10-Q 1 insy-10q_20190331.htm 10-Q insy-10q_20190331.htm

Table of Contents

 

FYI

 

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, 2019

OR

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

For the transition period from __________________ to _________________

Commission file number: 001-35902

 

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 every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No   

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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

 

Title Of Each Class

 

Trading Symbol

Name Of Each Exchange On Which Registered

 

Common Stock, $0.01 Par Value Per Share

 

INSY

The Nasdaq Stock Market LLC

 

As of May 6, 2019, the registrant had 74,569,163 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

 

1

 

 

 

 

 

 

 

 

 

Item 1.

 

Unaudited Financial Statements:

 

1

 

 

 

 

 

 

 

 

 

 

 

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

 

1

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018

 

2

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Deficit for the Three Months Ended March 31, 2019 and 2018

 

3

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

5

 

 

 

 

 

 

 

 

 

Item 2.

 

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

 

35

 

 

 

 

 

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

 

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

43

 

 

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

44

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

44

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

44

 

 

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

 

 

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

45

 

 

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

45

 

 

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

45

 

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

46

 

 

 

 

 

 

 

 

 

SIGNATURES

 

47

 

 

 


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

AIDS

 

Acquired Immune Deficiency Syndrome

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

CBD

 

Synthetic cannabidiol

cGMP

 

Current Good Manufacturing Practices

CID

 

Civil Investigative Demand

CINV

 

Chemotherapy-induced nausea and vomiting

CMS

 

Centers for Medicare & Medicaid Services

CODM

 

Chief Operating Decision Maker

CRO

 

Contract Research Organization

CSA

 

Federal Controlled Substances Act of 1970

DEA

 

U.S. Drug Enforcement Administration

DOJ

 

U.S. Department of Justice

DOJ Investigations

 

HHS and HIPAA investigations, collectively

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

IQVIA

 

IQVIA Holdings Inc.  (formerly IMS Health, or “IMS”)

IRB

 

Institutional Review Board

MMA

 

Medicare Prescription Drug, Improvement, and Modernization Act of 2003

NDA

 

New Drug Application

NOL

 

Net operating loss

NRV

 

Net Realizable Value

NSAID

 

Non-steroidal anti-inflammatory drug

OIG

 

HHS Office of Inspector General

ODOJ

 

Oregon Department of Justice

 


Table of Contents

 

Orange Book

 

FDA's Approved Drug Products with Therapeutic Equivalence Evaluations

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

REMS

 

Risk Evaluation and Mitigation Strategy

Renaissance

 

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

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)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,513

 

 

$

31,552

 

Short-term investments

 

 

47,380

 

 

 

64,126

 

Accounts receivable, net

 

 

6,087

 

 

 

12,610

 

Inventories, net

 

 

7,246

 

 

 

8,608

 

Prepaid expenses and other current assets

 

 

8,501

 

 

 

9,396

 

Total current assets

 

 

105,727

 

 

 

126,292

 

Property and equipment, net

 

 

47,810

 

 

 

52,086

 

Operating lease right-of-use assets

 

 

11,036

 

 

 

 

Long-term investments

 

 

3,726

 

 

 

8,446

 

Other assets

 

 

4,301

 

 

 

5,703

 

Total assets

 

$

172,600

 

 

$

192,527

 

Liabilities and Stockholders' Deficit

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses (including accrued

  legal expenses of $56,843 and $32,625 at March 31, 2019 and

  December 31, 2018, respectively

 

$

67,095

 

 

$

50,778

 

Accrued compensation

 

 

2,640

 

 

 

6,437

 

Accrued sales allowances

 

 

7,157

 

 

 

8,162

 

Current portion of operating lease liabilities

 

 

1,839

 

 

 

 

Current portion of uncertain income tax positions

 

 

1,219

 

 

 

 

Accrued litigation award and settlements

 

 

115,265

 

 

 

41,402

 

Total current liabilities

 

 

195,215

 

 

 

106,779

 

Operating lease liabilities

 

 

12,163

 

 

 

 

Noncurrent accrued litigation awards and settlements

 

 

125,000

 

 

 

125,000

 

Uncertain income tax positions

 

 

3,861

 

 

 

3,767

 

Other noncurrent liabilities

 

 

85

 

 

 

81

 

Total liabilities

 

 

336,324

 

 

 

235,627

 

Commitments and Contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders' Deficit:

 

 

 

 

 

 

 

 

Preferred stock (par value $0.001 per share; 10,000,000 shares authorized; 0

   shares issued and outstanding as of March 31, 2019 and

   December 31, 2018, respectively)

 

 

 

 

 

 

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

   74,513,286 and 74,381,303 shares issued and outstanding as of

   March 31, 2019 and December 31, 2018, respectively)

 

 

745

 

 

 

744

 

Additional paid in capital

 

 

295,634

 

 

 

292,508

 

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

 

 

(176

)

 

 

(269

)

Accumulated deficit

 

 

(459,927

)

 

 

(336,083

)

Total stockholders' deficit

 

 

(163,724

)

 

 

(43,100

)

Total liabilities and stockholders' deficit

 

$

172,600

 

 

$

192,527

 

 

See accompanying notes to unaudited condensed consolidated financial statements. 

1


Table of Contents

 

INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2019

 

 

2018

 

 

Net revenue

 

$

7,630

 

 

$

23,911

 

 

Cost of revenue

 

 

4,575

 

 

 

2,204

 

 

Gross profit

 

 

3,055

 

 

 

21,707

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

4,119

 

 

 

9,051

 

 

Research and development

 

 

10,523

 

 

 

12,260

 

 

General and administrative

 

 

10,986

 

 

 

9,552

 

 

Legal

 

 

25,677

 

 

 

10,337

 

 

Charges related to litigation award and settlements

 

 

73,863

 

 

 

740

 

 

Total operating expenses

 

 

125,168

 

 

 

41,940

 

 

Operating loss

 

 

(122,113

)

 

 

(20,233

)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

 

423

 

 

 

503

 

 

Other expense, net

 

 

(908

)

 

 

(469

)

 

Total other income (expense)

 

 

(485

)

 

 

34

 

 

Loss before income taxes

 

 

(122,598

)

 

 

(20,199

)

 

Income tax expense

 

 

1,246

 

 

 

171

 

 

Net loss

 

 

(123,844

)

 

 

(20,370

)

 

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

   net of tax of $27 and $0

 

 

93

 

 

 

(112

)

 

Total comprehensive loss

 

$

(123,751

)

 

$

(20,482

)

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.66

)

 

$

(0.28

)

 

Diluted

 

$

(1.66

)

 

$

(0.28

)

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

 

74,426,030

 

 

 

73,745,202

 

 

Diluted

 

 

74,426,030

 

 

 

73,745,202

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

2


Table of Contents

 

INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(In thousands, except share data)

(unaudited)

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Unrealized

Gain (Loss) on

Available-

For-Sale

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Securities

 

 

Deficit

 

 

Total

 

Balance at December 31, 2018

 

 

74,381,303

 

 

$

744

 

 

$

292,508

 

 

$

(269

)

 

$

(336,083

)

 

$

(43,100

)

Exercise of stock options

 

 

4,537

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

18

 

Stock-based compensation-

   stock options, awards, and

   restricted stock units

 

 

 

 

 

 

 

 

3,109

 

 

 

 

 

 

 

 

 

3,109

 

Unrealized gain on available-for

   -sale securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

93

 

 

 

 

 

 

93

 

Vesting of restricted stock units

 

 

127,446

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(123,844

)

 

 

(123,844

)

Balance at March 31, 2019

 

 

74,513,286

 

 

$

745

 

 

$

295,634

 

 

$

(176

)

 

$

(459,927

)

 

$

(163,724

)

 

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Unrealized

Loss on

Available-

For-Sale

 

 

Notes Receivable From

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Securities

 

 

Shareholders

 

 

Deficit

 

 

Total

 

Balance at December 31, 2017

 

 

73,612,052

 

 

$

736

 

 

$

278,356

 

 

$

(438

)

 

$

(21

)

 

$

(212,424

)

 

$

66,209

 

Adoption of new accounting standard ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

848

 

 

 

848

 

Exercise of stock options

 

 

146,859

 

 

 

2

 

 

 

522

 

 

 

 

 

 

 

 

 

 

 

 

 

524

 

Stock-based compensation-

   stock options, awards, and

   restricted stock units

 

 

 

 

 

 

 

 

3,170

 

 

 

 

 

 

 

 

 

 

 

 

3,170

 

Unrealized loss on available-for

   -sale securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

(112

)

 

 

 

 

 

 

 

 

(112

)

Vesting of restricted stock units

 

 

49,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Write-off of notes receivable from stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

 

 

 

 

 

21

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,370

)

 

 

(20,370

)

Balance at March 31, 2018

 

 

73,808,821

 

 

$

738

 

 

$

282,048

 

 

$

(550

)

 

$

 

 

$

(231,946

)

 

$

50,290

 

 

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)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(123,844

)

 

$

(20,370

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

 

Inventory obsolescence reserve

 

 

2,831

 

 

 

528

 

Depreciation and amortization

 

 

1,961

 

 

 

1,938

 

Stock-based compensation

 

 

3,109

 

 

 

3,170

 

Loss on disposal of property and equipment

 

 

851

 

 

 

108

 

Impairment on property and equipment

 

 

129

 

 

 

 

Write-off of notes receivable and other assets due from stockholders

 

 

 

 

 

26

 

Non-cash operating lease expense

 

 

(34

)

 

 

 

Amortization of investment discount

 

 

(58

)

 

 

93

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

6,523

 

 

 

6,002

 

Inventories

 

 

195

 

 

 

1,035

 

Prepaid expenses and other current assets

 

 

1,633

 

 

 

(361

)

Accounts payable, accrued expenses and other current and noncurrent

   liabilities

 

 

15,968

 

 

 

(6,535

)

Accrued sales allowances

 

 

(1,005

)

 

 

(3,777

)

Accrued litigation award and settlements

 

 

75,082

 

 

 

740

 

Net cash used in operating activities

 

 

(16,659

)

 

 

(17,403

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(6,005

)

 

 

(25,394

)

Proceeds from sales of investments

 

 

 

 

 

6,880

 

Proceeds from maturities of investments

 

 

27,622

 

 

 

22,703

 

Purchases of property and equipment

 

 

(15

)

 

 

(760

)

Net cash provided by investing activities

 

 

21,602

 

 

 

3,429

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

18

 

 

 

524

 

Net cash provided by financing activities

 

 

18

 

 

 

524

 

Change in cash and cash equivalents

 

 

4,961

 

 

 

(13,450

)

Cash and cash equivalents, beginning of period

 

 

31,552

 

 

 

31,999

 

Cash and cash equivalents, end of period

 

$

36,513

 

 

$

18,549

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Cash paid (refunded) for income taxes, net

 

$

(66

)

 

$

43

 

Non-cash capital expenditures

 

$

9

 

 

$

889

 

 

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 specialty pharmaceutical company that develops and commercializes innovative drugs and novel drug delivery systems of therapeutic molecules that improve patients’ quality of life. As of March 31, 2019, we have two marketed products: SUBSYS®, a proprietary sublingual fentanyl spray indicated for the management of BTCP patients 18 years of age and older who are already receiving and are tolerant to around-the-clock opioid therapy for their underlying persistent cancer pain; and SYNDROS®, a proprietary, orally administered liquid formulation of dronabinol for the treatment of nausea and vomiting associated with cancer chemotherapy in patients who have failed to respond adequately to conventional antiemetic treatments 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 unaudited condensed consolidated financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented. Certain recurring seasonal factors relating to the commencement of a new calendar year may have an adverse effect on net revenue in the first quarter. These unaudited 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, 2018, included in our Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2019, are not necessarily indicative of results to be expected for the full fiscal year or any other periods.

The preparation of the unaudited 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 and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported period. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition (which are affected by prescriptions dispensed, wholesaler discounts, patient discount programs, rebates, returns, and chargebacks), inventories, legal liabilities and settlements, stock-based compensation expense, income taxes, 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 could materially differ from these estimates.

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

Going Concern Uncertainty

ASC Topic 205-40, Presentation of Financial Statements - Going Concern (ASC 205-40), requires management to assess the Company’s ability to continue as a going concern for one year after the date the financial statements are issued. Under ASC 205-40, management has the responsibility to evaluate whether conditions and/or events raise substantial doubt about the Company’s ability to meet future financial obligations as they become due within one year after the date that the financial statements are issued. As required by this standard, management’s evaluation shall initially not take into consideration the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued. 

As of March 31, 2019, the Company had an accumulated deficit of $459.9 million, negative cash flows of $16.7 million from operating activities for the three months ended March 31, 2019, and significant ongoing legal expenses.

While we have no outstanding debt, our available liquidity is limited to $87.6 million in cash and cash equivalents and investments as of March 31, 2019, and we expect to have continued negative cash flows from operating activities. We have experienced recurring and increasing losses from operations over the previous 18 months due to significant declines in the TIRF market and significant legal expenses resulting from the DOJ Investigation and other significant litigation matters to which we are subject (see Note 8 of the notes to our unaudited condensed consolidated financial statements for a discussion of these legal matters). We have estimated liabilities of approximately $240.3 million as of March 31, 2019 for proposed settlements of our various litigation matters, and there are other matters for which we have not been able to determine a

5


Table of Contents

 

reasonable estimated loss. Furthermore, we are uncertain if we will be able to complete a final settlement with the DOJ because of the Company’s inability to fulfill demands made by the DOJ, including the execution of a security agreement relating to the assets of the Company to collateralize payments under the settlement. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the issuance date of these unaudited condensed consolidated financial statements.

Management’s plans, in order to meet our operating cash flow requirements, include the pursuit of strategic alternatives related to the sale or licensing of the Company’s assets. On November 5, 2018, we announced that we commenced a process to review strategic alternatives for our portfolio of opioid-related assets, including SUBSYS®, as well as formulations of buprenorphine and the combination of buprenorphine/naloxone.  The Company has engaged Lazard Freres & Co. LLC to advise the Company on capital planning and the evaluation of strategic alternatives.

There are no assurances that the Company will be successful in implementing a strategic plan for the sale or licensing of its assets in order to address its impending liquidity constraints.  If the Company cannot successfully implement its strategic plan for the sale or licensing of its assets, and/or reach an agreement with the DOJ, its liquidity, financial condition and business prospects will be materially and adversely affected.  Accordingly, it may be necessary for the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring.  Our Board of Directors has not made any decisions related to any strategic alternatives at this time.

Recently Adopted Accounting Pronouncements  

Effective January 1, 2019, we adopted the requirements of ASU No. 2016-02, “Leases: (Topic 842),” and all related amendments (“new lease standard”). The core principle of the new lease standard 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. We initially applied the new lease standard at the adoption date of January 1, 2019, with no cumulative effect adjustment to retained earnings, and elected all of the practical expedients, with the exception of hindsight to determine the lease term, and combining lease and non-lease components. We have elected not to apply the recognition and measurement requirements of the new lease standard to short-term leases, which are those with terms of twelve months or less with no option or intent to purchase the underlying asset at the term of the lease. We recognize lease payments associated with short-term leases on a straight-line basis over the term of the lease. We have presented additional qualitative and quantitative disclosures regarding the Company’s lease obligations as required upon implementation of ASC 842 in Note 7, Leases, and have identified and implemented changes to our business processes and internal controls relating to implementation of the new standard. The comparative information in these condensed consolidated financial statements has not been restated and continues to be reported under ASC Topic 840, “Leases”. The new lease standard requires a lessee to measure its operating lease liabilities at the present value of the remaining minimum lease payments with a discounted cash flow model using the interest rate implicit in the lease. If the implicit interest rate cannot be readily determined, the lessee must use its incremental borrowing rate (“IBR”). If the lessee does not have an IBR, the lessee must use a rate that approximates the rate of interest that the lessee would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The implicit interest rate was not readily determinable for our operating leases; therefore, we used an IBR to measure our adoption date operating lease liabilities. As we do not have any outstanding debt, we obtained an IBR from a reputable financial institution that took into consideration our financial position, credit quality rating, the underlying asset, and the terms of our lease agreements. The rate represents our estimated borrowing rate on a secured loan collateralized by similar assets for a similar term. We measured our adoption date right-of-use (“ROU”) assets at the amount of the lease liability, adjusted for accrued lease payments and unamortized initial direct costs. On January 1, 2019, we recorded total operating lease liabilities of $14.4 million and ROU assets of $11.4 million, which included adjustments from the operating lease liabilities of $3.0 million for deferred rent. Included in the deferred rent balance of $3.0 million was tenant improvement allowances of $1.4 million. See Note 7, Leases, of the notes to our unaudited condensed consolidated financial statements for additional discussion of our leases and the amounts recognized in these unaudited condensed consolidated financial statements.

Effective January 1, 2019, we adopted 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 adoption of this guidance had no impact on our unaudited condensed consolidated financial statements.

6


Table of Contents

 

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” to improve the effectiveness of disclosures. The amendments remove, modify, and add certain disclosure requirements in Topic 820, “Fair Value Measurement.” The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. Furthermore, an entity is permitted to early adopt any removed or modified disclosures upon issuance of the update and delay adoption of the additional disclosures until their effective date. We do not expect this amendment to have a material impact 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 do not expect this amendment to have a material impact on our consolidated financial statements.

2.

Revenue Recognition

SUBSYS® was commercially launched in March 2012 and is monitored by an FDA-mandated REMS program known as the TIRF REMS. SYNDROS® was commercially launched in July 2017. We sell all of our products in the United States to our customers. See Note 11, Product Lines, Concentration of Credit Risk and Significant Customers, for information on revenues disaggregated by product line and route to market.

To determine revenue recognition for contractual arrangements that we determine are within the scope of ASC Topic 606, we perform the following five steps: (i) identify each contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to our performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the relevant performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods we transfer to the customer. We recognize revenue from the sale of our commercially approved products, SUBSYS® and SYNDROS®, when we transfer control of our products to our customers, as our contracts have a single performance obligation (delivery of our product to their preferred location). Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Any shipping and handling activities that we perform, whether before or after a customer has obtained control of the products, are considered activities to fulfill our obligation to transfer the products, and are recorded as incurred within sales and marketing expenses. We offer the following discounts to our customers:

Wholesaler and Retailer Discounts. We offer discounts to certain wholesale distributors and specialty retailers based on contractually determined rates. We record receivables due from the wholesalers and retailers net of these discounts 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 record receivables net of these cash discounts.

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 record receivables due from the wholesalers and retailers net of these discounts upon shipment to the respective wholesale distributors and retail pharmacies. The extended payment terms are not greater than 12 months and therefore do not include a financing component.

As is customary in the pharmaceutical industry, it is common for our contracts to include product sales allowances that can decrease the transaction price and are therefore considered to be variable consideration. Product sales allowances, which include product returns, patient discount programs, rebates and chargebacks, are variable consideration and are based on amounts owed or to be claimed on the related sales. We estimate variable consideration when determining the transaction price using the expected value method. We assess whether variable consideration is constrained and only include estimated amounts

7


Table of Contents

 

in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on historical data, and 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, our estimates are based on estimated utilization. If actual future results vary, we may need to adjust these estimates, which could have an effect on revenue in the period of adjustment. During the three months ended March 31, 2019, we recognized revenue of $0.5 million related to changes in the estimated transaction price allocated to performance obligations satisfied in prior periods. 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. SUBSYS® currently has a shelf life of 36 or 48 months from the date of manufacture, depending on the manufacture date, and SYNDROS® currently has a shelf life of 24 or 36 months from the date of manufacture, depending on the manufacture 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 products. Accordingly, we may have to adjust these estimates, which could have a material effect on net revenue and earnings in the period of adjustment. The allowance for product returns is included in accrued sales allowances. 

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 prescribed 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 chargebacks based on estimated wholesaler inventory levels, current contract and estimated future prices and historical chargeback activity.

We do not have any significant extended payment terms as payment is received shortly after the point of sale. As of March 31, 2019, the majority of our accounts receivables were related to product sales. For the three months ended March 31, 2019, the Company had no material bad-debt write-offs in the unaudited condensed consolidated statement of operations and comprehensive income (loss) and there were no contract assets, contract liabilities or deferred contract costs recorded on the unaudited condensed consolidated balance sheets as of March 31, 2019.   

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 Topic 320, “Investments — Debt and Equity Securities.” Investments in debt securities that are classified as available-for-sale 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

8


Table of Contents

 

securities during the three months ended March 31, 2019. 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 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 unaudited condensed consolidated statements of operations and comprehensive 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, 2019, our certificates of deposit and commercial paper as well as our marketable securities have been recorded at an estimated fair value of $3,537,000, $47,380,000, and $3,208,000 in cash and cash equivalents, short-term and long-term investments, respectively. 

Cash, cash equivalents and investments consisted of the following at March 31, 2019 (in thousands):

 

 

 

Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Other-

Than-

Temporary

Impairment

Losses

 

 

Fair

Value

 

 

Cash and

Cash

Equivalents

 

 

Short-term

Investments

 

 

Long-term

Investments

 

Cash and cash equivalents

 

$

8,716

 

 

$

 

 

$

 

 

$

 

 

$

8,716

 

 

$

8,716

 

 

$

 

 

$

 

Money market securities

 

 

24,260

 

 

 

 

 

 

 

 

 

 

 

 

24,260

 

 

 

24,260

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

9,044

 

 

 

 

 

 

 

 

 

 

 

 

9,044

 

 

 

 

 

 

8,064

 

 

 

980

 

Commercial paper

 

 

7,068

 

 

 

 

 

 

 

 

 

 

 

 

7,068

 

 

 

3,537

 

 

 

3,531

 

 

 

 

Corporate securities

 

 

20,279

 

 

 

1

 

 

 

(30

)

 

 

 

 

 

20,250

 

 

 

 

 

 

20,250

 

 

 

 

Federal agency securities

 

 

16,481

 

 

 

1

 

 

 

(69

)

 

 

 

 

 

16,413

 

 

 

 

 

 

14,185

 

 

 

2,228

 

Municipal securities

 

 

1,352

 

 

 

 

 

 

(2

)

 

 

 

 

 

1,350

 

 

 

 

 

 

1,350

 

 

 

 

Total marketable securities

 

 

54,224

 

 

 

2

 

 

 

(101

)

 

 

 

 

 

54,125

 

 

 

3,537

 

 

 

47,380

 

 

 

3,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

518

 

 

 

 

 

 

 

 

 

 

 

 

518

 

 

 

 

 

 

 

 

 

518

 

 

 

$

87,718

 

 

$

2

 

 

$

(101

)

 

$

 

 

$

87,619

 

 

$

36,513

 

 

$

47,380

 

 

$

3,726

 

 

Cash, cash equivalents and investments consisted of the following at December 31, 2018 (in thousands):

 

 

 

Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Other-

Than-

Temporary

Impairment

Losses

 

 

Fair

Value

 

 

Cash and

Cash

Equivalents

 

 

Short-term

Investments

 

 

Long-term

Investments

 

Cash and cash equivalents

 

$

18,773

 

 

$

 

 

$

 

 

$

 

 

$

18,773

 

 

$

18,773

 

 

$

 

 

$

 

Money market securities

 

 

6,389

 

 

 

 

 

 

 

 

 

 

 

 

6,389

 

 

 

6,389

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

10,967

 

 

 

 

 

 

 

 

 

 

 

 

10,967

 

 

 

 

 

 

8,437

 

 

 

2,530

 

Commercial paper

 

 

11,468

 

 

 

 

 

 

 

 

 

 

 

 

11,468

 

 

 

5,890

 

 

 

5,578

 

 

 

 

Corporate securities