenues, cash flows, and
operational results. Management believes that its financial
forecasts are reasonable and appropriate based upon current facts
and circumstances. Because of the inherent nature of forecasts,
however, actual results may differ from these forecasts. Management
regularly reviews the information related to these forecasts and
adjusts the carrying amounts of the applicable assets
prospectively, if and when actual results differ from previous
estimates.
Revenue Recognition
The Company sells Vascepa principally to a limited number of major
wholesalers, as well as selected regional wholesalers and specialty
pharmacy providers, or collectively, its Distributors or its
customers, that in turn resell Vascepa to retail pharmacies for
subsequent resale to patients and healthcare providers. Patients
are required to have a prescription in order to purchase Vascepa.
In accordance with GAAP, the Company’s revenue recognition
policy requires that: (i) there is persuasive evidence that an
arrangement exists between the Company and the Distributor,
(ii) delivery has occurred, (iii) collectability is
reasonably assured and (iv) the price is fixed or
determinable.
The Company has contracts with its primary Distributors and
delivery generally occurs when a Distributor receives Vascepa. The
Company evaluates the creditworthiness of each of its Distributors
to determine whether revenues can be recognized upon delivery,
subject to satisfaction of the other requirements, or whether
recognition is required to be delayed until receipt of payment. In
order to conclude that the price is fixed or determinable, the
Company must be able to (i) calculate its gross product
revenues from the sales to Distributors and (ii) reasonably
estimate its net product revenues. The Company calculates gross
product revenues generally based on the wholesale acquisition cost
that the Company charges its Distributors for Vascepa. The Company
estimates its net product revenues by deducting from its gross
product revenues (a) trade allowances, such as invoice
discounts for prompt payment and distributor fees,
(b) estimated government and private payor rebates,
chargebacks and discounts, such as Medicaid reimbursements,
(c) reserves for expected product returns and
(d) estimated costs of incentives offered to certain indirect
customers, including patients.
Trade Allowances:
Rebates, Chargebacks and Discounts:
Product Returns:
Other Incentives:
The following tables summarize activity in each of the net product
revenue allowance and reserve categories described above for the
nine months ended September 30, 2016 and 2015:
In thousands Trade Rebates, Product Other Total
Balance as of December 31, 2015 $ 4,296 $ 9,881 $ 535 $ 1,084 $ 15,796
Provision related to current period sales 15,823 46,553 403 8,539 71,318
Provision related to prior period sales (87 ) (402 )
—
— (489 )
Credits/payments made for current period sales (11,086 ) (22,236 )
— (6,788 ) (40,110 )
Credits/payments made for prior period sales (4,180 ) (8,492 ) (247 ) (1,284 ) (14,203 )
Balance as of September 30, 2016 $ 4,766 $ 25,304 $ 691 $ 1,551 $ 32,312
In thousands Trade Rebates, Product Other Total
Balance as of December 31, 2014 $ 2,207 $ 3,610 $ 481 $ 792 $ 7,090
Provision related to current period sales 10,104 21,633 231 5,976 37,944
Provision related to prior period sales (174 ) (70 )
—
— (244 )
Credits/payments made for current period sales (6,729 ) (14,194 )
— (4,220 ) (25,143 )
Credits/payments made for prior period sales (2,043 ) (3,522 ) (26 ) (792 ) (6,383 )
Balance as of September 30, 2015 $ 3,365 $ 7,457 $ 686 $ 1,756 $ 13,264
Such net product revenue allowances and reserves are included
within accrued expenses and other current liabilities within the
condensed consolidated balance sheets, with the exception of trade
allowances and chargebacks, which are included within accounts
receivable, net as discussed below.
Multiple-Element Arrangements and Licensing Revenue
When evaluating multiple-element arrangements, the Company
identifies the deliverables included within the agreement and
evaluates which deliverables represent separate units of accounting
based on whether the delivered element has stand-alone value to the
customer or if the arrangement includes a general right of return
for delivered items.
The consideration received is allocated between each of the
separable elements in the arrangement using the relative selling
price method. The selling price used for each separable element
will be based on vendor specific objective evidence
(“VSOE”) if available, third-party evidence if VSOE is
not available, or estimated selling price if neither VSOE nor
third-party evidence is available. Revenue is then recognized as
each of the separable elements to which the revenue has been
allocated is delivered.
The Company may receive up-front, non-refundable payments when
licensing its intellectual property in conjunction with research,
development and commercialization agreements. In determining the
units of accounting, management evaluates whether the license has
stand-alone value from the undelivered elements to the
collaborative partner based on the consideration of the relevant
facts and circumstances for each arrangement. Factors considered in
this determination include the stage of development of the license
delivered, research and development capabilities of the partner and
the ability of partners to develop and commercialize Vascepa
independent of the Company.
When management believes the license to its intellectual property
does not have stand-alone value from the other deliverables to be
provided in the arrangement, the Company generally recognizes
revenue attributable to the license over the Company’s
contractual or estimated performance period. Any unrecognized
portion of license revenue is classified within deferred revenue in
the accompanying condensed consolidated balance sheets. When
management believes the license to its intellectual property has
stand-alone value, the Company recognizes revenue attributed to the
license upon delivery. The periods over which revenue is recognized
is subject to estimates by management and may change over the
course of the agreement. Such a change could have a material impact
on the amount of revenue the Company records in future periods.
Milestones
Contingent consideration from activities that is earned upon the
achievement of a substantive milestone is recognized in its
entirety in the period in which the milestone is achieved. At the
inception of each arrangement that includes milestone payments, the
Company evaluates whether each milestone is substantive. This
evaluation includes an assessment of whether: (a) the
consideration is commensurate with either (1) the
entity’s performance to achieve the milestone, or
(2) the enhancement of the value of the delivered item(s) as a
result of a specific outcome resulting from the entity’s
performance to achieve the milestone, (b) the consideration
relates solely to past performance and (c) the consideration
is reasonable relative to all of the deliverables and payment terms
within the arrangement. The Company evaluates factors such as the
scientific, clinical, regulatory, commercial and other risks that
must be overcome to achieve the respective milestone, the level of
effort and investment required and whether the milestone
consideration is reasonable relative to all deliverables and
payment terms in the arrangement in making this assessment.
See Note 10—Development, Commercialization and Supply
Agreement for further information regarding licensing revenue and
milestones primarily related to the Company’s
multiple-element arrangement with Eddingpharm (Asia) Macao
Commercial Offshore Limited.
Distribution Costs
The Company records distribution costs related to shipping product
to its customers, primarily through the use of common carriers or
external distribution services, in cost of goods sold.
Cash and Cash Equivalents and Restricted
Cash
Cash and cash equivalents consist of cash, deposits with banks and
short-term highly liquid money market instruments with remaining
maturities at the date of purchase of 90 days or less.
Restricted cash represents cash and cash equivalents pledged to
guarantee repayment of certain expenses which may be incurred for
business travel under corporate credit cards held by employees.
Accounts Receivable, net
Accounts receivable, net, comprised of trade receivables, are
generally due within 30 days and are stated at amounts due from
customers. The Company recognizes an allowance for losses on
accounts receivable in an amount equal to the estimated probable
losses net of any recoveries. The allowance is based primarily on
assessment of specific identifiable customer accounts considered at
risk or uncollectible, as well as an analysis of current
receivables aging and expected future write-offs. The expense
associated with the allowance for doubtful accounts is recognized
as selling, general, and administrative expense. The Company has
not historically experienced any credit losses.
The following table summarizes the impact of accounts receivable
reserves on the gross trade accounts receivable balances as of
September 30, 2016 and December 31, 2015:
In thousands September 30, 2016 December 31, 2015
Gross trade accounts receivable $ 22,522 $ 18,270
Trade allowances (4,766 ) (4,296 )
Chargebacks (240 ) (148 )
Allowance for doubtful accounts (12 )
—
Accounts receivable, net $ 17,504 $ 13,826
Inventory
Effective April 2016, the Company adopted ASU No. 2015-11,
Inventory (Topic 330)—Simplifying the Measurement of
Inventory
Property, Plant and Equipment
The Company provides for depreciation and amortization using the
straight-line method by charges to operations in amounts that
depreciate the cost of the fixed asset over its estimated useful
life. The estimated useful lives, by asset classification, are as
follows:
Asset Classification Useful Lives
Computer equipment and software 3 - 5 years
Furniture and fixtures 5 years
Leasehold improvements
Lesser of useful life or lease term
Upon retirement or sale of assets, the cost of the assets disposed
and the related accumulated depreciation are removed from the
condensed consolidated balance sheet and any resulting gain or loss
is credited or expensed to operations. Repairs and maintenance
costs are expensed as incurred.
Long-Lived Asset Impairment
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. Recoverability of
these assets is determined by comparing the forecasted undiscounted
net cash flows of the operation to which the assets relate to their
carrying amount. If impairment is indicated, the assets are written
down to fair value. Fair value is determined based on discounted
forecasted cash flows or appraised values, depending on the nature
of the assets.
Intangible Asset, net
Intangible asset, net consists of a milestone payment paid to the
former shareholders of Laxdale Limited related to the 2004
acquisition of the rights to Vascepa, which is the result of
Vascepa receiving marketing approval for the first indication and
is amortized over its estimated useful life on a straight-line
basis. See Note 7—Commitments and Contingencies for further
information regarding other obligations related to the acquisition
of Laxdale Limited.
Beneficial Conversion Features
The Company issued Series A preference shares in a private
placement transaction executed in two tranches that each contain a
conversion feature whereby such shares are convertible into
ordinary shares at a fixed rate. The conversion price on the date
of issuance was less than the market price of the Company’s
ordinary shares. It was determined that these discounts represent
contingent beneficial conversion features, which were valued based
on the difference between the conversion price and the market price
of the ordinary shares on the date of issuance, which is the
commitment date. These features are analogous to preference
dividends and were each recorded as a non-cash return to preferred
shareholders through accumulated deficit upon the earliest possible
date of conversion, which occurred in the three months ended
June 30, 2015 upon effectiveness of the related resale
Registration Statement on Form S-3 and in the three months ended
September 30, 2015 upon shareholder approval received at the
Company’s Annual General Meeting of Shareholders. See Note
8—Equity for further discussion.
Costs for Patent Litigation and Legal
Proceedings
Costs for patent litigation or other legal proceedings are expensed
as incurred and included in selling, general and administrative
expenses.
Research and Development Costs
The Company charges research and development costs to operations as
incurred. Research and development expenses are comprised of costs
incurred by the Company in performing research and development
activities, including: salary and benefits; stock-based
compensation expense; laboratory supplies and other direct
expenses; contractual services, including clinical trial and
pharmaceutical development costs; commercial supply investment in
its drug candidates; and infrastructure costs, including facilities
costs and depreciation expense. In addition, research and
development costs include the costs of product supply received from
suppliers when such receipt by the Company is prior to regulatory
approval of the supplier.
Selling, General and Administrative Costs
The Company charges selling, general and administrative costs to
operations as incurred. Selling, general and administrative costs
include costs of salaries, programs and infrastructure necessary
for the general conduct of the Company’s business, including
those incurred as a result of the commercialization of Vascepa in
the United States as well as co-promotion fees payable to Kowa
Pharmaceuticals America, Inc.
Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences of differences between the carrying amounts and
tax bases of assets and liabilities and operating loss
carryforwards and other attributes using enacted rates expected to
be in effect when those differences reverse. Valuation allowances
are provided against deferred tax assets that are not more likely
than not to be realized.
The Company provides reserves for potential payments of tax to
various tax authorities or does not recognize tax benefits related
to uncertain tax positions and other issues. Tax benefits for
uncertain tax positions are based on a determination of whether a
tax benefit taken by the Company in its tax filings or positions is
more likely than not to be realized, assuming that the matter in
question will be decided based on its technical merits. The
Company’s policy is to record interest and penalties in the
provision for income taxes.
The Company regularly assesses its ability to realize deferred tax
assets. Changes in historical earnings performance and future
earnings projections, among other factors, may cause the Company to
adjust its valuation allowance on deferred tax assets, which would
impact the Company’s income tax expense in the period in
which it is determined that these factors have changed.
In April 2016, the Company adopted ASU No. 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting,
The Company’s and its subsidiaries’ income tax returns
are periodically examined by various tax authorities. The Company
is currently under audit by the United States Internal Revenue
Service (IRS) for the years 2012 to 2013. Although the outcome of
tax audits is always uncertain and could result in significant cash
tax payments, the Company does not believe the outcome of these
audits will have a material adverse effect on the Company’s
consolidated financial position or results of operations.
Derivative Instruments
Derivative financial liabilities are recorded at fair value, with
gains and losses arising for changes in fair value recognized in
the condensed consolidated statement of operations at each period
end while such instruments are outstanding. If the Company issues
shares to discharge the liability, the derivative financial
liability is derecognized and common stock and additional paid-in
capital are recognized on the issuance of those shares. Warrants
are valued using a Black-Scholes option pricing model. The
long-term debt redemption features are valued using
probability-weighted models incorporating management estimates for
potential change in control, and by determining the fair value of
the debt with and without the change in control provision
included.
If the terms of warrants that initially require the warrant to be
classified as a derivative financial liability lapse, the
derivative financial liability is reclassified out of financial
liabilities into equity at its fair value on that date. The cash
proceeds received from exercises of warrants are recorded in common
stock and additional paid-in capital.
Loss per Share
Basic net loss per share is determined by dividing net loss by the
weighted average shares of common stock outstanding during the
period. Diluted net loss per share is determined by dividing net
loss by diluted weighted average shares outstanding. Diluted
weighted average shares reflects the dilutive effect, if any, of
potentially dilutive common shares, such as common stock options
and warrants calculated using the treasury stock method and
convertible notes using the “if-converted” method. In
periods with reported net operating losses, all common stock
options and warrants are deemed anti-dilutive such that basic net
loss per share and diluted net loss per share are equal. However,
in certain periods in which there is a gain recorded pursuant to
the change in fair value of the warrant derivative liability, for
diluted net loss per share purposes, the impact of such gains is
reversed and the treasury stock method is used to determine diluted
net loss per share.
The Company’s preferred stock is entitled to receive
dividends on an as-if-converted basis in the same form as dividends
actually paid on common shares. Accordingly, the preferred stock is
considered a participating security and the Company is required to
apply the two-class method to consider the impact of the preferred
stock on the calculation of basic and diluted earnings per share.
The Company is currently in a net loss position and is therefore
not required to present the two-class method, however, in the event
the Company is in a net income position, the two-class method must
be applied by allocating all earnings during the period to common
shares and preferred stock based on their contractual entitlements
assuming all earnings were distributed.
The calculation of net loss and the number of shares used to
compute basic and diluted net loss per share for the three and nine
months ended September 30, 2016 and 2015 are as follows:
Three months ended September 30,
Nine months ended September 30,
In thousands 2016 2015 2016 2015
Net loss $ (15,772 ) $ (30,675 ) $ (58,897 ) $ (93,313 )
Preferred stock purchase option (see Note 8)
—
—
— (868 )
Preferred stock beneficial conversion features (see Note 8)
— (1,646 )
— (32,987 )
Net loss applicable to common shareholders—basic (15,772 ) (32,321 ) (58,897 ) (127,168 )
Gain on warrant derivative liability
—
—
— (119 )
Net loss—diluted (15,772 ) (32,321 ) (58,897 ) (127,287 )
Net loss per share—basic and diluted (0.08 ) (0.18 ) (0.31 ) (0.71 )
Weighted average shares outstanding—basic and diluted 209,149 183,245 192,618 179,780
For the three and nine months ended September 30, 2016 and
2015, the following potentially dilutive securities were not
included in the computation of net loss per share because the
effect would be anti-dilutive:
Three months ended September 30,
Nine months ended September 30,
In thousands 2016 2015 2016 2015
Stock options 21,241 17,627 21,241 17,627
Restricted stock and restricted stock units 10,346 11,001 10,346 11,001
Exchangeable senior notes (if converted) 1,714 49,215 1,714 49,215
Preferred stock (if converted) 32,818 32,818 32,818 32,818
Debt Instruments
Debt instruments are initially recorded at fair value, with coupon
interest and amortization of debt issuance discounts recognized in
the condensed consolidated statement of operations as interest
expense each period in which such instruments are outstanding. If
the Company issues shares to discharge the liability, the debt
obligation is derecognized and common stock and additional paid-in
capital are recognized on the issuance of those shares. The
conversion features in the 2012 Notes and previously the 2014 Notes
and 2015 Notes prior to the mandatory exchange qualify for the
exception from derivative accounting in accordance with ASC 815-40.
The 2012 Notes may be put to the Company by their holders for
repurchase in cash. The 2012 Notes are exchangeable under certain
circumstances at the Company’s discretion, in any combination
of ADSs or cash upon conversion and have been accounted for in
accordance with ASC 470-20. Under ASC 470-20, the fair value of the
liability component of the 2012 Notes was determined and deducted
from the initial proceeds to determine the proceeds allocated to
the conversion option, which has been recorded in equity. The
difference between the initial fair value of the liability
component and the amount repayable was fully amortized over the
expected term of the instrument. The conversion features in the
2014 Notes and 2015 Notes could only have been settled in ADSs upon
conversion and were therefore accounted for as part of the debt
host.
The conversion feature in the 2012 Notes continues to be evaluated
on a quarterly basis to determine if it still receives an exception
from derivative accounting in accordance with ASC 815-40. The 2014
Notes were recognized initially at fair value as part of an
extinguishment of a portion of the 2012 Notes. As a result, the
2014 Notes were initially recognized at a discount of $27.9
million. The 2015 Notes were recognized initially at fair value as
part of the issuance of new debt in November 2015. As a result, the
2015 Notes were initially recognized at a discount of $3.8 million.
These discounts were amortized through interest expense though the
date of mandatory exchange. See Note 6—Debt for further
discussion.
Stock-Based Compensation
Stock-based compensation cost is generally measured at the grant
date, based on the fair value of the award, and is recognized as
compensation expense over the requisite service period. For awards
with performance conditions, if the achievement of the performance
conditions is deemed probable, the Company recognizes compensation
expense based on the fair value of the award over the estimated
service period. The Company reassesses the probability of
achievement of the performance conditions for such awards each
reporting period.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company maintains substantially all of its
cash and cash equivalents in financial institutions believed to be
of high-credit quality.
A significant portion of the Company’s sales are to
wholesalers in the pharmaceutical industry. The Company monitors
the creditworthiness of customers to whom it grants credit terms
and has not experienced any credit losses. The Company does not
require collateral or any other security to support credit sales.
The Company’s top three customers accounted for 95% of gross
product sales for each of the nine months ending September 30,
2016 and 2015 and represented 95% of the gross accounts receivable
balance as of September 30, 2016 and 2015. The Company has not
experienced any write-offs of its accounts receivable.
Concentration of Suppliers
The Company has contractual freedom to source the API for Vascepa
and has entered into supply agreements with multiple suppliers. The
Company’s supply of product for commercial sale and clinical
trials is dependent upon relationships with third-party
manufacturers and key suppliers, in particular three suppliers of
API for Vascepa.
The Company cannot provide assurance that its efforts to procure
uninterrupted supply of Vascepa API to meet market demand will
continue to be successful or that it will be able to renew current
API supply agreements on favorable terms or at all. Significant
alteration to or termination of the Company’s current API
supply chain or its failure to enter into new and similar
agreements, if needed, could have a material adverse effect on its
business, condition (financial and other), prospects or results of
operations.
The Company currently has manufacturing agreements with three
FDA-approved commercial API encapsulators for Vascepa
manufacturing. Each of these companies has qualified its
manufacturing processes and is capable of manufacturing Vascepa.
There can be no guarantee that these or other suppliers with which
the Company may contract in the future to encapsulate API will
continue to be qualified to manufacture the product to its
specifications or that these and any future suppliers will have the
manufacturing capacity to meet anticipated demand for Vascepa.
Foreign Currency
All subsidiaries use the U.S. dollar as the functional currency.
Monetary assets and liabilities denominated in a foreign currency
are remeasured into U.S. dollars at period-end exchange rates.
Gains and losses from the remeasurement are included in other
expense, net, in the condensed consolidated statements of
operations. For transactions settled during the applicable period,
gains and losses are included in other expense, net, in the
condensed consolidated statements of operations. Certain amounts
payable pursuant to supply contracts are denominated in currencies
other than the U.S. dollar.
Debt Issuance Costs
Prior to January 2016, debt issuance costs were initially recorded
as a deferred cost and amortized to interest expense using the
effective interest method over the expected term of the related
debt. Effective January 2016, the Company adopted ASU
No. 2015-03, Interest—Imputation of Interest
(Subtopic 835-30): Simplifying the Presentation of Debt Issuance
Costs
Fair Value of Financial Instruments
The Company provides disclosure of financial assets and financial
liabilities that are carried at fair value based on the price that
would be received upon sale of an asset or paid to transfer a
liability in an orderly transaction between market participants at
the measurement date. Fair value measurements may be
classified based on the amount of subjectivity associated with the
inputs to fair valuation of these assets and liabilities using the
following three levels:
Level 1—Inputs are unadjusted quoted prices in active markets
for identical assets or liabilities that the Company has the
ability to access at the measurement date.
Level 2—Inputs include quoted prices for similar assets and
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the asset
or liability (i.e., interest rates, yield curves, etc.) and inputs
that are derived principally from or corroborated by observable
market data by correlation or other means (market corroborated
inputs).
Level 3—Unobservable inputs that reflect the Company’s
estimates of the assumptions that market participants would use in
pricing the asset or liability. The Company develops these
inputs based on the best information available, including its own
data.
The following tables present information about the Company’s
assets and liabilities as of September 30, 2016 and
December 31, 2015 that are measured at fair value on a
recurring basis and indicate the fair value hierarchy of the
valuation techniques the Company utilized to determine such fair
value:
September 30, 2016
In thousands Total Level 1 Level 2 Level 3
Asset:
Cash equivalents—money markets $ 14,223 $ 14,223 $
— $
—
Liabilities:
Long-term debt derivative liabilities $
— $
— $
— $
—
December 31, 2015
In thousands Total Level 1 Level 2 Level 3
Asset:
Cash equivalents—money markets $ 14,184 $ 14,184 $
— $
—
Liabilities:
Long-term debt derivative liabilities $ 8,170 $
— $
— $ 8,170
The carrying amounts of cash, cash equivalents, accounts payable
and accrued liabilities approximate fair value because of their
short-term nature. The carrying amounts and the estimated fair
values of debt instruments as of September 30, 2016 and
December 31, 2015 are as follows:
September 30, 2016 December 31, 2015
In thousands Carrying Estimated Carrying Estimated
Long-term debt from royalty-bearing instrument $ 93,055 $ 90,800 $ 91,512 $ 87,700
2012 Notes 15,107 15,084 15,107 13,637
2014 Notes
—
— 94,599 108,034
2015 Notes
—
— 27,028 28,448
The estimated fair value of the long-term debt from royalty-bearing
instrument pursuant to the December 2012 financing is calculated
utilizing the same Level 3 inputs utilized in valuing the related
derivative liability (see Long-Term Debt Redemption Features
below). The estimated fair value of the 2012 Notes and 2014
Notes is calculated based on Level 1 quoted bond prices, while the
estimated fair value of the 2015 Notes is calculated based on Level
2 quoted bond prices for the 2014 Notes. The carrying value of
the 2012 Notes as of September 30, 2016 and December 31,
2015 does not include a debt discount, as it had been fully
amortized as non-cash interest expense over the expected term of
the 2012 Notes, which was calculated to be a period of twenty-four
months. The carrying value of the 2014 Notes as of
December 31, 2015 includes a debt discount of $24.1 million,
which prior to mandatory exchange was being amortized as non-cash
interest expense over the expected term of the 2014 Notes, through
January 2019. The carrying value of the 2015 Notes as of
December 31, 2015 includes a debt discount of $4.2 million,
which prior to mandatory exchange was being amortized as non-cash
interest expense over the expected term of the 2015 Notes, through
January 2019. The carrying values and related debt discounts of the
2014 Notes and 2015 Notes as of December 31, 2015 reflect the
retroactive reclassification of debt issuance costs per adoption of
ASU No. 2015-03 as described in Note 6—Debt. The change
in the estimated fair values of these liabilities from
December 31, 2015 to September 30, 2016 is largely
related to changes in the quoted bond prices and derecognition of
the mandatorily exchanged debt.
Derivative Liabilities
Warrant Derivative Liability
The Company’s warrant derivative liability (discussed in Note
5—Warrants and Warrant Derivative Liability) was carried at
fair value and was classified as Level 3 in the fair value
hierarchy due to the use of significant unobservable inputs. During
the nine months ended September 30, 2015, of the 8,087,388
warrants outstanding |
