10-Q 1 insy-10q_20170930.htm 10-Q insy-10q_20170930.htm

Table of Contents

 

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 September 30, 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.

 

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

As of October 27, 2017, the registrant had 73,316,650 shares of Common Stock ($0.01 par value) outstanding.

 


Table of Contents

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 September 30, 2017 and December 31, 2016

 

1

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the    Three and Nine Months Ended September 30, 2017 and 2016

 

2

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2017

 

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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

 

27

 

 

 

 

 

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

40

 

 

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

43

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

43

 

 

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

 

 

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

43

 

 

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

43

 

 

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

43

 

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

44

 

 

 

 

 

 

 

 

 

SIGNATURES

 

45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Table of Contents

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

DOJ

 

U.S. Department of Justice

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

 


Table of Contents

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

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.

Renaissance

 

Renaissance Acquisition Holdings, LLC (formerly DPT Lakewood, LLC, or “DPT”)

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

 

 

 

 


Table of Contents

PART I:  FINANCIAL INFORMATION

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,755

 

 

$

104,642

 

Short-term investments

 

 

85,891

 

 

 

78,238

 

Accounts receivable, net of allowances of $3,485 and $6,144 at September 30, 2017

  and December 31, 2016, respectively

 

 

23,249

 

 

 

20,654

 

Inventories, net

 

 

18,424

 

 

 

20,414

 

Prepaid expenses and other current assets

 

 

16,544

 

 

 

5,695

 

Total current assets

 

 

179,863

 

 

 

229,643

 

Property and equipment, net

 

 

53,931

 

 

 

43,172

 

Long-term investments

 

 

55,514

 

 

 

53,796

 

Deferred income tax assets, net

 

 

31,748

 

 

 

23,243

 

Other assets

 

 

2,030

 

 

 

6,282

 

Total assets

 

$

323,086

 

 

$

356,136

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

31,226

 

 

$

27,359

 

Accrued compensation

 

 

5,376

 

 

 

8,833

 

Accrued sales allowances

 

 

20,855

 

 

 

28,955

 

Deferred revenue

 

 

940

 

 

 

-

 

Accrued litigation award and settlements

 

 

150,500

 

 

 

13,467

 

Total current liabilities

 

 

208,897

 

 

 

78,614

 

Uncertain income tax positions

 

 

8,172

 

 

 

7,933

 

Total liabilities

 

 

217,069

 

 

 

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 September 30, 2017 and December 31, 2016, respectively)

 

 

 

 

 

 

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

   73,090,955 and 71,923,550 shares issued and outstanding as of

   September 30, 2017 and December 31, 2016, respectively)

 

 

731

 

 

 

719

 

Additional paid in capital

 

 

273,909

 

 

 

256,529

 

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

 

 

(238

)

 

 

(302

)

Notes receivable from stockholders

 

 

(21

)

 

 

(21

)

Retained earnings (accumulated deficit)

 

 

(168,364

)

 

 

12,664

 

Total stockholders' equity

 

 

106,017

 

 

 

269,589

 

Total liabilities and stockholders' equity

 

$

323,086

 

 

$

356,136

 

 

See accompanying notes to unaudited condensed consolidated financial statements. 

1


Table of Contents

INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net revenue

 

$

30,670

 

 

$

57,773

 

 

$

109,208

 

 

$

187,415

 

Cost of revenue

 

 

7,472

 

 

 

4,677

 

 

 

16,032

 

 

 

15,588

 

Gross profit

 

 

23,198

 

 

 

53,096

 

 

 

93,176

 

 

 

171,827

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

12,825

 

 

 

16,662

 

 

 

41,775

 

 

 

56,153

 

Research and development

 

 

19,552

 

 

 

16,516

 

 

 

46,589

 

 

 

58,440

 

General and administrative

 

 

15,714

 

 

 

17,653

 

 

 

47,882

 

 

 

46,275

 

Charges related to litigation award and settlements

 

 

150,850

 

 

 

 

 

 

155,300

 

 

 

 

Total operating expenses

 

 

198,941

 

 

 

50,831

 

 

 

291,546

 

 

 

160,868

 

Operating income (loss)

 

 

(175,743

)

 

 

2,265

 

 

 

(198,370

)

 

 

10,959

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

510

 

 

 

281

 

 

 

1,410

 

 

 

762

 

Other income (expense), net

 

 

(83

)

 

 

 

 

 

(44

)

 

 

44

 

Total other income

 

 

427

 

 

 

281

 

 

 

1,366

 

 

 

806

 

Income (loss) before income taxes

 

 

(175,316

)

 

 

2,546

 

 

 

(197,004

)

 

 

11,765

 

Income tax expense (benefit)

 

 

(8,996

)

 

 

(379

)

 

 

(15,976

)

 

 

523

 

Net income (loss)

 

 

(166,320

)

 

 

2,925

 

 

 

(181,028

)

 

 

11,242

 

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

 

 

13

 

 

 

(158

)

 

 

64

 

 

 

78

 

Total comprehensive income (loss)

 

$

(166,307

)

 

$

2,767

 

 

$

(180,964

)

 

$

11,320

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(2.30

)

 

$

0.04

 

 

$

(2.51

)

 

$

0.16

 

Diluted

 

$

(2.30

)

 

$

0.04

 

 

$

(2.51

)

 

$

0.15

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

72,285,146

 

 

 

71,640,536

 

 

 

72,133,417

 

 

 

71,592,145

 

Diluted

 

 

72,285,146

 

 

 

74,328,963

 

 

 

72,133,417

 

 

 

74,545,823

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

2


Table of Contents

INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In thousands, except share data)

(unaudited)

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Unrealized

Loss on

Available-

For-Sale

 

 

Notes

Receivable

From

 

 

Retained Earnings (Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Securities

 

 

Stockholders

 

 

Deficit)

 

 

Total

 

Balance at December 31, 2016

 

 

71,923,550

 

 

$

719

 

 

$

256,529

 

 

$

(302

)

 

$

(21

)

 

$

12,664

 

 

$

269,589

 

Exercise of stock options

 

 

1,050,146

 

 

 

11

 

 

 

3,539

 

 

 

 

 

 

 

 

 

 

 

 

3,550

 

Issuance of common stock-

   employee stock purchase plan

 

 

107,802

 

 

 

1

 

 

 

835

 

 

 

 

 

 

 

 

 

 

 

 

836

 

Stock-based compensation-

   stock options and awards

 

 

 

 

 

 

 

 

13,048

 

 

 

 

 

 

 

 

 

 

 

 

13,048

 

Unrealized gain on available-for

   -sale securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

64

 

 

 

 

 

 

 

 

 

64

 

Vesting of restricted stock units

 

 

14,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares withheld for future payment of employees' withholding tax liability

 

 

(4,543

)

 

 

 

 

 

(42

)

 

 

 

 

 

 

 

 

 

 

 

(42

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(181,028

)

 

 

(181,028

)

Balance at September 30, 2017

 

 

73,090,955

 

 

$

731

 

 

$

273,909

 

 

$

(238

)

 

$

(21

)

 

$

(168,364

)

 

$

106,017

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


Table of Contents

INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(181,028

)

 

$

11,242

 

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

   operating activities:

 

 

 

 

 

 

 

 

Inventory obsolescence reserve

 

 

5,543

 

 

 

3,244

 

Depreciation and amortization

 

 

5,505

 

 

 

4,534

 

Stock-based compensation

 

 

13,048

 

 

 

17,471

 

Deferred income tax benefit

 

 

(8,505

)

 

 

(6,494

)

Excess tax benefits on stock options and awards

 

 

 

 

 

(675

)

Amortization of investment discount

 

 

942

 

 

 

1,592

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,595

)

 

 

13,711

 

Inventories

 

 

705

 

 

 

3,009

 

Prepaid expenses and other current assets

 

 

(10,855

)

 

 

(662

)

Accounts payable, accrued expenses and other current liabilities

 

 

(10,117

)

 

 

(12,870

)

Deferred revenue

 

 

940

 

 

 

 

Accrued litigation award and settlements

 

 

137,033

 

 

 

 

Net cash provided by (used in) operating activities

 

 

(49,384

)

 

 

34,102

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of investments

 

 

(108,503

)

 

 

(85,482

)

Proceeds from sales of investments

 

 

22,303

 

 

 

7,146

 

Proceeds from maturities of investments

 

 

75,951

 

 

 

75,971

 

Purchases of property and equipment

 

 

(13,598

)

 

 

(7,349

)

Net cash used in investing activities

 

 

(23,847

)

 

 

(9,714

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

836

 

 

 

1,576

 

Excess tax benefits on stock options and awards

 

 

 

 

 

675

 

Shares withheld for future payment of employees' withholding tax liability

 

 

(42

)

 

 

 

Proceeds from exercise of stock options

 

 

3,550

 

 

 

3,475

 

Repurchase of common stock

 

 

 

 

 

(16,100

)

Net cash provided by (used in) financing activities

 

 

4,344

 

 

 

(10,374

)

Change in cash and cash equivalents

 

 

(68,887

)

 

 

14,014

 

Cash and cash equivalents, beginning of period

 

 

104,642

 

 

 

79,515

 

Cash and cash equivalents, end of period

 

$

35,755

 

 

$

93,529

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

1,917

 

 

$

9,254

 

Non-cash capital expenditures

 

$

2,666

 

 

$

71

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


Table of Contents

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. As of September 30, 2017, we have two marketed products: SUBSYS®, a proprietary sublingual fentanyl spray for BTCP in opioid-tolerant adult patients; and SYNDROS®, a proprietary, orally administered liquid formulation of dronabinol for the treatment of CINV and anorexia associated with weight loss in patients with AIDS.

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 and nine months ended September 30, 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, legal liabilities, 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, upon adoption, 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 nine months ended September 30, 2016.

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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 May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Specifically, the ASU requires modification accounting to a share-based payment award unless all of the following are the same immediately before and after the change: the award’s fair value; the award’s vesting conditions; and the award’s classification as an equity instrument or a liability instrument. The amendments should be applied prospectively to an award modified on or after the adoption date, and are effective for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. We are currently evaluating the impact of this amendment on our consolidated financial statements.

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.

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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.

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 our consolidated financial statements.

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

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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 and will complete our analysis by December 31, 2017. As part of our analysis, we initiated a contract review process which includes an evaluation of our performance obligations and variable consideration. Our evaluation is still ongoing; however, based on the evaluation of our current contracts and revenue stream, most will be recorded consistently under both the current and new standard. We primarily sell products and recognize revenue upon delivery to customers, at which point the earnings process is deemed to be complete. Our performance obligations are clearly identifiable and we do not anticipate significant changes to the assessment of such performance obligations or the timing of our revenue recognition upon adoption of the new standard. We believe our primary business processes are consistent with the principles contained in the ASU.  We are evaluating if any changes to those processes, our internal controls or systems are needed upon adoption of the new standard, and will complete our evaluation by December 31, 2017. We plan to adopt the new guidance on January 1, 2018, using the modified retrospective method applied to those contracts which were not completed as of that date.  Upon adoption, we will recognize the cumulative effect of adopting this guidance as an adjustment to the opening balance of accumulated deficit. We continue to evaluate the impact of the new standard on our financial statement disclosures and will complete the evaluation by December 31, 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.

2.

Revenue Recognition

We recognize revenue from the sale of SUBSYS® and SYNDROS®. 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 or 48 months from the date of manufacture, depending on the manufacture date. We record revenue for SUBSYS® at the time the customer receives the shipment.

SYNDROS® was commercially launched in July 2017. We sell SYNDROS® 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. SYNDROS® currently has a shelf life of 24 or 36 months from the date of manufacture, depending on the manufacture date. Given the limited sales history of SYNDROS®, the Company currently cannot reliably estimate expected returns of the product at the time of shipment. Accordingly, the Company defers recognition of revenue on product shipments of SYNDROS® until the right of return no longer exists, which occurs at the earlier of the time SYNDROS® units are sold to healthcare facilities or dispensed through patient prescriptions, or expiration of the right of return. Units dispensed are generally not subject to return, except in the rare cases where the product malfunctions or the product is damaged in transit. The Company estimates patient prescriptions dispensed using an analysis of third-party market research data. If this third-party data underestimates or overestimates actual patient prescriptions dispensed for a given period, adjustments to revenue may be necessary in future periods.

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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. 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 following, 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 and retailers upon shipment to the respective wholesale distributors and retail pharmacies.

Patient Discount Programs. We offer discount card programs to patients, 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 redemptions applied to inventory in the distribution and retail channels. 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. 

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 and estimated future 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

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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 and nine months ended September 30, 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.  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 September 30, 2017, our certificates of deposit and commercial paper as well as our marketable securities have been recorded at an estimated fair value of $2,996,000, $85,891,000, and $55,514,000 in cash and cash equivalents, short-term and long-term investments, respectively. 

Investments consisted of the following at September 30, 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

 

$

10,266

 

 

$

 

 

$

 

 

$

 

 

$

10,266

 

 

$

10,266

 

 

$

 

 

$

 

Money market securities

 

 

22,493

 

 

 

 

 

 

 

 

 

 

 

 

22,493

 

 

 

22,493

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

24,067

 

 

 

 

 

 

 

 

 

 

 

 

24,067

 

 

 

 

 

 

11,988

 

 

 

12,079

 

Commercial paper

 

 

10,462

 

 

 

 

 

 

 

 

 

 

 

 

10,462

 

 

 

1,498

 

 

 

8,964

 

 

 

 

Corporate securities

 

 

60,183

 

 

 

2

 

 

 

(113

)

 

 

 

 

 

60,072

 

 

 

 

 

 

38,111

 

 

 

21,961

 

Federal agency securities

 

 

36,365

 

 

 

 

 

 

(117

)

 

 

 

 

 

36,248

 

 

 

1,498

 

 

 

14,697

 

 

 

20,053

 

Municipal securities

 

 

13,562

 

 

 

1

 

 

 

(11

)

 

 

 

 

 

13,552

 

 

 

 

 

 

12,131

 

 

 

1,421

 

Total marketable securities

 

 

144,639

 

 

 

3

 

 

 

(241

)

 

 

 

 

 

144,401

 

 

 

2,996

 

 

 

85,891

 

 

 

55,514

 

 

 

$

177,398

 

 

$

3

 

 

$

(241

)

 

$

 

 

$

177,160

 

 

$

35,755

 

 

$

85,891

 

 

$

55,514

 

 

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