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10-Q
OREXIGEN THERAPEUTICS, INC. filed this Form 10-Q on 05/12/2017
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orex-10q_20170331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED March 31, 2017

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: 001-33415

 

OREXIGEN THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

65-1178822

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

3344 North Torrey Pines Court, Suite 200, La Jolla, CA

 

92037

(Address of Principal Executive Offices)

 

(Zip Code)

(858) 875-8600

(Registrant’s Telephone Number, Including Area Code)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

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 registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No

As of May 5, 2017, the registrant had 15,227,802 shares of Common Stock ($0.001 par value) outstanding.

 

 


 

OREXIGEN THERAPEUTICS, INC.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

3

Item 1. Financial Statements

3

Condensed Consolidated Balance Sheets

3

Unaudited Condensed Consolidated Statements of Operations

4

Unaudited Condensed Consolidated Statements of Comprehensive Loss

5

Unaudited Condensed Consolidated Statements of Cash Flows

6

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3. Quantitative and Qualitative Disclosures about Market Risk

32

Item 4. Controls and Procedures

33

PART II. OTHER INFORMATION

33

Item 1. Legal Proceedings

33

Item 1A. Risk Factors

36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

65

Item 3. Defaults Upon Senior Securities

65

Item 4. Mine Safety Disclosures

65

Item 5. Other Information

66

Item 6. Exhibits

67

SIGNATURES

69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Orexigen Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and par value amounts)

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

(See Note below)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

76,656

 

 

$

92,494

 

Accounts receivable, net

 

 

6,277

 

 

 

1,102

 

Investment securities, available-for-sale

 

 

9,985

 

 

 

11,499

 

Restricted cash and investments

 

 

40,000

 

 

 

90,005

 

Inventory

 

 

20,663

 

 

 

23,193

 

Prepaid expenses and other current assets

 

 

4,938

 

 

 

6,168

 

Total current assets

 

 

158,519

 

 

 

224,461

 

Property and equipment, net

 

 

927

 

 

 

1,044

 

Intangible assets

 

 

74,077

 

 

 

76,061

 

Other long-term assets

 

 

2,672

 

 

 

2,835

 

Restricted cash

 

 

188

 

 

 

188

 

Total assets

 

$

236,383

 

 

$

304,589

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

15,640

 

 

$

15,210

 

Accrued expenses

 

 

32,106

 

 

 

30,412

 

Contingent consideration

 

 

 

 

 

15,000

 

Deferred revenue, current portion

 

 

1,713

 

 

 

4,738

 

Total current liabilities

 

 

49,459

 

 

 

65,360

 

Long-term contingent consideration

 

 

8,200

 

 

 

6,800

 

Long-term convertible debt

 

 

24,701

 

 

 

64,279

 

Long-term convertible debt, at fair value

 

 

152,466

 

 

 

101,900

 

Deferred revenue, less current portion

 

 

6,069

 

 

 

5,863

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Series Z preferred stock, $0.001 par value, 219,994 shares issued and outstanding at

   March 31, 2017 and December 31, 2016

 

 

3,343

 

 

 

3,343

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized at March 31, 2017 and

   December 31, 2016; 219,994 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively

 

 

 

 

 

 

Common stock, $0.001 par value, 300,000,000 shares authorized at March 31, 2017

   and December 31, 2016; 15,227,802 and 14,616,751 shares issued and outstanding at

   March 31, 2017 and December 31, 2016, respectively

 

 

15

 

 

 

15

 

Additional paid-in capital

 

 

703,933

 

 

 

698,229

 

Accumulated other comprehensive income

 

 

2,495

 

 

 

4,011

 

Accumulated deficit

 

 

(714,298

)

 

 

(645,211

)

Total stockholders’ equity (deficit)

 

 

(7,855

)

 

 

57,044

 

Total liabilities and stockholders’ equity (deficit)

 

$

236,383

 

 

$

304,589

 

 

See accompanying notes.

Note: The Balance Sheet at December 31, 2016 has been derived from the audited financial statements at that date.

 

 

3


 

Orexigen Therapeutics, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

Net product sales

 

$

19,041

 

 

$

 

Collaborative agreement

 

 

104

 

 

 

2,391

 

Royalties

 

 

 

 

 

2,642

 

Total revenues

 

 

19,145

 

 

 

5,033

 

Cost of product sales

 

 

6,187

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

8,173

 

 

 

11,801

 

Selling, general and administrative

 

 

55,247

 

 

 

16,551

 

Amortization expense of intangible assets

 

 

1,984

 

 

 

 

Change in fair value of contingent consideration

 

 

1,400

 

 

 

 

Total operating expenses

 

 

66,804

 

 

 

28,352

 

Loss from operations

 

 

(53,846

)

 

 

(23,319

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

147

 

 

 

123

 

Interest expense

 

 

(1,173

)

 

 

(1,936

)

Change in fair value of financial instruments

 

 

(28,006

)

 

 

 

Gain on extinguishment of debt

 

 

12,316

 

 

 

 

Foreign currency gain, net

 

 

1,475

 

 

 

2,784

 

Total other income (expense)

 

 

(15,241

)

 

 

971

 

Net loss

 

$

(69,087

)

 

$

(22,348

)

Net loss per share - basic and diluted

 

$

(4.67

)

 

$

(1.54

)

Shares used in computing basic and diluted net loss per share

 

 

14,806

 

 

 

14,556

 

 

See accompanying notes.

 

 

4


 

Orexigen Therapeutics, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Net loss

 

$

(69,087

)

 

$

(22,348

)

Other comprehensive gain (loss)

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

(1,517

)

 

 

(3,020

)

Unrealized gain on investment securities, available for sale

 

 

1

 

 

 

38

 

Other comprehensive loss

 

 

(1,516

)

 

 

(2,982

)

Comprehensive loss

 

$

(70,603

)

 

$

(25,330

)

 

See accompanying notes.

 

 

5


 

Orexigen Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(69,087

)

 

$

(22,348

)

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

 

 

 

 

 

 

 

 

Amortization of premium on investment securities, available-for-sale

 

 

20

 

 

 

65

 

Accretion of debt discount

 

 

639

 

 

 

1,116

 

Change in fair value of financial instruments

 

 

28,006

 

 

 

 

Gain from extinguishment of debt

 

 

(13,869

)

 

 

 

Change in fair value of contingent consideration

 

 

1,400

 

 

 

 

Amortization of intangible assets

 

 

1,984

 

 

 

 

Depreciation

 

 

117

 

 

 

78

 

Stock-based compensation

 

 

2,991

 

 

 

2,792

 

Deferred revenue

 

 

(2,963

)

 

 

(2,687

)

Unrealized foreign currency gain

 

 

(1,420

)

 

 

(2,398

)

Other non-cash adjustments

 

 

14

 

 

 

18

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(5,160

)

 

 

4,039

 

Inventory

 

 

2,433

 

 

 

(4,096

)

Prepaid expenses and other current assets

 

 

1,337

 

 

 

(303

)

Other assets

 

 

157

 

 

 

64

 

Accounts payable and accrued expenses

 

 

3,465

 

 

 

(1,890

)

Deferred rent and lease incentives

 

 

 

 

 

(54

)

Net cash used in operating activities

 

 

(49,936

)

 

 

(25,604

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of investment securities, available-for-sale

 

 

 

 

 

(23,600

)

Maturities of investment securities, available-for-sale

 

 

1,500

 

 

 

23,033

 

Restricted cash and investments

 

 

50,000

 

 

 

(165,000

)

Purchase of Contrave - net

 

 

(3,414

)

 

 

 

Prepaid purchase price - Contrave

 

 

 

 

 

(60,000

)

Purchase of property and equipment

 

 

 

 

 

(228

)

Net cash provided by (used) in investing activities

 

 

48,086

 

 

 

(225,795

)

Financing activities

 

 

 

 

 

 

 

 

Payment for conversions of 2017 Exchange Notes

 

 

(1,074

)

 

 

 

Contingent payment to Takeda

 

 

(12,900

)

 

 

 

Proceeds from convertible debt issuance

 

 

 

 

 

120,000

 

Proceeds from issuance of warrants

 

 

 

 

 

41,000

 

Proceeds from issuance of Series Z Preferred

 

 

 

 

 

3,343

 

Proceeds from issuance of common stock

 

 

 

 

 

36

 

Net cash provided by (used in) financing activities

 

 

(13,974

)

 

 

164,379

 

Effect of exchange rate changes on cash

 

 

(14

)

 

 

(435

)

Net decrease in cash and cash equivalents

 

 

(15,838

)

 

 

(87,455

)

Cash and cash equivalents at beginning of period

 

 

92,494

 

 

 

155,422

 

Cash and cash equivalents at end of period

 

$

76,656

 

 

$

67,967

 

Supplemental disclosure of non-cash financing information:

 

 

 

 

 

 

 

 

Conversions of 2017 Exchange Notes

 

$

3,794

 

 

$

 

See accompanying notes.

 

 

6


 

OREXIGEN THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Basis of Presentation

Organization

Orexigen Therapeutics, Inc., or the Company, a Delaware corporation, is a biopharmaceutical company focused on the development and commercialization of pharmaceutical product candidates for the treatment of obesity. The Company was incorporated in September 2002 and commenced operations in 2003. The Company operates in one segment.

The Company’s primary activities since incorporation have been organizational activities, including recruiting personnel, conducting research and development, including clinical trials, raising capital, and preparing for the marketing and commercialization of its sole product, Contrave®, in the United States. Contrave was launched commercially in the United States by the Company’s former partner, Takeda Pharmaceutical Company Limited, or Takeda, in October 2014. In August 2016, the collaboration agreement between the Company and Takeda was terminated and the Company is now solely responsible for developing and commercializing Contrave within the United States and the rest of the world. The Company has experienced losses since its inception, and as of March 31, 2017, had an accumulated deficit of $714.3 million. The Company expects to continue to incur losses for at least the next several years. Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support the Company’s cost structure, and until that time, the Company may need to continue to raise additional equity or debt financing.

Basis of Presentation

The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s interim financial information. The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The Company follows the provisions of FASB Accounting Standard Codification (ASC) Topic 205-40, Presentation of Financial Statements – Going Concern, which requires that management evaluate whether there are relevant conditions and events that in aggregate raise substantial doubt about the entity’s ability to continue as a going concern and to meet its obligations as they become due within one year from the date that the financial statements are issued.

The Company has a board approved plan which projects that the Company’s existing working capital can fund its operations for one year after the financial statements are issued. This plan is based on management’s best estimate and assumptions for U.S. sales of Contrave, for which the Company reacquired the rights to sell in August 2016, and sales of Contrave or Mysimba outside the U.S. for which there is limited history or no history. Due to the inherent uncertainty in achieving the forecasted global revenues in the plan, the Company has identified certain forecasted expenses that can be reduced during the second half of 2017 and through May 2018 if revenues are less than forecasted or if the Company is not able to raise additional equity or debt financing during the interim period.

The identified cost cutting actions could include a reduction of certain discretionary sales, general and administrative expenses. Management has evaluated that, if required, the cost cutting measures described above could be effectively implemented during the second half of 2017 and through May 2018, and that when implemented, would allow the Company to reduce its working capital requirements. Thus, management has concluded that there is not substantial doubt that the Company can meet its obligations as they become due within one year after the financial statements are issued.

The financial statements of the Company’s foreign subsidiary with a functional currency other than the U.S. dollar are translated into U.S. dollars using period-end exchange rates for assets and liabilities, historical exchange rates for stockholders’ equity and weighted average exchange rates for operating results. Translation gains and losses are included in accumulated other comprehensive income (loss) in stockholders’ equity. Foreign currency transaction gains and losses are included in the results of operations in other income (expense).

The balance sheet as of December 31, 2016 has been derived from the audited financial statements as of December 31, 2016 but does not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For more complete financial information, the accompanying unaudited condensed consolidated financial statements and

7


 

notes thereto should be read in conjunction with the audited financial statements for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

2. Summary of Significant Accounting Policies

Research and Development Costs

All research and development costs are charged to expense as incurred and consist principally of costs related to clinical trials, license fees and salaries and related benefits. Clinical trial costs are a significant component of research and development expenses. These costs are accrued based on estimates of work performed, and require estimates of total costs incurred based on patients enrolled, progress of clinical studies and other events. Clinical trial costs are subject to revision as the trials progress and revisions are charged to expense in the period in which they become known.

Revenue Recognition

Collaborative agreement revenue

The Company identifies the deliverables included within the agreement and evaluates which deliverables represent separate units of accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation to deliver services, a right or license to use an asset, or another performance obligation. A delivered item is considered a separate unit of accounting when the delivered item has value to the partner on a standalone basis based on the consideration of the relevant facts and circumstances for each arrangement. Factors considered in this determination include the research capabilities of the partner and the availability of research expertise in this field in the general marketplace. Arrangement consideration is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price. The relative selling price for each deliverable is determined using VSOE of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, the Company use its best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units. Changes in the allocation of the sales price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized under any agreement. Upfront license fee payments are recognized upon delivery of the license if facts and circumstances dictate that the license has standalone value from the undelivered items, which generally include research and development services and the manufacture of drug products, the relative selling price allocation of the license is equal to or exceeds the upfront license fee, persuasive evidence of an arrangement exists, the Company’s price to the partner is fixed or determinable, and collectability is reasonably assured.

Upfront license fee payments are deferred if facts and circumstances dictate that the license does not have standalone value. The determination of the length of the period over which to defer revenue is subject to judgment and estimation and can have a material impact on the amount of revenue recognized in a given period.

The Company accounts for milestone payments under its agreements using the milestone method of accounting. The Company recognizes consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following three criteria: 1) the consideration is commensurate with either the entity’s performance to achieve the milestone or 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, 2) the consideration relates solely to past performance, and 3) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity’s performance or on the occurrence of a specific outcome resulting from the entity’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company. Any milestone payments that do not satisfy these revenue recognition criteria are recorded over the remaining life of the agreements with a cumulative catch up adjustment for the portion of the milestone earned from the inception of the agreement to the expected term of the agreement. The excess of the milestone paid and the amount recognized in the cumulative catch up adjustment is recorded as deferred revenue and recognized over the remaining expected term of the agreement.

Royalty revenue

Royalties to be received based on sales of the Company’s licensed products by partners are recognized as earned.

8


 

Product Sales, Net

The Company’s net product sales consist of U.S. sales of Contrave as well as product sales to our distributors in other countries. The Company recognizes product revenue when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured.

Effective August 1, 2016, the Company reacquired the commercial rights of Contrave from Takeda and began selling Contrave in the U.S.  The Company commenced shipments of Contrave to its wholesalers in mid-August 2016. The Company has determined it does not currently have the necessary volume of activity to reasonably estimate certain sales allowances at the time title and risk of loss transfers to the wholesalers. Accordingly, the price is not considered fixed or determinable at that time.  Therefore, the Company recognizes revenue when the wholesalers sell Contrave to the dispensing institutions (i.e. pharmacies, hospitals) at which point it has developed sufficient historical experience and data to reasonably estimate future returns and chargebacks. As of March 31, 2017, the Company had a deferred revenue balance of $1.2 million related to Contrave net product sales.

Upon recognition of revenue from product sales of Contrave in the U.S., the Company records certain sales reserves and allowances as a reduction to gross revenue.  These reserves and allowances include:

Rebates:

The Company records provisions for commercial managed care contract rebates and U.S. Medicaid at the time revenue is recognized based upon our estimated rebate claims attributable to a sale. For commercial managed care contract rebates, the Company considers current contract terms, such as changes in formulary status and agreed to discount rates, along with historical utilization rates. Orexigen also considers outstanding rebate claims, rebate payments, forecasted sales, and levels of inventory in the distribution channel and adjusts estimates each period to reflect actual experience. There can be a significant time lag between recording estimates and actual payments. U.S Medicaid rebate accruals are generally based on historical payment data and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services.

Chargebacks:

The Company provides predetermined discounts under certain government programs, including the Veterans Administration FSS and Public Health Service 340B, whereby the pharmacies or health care facilities affiliated with these programs purchase Contrave from wholesalers at reduced prices. A chargeback represents the difference between the invoice price to the wholesaler and the contractual discounted price offered by the Company under the respective program. Our estimate for these chargeback fees takes into consideration contractual terms, historical utilization rates along with payor mix, and our expectations regarding future utilization rates.

Cash Discounts:

The Company offers certain wholesalers cash discounts as an incentive for meeting certain payment terms.   The Company estimates prompt payment discounts based on contractual terms, historical utilization rates, as available, and our expectations regarding future utilization rates.  As the prompt pay discounts are applied against wholesaler purchases of Contrave, the Company records its initial estimate at the point in which that sales occurs.

Distribution Fees:

The distribution fees, based on contractually determined rates, arise from contractual agreements the Company has with certain wholesalers for distribution services they provide with respect to Contrave. These fees are generally a fixed percentage of the price of the product purchased by the wholesalers.

Savings Card Program:

The Company offers certain discount programs to patients under which the patient receives a discount on his or her prescription. The Company reimburses pharmacies for this discount through a third-party vendor. The discounts, which are recorded as a reduction of sales at the point of revenue recognition, reflect an estimate based on historical utilization rates, expectations surrounding future utilization, and user mix in relation to the discount offering.

9


 

Sales Returns:

The Company allows the wholesalers to return product that is damaged or received in error. In addition, the Company accepts unused product to be returned beginning six months prior to and ending twelve months following product expiration. Specific rights of return are also extended to certain customers. The Company believes that its estimated product returns for Contrave requires a high degree of judgement and is subject to change based on our experience and certain quantitative and qualitative factors. Because of the shelf life of Contrave and the lengthy return period, there may be a significant period of time between when the product is shipped and when the Company issues credits on returned product.  In order to develop a methodology to reliably estimate future returns, the Company analyzes many factors, including, without limitation: (1) actual Contrave product return history, taking into account product expiration dating at the time of shipment, (2) re-order activities of the wholesalers as well as their customers and (3) levels of inventory in the wholesale channel.  The Company considers the dating of product at the time of shipment into the distribution channel and changes in the estimated levels of inventory within the distribution channel to estimate our exposure to returned product. The Company also considers current contract prices and projected future prices to estimate the exposure to returned product. Given the exposure to returns and the Company’s limited history of selling Contrave in the U.S., the Company recognizes product sales allowances based on these estimates as a reduction of product sales in the same period the related revenue is recognized, upon sale of Contrave from the wholesalers to the pharmacies, hospitals, etc.  The Company believes this reduces its exposure to returns and allows us to more reasonably justify the estimate.  Should actual product return results differ from our estimates, however, the Company will be required to make adjustments to these allowances in the future, which could have an effect on product sales revenue and earnings in the period of adjustments.

Inventory

Inventories are stated at the lower of cost (using a first-in, first-out basis) and net realizable value. Inventory costs including raw materials, work in process and finished goods that may be associated with its products prior to regulatory approval are charged to research and development expense prior to such approval on a country-specific basis.

Fair Value Option

The Company has elected the fair value option to account for convertible debt instruments that were issued during both the year ended December 31, 2016 and the quarter ended March 31, 2017 and records this convertible debt at fair value with changes in fair value recorded in the statement of operations. As a result of applying the fair value option, direct costs and fees related to the convertible debt were recognized in earnings as incurred and not deferred.

Preferred Stock

When issued, the Company classifies conditionally redeemable preferred shares, which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. The Company’s Series Z Preferred Stock features a contingent right to receive payment from the Company in the event of certain fundamental changes, some of which are not within the Company’s control. Accordingly, the Series Z Preferred Stock is presented as a component of temporary equity.

 

Purchased Intangibles

 

Acquired assets and assumed liabilities recognized in an acquisition are recorded on the basis of their estimated fair values determined by management at the date of acquisition. The Company determines the estimated economic lives of the acquired intangible assets for amortization purposes.

 

Intangible assets consist of developed technology and tradenames acquired in the Contrave business combination under the purchase method of accounting are recorded at fair value net of accumulated amortization since the acquisition date. Amortization is calculated using the straight line method over the following estimated useful lives:

 

 

 

Useful Lives

Developed technology

 

 

10

 years 

Tradename

 

 

10

 years

 

The Company reviews its finite-lived intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of finite-lived intangible asset may not be recoverable. Recoverability of a finite-lived intangible asset is measured by a comparison of its carrying amount to the undiscounted future cash flows expected to be generated by the asset. If the asset is

10


 

considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset.  There were no indicators of impairment during the period ended March 31, 2017.

 

Contingent Consideration

The Company measures contingent consideration liabilities recognized in connection with business combinations at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy.  The Company uses a probability-weighted discounted cash flow approach as a valuation technique to determine the fair value of the contingent consideration on the acquisition date. The fair value of the Company’s contingent consideration liability is revalued to fair value each period and any increase or decrease is recorded into earnings. Amounts paid in excess of the amount recorded on the acquisition date will be classified as cash flows used in operating activities. Payments not exceeding the acquisition-date fair value of the contingent consideration will be classified as cash flows used in financing activities.

 

Restricted Cash and Investments

All cash and investments that are legally restricted from use are recorded in restricted cash and investments on the balance sheet. The convertible senior secured notes due 2020 issued in March 2016 (See Note 11) require the Company to maintain a minimum account balance which is considered to be restricted cash and investments. The required restricted cash and investment amount is $40.0 million until June 21, 2017.   

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new standard 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. ASU 2014-09 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. The new standard will be effective for the Company starting in the first quarter of fiscal 2018. The FASB will permit entities to adopt one year earlier if they choose (i.e., the original effective date). The new standard allows for two methods of adoption: (a) full retrospective adoption, meaning the standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance. The Company is in the process of performing a preliminary assessment of the impact of ASU 2014-09 on the Consolidated Financial Statements, and is considering all items outlined in the standard. In assessing the impact, the Company will identify all revenue generating activities, map those activities to deliverables and map those deliverables to the standard. The Company will be assessing what impact the change in standard will have on those deliverables. Based on the Company’s preliminary assessment to date, the Company expects that the new standard will impact the estimation of sales allowances for the Company’s U.S. product revenues and the timing of revenue recognition which could be earlier than that what the Company is currently recognizing U.S. product revenue. And the new standard is expected to have a material impact on the Company’s financial statement disclosures. The Company will continue to evaluate the impact of ASU 2014-09 and related amendments on the Consolidated Financial Statements and related disclosures throughout 2017. The Company plans to adopt the new standard beginning January 2018 using the modified retrospective method.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-2 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet for all leases and to disclose key information about leasing arrangements. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adoption of ASU No. 2016-02 on the consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, or ASU 2016-09. The amendment is to simplify several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in ASU 2016-09 are effective for interim and annual reporting periods beginning after December 15, 2016. The Company adopted ASU 2016-09 on January 1, 2017. The adoption did not have a material impact on its consolidated financial statements. Under ASU 2016-09, previously unrecognized deferred tax assets were recognized on a modified retrospective basis as of January 1, 2017. As a result of adoption of ASU 2016-09, we recorded approximately $4.6 million of additional deferred tax assets, which are fully offset by a valuation allowance.  The Company elected to continue estimating stock-based compensation award forfeitures in determining the amount of compensation cost to be recognized each period.

11


 

In June 2016, the FASB issued ASU 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 the Company beginning in the first quarter of 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of this new pronouncement on its consolidated statements of cash flows and related disclosures.

 

In July 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. The standard requires inventory within the scope of the ASU to be measured using the lower of cost and net realizable value. The changes apply to all types of inventory, except those measured using LIFO or the retail inventory method, and are intended to more clearly articulate the requirements for the measurement and disclosure of inventory and to simplify the accounting for inventory by eliminating the notions of replacement cost and net realizable value less a normal profit margin. The standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. The Company adopted this guidance prospectively for the fiscal year beginning January 1, 2017. The Company previously measured its inventory at the lower of cost or market with cost being determined by the first-in, first-out (“FIFO”) method. The adoption of the guidance did not have a material impact on its consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, which outlines that a statement of cash flows explains the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, and early application is permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.

 

In January 2017, the FASB issued an ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, and early application is permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.

3. Net Loss per Share

Basic earnings per share (“EPS”) is calculated by dividing the net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing the net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method or the if-converted method.

12


 

For purposes of this calculation, options, warrants and shares underlying convertible notes are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.

(In thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(69,087

)

 

$

(22,348

)

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

14,806

 

 

 

14,556

 

Net loss per share — basic and diluted

 

$

(4.67

)

 

$

(1.54

)

 

 

 

 

 

 

 

 

 

Historical outstanding anti-dilutive securities not included in the diluted net loss per share calculation include the following (in thousands):

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

Shares underlying 2013 convertible senior notes

 

370

 

 

 

1,405

 

Shares underlying 2016 convertible senior notes

 

22,000

 

 

 

 

Shares underlying 2017 exchange notes

 

2,829

 

 

 

 

Common stock warrants outstanding

 

22,500

 

 

 

500

 

Common stock options and PSU's outstanding

 

4,379

 

 

 

2,330

 

 

 

52,078

 

 

 

4,235

 

 

 

4. Investment Securities, Available-for-Sale

The Company invests its excess cash in investment securities, including debt instruments of financial institutions, corporations with investment grade credit ratings and government agencies. Investment securities, available-for-sale, consisted of the following (in thousands):

March 31, 2017

 

 

Maturity in

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

Years

 

Amortized Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. Treasury securities

 

Less than 1

 

$

50,005

 

 

$

-

 

 

$

(20

)

 

$

49,985

 

Total investment securities

 

 

 

$

50,005

 

 

$

 

 

$

(20

)

 

$

49,985

 

 

December 31, 2016

 

 

Maturity in

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

Years

 

Amortized Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. Treasury securities

 

Less than 1

 

$

100,026

 

 

$

 

 

$

(21

)

 

$

100,005

 

Corporate debt securities

 

Less than 1

 

 

1,498

 

 

 

1

 

 

 

 

 

$

1,499

 

Total investment securities

 

 

 

$

101,524

 

 

$

1

 

 

$

(21

)

 

$

101,504

 

 

$40.0 million and $90.0 million of the investments at March 31, 2017 and December 31, 2016, respectively, are restricted investments as described in Note 2. Gross realized gains and losses on available-for-sale securities were immaterial during the three months ended March 31, 2017 and 2016.

 

5. Contrave Acquisition

 

In March 2016, the Company entered into a separation agreement with Takeda (the “Separation Agreement”), which terminated the Restated Collaboration Agreement between the Company and Takeda, and the manufacturing services agreement between the Company and Takeda (see Note 12). The Separation Agreement provided for the transfer of certain rights and assets to the Company and provided for the transition of activities under the collaboration agreement from Takeda to the Company during the transition period. On August 1, 2016, the transition period under the Separation Agreement between the Company and Takeda terminated and the Company reacquired all commercial rights to Contrave in the United States. The Company made an initial payment of $60.0 million (the “Initial Payment”) to Takeda in March 2016 and paid an additional $15.0 million to Takeda in January 2017 (the “January 2017 Payment”). The source of funds for the Initial Payment and the January 2017 Payment was from the Company’s cash on hand.

13


 

The Company may also be obligated to pay Takeda milestone payments of $10 million, $20 million, $30 million and $50 million, based on the achievement of annual Contrave net sales milestones of $200 million, $300 million $400 million and $600 million, respectively, in any future year. Each such milestone payment shall be payable only once but more than one may be payable with respect to net sales in a single year. The contingent consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any changes in fair value are recognized in earnings. See Footnote 6 for valuation methodology of contingent consideration. As a result of the Contrave acquisition and the resulting settlement of its pre-existing relationship with Takeda, the Company recorded a settlement gain of $80.2 million representing the remaining Contrave deferred revenue on August 1, 2016.

 

Purchase Consideration

 

The estimated fair value of the total consideration at the date of acquisition (August 1, 2016) is as follows (in thousands):

 

Prepaid purchase price payment to Takeda in March 2016

 

$

60,000

 

Fair value of contingent consideration due to Takeda

 

 

18,800

 

Payment due to Takeda for Contrave inventory

 

 

7,762

 

Estimated payment due to Takeda for charge-backs and rebates

 

 

823

 

Cash received from Takeda for estimated returns as of August 1, 2016

 

 

(1,667

)

Total Purchase Price

 

$

85,718

 

 

 

On the acquisition date, the estimated fair value of net assets acquired was $85.7 million. The preliminary allocation of the total consideration to the fair value of the assets acquired and liabilities assumed is subject to finalization of estimating the fair value of the assets acquired and liabilities assumed. The estimated fair values of the assets acquired and liabilities assumed, including the fair value of purchased intangibles, are preliminary estimates pending the finalization of our valuation analyses. The estimated fair value of the inventory and accrued expenses will be finalized as further information is received regarding these items and analysis of this information is completed. The allocation as of the date of the acquisition is as follows (in thousands):

 

Developed technology intangible

 

$

74,967

 

Tradename

 

 

4,400

 

Inventory

 

 

14,261

 

Assumption of accrued expenses (savings card program)

 

 

(5,687

)

Assumption of accrued expenses (returns reserve)

 

 

(2,223

)

Total Fair Value of Assets Acquired and Liabilities Assumed

 

$

85,718

 

 

The fair value of intangible assets (developed technology intangible and tradename) is determined primarily using the “income method,” which starts with a forecast of all expected future cash flows. Some of the more significant assumptions inherent in the intangible asset values, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including net revenue, cost of product sales, research and development costs, sales and marketing expenses, capital expenditures and working capital requirements) as well as estimated contributory asset charges; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, among other factors.

 

The remaining estimated amortization expense related to the intangible assets recorded in connection with the Contrave acquisition for 2017 through 2021 and thereafter is as follows (in thousands):

 

2017

 

 

5,953

 

2018

 

 

7,938

 

2019

 

 

7,938

 

2020

 

 

7,938

 

2021

 

 

7,938

 

Thereafter

 

 

36,372

 

 

 

$

74,077

 

 

14


 

Pro forma

 

The following unaudited pro forma financial information presents results as if the acquisition of Contrave had occurred on January 1, 2015 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

2017

 

 

2016

 

 

Revenues

 

$

19,145

 

 

$

13,188

 

 

Net loss

 

 

(69,087

)

 

 

(62,510

)

 

Net loss per share - basic and diluted

 

$

(4.67

)

 

$

(4.29

)

 

 

For purposes of the pro forma disclosures above, the primary adjustments for the three months ended March 31, 2016 include the amortization of the intangible assets, reversal of collaborative and royalty revenue and the elimination of existing Contrave deferred revenue.

 

6. Fair Value Measurements

The fair values of the Company’s financial instruments are estimated and classified using a hierarchal disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2017, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. The Company classifies money market funds as Level 1 assets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company classifies commercial paper holdings, U.S. Treasury securities, U.S. government agency securities and asset-backed security holdings as Level 2 assets and its Exchange Notes (see Note 11) as a Level 2 liability.  Level 3 inputs are unobservable inputs for the assets or liabilities, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Assets and liabilities measured at fair value that have recurring measurements are shown below (in thousands):

 

 

 

 

 

 

 

Fair Value Measurement at Reporting Date Using

 

Description

 

Balance as of

March 31, 2017

 

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs (Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

70,251

 

 

$

70,251

 

 

$

 

 

$

 

U.S. Treasury securities

 

 

49,985

 

 

 

 

 

 

49,985

 

 

 

 

Total assets measured at fair value

 

$

120,236

 

 

$

70,251

 

 

$

49,985

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration - long-term

 

$

8,200

 

 

$

 

 

$

 

 

$

8,200

 

Convertible debt - 2017 Exchange Notes

 

 

21,866

 

 

 

 

 

 

21,866

 

 

 

 

Convertible debt - 2016 Notes

 

 

130,600

 

 

 

 

 

 

 

 

 

130,600

 

Total liabilities measured at fair value

 

$

160,666

 

 

$

 

 

$

21,866

 

 

$

138,800

 

 

15


 

 

 

 

 

 

 

Fair Value Measurement at Reporting Date Using

 

Description

 

Balance as of

December 31, 2016

 

 

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

 

 

Significant Other

Observable

Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

Financial instruments owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

65,081

 

 

$

65,081

 

 

$

 

 

$

 

U.S. Treasury securities

 

 

100,005

 

 

 

 

 

 

100,005

 

 

 

 

Corporate debt securities

 

 

1,499

 

 

 

 

 

 

 

1,499

 

 

 

 

 

Total assets measured at fair value

 

$

166,585

 

 

$

65,081

 

 

$

101,504

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration - current

 

$

15,000

 

 

$

 

 

$

 

 

$

15,000

 

Contingent consideration - long-term

 

 

6,800

 

 

 

 

 

 

 

 

 

 

 

6,800

 

Convertible debt

 

 

101,900

 

 

 

 

 

 

 

 

 

101,900

 

Total liabilities measured at fair value

 

$

123,700

 

 

$

 

 

$

 

 

$

123,700

 

 

There were no transfers between Levels 1, 2 or 3 during the three months ended March 31, 2017 and the year ended December 31, 2016.

The fair value of the Company’s Exchange Notes is estimated using Level 2 inputs by reference to prices observed for recent trading activity in the Exchange Notes, adjusted for observable changes in the yield curve index of similar credit-quality borrowers, between the date of the observed price and the measurement date.  

 

The following table presents additional information about Level 3 liabilities measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains and losses for liabilities within the Level 3 category may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

Changes in Level 3 liabilities measured at fair value for the three months ended March 31, 2017 (in thousands):

 

Contingent Consideration—December 31, 2016

 

$

21,800

 

Payment to Takeda

 

$

(15,000

)

Change in fair value of contingent consideration (recognized in

   earnings)

 

 

1,400

 

Contingent Consideration at fair value – March 31, 2017

 

$

8,200

 

 

 

 

 

 

Convertible Debt—December 31, 2016

 

$

101,900

 

Change in fair value of convertible debt (recognized in

   earnings)

 

 

28,700

 

Convertible debt at fair value – March 31, 2017

 

$

130,600

 

 

In March 2016, the Company issued $165.0 million in aggregate principal amount of 0.0% convertible 2016 Notes, which included the principal amount of the convertible note, a conversion feature, warrant coverage, and preferred shares.

To measure the fair value of the principal amount, the Company used an income approach, discounting the principal amount due under the convertible note by market interest rates by potential scenario. To measure the fair value of the conversion feature of the convertible note, a Black-Scholes option pricing model was utilized. The Black-Scholes option pricing model utilized the following assumptions: (i) expected term; (ii) common stock price; (iii) risk-free interest rate; and (iv) expected volatility. Assumptions used in the estimates represent what market participants would use in pricing the liability components, including market interest rates, credit standing, yield curves, volatilities, and risk-free rates, all of which are defined as Level 2 observable inputs. The estimated implied interest rates were applied to the principal amount of the convertible note by scenario and were weighted based on the probability of each scenario occurring. The estimated volatilities and the risk-free rates were incorporated into the Black-Scholes option pricing models for the conversion feature of the convertible note by scenario and were weighted based on the probability of each scenario

16


 

occurring. Scenarios and probabilities were based on Company management estimates and were incorporated into the determination of the fair values of the principal amount and the conversion feature of the convertible note.

A Black-Scholes option pricing model is also utilized to measure the fair value of the warrant coverage component of the 2016 Note offering. The Black-Scholes option-pricing model utilizes the following assumptions: (i) expected term; (ii) common stock price; (iii) risk-free interest rate; and (iv) expected volatility. Assumptions used in the estimates represent what market participants would use in pricing the component, including volatilities and risk-free rates, which are defined as Level 2 observable inputs. The estimated volatilities and the risk-free rates are incorporated into the Black-Scholes option pricing models for the warrants by scenario and are weighted based on the probability of each scenario occurring. Scenarios and probabilities are based on Company management estimates and are incorporated into the determination of the fair value of the warrant coverage.

The fair values of the principal amount of the 2016 Note, the conversion feature of the convertible note and the warrant coverage are impacted by certain unobservable inputs, most significantly with regards to the discount rates, probabilities of certain scenarios occurring, expected volatility, share price performance, and expected scenario timing. Significant changes to these inputs in isolation could result in a significantly different fair value measurement.

 

As part of the Separation Agreement between the Company and Takeda, the Company recorded a current contingent consideration liability and a long-term contingent consideration liability that have been classified as Level 3 inputs in the fair value hierarchy. The contingent consideration represents the estimated fair value of future payments due to Takeda based on: (i) Orexigen achieving annual net sales targets in certain years and (ii) Takeda performing certain obligations, as outlined in the Separation Agreement. The initial fair value of the long-term portion of the contingent consideration based on net sales was estimated through the use of a Monte Carlo simulation model. The Monte Carlo simulation model utilized the following assumptions: (i) expected term; (ii) risk-adjusted net sales; (iii) risk-free interest rate; and (iv) expected volatility. The initial fair value of the current portion of the contingent consideration based on Takeda performing certain obligations was estimated using a probability weighted approach. The probability was applied to the contingent consideration based on Takeda performing certain obligations and discounted to present value.  The fair value of the Company’s contingent consideration liability is revalued to fair value each period and any increase or decrease is recorded into earnings. The fair value of the contingent consideration was impacted by certain unobservable inputs, most significantly with regards to the discount rates, probability of scenario occurrence, expected volatility, historical and projected net sales performance, and expected scenario timing. Significant changes to these inputs in isolation could result in a significantly different fair value measurement. The potential contingent consideration payments required upon achievement of sales-based milestones related to the Company’s acquisition of Contrave range from zero if none of the milestones are achieved to a maximum of $110.0 million (undiscounted)(see Note 5).

 

 

7. Inventory

Inventory consists of the following (in thousands):

 

 

 

March 31, 2017

 

 

December 31,

2016

 

Raw materials

 

$

8,258

 

 

$

6,678

 

Work in process

 

 

881

 

 

 

1,036

 

Finished goods

 

 

11,524

 

 

 

15,479

 

 

 

$

20,663

 

 

$

23,193

 

 

 

8. Property and Equipment

Property and equipment consist of the following (in thousands):

 

 

 

Useful Life

In Years

 

 

March 31, 2017

 

 

December 31,

2016

 

Furniture and fixtures

 

 

5

 

 

$

1,209

 

 

$

1,209

 

Computer equipment and software

 

3 to 5

 

 

 

1,157

 

 

 

1,157

 

Leasehold improvements

 

 

5

 

 

 

644

 

 

 

644

 

Manufacturing equipment

 

 

5

 

 

 

664

 

 

 

664

 

 

 

 

 

 

 

 

3,674

 

 

 

3,674

 

Less accumulated depreciation and amortization

 

 

 

 

 

 

(2,747

)

 

 

(2,630

)

 

 

 

 

 

 

$

927

 

 

$

1,044

 

 

17


 

 

9. Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Product sales reserves and allowances

 

$

17,830

 

 

$

9,998

 

Accrued compensation related expenses

 

 

3,597

 

 

 

7,169

 

Inventory received, not invoiced

 

 

494

 

 

 

5,398

 

Accrued income taxes

 

 

131

 

 

 

133

 

Accrued marketing and market research expenses

 

 

6,667

 

 

 

5,201

 

Accrued research and development expenses

 

 

1,074

 

 

 

864

 

Accrued interest on convertible notes

 

 

669

 

 

 

184

 

Accrued legal and professional expenses

 

 

1,328

 

 

 

984

 

Other accrued expenses

 

 

316

 

 

 

481

 

 

 

$

32,106

 

 

$

30,412

 

 

 

10. Stock-Based Compensation

Total stock-based compensation expense recognized during the three months ended March 31, 2017 and 2016 was comprised of the following (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Cost of goods sold

 

$

157

 

 

$

 

Selling, general and administrative

 

 

2,240

 

 

 

1,822

 

Research and development

 

 

594

 

 

 

970

 

 

 

$

2,991

 

 

$

2,792

 

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The following weighted-average assumptions were utilized for the calculations during each period:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Expected life (in years)

 

 

5.9

 

 

 

5.8

 

Expected volatility

 

 

79.9

%

 

 

94.7

%

Risk-free interest rate

 

 

2.1

%

 

 

1.5

%

Expected dividend yield

 

 

 

 

 

 

 

 

 

11. Convertible Debt

0% Convertible Senior Secured Notes due 2020 – 2016 Notes

On March 21, 2016, the Company closed an offering, or the Offering, of $165.0 million aggregate principal amount of 0% Convertible Senior Secured Notes due 2020, or the 2016 Notes, and related warrants, or the Warrants, to purchase up to 21,999,999 shares of the Company’s common stock, par value $0.001 per share, or the Common Stock, and 219,994 shares of Series Z Non-Convertible Non-Voting Preferred Stock, par value $0.001 per share, or the Series Z Preferred Stock, and, together with the 2016 Notes, Warrants and Common Stock underlying the 2016 Notes and Warrants, the Securities, to qualified institutional buyers and accredited investors, or the Purchasers, pursuant to a securities purchase agreement, dated March 15, 2016, or the Securities Purchase Agreement, by and among the Company and the Purchasers. The Offering was led by funds managed by The Baupost Group, L.L.C., collectively, Baupost, which, prior to the Offering, was the holder of approximately 18.1% of the Company’s outstanding Common Stock.

The 2016 Notes will mature on July 1, 2020, unless earlier repurchased, redeemed or converted in accordance with the Indenture. The 2016 Notes shall only be convertible into shares of Common Stock of the Company at the Conversion Rate. In the

18


 

event of a change of control transaction at any time, the 2016 Notes will be convertible for a period beginning on the closing of such change of control transaction and ending 35 Trading Days after the closing of such transaction.

The Conversion Rate is 133.333 shares of Common Stock for each $1,000 principal amount of 2016 Notes, which represents a conversion price of $7.50 per shares of Common Stock. The Conversion Rate and the corresponding conversion price will be subject to adjustment for certain events, but will not be adjusted for accrued and unpaid interest.

If one or more Events of Default occurs, then unless the principal of all of the 2016 Notes shall have already become due and payable, either the Trustee or the holders of at least 25% in aggregate principal amount of the 2016 Notes then outstanding, by notice in writing to the Company (and to the Trustee if given by holders), may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the 2016 Notes to be due and payable immediately, and upon any such declaration the same will become and will automatically be immediately due and payable. If an Event of Default resulting from a voluntary or involuntary liquidation, reorganization, or other relief occurs and is continuing, 100% of the principal of, and accrued and unpaid interest, if any, on, all 2016 Notes shall become and shall automatically be immediately due and payable.

Upon the occurrence of certain fundamental changes or adverse events related to the regulatory approval for and commercialization of Contrave, and net sales of the Company, as described in the Indenture, holders of the 2016 Notes will, at their option, have the right to require the Company to repurchase for cash all or a portion of their 2016 Notes at a repurchase price equal to 100% of the aggregate principal amount of 2016 Notes. The 2016 Notes were not redeemable by the Company, in whole or in part, prior to the receipt of the required stockholder approvals, or the Stockholder Approval, which the Company obtained at its 2016 annual meeting of stockholders in July 2016.  From and after the receipt of the Stockholder Approval, the 2016 Notes are not redeemable, in whole or in part, without the consent of the holders of not less than 70% in aggregate principal amount of the 2016 Notes at the time outstanding.

In March 2016, the Company entered into a Security Agreement by and among the Company, the guarantors party thereto from time to time and U.S. Bank National Association, as the collateral agent, pursuant to which the Company granted a first-priority security interest in substantially all of the Company’s current and future assets, subject to customary exclusions, to secure the Company’s obligations under the Indenture. The security interests shall be released once less than 25% of the original principal amount of 2016 Notes issued on the date of the Indenture remains outstanding.

The Purchasers received Warrants exercisable for a number of shares of Common Stock equal to the aggregate principal amount of the 2016 Notes acquired by the Purchasers, multiplied by the Conversion Rate. The exercise price of the Warrants is $15.00 per share and the Warrants expire on September 21, 2026. From and after the Stockholder Approval, the Warrants became only exercisable for a number of shares of Common Stock of the Company at the Exercise Price. In the event of a change of control transaction at any time, the Warrants will be exercisable for a period beginning on closing of such change of control transaction and ending 35 days after such transaction.

Due to the complexity and number of embedded features within the convertible note and as permitted under accounting guidance, the Company elected to account for the convertible notes and all the embedded features, collectively, the hybrid instrument, under the fair value option. The Company recognizes the convertible debt at fair value rather than at historical cost with changes in fair value recorded in the consolidated statements of operations. Direct costs and fees incurred to issue the convertible notes were recognized in earnings as incurred and not deferred. On the initial measurement date of March 21, 2016, the fair value of the hybrid instrument was estimated at $120.0 million, which was $45.0 million lower than the principal amount of $165.0 million. Upfront costs and fees related to items for which the fair value option is elected was $5.3 million and was recorded as a component of selling, general and administrative expense for the year ended December 31, 2016.   On March 31, 2017, the aggregate fair value of the 2016 Notes was estimated at approximately $130.6 million.

In connection with the Offering the Company issued 219,994 shares of Series Z Preferred Stock.

The Series Z Preferred Stock is not convertible and does not pay or accrete dividends. The Series Z Preferred Stock is entitled to a liquidation preference upon a Fundamental Change, which includes a change of control. Upon a Fundamental Change, the Company must pay each holder an amount equal to the lesser of (i) the amount by which $975 exceeds the amount received by holders of each 100 shares of Common Stock and (ii) $225; provided however that, if $975 does not exceed the amount received by holders of each 100 shares of Common Stock, then the Fundamental Change Amount will be $0.

19


 

The Series Z Preferred Stock expires on the earlier to occur of (a) December 31, 2020 or (b) upon receipt of the consen