10-Q 1 insy-10q_20170331.htm 10-Q insy-10q_20170331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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

OR

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

For the transition period from __________________ to _________________

Commission file number: 001-35902

 

Insys Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

51-0327886

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

 

1333 S. Spectrum Blvd, Suite 100, Chandler, Arizona

85286

(Address of principal executive offices)

(Zip Code)

(480) 500-3127

(Registrant’s telephone number, including area code)

N/A

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

 

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 Date 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 the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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 revisited 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 May 2, 2017, the registrant had 72,125,321 shares of Common Stock ($0.01 par value) outstanding.

 


INSYS THERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

 

 

PAGE NO.

 

 

 

 

 

 

 

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Unaudited Financial Statements:

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

 

1

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2017 and 2016

 

2

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2017

 

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2017 and 2016

 

4

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

5

 

 

 

 

 

 

 

 

 

Item 2.

 

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

 

23

 

 

 

 

 

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

 

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

33

 

 

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

35

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

35

 

 

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

 

 

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

35

 

 

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

35

 

 

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

35

 

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

35

 

 

 

 

 

 

 

 

 

SIGNATURES

 

36

 

 

 

 

 

 

 

 

 

EXHIBIT INDEX

 

37

 

 

 


FORM 10-Q

GLOSSARY OF TERMS

The following glossary provides definitions for certain acronyms and terms used in our periodic filings with the United States Securities and Exchange Commission, including this Quarterly Report on Form 10-Q. These acronyms and terms are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our filings, including this document.

 

Abbreviated

Term

 

Defined Term

  

  

  

ANDA

 

Abbreviated New Drug Application

API

 

Active pharmaceutical ingredient

Aptar

 

AptarGroup, Inc.

ASC

 

Accounting Standards Codification

ASU

 

Accounting Standards Update

ATRA

 

American Taxpayer Relief Act of 2012

AUC

 

Area under the curve

AVC

 

Assurance of Voluntary Compliance

BTCP

 

Breakthrough cancer pain

Catalent

 

Catalent Pharma Solutions, LLC

CBD

 

Synthetic cannabidiol

cGMP

 

Current Good Manufacturing Practices

CID

 

Civil Investigative Demand

CINV

 

Chemotherapy-induced nausea and vomiting

CMS

 

Centers for Medicare & Medicaid Services

CRO

 

Contract Research Organization

CSA

 

Federal Controlled Substances Act of 1970

DEA

 

U.S. Drug Enforcement Administration

DPT

 

DPT Lakewood, LLC

ERP

 

Enterprise Resource Planning

ESI

 

Express Scripts, Inc.

FASB

 

Financial Accounting Standards Board

FDA

 

U.S. Food and Drug Administration

FDCA

 

Federal Food, Drug, and Cosmetic Act

FSS

 

Federal Supply Schedule

GAO

 

Government Accountability Office

GCP

 

Good Clinical Practices

GI

 

Gastrointestinal

GLP

 

Good Laboratory Practices

HHS

 

U.S. Department of Health and Human Services

HIPAA

 

Health Insurance Portability and Accountability Act of 1996

HITECH

 

Health Information Technology for Economic and Clinical Health Act of 2009

IND

 

Investigational New Drug Application

Insys Pharma

 

Insys Pharma, Inc.

Insys Therapeutics

 

Insys Therapeutics, Inc.

IPO

 

Initial public offering

IPR

 

Inter Partes Review

IRB

 

Institutional Review Board

MMA

 

Medicare Prescription Drug, Improvement, and Modernization Act of 2003

Mylan

 

Mylan Pharmaceuticals, Inc.

NDA

 

New Drug Application

NeoPharm

 

NeoPharm, Inc.

NOL

 

Net operating loss carryforward

NRV

 

Net Realizable Value

NSAID

 

Non-steroidal anti-inflammatory drug

Orange Book

 

FDA's Approved Drug Products with Therapeutic Equivalence Evaluations

ODOJ

 

Oregon Department of Justice

PBM

 

Pharmacy Benefit Managers

 


Abbreviated

Term

 

Defined Term

  

  

  

PDEs

 

Prescription Drug Events

PDMA

 

Prescription Drug Marketing Act

PDUFA

 

Prescription Drug User Fee Act

PK

 

Pharmacokinetics

PPACA

 

Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010

QSR

 

FDA's Quality System Regulation

QuintilesIMS

 

QuintilesIMS Holdings, Inc.

REMS

 

Risk Evaluation and Mitigation Strategy

RLD

 

Reference listed drug

SEC

 

U.S. Securities and Exchange Commission

THC

 

Delta-9-tetrahydrocannabinol

TIRF

 

Transmucosal immediate-release fentanyl

TIRF REMS

 

Transmucosal immediate release fentanyl risk evaluation and mitigation strategy

USAO

 

United States Attorney Office

U.S. GAAP

 

Accounting Principles Generally Accepted in the United States of America

USPTO

 

United States Patent and Trademark Office

VC

 

Vomiting center

 

 

 

 


PART I:  FINANCIAL INFORMATION

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

68,373

 

 

$

104,642

 

Short-term investments

 

 

86,914

 

 

 

78,238

 

Accounts receivable, net of allowances of $4,105 and $6,144 at March 31, 2017

  and December 31, 2016, respectively

 

 

13,313

 

 

 

20,654

 

Inventories, net

 

 

21,288

 

 

 

20,414

 

Prepaid expenses and other current assets

 

 

7,048

 

 

 

5,695

 

Total current assets

 

 

196,936

 

 

 

229,643

 

Property and equipment, net

 

 

46,009

 

 

 

43,172

 

Long-term investments

 

 

63,193

 

 

 

53,796

 

Deferred income tax assets, net

 

 

27,708

 

 

 

23,243

 

Other assets

 

 

3,750

 

 

 

6,282

 

Total assets

 

$

337,596

 

 

$

356,136

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

28,205

 

 

$

27,359

 

Accrued compensation

 

 

4,236

 

 

 

8,833

 

Accrued sales allowances

 

 

19,352

 

 

 

28,955

 

Accrued litigation award and settlements

 

 

10,067

 

 

 

13,467

 

Total current liabilities

 

 

61,860

 

 

 

78,614

 

Uncertain income tax position

 

 

7,950

 

 

 

7,933

 

Total liabilities

 

 

69,810

 

 

 

86,547

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Preferred stock (par value $0.01 per share; 10,000,000 shares authorized;

   0 shares issued and outstanding as of March 31, 2017 and December

   31, 2016, respectively)

 

 

 

 

 

 

Common stock (par value $0.01 per share; 100,000,000 shares authorized;

   72,114,799 and 71,923,550 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively)

 

 

721

 

 

 

719

 

Additional paid in capital

 

 

261,173

 

 

 

256,529

 

Unrealized loss on available-for-sale securities, net of tax

 

 

(227

)

 

 

(302

)

Notes receivable from stockholders

 

 

(21

)

 

 

(21

)

Retained earnings

 

 

6,140

 

 

 

12,664

 

Total stockholders' equity

 

 

267,786

 

 

 

269,589

 

Total liabilities and stockholders' equity

 

$

337,596

 

 

$

356,136

 

 

See accompanying notes to unaudited condensed consolidated financial statements. 

1


INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Net revenue

 

$

35,962

 

 

$

60,421

 

Cost of revenue

 

 

4,639

 

 

 

4,638

 

Gross profit

 

 

31,323

 

 

 

55,783

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

15,658

 

 

 

19,800

 

Research and development

 

 

12,934

 

 

 

19,035

 

General and administrative

 

 

15,042

 

 

 

14,698

 

Total operating expenses

 

 

43,634

 

 

 

53,533

 

Operating income (loss)

 

 

(12,311

)

 

 

2,250

 

Other income:

 

 

 

 

 

 

 

 

Interest income

 

 

435

 

 

 

225

 

Other income, net

 

 

26

 

 

 

49

 

Total other income

 

 

461

 

 

 

274

 

Income (loss) before income taxes

 

 

(11,850

)

 

 

2,524

 

Income tax expense (benefit)

 

 

(5,326

)

 

 

234

 

Net income (loss)

 

 

(6,524

)

 

 

2,290

 

Unrealized gain on available-for-sale securities, net of tax

 

 

75

 

 

 

166

 

Total comprehensive income (loss)

 

$

(6,449

)

 

$

2,456

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.09

)

 

$

0.03

 

Diluted

 

$

(0.09

)

 

$

0.03

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

71,945,743

 

 

 

71,592,089

 

Diluted

 

 

71,945,743

 

 

 

74,462,878

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

2


INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In thousands, except share data)

(unaudited)

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Unrealized

Gain

(Loss) on

Available-

For-Sale

 

 

Notes

Receivable

From

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Securities

 

 

Stockholders

 

 

Earnings

 

 

Total

 

Balance at December 31, 2016

 

 

71,923,550

 

 

$

719

 

 

$

256,529

 

 

$

(302

)

 

$

(21

)

 

$

12,664

 

 

$

269,589

 

Exercise of stock options

 

 

191,249

 

 

 

2

 

 

 

652

 

 

 

 

 

 

 

 

 

 

 

 

654

 

Stock based compensation-

   stock options and awards

 

 

 

 

 

 

 

 

3,992

 

 

 

 

 

 

 

 

 

 

 

 

3,992

 

Unrealized gain on available-for

   -sale securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

75

 

 

 

 

 

 

 

 

 

75

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,524

)

 

 

(6,524

)

Balance at March 31, 2017

 

 

72,114,799

 

 

$

721

 

 

$

261,173

 

 

$

(227

)

 

$

(21

)

 

$

6,140

 

 

$

267,786

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(6,524

)

 

$

2,290

 

Adjustments to reconcile net income (loss) to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,774

 

 

 

1,527

 

Stock-based compensation

 

 

3,992

 

 

 

4,126

 

Deferred income tax benefit

 

 

(4,465

)

 

 

(585

)

Excess tax benefits on stock options and awards

 

 

 

 

 

(653

)

Amortization of investment discount

 

 

347

 

 

 

569

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

7,341

 

 

 

26,609

 

Inventories

 

 

1,658

 

 

 

(1,665

)

Prepaid expenses and other current assets

 

 

(1,353

)

 

 

(104

)

Accounts payable, accrued expenses and other current liabilities

 

 

(16,039

)

 

 

(19,939

)

Accrued litigation award and settlements

 

 

(3,400

)

 

 

 

Net cash provided by (used in) operating activities

 

 

(16,669

)

 

 

12,175

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of investments

 

 

(46,510

)

 

 

(22,574

)

Proceeds from sales of investments

 

 

1,620

 

 

 

2,108

 

Proceeds from maturities of investments

 

 

26,545

 

 

 

16,607

 

Purchases of property and equipment

 

 

(1,909

)

 

 

(2,623

)

Net cash used in investing activities

 

 

(20,254

)

 

 

(6,482

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Excess tax benefits on stock options and awards

 

 

 

 

 

653

 

Proceeds from exercise of stock options

 

 

654

 

 

 

1,310

 

Repurchase of common stock

 

 

 

 

 

(13,351

)

Net cash provided by (used in) financing activities

 

 

654

 

 

 

(11,388

)

Change in cash and cash equivalents

 

 

(36,269

)

 

 

(5,695

)

Cash and cash equivalents, beginning of period

 

 

104,642

 

 

 

79,515

 

Cash and cash equivalents, end of period

 

$

68,373

 

 

$

73,820

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

14

 

 

$

 

Non-cash capital expenditures

 

$

2,702

 

 

$

140

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


INSYS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.

Nature of Business and Basis of Presentation

Insys Therapeutics, Inc., which was incorporated in Delaware in June 1990, and our subsidiaries (collectively, “we,” “us,” and “our”) maintain headquarters in Chandler, Arizona.

We are a commercial-stage specialty pharmaceutical company that develops and commercializes innovative supportive care products. We have one marketed product: SUBSYS®, a proprietary sublingual fentanyl spray for BTCP in opioid-tolerant adult patients; and one product: SYNDROS™, awaiting final labeling approval by the FDA, prior to commercial launch, after receiving FDA approval in July 2016 and DEA scheduling in March 2017.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. GAAP, pursuant to rules and regulations of the SEC. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying condensed consolidated financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2016, included in our Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2017 and 2016 are not necessarily indicative of results to be expected for the full fiscal year or any other periods.

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make a number of estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition (which is affected by prescriptions dispensed, wholesaler discounts, patient discount programs, rebates, and chargebacks), inventories, stock-based compensation expense, and deferred tax valuation allowances. We base our estimates on historical experience and on various other assumptions that are believed by management to be reasonable under the circumstances. Actual results may materially differ from these estimates.

Certain prior period amounts have been reclassified to conform with current period presentation.

All significant intercompany balances and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

Effective January 1, 2017, we adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Among other requirements, the new guidance requires all tax effects related to share-based payments at settlement (or expiration) to be recorded through the income statement. Previously, tax benefits in excess of compensation cost ("windfalls") were recorded in equity, and tax deficiencies ("shortfalls") were recorded in equity to the extent of previous windfalls, and then to the income statement. As required, this change was applied prospectively to all excess tax benefits and tax deficiencies resulting from settlements.

Under the new guidance, the windfall tax benefit is to be recorded when it arises, subject to normal valuation allowance considerations. Excess tax benefits that were not previously recognized because the related tax deduction had not reduced current taxes payable were recorded through a cumulative effect adjustment as of the date of the adoption. As required, this change was applied on a modified retrospective basis, with a cumulative effect adjustment of change in accounting principle of approximately $368,000 as a deferred tax asset with a corresponding valuation allowance of $368,000, which were offset in retained earnings. Additionally, our condensed consolidated statement of cash flows now presents excess tax benefits as an operating activity, adjusted prospectively with no adjustments made to prior periods.

Additionally, ASU No. 2016-09 addressed the presentation of employee taxes paid on the statement of cash flows. We are now required to present the cost of shares withheld from the employee to satisfy the employees’ income tax liability as a financing activity on the statement of cash flows rather than as an operating cash flow. This change was applied on a retrospective basis, as required, but did not impact the condensed consolidated statement of cash flows for the three months ended March 31, 2016.

5


ASU 2016-09 also permits entities to make an accounting policy election related to how forfeitures will impact the recognition of compensation cost for stock-based compensation to either estimate the total number of awards for which the requisite service period will not be rendered, as currently required, or to account for forfeitures as they occur. Upon adoption of ASU 2016-09, we elected to change our accounting policy to account for forfeitures as they occur. As required, this change was applied on a modified retrospective basis; however, as of December 31, 2016, we had estimated no forfeitures relating to the outstanding equity awards. As a result, no adjustment was required.

Going forward, the adoption of ASU 2016-09 could cause volatility in the effective tax rate, as the excess tax benefits associated with the exercise of stock options could generate a significant discrete income tax benefit in a particular interim period, potentially creating volatility in net income and net income per share period-to-period and period-over-period.

Effective January 1, 2017, we adopted ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Prior to January 1, 2017, we measured inventory at the lower of cost or market. This guidance requires us to measure inventory at the lower of cost and NRV, which eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

Recent Accounting Pronouncements

In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, to amend the amortization period for certain purchased callable debt securities held at a premium. The ASU shortens the amortization period for the premium to the earliest call date. Under current U.S. GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The amendments should be applied on a modified retrospective basis and are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period.  We are currently evaluating the impact of this amendment on our consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory.  Current U. S. GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party, which is an exception to the principle of comprehensive recognition of current and deferred income taxes in U. S. GAAP. The amendments in this update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments should be applied on a modified retrospective transition basis, and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact of these amendments on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments effected by this ASU affect entities required to present a statement of cash flows and provide specific guidance on a variety of cash flow issues to reduce current and potential future diversity in practice. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments should be applied using a retrospective transition method to each period presented. We are currently evaluating the impact of these amendments on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments effected by this ASU affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income and are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the timelier recognition of losses. We are currently evaluating the impact of these amendments on our consolidated financial statements.

6


In February 2016, the FASB issued ASU No. 2016-02, Leases: (Topic 842), to provide guidance on recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from all leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP guidance. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the balance sheet. The accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP guidance. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with previous U.S. GAAP guidance unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous U.S. GAAP guidance. We are currently evaluating the impact of these amendments on our consolidated financial statements and related disclosures; however, based on our current operating leases, we do not expect that the adoption of this guidance will have a material impact on the consolidated financial statements. See Note 6, Commitments and Contingencies, for information about our lease commitments.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amended the Financial Instruments topic of the ASC to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is not permitted. These amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. We are currently evaluating the impact of these amendments on our consolidated financial statements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard aims to achieve a consistent application of revenue recognition within the United States, resulting in a single revenue model to be applied by reporting companies under U.S. GAAP. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is required to be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. In March 2016 and April 2016, the FASB issued ASU No. 2016-08 and ASU No. 2016-10, respectively, which further clarified the implementation guidance on principal versus agent considerations contained in ASU No. 2014-09 and the identification of performance obligations and licensing, respectively. In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition. These standards will be effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is permitted, but not before December 15, 2016, the original effective date of the standard. We are currently analyzing ASU 2014-09, and the related ASUs, to evaluate the impact of the new standard on existing contracts with our customers. This includes reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. We initiated a contract review process during 2016 and expect to complete the contract evaluations and validate results by the end of the second quarter of 2017. We have also started evaluating our existing accounting policies and the new disclosure requirements and expect to complete our evaluation of the impacts of the accounting and disclosure requirements on our business processes, controls and systems by the end of the second quarter of 2017. Additionally, we will continue to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession and adjust our assessment and implementation plans accordingly. Full implementation will be completed by the end of 2017. We have not yet determined our selected method of transition.

7


2.

Revenue Recognition

We recognize revenue from the sale of SUBSYS®. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured.

SUBSYS® was commercially launched in March 2012 and is monitored by an FDA-mandated REMS program known as the TIRF REMS. We sell SUBSYS® in the United States to wholesale pharmaceutical distributors and directly to retail pharmacies, collectively our customers, subject to rights of return within a period beginning six months prior to, and ending 12 months following, product expiration. SUBSYS® currently has a shelf life of 36 months from the date of manufacture. We record revenue for SUBSYS® at the time the customer receives the shipment.

We recognize estimated product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements with customers and third-party payers and the levels of inventory within the distribution channels that may result in future discounts taken. In certain cases, such as patient assistance programs, we recognize the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual future results vary, we may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. Our product sales allowances include:

Product Returns. We allow customers to return product for credit beginning six months prior to, and ending 12 months following, the product expiration date. The shelf life of SUBSYS® is currently 36 months from the date of manufacture. We have monitored actual return history since product launch, which provides us with a basis to reasonably estimate future product returns, taking into consideration the shelf life of product at the time of shipment, shipment and prescription trends, estimated distribution channel inventory levels, and consideration of the introduction of competitive products.

Because of the shelf life of our products and our return policy of issuing credits on returned product that is within six months before, and up to 12 months after, the product expiration date, there may be a significant period of time between when the product is shipped and when we issue credits on returned product. Accordingly, we may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. The allowance for product returns is included in accrued sales allowances. 

Wholesaler and Retailer Discounts. We offer discounts to certain wholesale distributors and specialty retailers based on contractually determined rates. We accrue the discount as a reduction of receivables due from the wholesalers and retailers upon shipment to the respective wholesale distributors and retail pharmacies.

Prompt Pay Discounts. We offer cash discounts to our customers, generally 2% of the sales price, as an incentive for prompt payment. We account for cash discounts by reducing accounts receivable by the full amount of the discount.

Stocking Allowances.  We may offer discounts and extended payment terms, generally in the month of the initial commercial launch of a new product and on the first order made by certain wholesale distributors and retail pharmacies based on contractually determined rates. We accrue the discount as a reduction of receivables due from the wholesalers upon shipment to the respective wholesale distributors and retail pharmacies.

Patient Discount Programs. We offer discount card programs to patients for SUBSYS®, in which patients receive discounts on their prescriptions that are reimbursed by us to the retailer. We estimate the total amount that will be redeemed based on a percentage of actual redemption applied to inventory in the distribution and retail channel. The allowance for patient discount programs is included in accrued sales allowances.  

Rebates. We participate in certain rebate programs, which provide discounted prescriptions to qualified insured patients. Under these rebate programs, we pay a rebate to the third-party administrator of the program, generally two to three months after the quarter in which prescriptions subject to the rebate are filled. We estimate and accrue these rebates based on current and estimated future contract prices, historical and estimated future percentages of products sold to qualified patients and estimated levels of inventory in the distribution channel. The allowance for rebates is included in accrued sales allowances. 

8


Chargebacks. We provide discounts primarily to authorized users of the FSS of the General Services Administration under an FSS contract negotiated by the Department of Veterans Affairs and various organizations under Medicaid contracts and regulations. These organizations purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to us the difference between the current retail price and the price the organization paid for the product. We estimate and accrue chargebacks based on estimated wholesaler inventory levels, current contract prices and historical chargeback activity. Estimated chargebacks are recognized as a reduction of revenue in the same period the related revenue is recognized. The allowance for chargebacks is included as a reduction to accounts receivable. 

3.

Short-Term and Long-Term Investments 

Our policy for short-term and long-term investments is to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yield in relationship to our investment guidelines and market conditions. Short-term and long-term investments consist of corporate and various government agency and municipal debt securities, commercial paper, as well as certificates of deposit that have maturity dates that are greater than 90 days. Certificates of deposit and commercial paper are carried at cost, which approximates fair value. We classify our marketable securities as available-for-sale in accordance with FASB ASC No. 320, Investments — Debt and Equity Securities. Available-for-sale securities are carried at fair value with unrealized gains and losses reported in stockholders’ equity, net of related tax effects. There were no reclassifications on available-for-sale securities during the three months ended March 31, 2017 and 2016. A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in impairment of the fair value of the investment. We did not have any unrealized gains or losses or decline in values judged to be other than temporary during the three months ended March 31, 2017 and 2016. If we had unrealized gains and losses and declines in value judged to be other than temporary, we would have been required to include those changes in other income/expense in the condensed consolidated statements of operations and comprehensive income (loss). Premiums and discounts are amortized or accreted over the life of the related available-for-sale security. The cost of securities sold is calculated using the specific identification method. At March 31, 2017, our certificates of deposit and commercial paper as well as our marketable securities have been recorded at an estimated fair value of $5,009,000, $86,914,000, and $63,193,000 in cash and cash equivalents, short-term and long-term investments, respectively. 

Investments consisted of the following at March 31, 2017 (in thousands):

 

 

 

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Other-

Than-

Temporary

Impairment

Losses

 

 

Fair

Value

 

 

Cash and

Cash

Equivalents

 

 

Short-term

Investments

 

 

Long-term

Investments

 

Cash

 

$

28,562

 

 

$

 

 

$

 

 

$

 

 

$

28,562

 

 

$

28,562

 

 

$

 

 

$

 

Money market securities

 

 

34,802

 

 

 

 

 

 

 

 

 

 

 

 

34,802

 

 

 

34,802

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

25,919

 

 

 

 

 

 

 

 

 

 

 

 

25,919

 

 

 

 

 

 

14,055

 

 

 

11,864

 

Commercial paper

 

 

11,963

 

 

 

 

 

 

 

 

 

 

 

 

11,963

 

 

 

4,497

 

 

 

7,466

 

 

 

 

Corporate securities

 

 

53,815

 

 

 

6

 

 

 

(120

)

 

 

 

 

 

53,701

 

 

 

 

 

 

34,371

 

 

 

19,330

 

Federal agency securities

 

 

33,320

 

 

 

3

 

 

 

(94

)

 

 

 

 

 

33,229

 

 

 

 

 

 

10,502

 

 

 

22,727

 

Municipal securities

 

 

30,326

 

 

 

6

 

 

 

(28

)

 

 

 

 

 

30,304

 

 

 

512

 

 

 

20,520

 

 

 

9,272

 

Total marketable securities

 

 

155,343

 

 

 

15

 

 

 

(242

)

 

 

 

 

 

155,116

 

 

 

5,009

 

 

 

86,914

 

 

 

63,193

 

 

 

$

218,707

 

 

$

15

 

 

$

(242

)

 

$

 

 

$

218,480

 

 

$

68,373

 

 

$

86,914

 

 

$

63,193

 

 

9


Investments consisted of the following at December 31, 2016 (in thousands):

 

 

 

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Other-

Than-

Temporary

Impairment

Losses

 

 

Fair

Value

 

 

Cash and

Cash

Equivalents

 

 

Short-term

Investments

 

 

Long-term

Investments

 

Cash

 

$

49,331

 

 

$

 

 

$

 

 

$

 

 

$

49,331

 

 

$

49,331

 

 

$

 

 

$

 

Money market securities

 

 

54,015

 

 

 

 

 

 

 

 

 

 

 

 

54,015

 

 

 

54,015

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

26,114

 

 

 

 

 

 

 

 

 

 

 

 

26,114

 

 

 

 

 

 

13,855

 

 

 

12,259

 

Commercial paper

 

 

1,485

 

 

 

 

 

 

 

 

 

 

 

 

1,485

 

 

 

 

 

 

1,485

 

 

 

 

Corporate securities

 

 

39,562

 

 

 

 

 

 

(135

)

 

 

 

 

 

39,427

 

 

 

500

 

 

 

25,681

 

 

 

13,246

 

Federal agency securities

 

 

30,660

 

 

 

4

 

 

 

(92

)

 

 

 

 

 

30,572

 

 

 

 

 

 

10,854

 

 

 

19,718

 

Municipal securities

 

 

35,811

 

 

 

2

 

 

 

(81

)

 

 

 

 

 

35,732

 

 

 

796

 

 

 

26,363

 

 

 

8,573

 

Total marketable securities

 

 

133,632

 

 

 

6

 

 

 

(308

)

 

 

 

 

 

133,330

 

 

 

1,296

 

 

 

78,238

 

 

 

53,796

 

 

 

$

236,978

 

 

$

6

 

 

$

(308

)

 

$

 

 

$

236,676

 

 

$

104,642

 

 

$

78,238

 

 

$

53,796

 

 

The amortized cost and estimated fair value of the marketable securities by maturity, are shown below (in thousands):

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

Amortized

Cost

 

 

Fair

Value

 

 

Amortized

Cost

 

 

Fair

Value

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

93,976

 

 

$

93,924

 

 

$

80,092

 

 

$

80,027

 

Due after one year through 5 years

 

 

61,367

 

 

 

61,192

 

 

 

53,540

 

 

 

53,303

 

Due after 5 years through 10 years

 

 

 

 

 

 

 

 

 

 

 

 

Due after 10 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

155,343

 

 

$

155,116

 

 

$

133,632

 

 

$

133,330

 

 

The following table shows the gross unrealized losses and the fair value of our investments, with unrealized losses that are not deemed to be other-than-temporarily impaired aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

Less Than 12 Months

 

 

Greater Than 12

Months

 

 

Less Than 12 Months

 

 

Greater Than 12

Months

 

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

$

48,277

 

 

$

(120

)

 

$

 

 

$

 

 

$

38,027

 

 

$

(134

)

 

$

401

 

 

$

(1

)

Federal agency securities

 

 

26,878

 

 

 

(93

)

 

 

1,205

 

 

 

(1

)

 

 

26,449

 

 

 

(91

)

 

 

1,217

 

 

 

(1

)

Municipal securities

 

 

16,870

 

 

 

(28

)

 

 

 

 

 

 

 

 

30,373

 

 

 

(81

)

 

 

100

 

 

 

 

 

 

$

92,025

 

 

$

(241

)

 

$

1,205

 

 

$

(1

)

 

$

94,849

 

 

$

(306

)

 

$

1,718

 

 

$

(2

)

 

As of March 31, 2017 and 2016, we have concluded that all the unrealized losses on our marketable securities are temporary in nature. Marketable securities are reviewed quarterly for possible other-than-temporary impairment. This review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the expectation for that security’s performance and the creditworthiness of the issuer. Additionally, we do not intend to sell, and it is not probable that we will be required to sell, any of the securities before the recovery of their amortized cost basis.

 

10


4.

Fair Value Measurement

FASB ASC No. 820, “Fair Value Measurement,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1:

Observable inputs such as quoted prices in active markets;

 

Level 2:

Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3:

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

At March 31, 2017 and December 31, 2016, we held short-term and long-term investments, as discussed in Note 3, that are required to be measured at fair value on a recurring basis. All available-for-sale investments held by us at March 31, 2017 and December 31, 2016 have been valued based on Level 2 inputs. Available-for-sale securities classified within Level 2 of the fair value hierarchy are valued utilizing reports from an independent third-party public quotation service based on closing prices on the last business day of the period presented.  In addition, we use the public quotation service to perform price testing by comparing quoted prices listed in reports provided by the asset managers that hold our investments to quotes listed through the public quotation service. These asset managers utilize an independent pricing source to obtain quotes for most fixed income securities and utilize internal procedures to validate the prices obtained. Our Level 3 asset represents our investment in a long-term corporate convertible promissory note and a warrant to purchase shares issued in connection with the convertible promissory note, which converted to convertible preferred stock on December 30, 2016. This stock is not listed on any security exchange. The fair value of the preferred stock approximates its carrying value at March 31, 2017 and December 31, 2016.

Our investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 at March 31, 2017 were as follows (in thousands):

 

 

 

Fair Value Measurement at Reporting Date

 

 

 

Total

 

 

Quoted Prices