gwph-10q_20200630.htm

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, 2020

☐

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

Commission File Number 001-35892

GW PHARMACEUTICALS PLC

(Exact name of Registrant as specified in its charter)

England and Wales		Not Applicable
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Sovereign House, Vision Park Chivers Way, Histon Cambridge, CB24 9BZ United Kingdom		+44 1223 266800
(Address of principal executive offices)		(Registrant’s telephone number, including area code)

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

Title of each class		Trading Symbol		Name of exchange on which registered
American Depositary Shares, each representing 12 Ordinary Shares, par value £0.001 per share		GWPH		The Nasdaq Global Market

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, 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 Exchange Act). YES ☐ NO ☑

As of July 31, 2020, 373,717,172 Ordinary Shares were outstanding including 362,979,720 Ordinary Shares held as American Depositary Shares, each representing twelve Ordinary Shares, par value of £0.001 per share and 10,737,452 Ordinary Shares.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019	2
	Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2020 and 2019	3
	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	25

PART II.	OTHER INFORMATION	26
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 6.	Exhibits	34
Signatures		35

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GW PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	June 30,			December 31,
	2020			2019
Assets
Cash and cash equivalents	$	477,557		$	536,933
Accounts receivable, net		80,357			48,883
Inventory		99,620			85,528
Prepaid expenses and other current assets		30,183			28,292
Total current assets		687,717			699,636
Property, plant, and equipment, net		125,106			127,765
Operating lease assets		22,333			24,916
Intangible assets		5,627			—
Goodwill		6,959			6,959
Deferred tax assets		18,123			18,123
Other assets		4,715			4,850
Total assets	$	870,580		$	882,249
Liabilities and stockholders’ equity
Accounts payable	$	16,238		$	9,990
Accrued liabilities		93,313			99,374
Current tax liabilities		2,004			437
Other current liabilities		6,947			7,760
Total current liabilities		118,502			117,561
Long-term liabilities:
Finance lease liabilities		5,066			5,573
Operating lease liabilities		19,659			21,650
Other liabilities		10,416			11,431
Total long-term liabilities		35,141			38,654
Total liabilities		153,643			156,215
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock - Ordinary shares par value £0.001; 373,709,720 shares outstanding as of June 30, 2020; 371,068,436 shares outstanding as of December 31, 2019		575			570
Additional paid-in capital		1,655,500			1,632,046
Accumulated deficit		(854,752	)		(837,959	)
Accumulated other comprehensive loss		(84,386	)		(68,623	)
Total stockholders’ equity		716,937			726,034
Total liabilities and stockholders’ equity	$	870,580		$	882,249

See accompanying notes to these condensed consolidated financial statements.

GW PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Revenues
Product net sales	$	121,230		$	71,489		$	241,762		$	110,463
Other revenue		67			549			168			822
Total revenues		121,297			72,038			241,930			111,285
Operating expenses
Cost of product sales		8,708			6,620			19,477			11,751
Research and development		45,734			32,467			91,608			62,842
Selling, general and administrative		75,894			62,273			147,077			117,351
Total operating expenses		130,336			101,360			258,162			191,944
Loss from operations		(9,039	)		(29,322	)		(16,232	)		(80,659	)
Interest income		250			2,310			1,519			4,397
Interest expense		(297	)		(268	)		(581	)		(533	)
Other income		-			104,117			-			104,117
Foreign exchange gain		1,386			2,026			1,366			912
(Loss) income before income taxes		(7,700	)		78,863			(13,928	)		28,234
Income tax expense (benefit)		1,128			(885	)		2,865			(1,450	)
Net (loss) income	$	(8,828	)	$	79,748		$	(16,793	)	$	29,684

Net loss per share:
Basic	$	(0.02	)	$	0.21		$	(0.04	)	$	0.08
Diluted	$	(0.02	)	$	0.21		$	(0.04	)	$	0.08

Weighted average shares outstanding:
Basic		375,525			371,712			374,680			370,776
Diluted		375,525			377,435			374,680			376,674

See accompanying notes to these condensed consolidated financial statements.

GW PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net (loss) income	$	(8,828	)	$	79,748		$	(16,793	)	$	29,684
Foreign currency translation adjustments		(1,335	)		(4,878	)		(15,763	)		(1,080	)
Comprehensive (loss) income	$	(10,163	)	$	74,870		$	(32,556	)	$	28,604

See accompanying notes to these condensed consolidated financial statements.

GW PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

											Accumulated
					Additional						Other			Total
	Common Stock				Paid-in			Accumulated			Comprehensive			Stockholders'
	Shares		Amount		Capital			Deficit			Loss			Equity
Balances at December 31, 2019		371,069	$	570	$	1,632,046		$	(837,959	)	$	(68,623	)	$	726,034
Issuance of common stock from exercise of stock options		1,493		3		—			—			—			3
Net loss		—		—		—			(7,965	)		—			(7,965	)
Share-based compensation		—		—		11,361			—			—			11,361
Other comprehensive loss		—		—		—			—			(14,428	)		(14,428	)
Balances at March 31, 2020		372,562	$	573	$	1,643,407		$	(845,924	)	$	(83,051	)	$	715,005
Issuance of common stock from exercise of stock options		1,147		2		—			—			—			2
Net loss		—		—		—			(8,828	)		—			(8,828	)
Common stock withheld for employee tax obligations		—				(1,223	)								(1,223	)
Share-based compensation		—		—		13,316			—			—			13,316
Other comprehensive loss		—		—		—			—			(1,335	)		(1,335	)
Balances at June 30, 2020		373,709		575		1,655,500			(854,752	)		(84,386	)		716,937

										Accumulated
					Additional					Other			Total
	Common Stock				Paid-in		Accumulated			Comprehensive			Stockholders'
	Shares		Amount		Capital		Deficit			Loss			Equity
Balances at December 31, 2018		366,617	$	564	$	1,581,144	$	(828,940	)	$	(78,688	)	$	674,080
Issuance of common stock from exercise of stock options		1,996		3		770		—			—			773
Net loss		—		—		—		(50,064	)		—			(50,064	)
Share-based compensation		—		—		11,142		—			—			11,142
Other comprehensive income		—		—		—		—			3,798			3,798
Balances at March 31, 2019		368,613	$	567	$	1,593,056	$	(879,004	)	$	(74,890	)	$	639,729
Issuance of common stock from exercise of stock options		2,008		3		2,102		—			—			2,105
Net income		—		—		—		79,748			—			79,748
Share-based compensation		—		—		12,188		—			—			12,188
Other comprehensive loss		—		—		—		—			(4,878	)		(4,878	)
Balances at June 30, 2019		370,621		570		1,607,346		(799,256	)		(79,768	)		728,892

See accompanying notes to these condensed consolidated financial statements.

GW PHARMACEUTICALS PLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities
Net loss	$	(16,793	)	$	29,684
Adjustments to reconcile net loss to net cash used in operating activities:
Foreign exchange (gain) loss		(488	)		882
Share-based compensation		24,677			23,330
Depreciation and amortization		5,514			4,808
Gain from sale of priority review voucher		—			(104,117	)
Other		27			21
Changes in operating assets and liabilities:
Accounts receivable, net		(31,794	)		(27,924	)
Inventory		(19,669	)		(27,070	)
Prepaid expenses and other current assets		(4,312	)		(6,819	)
Other assets		1,884			1,542
Accounts payable		6,625			3,488
Current tax liabilities		2,732			619
Accrued liabilities		(599	)		13,887
Other liabilities		(2,145	)		(2,192	)
Net cash used in operating activities		(34,341	)		(89,861	)
Cash flows from investing activities
Proceeds from sale of priority review voucher		—			104,117
Additions to property, plant and equipment		(11,362	)		(22,515	)
Additions to capitalized software		(1,455	)		(1,017	)
Additions to intangible assets		(6,404	)		—
Net cash (used) provided by in investing activities		(19,221	)		80,585
Cash flows from financing activities
Proceeds from exercise of stock options		5			2,878
Payments in connection with common stock withheld for employee tax obligation		(1,223	)		—
Payments on finance leases		(146	)		(250	)
Payments on landlord financing obligation		(283	)		(273	)
Net cash (used in) provided by financing activities		(1,647	)		2,355
Effect of exchange rate changes on cash		(4,167	)		(893	)
Net decrease in cash and cash equivalents		(59,376	)		(7,814	)
Cash and cash equivalents at beginning of period		536,933			591,497
Cash and cash equivalents at end of period	$	477,557		$	583,683
Supplemental disclosure of cash flow information:
Income taxes paid		251			3,907
Interest paid		581			533
Supplemental disclosure of noncash information:
Property and equipment purchases in accounts payable and accrued liabilities		1,727			856
Right-of-use asset obtained in exchange for operating liabilities		275			—

See accompanying notes to these condensed consolidated financial statements.

GW PHARMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Business Overview

GW Pharmaceuticals plc and its subsidiaries (referred to herein as “we,” “us,” “our,” and the “Company”) is a biopharmaceutical company focused on discovering, developing and commercializing novel therapeutics from our proprietary cannabinoid product platform in a broad range of disease areas. The Company is developing a portfolio of cannabinoid medicines, of which the lead product is Epidiolex^®, an oral medicine for the treatment of certain refractory childhood epilepsies.

The Company is a public limited company, which has American Depository Shares (ADSs) registered with the U.S. Securities and Exchange Commission (SEC) and has been listed on Nasdaq since May 1, 2013. The Company’s ADSs each represent twelve ordinary shares of GW Pharmaceuticals plc. The Company is incorporated and domiciled in the United Kingdom. The address of the Company’s registered office and principal place of business is Sovereign House, Vision Park, Histon, Cambridgeshire.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (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 annual financial statements. In the Company’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the Company’s financial statements for interim periods.

The condensed consolidated balance sheet as of December 31, 2019 was derived from audited annual financial statements but does not include all annual disclosures required by U.S. GAAP. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2019 included in the Company’s Form 10-K. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full year or any other future periods.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates.

Fair Value of Financial Instruments

The carrying values of the Company’s financial instruments, consisting of cash and cash equivalents, trade receivables, interest and other receivables, and accounts payable and accrued liabilities, approximate fair value due to the relative short-term nature of these instruments.

Accounts Receivable

Accounts receivable are recorded net of customer allowances for prompt payment discounts, chargebacks, and doubtful accounts. Allowances for prompt payment discounts and chargebacks are based on contractual terms. The Company estimates the allowance for doubtful accounts based on existing contractual payment terms, actual payment patterns of its customers and individual customer circumstances. As of June 30, 2020, the allowance for doubtful accounts was $0.3 million. At December 31, 2019, the allowance for doubtful accounts was $0.3 million. No accounts were written off during the periods presented.

Inventory

Inventory is stated at the lower of cost or estimated net realizable value. The Company uses a combination of standard and actual costing methodologies to determine the cost basis for its inventories which approximates actual cost. Inventory is valued on a first-in, first-out basis. The Company reduces its inventory to net realizable value for potentially excess, dated or obsolete inventory based on an analysis of forecasted demand compared to quantities on hand, as well as product shelf life.

Our inventory production process includes the cultivation of botanical raw material. Because of the duration of the cultivation process, a portion of our inventory will not be sold within one year. Consistent with the practice in other industries that cultivate botanical raw materials, all inventory is classified as a current asset.

The Company capitalizes inventory costs associated with its products upon regulatory approval when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed. Prior to FDA approval of Epidiolex, all costs related to the manufacturing of Epidiolex were charged to research and development expense in the period incurred.

Revenue Recognition

The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Revenue for the Company’s product sales has not been adjusted for the effects of a financing component as the Company expects, at contract inception, that the period between when the Company’s transfers control of the product and when the Company receives payment will be one year or less. Product shipping and handling costs are included in cost of product sales.

Epidiolex Product Net Sales

In the United States, the Company sells Epidiolex to specialty pharmacies (SPs) and specialty distributors (SDs). The Company recognizes revenue from product sales upon receipt of product at the SPs and SDs, the date at which the control is transferred, net of the following allowances which are reflected either as a reduction to the related account receivable or as an accrued liability, depending on how the allowance is settled:

Distribution Fees: Distribution fees include distribution service fees paid to the SPs and SDs based on a contractually fixed percentage of the wholesale acquisition cost (WAC), and prompt payment discounts. Distribution fees are recorded as an offset to revenue based on contractual terms at the time revenue from the sale is recognized.

Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program and the Medicare Part D prescription drug benefit, and contractual rebates with commercial payers. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or statutory requirements. The allowance for rebates is based on contracted or statutory discount rates and expected utilization by benefit plan participants. The Company’s estimates for expected utilization of rebates is based on utilization data received from the SPs since product launch. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for prior quarters’ unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Chargebacks: Chargebacks are discounts and fees that relate to contracts with government and other entities purchasing from the SDs at a discounted price. The SDs charge back to the Company the difference between the price initially paid by the SDs and the discounted price paid to the SDs by these entities. The Company also incurs group purchasing organization fees for transactions through certain purchasing organizations. The Company estimates sales with these entities and accrues for anticipated chargebacks and organization fees, based on the applicable contractual terms. If actual future chargebacks vary from these estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Co-Payment Assistance: The Company offers co-payment assistance to commercially insured patients meeting certain eligibility requirements. Co-payment assistance is accrued for based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Product Returns: Consistent with industry practice, the Company offers the SPs and SDs limited product return rights for damages, shipment errors, and expiring product, provided that the return is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement. The Company does not allow product returns for product that has been dispensed to a patient. As the Company receives inventory reports from the SPs and SDs and has the ability to control the amount of product that is sold to the SPs and SDs, it is able to make a reasonable estimate of future potential product returns based on this on-hand channel inventory data and sell-through data obtained from the SPs and SDs. In arriving at its estimate, the Company also considers historical product returns, the underlying product demand, and industry data specific to the specialty pharmaceutical distribution industry.

In September 2019, the Company announced that the European Commission (EC) approved the marketing authorization for Epidyolex (the trade name in Europe for Epidiolex) for use as adjunctive therapy of seizures associated with Lennox‑Gastaut syndrome (LGS) or Dravet syndrome, in conjunction with clobazam, for patients two years of age and older. The Company has launched Epidyolex in Germany and the U.K. and recognizes revenue from product sales in Europe upon delivery of the product, which is the point at which control of the goods is transferred to the customer. The Company recognizes revenue net of standard discounts and allowances, which are reflected as accrued liabilities.

The Company also sells Epidiolex in certain markets outside of the United States under early access programs that enable patients to receive the product prior to regulatory approval. Revenue under early access programs is generally recognized when the product is delivered.

The total amount deducted from gross sales for the allowances described above for the three and six months ended June 30, 2020 was $31.2 million and $62.3 million, respectively. The total amount deducted from gross sales for the allowances described above for the three and six months ended June 30, 2019 was $14.5 million and $22.0 million, respectively.

Sativex Product Net Sales

Sativex is sold outside of the United States for the treatment of spasticity due to multiple sclerosis, or MS, pursuant to license agreements with commercial partners and, beginning in the first quarter of 2020, directly to customers in the U.K.

Under the license agreements, the Company sells fully labeled Sativex vials to its commercial partners for a contractually agreed price, which is generally based on percentages of the commercial partners’ in-market net selling price charged to end customers. Product net sales revenue related to Sativex shipments to commercial license partners is recognized when shipped, at which point the customer obtains control of the product.

In the U.K., the Company recognizes revenue from product sales of Sativex upon delivery of the product, which is the point at which control of the goods is transferred to the customer. The Company recognizes revenue net of standard discounts and allowances, which are reflected as accrued liabilities.

The Company also commercializes Sativex in Australia and New Zealand through a consignment relationship with a local distributor. Product net sales revenues related to Sativex sales in Australia and New Zealand are recognized when the product is sold through to the end customer.

Other Revenue

The Company’s other revenue primarily consists of research and development fee revenue and variable consideration milestone payments related to the Sativex license agreements.

The research and development fee revenue is recognized at the time the underlying services are performed.

The Sativex license agreements contain provisions for the Company to earn variable consideration in the form of regulatory milestone payments, sales-based milestone payments, and royalty payments. The Company has no further performance obligations related to the regulatory milestone payments and these amounts are recognized in accordance with Topic 606 when receipt of these payments becomes probable and there is no significant risk of revenue reversal. Revenue related to the sales-based milestone payments and product royalty payments are subject to the sales-based royalty exception under Topic 606 and is recognized when the underlying sales are made.

Research and Development Expenses

Research and development expenses are charged to operations as incurred. Research and development expenses include, among other things, internal and external costs associated with preclinical development, pre-commercialization manufacturing expenses, and clinical trials. The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial or services provided and the invoices received from its external service providers. In the case of clinical trials, a portion of the estimated cost normally relates to the projected cost to treat a patient in the trials, and this cost is recognized based on the number of patients enrolled in the trial. As actual costs become known, the Company adjusts its accruals accordingly.

Research and development expense is presented net of reimbursements from reimbursable tax and expenditure credits from the U.K. government. Reimbursable research and development tax and expenditure credits were $1.1 million and $1.9 million for the three and six months ended June 30, 2020, respectively, compared to $0.7 million and $1.5 million for the same periods in 2019.

Concentration Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, principally consist of cash, cash equivalents, and accounts receivable. The Company’s cash and cash equivalents balances are primarily in depository accounts and money market funds at major financial institutions in accordance with the Company’s investment policy. The Company’s investment policy defines allowable investments and establishes guidelines relating to credit quality, diversification, and maturities of its investments to preserve principal and maintain liquidity. Further, the Company specifies credit quality standards for its customers that are designed to limit the Company’s credit exposure to any single party.

Share-based Compensation

The Company recognizes share-based compensation expense for grants of stock options under the Company’s Long-Term Incentive Plans to employees and non-employee members of the Company’s board of directors based on the grant-date fair value of those awards. The grant-date fair value of an award is generally recognized as compensation expense over the award’s requisite service period. Expense related to awards with graded vesting is generally recognized over the vesting period using the accelerated attribution method.

Income Taxes

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities along with net operating loss and tax credit carryovers. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.

Uncertain tax positions, for which management's assessment is that there is more than a 50% probability of sustaining the position upon challenge by a taxing authority based upon its technical merits, are subjected to certain recognition and measurement criteria. The Company re-evaluates uncertain tax positions and considers various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, and changes in facts or circumstances related to a tax position. The Company adjusts the level of the liability to reflect any subsequent changes in the relevant facts and circumstances surrounding the uncertain positions. The Company recognizes interest and penalties related to income tax matters in income tax expense.

The UK Finance Act 2020, originally introduced to Parliament as Finance Bill 2019-20, received Royal Assent from Her Majesty on July 22, 2020. As a result, the main UK corporate income tax rate remains at 19% rather than the previously enacted reduction to 17%. The Company is currently evaluating the legislation and the effect of this change on its deferred tax balances; however, given the full valuation allowance currently recorded, there will be no impact to the financial statements.

On March 27, 2020, the President of the United States signed the Coronavirus Aid Relief, and Economic Securities (“CARES”) Act into law. The Act includes several significant provisions for corporations, including the usage of net operating losses, interest deductions and payroll benefits. The Company does not expect any material impact to the financial statements.

Recently Issued Accounting Standards

Accounting Standards Update (ASU) 2016-13, Measurement of Credit Losses on Financial Instruments:

In June 2016, the FASB issued ASU 2016-13, 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. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods. We adopted this guidance as of January 1, 2020. Under the current expected credit loss model, we have adopted a provision matrix approach, utilizing historical loss rates based on the number of days past due, adjusted to reflect current economic conditions and forecasts of future economic conditions. The adoption of ASU 2016-13 had an immaterial impact on the Company’s interim unaudited condensed consolidated financial statements.

ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes:

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. We have not early adopted this ASU for 2020. The ASU is currently not expected to have a material impact on our interim unaudited condensed consolidated financial statements.

Note 3: Sativex License Agreements

The Company has entered into license agreements for Sativex with major pharmaceutical companies that provide the license partners with exclusive rights in a defined geographic territory to commercialize Sativex for all indications. The Company has retained the exclusive right to manufacture and supply Sativex to license partners on commercial supply terms for the duration of the commercial life of the product. In the first quarter of 2020, the Company reacquired the rights to commercialize Sativex in the U.K. from Bayer AG for approximately $6.4 million. The Company capitalized the cost to reacquire license as an intangible asset and will amortize the asset over its five-year estimated useful life.

In 2007, the Company entered into an exclusive license agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka) for the development and commercialization of Sativex in the United States. In December 2017, the Company entered into a mutual termination agreement with Otsuka to return the rights to develop and commercialize Sativex in the United States to the Company. As part of the termination agreement, the Company agreed to pay Otsuka a contingent future milestone payment of $10 million if Sativex achieves FDA approval in the U.S. and a total of $30 million of potential sales-based milestones if U.S. sales of Sativex reach certain thresholds. As of June 30, 2020, no amounts have been accrued related to the contingent payments because it is not probable that the milestones will be achieved.

Note 4: Fair Value Measurements

At June 30, 2020 and December 31, 2019, the Company’s cash equivalents consisted of money market funds, which are classified as Level 1 within the fair value hierarchy defined by authoritative guidance.

Securities classified as Level 1 are valued using quoted market prices. The Company does not hold any securities classified as Level 2, which are securities valued using inputs that are either directly or indirectly observable, or Level 3, which are securities valued using unobservable inputs. The Company has not transferred any investment securities between the classification levels.

Note 5: Composition of Certain Balance Sheet Captions:

Inventory consisted of the following:

	June 30,		December 31,
	2020		2019
	(in thousands)
Raw materials	$	2,576	$	1,976
Work in process		86,981		78,547
Finished goods		10,063		5,005
	$	99,620	$	85,528

Property, plant and equipment, net, consisted of the following:

	June 30,	December 31,
	2020	2019
	(in thousands)
Buildings	$