vvus_Current Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to            

Commission File Number 001-33389

VIVUS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

94-3136179

(State or other jurisdiction of

 

(IRS employer

incorporation or organization)

 

identification number)

 

 

 

 

 

900 E. Hamilton Avenue, Suite 550

 

 

Campbell, California

 

95008

(Address of principal executive office)

 

(Zip Code)

(650) 934-5200

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common Stock

VVUS

The Nasdaq Global Select Market

Preferred Share Purchase Rights

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer ☐

Accelerated filer 

Non-accelerated filer ☐

Smaller reporting company 

 

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate 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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ☐ Yes  ☒ No

At July 31, 2019,  10,642,713 shares of common stock, par value $.001 per share, were outstanding.

 

 

 

 

Table of Contents

VIVUS, INC.

 

Quarterly Report on Form 10-Q 

 

INDEX

 

 

 

 

 

PART I —  FINANCIAL INFORMATION

3

 

 

 

Item 1 

Condensed Consolidated Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets as of June  30, 2019 and December 31, 2018

3

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018

4

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2019 and 2018

4

 

Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Six Months ended June 30, 2019 and 2018

5

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June  30, 2019 and 2018

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3 

Quantitative and Qualitative Disclosures about Market Risk

34

Item 4 

Controls and Procedures

35

 

 

 

 

PART II  — OTHER INFORMATION

36

 

 

 

Item 1 

Legal Proceedings

36

Item 1A 

Risk Factors

36

Item 2 

Unregistered Sales of Equity Securities and Use of Proceeds

71

Item 3 

Defaults Upon Senior Securities

71

Item 4 

Mine Safety Disclosures

71

Item 5 

Other Information

71

Item 6 

Exhibits

71

 

Signatures

74

 

 

2

Table of Contents

PART I: FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

VIVUS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

2019

 

2018

ASSETS

 

Unaudited

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

25,022

 

$

30,411

Available-for-sale securities

 

69,344

 

 

80,838

Accounts receivable, net

 

24,568

 

 

25,608

Inventories

 

30,111

 

 

23,132

Prepaid expenses and other current assets

 

6,970

 

 

7,538

Total current assets

 

156,015

 

 

167,527

Fixed assets, net

 

306

 

 

341

Right-of-use assets

 

1,323

 

 

 —

Intangible and other non-current assets

 

127,003

 

 

134,279

Total assets

$

284,647

 

$

302,147

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

3,800

 

$

8,921

Accrued and other liabilities

 

34,384

 

 

33,044

Deferred revenue

 

1,205

 

 

1,235

Current portion of lease liability

 

710

 

 

 —

Current portion of long-term debt

 

185,384

 

 

 —

Total current liabilities

 

225,483

 

 

43,200

Long-term debt

 

107,007

 

 

294,446

Deferred revenue, net of current portion

 

3,738

 

 

4,290

Lease liability, net of current portion

 

894

 

 

 —

Non-current accrued and other liabilities

 

 —

 

 

234

Total liabilities

 

337,122

 

 

342,170

Commitments and contingencies

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

Preferred stock; $.001 par value; 5,000 shares authorized; no shares issued and outstanding at June 30, 2019 and December 31, 2018

 

 —

 

 

 —

Common stock; $.001 par value; 200,000 shares authorized; 10,643 and 10,636 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

11

 

 

11

Additional paid-in capital

 

841,702

 

 

840,751

Accumulated other comprehensive income (loss)

 

201

 

 

(270)

Accumulated deficit

 

(894,389)

 

 

(880,515)

Total stockholders’ deficit

 

(52,475)

 

 

(40,023)

Total liabilities and stockholders’ deficit

$

284,647

 

$

302,147

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3

Table of Contents

VIVUS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30, 

 

June 30, 

 

2019

 

2018

    

2019

    

2018

Revenue:

 

 

 

 

 

 

 

    

    

 

    

Net product revenue

$

15,104

 

$

13,250

 

$

28,601

 

$

22,882

Supply revenue

 

1,780

 

 

1,042

 

 

3,384

 

 

2,725

Royalty revenue

 

1,506

 

 

668

 

 

2,551

 

 

1,253

Total revenue

 

18,390

 

 

14,960

 

 

34,536

 

 

26,860

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (excluding amortization)

 

4,377

 

 

3,286

 

 

8,685

 

 

5,916

Amortization of intangible assets

 

3,638

 

 

1,273

 

 

7,276

 

 

1,364

Sales and marketing

 

4,607

 

 

3,521

 

 

9,141

 

 

7,800

General and administrative

 

5,463

 

 

8,190

 

 

10,747

 

 

13,979

Research and development

 

2,352

 

 

2,042

 

 

4,821

 

 

3,445

Total operating expenses

 

20,437

 

 

18,312

 

 

40,670

 

 

32,504

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(2,047)

 

 

(3,352)

 

 

(6,134)

 

 

(5,644)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and other expense, net

 

3,880

 

 

9,218

 

 

7,750

 

 

17,567

Loss before income taxes

 

(5,927)

 

 

(12,570)

 

 

(13,884)

 

 

(23,211)

Provision for income taxes

 

 8

 

 

 4

 

 

 —

 

 

16

Net loss

$

(5,935)

 

$

(12,574)

 

$

(13,884)

 

$

(23,227)

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share:

$

(0.56)

 

$

(1.18)

 

$

(1.31)

 

$

(2.19)

Shares used in per share computation:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

10,640

 

 

10,612

 

 

10,639

 

 

10,607

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30, 

 

June 30, 

 

2019

 

2018

 

2019

 

2018

Net loss

$

(5,935)

 

$

(12,574)

 

$

(13,884)

 

$

(23,227)

Unrealized gain on securities, net of taxes

 

222

 

 

577

 

 

471

 

 

100

Translation adjustment

 

 —

 

 

 1

 

 

 —

 

 

 1

Comprehensive loss

$

(5,713)

 

$

(11,996)

 

$

(13,413)

 

$

(23,126)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4

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VIVUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Accumulated

 

 

 

 

Shares

 

Amount

 

Capital

 

Loss

 

Deficit

 

Total

Balances, April 1, 2018

10,610

 

$

11

 

$

835,749

 

$

(1,085)

 

$

(854,218)

 

$

(19,543)

Sale of common stock through employee stock purchase plan

 5

 

 

 —

 

 

24

 

 

 —

 

 

 —

 

 

24

Exercise of common stock options for cash

 8

 

 

 —

 

 

60

 

 

 —

 

 

 —

 

 

60

Vesting of restricted stock units

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Share-based compensation expense

 —

 

 

 —

 

 

1,049

 

 

 —

 

 

 —

 

 

1,049

Warrants issued for acquisition of PANCREAZE

 —

 

 

 —

 

 

828

 

 

 

 

 

 —

 

 

828

Warrants issued in association with the issuance of debt

 —

 

 

 —

 

 

1,695

 

 

 

 

 

 —

 

 

1,695

Net unrealized gain on securities

 —

 

 

 —

 

 

 —

 

 

577

 

 

 —

 

 

577

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(12,574)

 

 

(12,574)

Balances, June 30, 2018

10,624

 

 

11

 

 

839,405

 

 

(508)

 

 

(866,792)

 

 

(27,884)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, April 1, 2019

10,637

 

$

11

 

$

841,219

 

$

(21)

 

$

(888,454)

 

$

(47,245)

Sale of common stock through employee stock purchase plan

 6

 

 

 —

 

 

16

 

 

 —

 

 

 —

 

 

16

Share-based compensation expense

 —

 

 

 —

 

 

467

 

 

 —

 

 

 —

 

 

467

Net unrealized gain on securities

 —

 

 

 —

 

 

 —

 

 

222

 

 

 —

 

 

222

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(5,935)

 

 

(5,935)

Balances, June 30, 2019

10,643

 

$

11

 

$

841,702

 

$

201

 

$

(894,389)

 

$

(52,475)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2018

10,603

 

$

11

 

$

834,824

 

$

(608)

 

$

(843,565)

 

$

(9,338)

Sale of common stock through employee stock purchase plan

 5

 

 

 —

 

 

24

 

 

 —

 

 

 —

 

 

24

Exercise of common stock options for cash

 8

 

 

 —

 

 

60

 

 

 —

 

 

 —

 

 

60

Vesting of restricted stock units

 8

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Share-based compensation expense

 —

 

 

 —

 

 

1,974

 

 

 —

 

 

 —

 

 

1,974

Warrants issued for acquisition of PANCREAZE

 —

 

 

 —

 

 

828

 

 

 

 

 

 —

 

 

828

Warrants issued in association with the issuance of debt

 —

 

 

 —

 

 

1,695

 

 

 

 

 

 —

 

 

1,695

Net unrealized gain on securities

 —

 

 

 —

 

 

 —

 

 

100

 

 

 —

 

 

100

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(23,227)

 

 

(23,227)

Balances, June 30, 2018

10,624

 

 

11

 

 

839,405

 

 

(508)

 

 

(866,792)

 

 

(27,884)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2019

10,636

 

$

11

 

$

840,751

 

$

(270)

 

$

(880,515)

 

$

(40,023)

Sale of common stock through employee stock purchase plan

 6

 

 

 —

 

 

16

 

 

 —

 

 

 —

 

 

16

Vesting of restricted stock units

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Share-based compensation expense

 —

 

 

 —

 

 

935

 

 

 —

 

 

 —

 

 

935

Net unrealized gain on securities

 —

 

 

 —

 

 

 —

 

 

471

 

 

 —

 

 

471

Cumulative effect of accounting change

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10

 

 

10

Net loss

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(13,884)

 

 

(13,884)

Balances, June 30, 2019

10,643

 

$

11

 

$

841,702

 

$

201

 

$

(894,389)

 

$

(52,475)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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VIVUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

Six Months Ended

 

June 30, 

 

2019

 

2018

Operating activities:

 

 

 

 

 

Net loss

$

(13,884)

 

$

(23,227)

Adjustments to reconcile net loss to net cash used for operating activities:

 

 

 

 

 

Depreciation and amortization

 

7,350

 

 

1,495

Amortization of debt issuance costs and discounts

 

(2,055)

 

 

10,706

Amortization of discount or premium on available-for-sale securities

 

(208)

 

 

616

Share-based compensation expense

 

935

 

 

1,974

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

1,040

 

 

1,116

Inventories

 

(7,254)

 

 

(2,785)

Prepaid expenses and other assets

 

775

 

 

779

Accounts payable

 

(5,121)

 

 

(5,727)

Accrued and other liabilities

 

1,563

 

 

(2,469)

Deferred revenue

 

(582)

 

 

(609)

Net cash used for operating activities

 

(17,441)

 

 

(18,131)

Investing activities:

 

 

 

 

 

Fixed asset purchases

 

(39)

 

 

(34)

Acquisition of PANCREAZE license

 

 —

 

 

(135,000)

Purchases of available-for-sale securities

 

(16,879)

 

 

(7,604)

Proceeds from maturity of available-for-sale securities

 

28,235

 

 

40,411

Proceeds from sales of available-for-sale securities

 

817

 

 

60,259

Net cash provided by (used for) investing activities

 

12,134

 

 

(41,968)

Financing activities:

 

 

 

 

 

Net proceeds from debt issuance

 

 —

 

 

107,991

Repayments of notes payable

 

 —

 

 

(57,187)

Principal payments of financing leases

 

(98)

 

 

 —

Net proceeds from exercise of common stock options

 

 —

 

 

60

Sale of common stock through employee stock purchase plan

 

16

 

 

24

Net cash (used for) provided by financing activities

 

(82)

 

 

50,888

Net decrease in cash and cash equivalents

 

(5,389)

 

 

(9,211)

Cash and cash equivalents:

 

 

 

 

 

Beginning of year

 

30,411

 

 

66,392

End of period

$

25,022

 

$

57,181

See accompanying notes to unaudited condensed consolidated financial statements.

6

Table of Contents

VIVUS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE  30, 2019

 

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

VIVUS is a specialty pharmaceutical company with three approved therapies (Qsymia®, PANCREAZE® and STENDRA®/SPEDRA™) and one product candidate in 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 on a transitional basis until the Company begins commercializing it on its own, which it expects to do in the third quarter of 2019. VI-0106 (tacrolimus) is in clinical development and is being studied in patients with pulmonary arterial hypertension (“PAH”).

When reference is made to the “Company” or “VIVUS” in these footnotes, it refers to the Delaware corporation, or VIVUS, Inc., and, unless the context otherwise requires, its California predecessor, as well as all of its consolidated subsidiaries.

Liquidity and Ability to Continue as a Going Concern

At June 30, 2019, the Company’s accumulated deficit was approximately $894.4 million and its cash, cash equivalents and available-for-sale securities were $94.4 million. As of June 30, 2019, the Company had a total of $292.4 million in debt, $181.4 million of which is due May 2020. In addition, at June 30, 2019, the Company was not in compliance with a covenant in the indenture covering its secured debt due 2024 (the “2024 Notes”) related to PANCREAZE net revenues. The Company subsequently received a waiver from the holders of the 2024 Notes (the “consenting noteholders”) with respect to any potential event of default or default that may have resulted from such covenant non-compliance. In connection with the waiver, the Company agreed with the consenting noteholders to use good faith efforts to make certain amendments to the 2024 Notes indenture at a future date (collectively, the “noteholder conditions”), including transferring $60.0 million from the existing 2024 Notes trustee controlled account into a new controlled account that can only be accessed upon prior written consent of the 2024 Notes trustee at the direction of the noteholders. If the Company does not satisfy the noteholder conditions, the consenting noteholders may revoke the waiver, which could result in an event of default. See Note 14 for additional information regarding the Company’s debt.

The Company does not currently have sufficient cash and/or credit facilities in place to address the debt due May 2020 and is actively pursuing funding, which may come through public or private debt or equity financings, collaborations or other available financing sources. Such funding 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 will not be able to continue its operations at its current level and may be required to relinquish rights to certain of its technologies, product candidates or products that it would otherwise seek to develop on its own. It might also 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. Even if adequate funds become available, the Company may need to raise additional funds in the near future to finance operations and pursue development and commercial opportunities.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company’s coming debt maturities as well as its negative cash flow from operations and accumulated deficit raise substantial doubt about its ability to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. Management has evaluated all events and transactions that occurred after June 30, 2019 through the date these unaudited condensed consolidated financial statements were filed. There were no events or transactions during this period that require recognition or disclosure in these unaudited condensed consolidated financial statements. The condensed consolidated balance sheet data as of December 31, 2018 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 as filed on February 26, 2019 with the Securities and Exchange Commission (“SEC”). Certain amounts have been reclassified to conform to current year presentation. The unaudited condensed consolidated financial statements include the accounts of VIVUS, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

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 preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, the Company evaluates its estimates, including critical accounting policies or estimates related to available-for-sale securities, debt instruments, research and development expenses, income taxes, inventories, revenues, contingencies and litigation 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.

Significant Accounting Policies

There have been no changes to the Company’s significant accounting policies since the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 with the exception of accounting for leases. See Note 12.

Recent Accounting Pronouncement 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 requires lessees

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to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The Company adopted this standard on January 1, 2019 using the modified retrospective transition method, and as a result did not adjust comparative periods. The Company has one large operating lease for its corporate headquarters and several smaller leases, including financing leases for its automobile fleet and copiers. See Note 12.

Recent Accounting Pronouncements Not Yet Adopted

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, but currently does not expect it to have a material impact on its consolidated financial statements.

 

2. REVENUES

For all revenue transactions, the Company evaluates its contracts with its customers to determine revenue recognition using the following five-step model:

1)The Company identifies the contract(s) with a customer

2)The Company identifies the performance obligations in the contract

3)The Company determines the transaction price

4)The Company allocates the transaction price to the identified performance obligations

5)The Company recognizes revenue when (or as) it satisfies a performance obligation

Product Revenue

Product revenue is recognized at the time of shipment at which time the Company has satisfied its performance obligation. Product revenue is recognized net of consideration paid to the Company’s customers, wholesalers and certified pharmacies. Such consideration is for services rendered by the wholesalers and pharmacies in accordance with the wholesalers and certified pharmacy services network agreements, and includes a fixed rate per prescription shipped and monthly program management and data fees. These services are not deemed sufficiently separable from the customers’ purchase of the product; therefore, they are recorded as a reduction of revenue at the time of revenue recognition.

Other product revenue allowances include a reserve for estimated product returns, certain prompt pay discounts and allowances offered to the Company’s customers, program rebates and chargebacks. These product revenue allowances are recognized as a reduction of revenue at the date at which the related revenue is recognized. The Company also offers discount programs to patients. Calculating certain of these items involves estimates and judgments based on sales or invoice data, contractual terms, utilization rates, new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates or chargebacks. The Company reviews the adequacy of product revenue allowances on a quarterly basis. Amounts accrued for product revenue allowances are adjusted when trends or significant events indicate that adjustment is appropriate and to reflect actual experience. See Note 9 for product reserve balances.

Supply Revenue

The Company produces STENDRA/SPEDRA through a contract manufacturing partner and then sells it to the Company’s commercialization partners. The Company is the primary responsible party in the commercial supply

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arrangements and bears significant risk in the fulfillment of the obligations, including risks associated with manufacturing, regulatory compliance and quality assurance, as well as inventory, financial and credit loss. As such, the Company recognizes supply revenue on a gross basis as the principal party in the arrangements. The Company recognizes supply revenue at the time of shipment and, in the unusual case where the product does not meet contractually-specified product dating criteria at the time of shipment to the partner, the Company records a reserve for estimated product returns. There are no such reserves as of June 30, 2019.

License and Milestone Revenue

License and milestone revenues related to arrangements, usually license and/or supply agreements, entered into by the Company are recognized by following the five-step process outlined above. The allocation and timing of recognition of such revenue will be determined by that process and the amounts recognized and the timing of that recognition may not exactly follow the wording of the agreement as the amount allocated following the accounting analysis of the agreement may differ and the timing of recognition of a significant performance obligation may predate the contractual date.

Royalty Revenue

The Company relies on data provided by its collaboration partner in determining its contractually-based royalty revenue. Such data includes accounting estimates and reports for various discounts and allowances, including product returns. The Company records royalty revenues based on the best data available and makes any adjustments to such revenues as such information becomes available.

Revenue by Source and Geography

Revenue disaggregated by revenue source and by geographic region was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

2019

 

2018

 

U.S.

 

ROW

 

Total

 

U.S.

 

ROW

 

Total

Qsymia—Net product revenue

$

9,994

 

$

 —

 

$

9,994

 

$

11,134

 

$

 —

 

$

11,134

PANCREAZE - Net product revenue

 

5,110

 

 

 —

 

 

5,110

 

 

2,116

 

 

 —

 

 

2,116

PANCREAZE - Royalty revenue

 

 —

 

 

987

 

 

987

 

 

 —

 

 

74

 

 

74

STENDRA/SPEDRA—Supply revenue

 

 —

 

 

1,780

 

 

1,780

 

 

525

 

 

517

 

 

1,042

STENDRA/SPEDRA—Royalty revenue

 

 —

 

 

519

 

 

519

 

 

 —

 

 

594

 

 

594

Total revenue

$

15,104

 

$

3,286

(1)

$

18,390

 

$

13,775

 

$

1,185

(2)

$

14,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

2019

 

2018

 

U.S.

 

ROW

 

Total

 

U.S.

 

ROW

 

Total

Qsymia—Net product revenue

$

18,417

 

$

 —

 

$

18,417

 

$

20,766

 

$

 —

 

$

20,766

PANCREAZE - Net product revenue

 

10,184

 

 

 —

 

 

10,184

 

 

2,116

 

 

 —

 

 

2,116

PANCREAZE - Royalty revenue

 

 —

 

 

1,557

 

 

1,557

 

 

 —

 

 

74

 

 

74

STENDRA/SPEDRA—Supply revenue

 

 —

 

 

3,384

 

 

3,384

 

 

1,071

 

 

1,654

 

 

2,725

STENDRA/SPEDRA—Royalty revenue

 

 —

 

 

994

 

 

994

 

 

 —

 

 

1,179

 

 

1,179

Total revenue

$

28,601

 

$

5,935

(3)  

$

34,536

 

$

23,953

 

$

2,907

(4)  

$

26,860

 


(1)

$2.3 million of which was attributable to Germany and $1.0 million of which was attributable to Canada.

(2)

$1.1 million of which was attributable to Germany.

(3)

$4.3 million of which was attributable to Germany and $1.6 million of which was attributable to Canada.

(4)

$2.8 million of which was attributable to Germany.

 

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Revenue and cost of goods sold by source was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

2019

 

2018

 

Qsymia

 

PANCREAZE

 

STENDRA/ SPEDRA

 

Total

 

Qsymia

 

PANCREAZE

 

STENDRA/ SPEDRA

 

Total

Net product revenue

$

9,994

 

$

5,110

 

$

 —

 

$

15,104

 

$

11,134

 

$

2,116

 

$

 —

 

$

13,250

Supply revenue

 

 —

 

 

 —

 

 

1,780

 

 

1,780

 

 

 —

 

 

 —

 

 

1,042

 

 

1,042

Royalty revenue

 

 —

 

 

987

 

 

519

 

 

1,506

 

 

 —

 

 

74

 

 

594

 

 

668

Total revenue

$

9,994

 

$

6,097

 

$

2,299

 

$

18,390

 

$

11,134

 

$

2,190

 

$

1,636

 

$

14,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (excluding amortization)

$

942

 

$

1,770

 

$

1,665

 

$

4,377

 

$

1,652

 

$

567

 

$

1,067

 

$

3,286

Amortization of intangible assets

$

91

 

$

3,547

 

$

 —

 

$

3,638

 

$

90

 

 

1,183

 

$

 —

 

$

1,273

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

2019

 

2018

 

Qsymia

 

PANCREAZE

 

STENDRA/ SPEDRA

 

Total

 

Qsymia

 

PANCREAZE

 

STENDRA/ SPEDRA

 

Total

Net product revenue

$

18,417

 

$

10,184

 

$

 —

 

$

28,601

 

$

20,766

 

$

2,116

 

$

 —

 

$

22,882

Supply revenue

 

 —

 

 

 —

 

 

3,384

 

 

3,384

 

 

 —

 

 

 —

 

 

2,725

 

 

2,725

Royalty revenue

 

 —

 

 

1,557

 

 

994

 

 

2,551

 

 

 —

 

 

74

 

 

1,179

 

 

1,253

Total revenue

$

18,417

 

$

11,741

 

$

4,378

 

$

34,536

 

$

20,766

 

$

2,190

 

$

3,904

 

$

26,860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (excluding amortization)

$

2,324

 

$

3,231

 

$

3,130

 

$

8,685

 

$

2,695

 

$

568

 

$

2,653

 

$

5,916

Amortization of intangible assets

$

182

 

$

7,094

 

$

 —

 

$

7,276

 

$

181

 

 

1,183

 

$

 —

 

$

1,364

 

 

 

3. SHARE-BASED COMPENSATION

Total share-based compensation expense for all of the Company’s share-based awards was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30, 

 

June 30, 

 

2019

 

2018

   

2019

   

2018

Cost of goods sold

$

13

 

$

18

 

$

27

 

$

30

Selling and marketing

 

70

 

 

87

 

 

140

 

 

174

General and administrative

 

335

 

 

868

 

 

664

 

 

1,613

Research and development

 

49

 

 

76

 

 

104

 

 

157

Total share-based compensation expense

$

467

 

$

1,049

 

$

935

 

$

1,974

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense capitalized as part of the cost of inventory

$

14

 

$

 -

 

$

14

 

$

 1

 

 

 

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4.  CASH, CASH EQUIVALENTS, AND AVAILABLE-FOR-SALE SECURITIES

The fair value and the amortized cost of cash, cash equivalents, and available-for-sale securities by major security type are presented in the tables that follow (in thousands).