mlnt-10q_20180331.htm

 

33

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2018

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: 001-35405

 

MELINTA THERAPEUTICS, INC.

(Exact name of registrant specified in its charter)

 

 

Delaware

 

2834

 

45-4440364

(State or Other Jurisdiction of
Incorporation or Organization)

 

(Primary Standard Industrial
Classification Code Number)

 

(I.R.S. Employer
Identification No.)

300 George Street, Suite 301

New Haven, CT 06511

(Address of Principal Executive Offices)

(312) 767-0291

(Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

 

Title of Each Class

 

Name of Exchange on which Registered

Common Stock, $0.001 Par Value

 

Nasdaq Global Market

Securities Registered Pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (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 May 2, 2018, there were 31,353,254 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

 

 

 


 

MELINTA THERAPEUTICS, INC.

TABLE OF CONTENTS

 

 

  

Page

PART I—FINANCIAL INFORMATION

  

1

 

 

 

Item 1.

 

Financial Statements (Unaudited)

  

1

 

 

 

 

 

Item 2.

 

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

  

24

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  

34

 

 

 

 

 

Item 4.

 

Controls and Procedures

  

34

 

 

 

 

 

PART II—OTHER INFORMATION

 

35

 

 

 

 

 

Item 1A.

 

Risk Factors

 

35

 

 

 

 

 

Item 6.

 

Exhibits

 

36

 

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

MELINTA THERAPEUTICS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

91,479

 

 

$

128,387

 

Trade receivables

 

 

11,271

 

 

 

-

 

Other receivables

 

 

11,619

 

 

 

7,564

 

Inventory

 

 

28,220

 

 

 

10,825

 

Prepaid expenses and other current assets

 

 

7,322

 

 

 

2,988

 

Total current assets

 

 

149,911

 

 

 

149,764

 

Property and equipment, net

 

 

2,276

 

 

 

1,596

 

In-process research and development

 

 

20,000

 

 

 

-

 

Other intangible assets

 

 

240,825

 

 

 

7,500

 

Goodwill

 

 

13,059

 

 

 

-

 

Other assets

 

 

22,678

 

 

 

1,413

 

Total assets

 

$

448,749

 

 

$

160,273

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

12,463

 

 

$

7,405

 

Accrued expenses

 

 

29,437

 

 

 

24,041

 

Warrant liability

 

 

9,179

 

 

 

-

 

Current deferred purchase price and contingent consideration

 

 

22,830

 

 

 

-

 

Contingent milestone payments

 

 

27,184

 

 

 

-

 

Accrued interest on notes payable

 

 

-

 

 

 

284

 

Total current liabilities

 

 

101,093

 

 

 

31,730

 

Long-term liabilities

 

 

 

 

 

 

 

 

Notes payable, net of debt discount

 

 

106,090

 

 

 

39,555

 

Deferred revenues

 

 

-

 

 

 

10,008

 

Deferred purchase price and contingent consideration

 

 

33,393

 

 

 

 

 

Other long-term liabilities

 

 

8,340

 

 

 

6,644

 

Total long-term liabilities

 

 

147,823

 

 

 

56,207

 

Total liabilities

 

 

248,916

 

 

 

87,937

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

Preferred stock; $.001 par value; 5,000,000 shares authorized; no shares issued or

   outstanding at March 31, 2018, and December 31, 2017, respectively

 

 

-

 

 

 

-

 

Common stock; $.001 par value; 80,000,000 shares authorized; 31,353,254 and 21,998,942 issued and outstanding at March 31, 2018, and December 31, 2017, respectively

 

 

31

 

 

 

22

 

Additional paid-in capital

 

 

791,885

 

 

 

644,973

 

Accumulated deficit

 

 

(592,083

)

 

 

(572,659

)

Total shareholders’ equity

 

 

199,833

 

 

 

72,336

 

Total liabilities and shareholders’ equity

 

$

448,749

 

 

$

160,273

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

1


 

MELINTA THERAPEUTICS, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Revenue

 

 

 

 

 

 

 

 

Product sales, net

 

$

11,846

 

 

$

-

 

Contract research

 

 

2,995

 

 

 

2,558

 

License

 

 

-

 

 

 

19,905

 

Total revenue

 

 

14,841

 

 

 

22,463

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

7,686

 

 

 

-

 

Research and development

 

 

16,129

 

 

 

12,917

 

Selling, general and administrative

 

 

34,624

 

 

 

7,973

 

Total operating expenses

 

 

58,439

 

 

 

20,890

 

Loss from operations

 

 

(43,598

)

 

 

1,573

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

210

 

 

 

5

 

Interest expense

 

 

(10,196

)

 

 

(1,622

)

Change in fair value of warrant liability

 

 

24,085

 

 

 

(55

)

Loss on extinguishment of debt

 

 

(2,595

)

 

 

-

 

Other income

 

 

4

 

 

 

25

 

Grant income

 

 

2,658

 

 

 

-

 

Other income (expense), net

 

 

14,166

 

 

 

(1,647

)

Net loss

 

$

(29,432

)

 

$

(74

)

Accretion to redemption value of convertible preferred stock

 

 

-

 

 

 

(5,720

)

Net loss attributable to common shareholders

 

 

(29,432

)

 

 

(5,794

)

Basic and diluted net loss per share

 

$

(0.95

)

 

$

(208.16

)

Basic and diluted weighted average shares outstanding

 

 

30,917,700

 

 

 

27,835

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

2


 

MELINTA THERAPEUTICS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(29,432

)

 

$

(74

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,805

 

 

 

114

 

Non-cash interest expense

 

 

5,954

 

 

 

1,155

 

Share-based compensation

 

 

955

 

 

 

572

 

Change in fair value of warrant liability

 

 

(24,085

)

 

 

55

 

Loss on disposal of assets

 

 

-

 

 

 

9

 

Loss on extinguishment of debt

 

 

2,595

 

 

 

-

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Receivables

 

 

(5,868

)

 

 

(2,623

)

Inventory

 

 

(2,002

)

 

 

-

 

Prepaid expenses and other current assets

 

 

(1,293

)

 

 

1,178

 

Accounts payable

 

 

3,983

 

 

 

1,342

 

Accrued expenses

 

 

(4,817

)

 

 

2,022

 

Accrued interest on notes payable

 

 

(284

)

 

 

(20

)

Deferred revenues

 

 

-

 

 

 

-

 

Other non-current assets and liabilities

 

 

(1,930

)

 

 

(165

)

Net cash (used in) provided by operating activities

 

 

(51,419

)

 

 

3,565

 

Investing activities

 

 

 

 

 

 

 

 

IDB acquisition

 

 

(166,383

)

 

 

-

 

Purchases of property and equipment

 

 

(504

)

 

 

(109

)

Net cash used in investing activities

 

 

(166,887

)

 

 

(109

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from financing (see Note 4):

 

 

 

 

 

 

 

 

Proceeds from the issuance of notes payable, net of issuance costs

 

 

104,966

 

 

 

8,010

 

Proceeds from the issuance of warrants

 

 

33,264

 

 

 

-

 

Proceeds from the issuance of royalty agreement

 

 

1,472

 

 

 

-

 

Purchase of notes payable disbursement option

 

 

(7,609

)

 

 

-

 

Proceeds from issuance of common stock, net

 

 

51,452

 

 

 

-

 

Other financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net

 

 

40,000

 

 

 

-

 

Debt extinguishment

 

 

(2,150

)

 

 

-

 

Proceeds from the exercise of stock options, net of cancellations

 

 

3

 

 

 

95

 

Principal payments on notes payable

 

 

(40,000

)

 

 

(2,844

)

Net cash provided by financing activities

 

 

181,398

 

 

 

5,261

 

Net change in cash and equivalents

 

 

(36,908

)

 

 

8,717

 

Cash, cash equivalents and restricted cash at beginning of the period

 

 

128,587

 

 

 

11,409

 

Cash, cash equivalents and restricted cash at end of the period

 

$

91,679

 

 

$

20,126

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,480

 

 

$

488

 

Supplemental non-cash flow information

 

 

 

 

 

 

 

 

Accrued purchases of fixed assets

 

$

327

 

 

$

56

 

Accrued deferred stock issuance costs

 

$

-

 

 

$

479

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

3


 

MELINTA THERAPEUTICS, INC.

March 31, 2018

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

NOTE 1 – FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements have been prepared assuming Melinta Therapeutics, Inc. (the “Company,” “we,” “us,” “our,” or “Melinta”) will continue as a going concern. We are not currently generating revenue from operations that is sufficient to cover our operating expenses and do not anticipate generating revenue sufficient to offset operating costs in the short-term. We have financed our operations to date principally through the sale of equity securities, debt financing and licensing and collaboration arrangements. Our history of operating losses, limited cash resources and lack of certainty regarding obtaining significant financing or timing thereof, raise substantial doubt about our ability to continue as a going concern absent a strengthening of our cash position. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should we be unable to continue as a going concern.

We have incurred losses from operations since our inception and had an accumulated deficit of $592,083 as of March 31, 2018. We expect to incur substantial expenses and further losses in the foreseeable future for the research, development, and commercialization of our product candidates and approved products. As a result, we will need to fund our operations through public or private equity offerings, debt financings, or corporate collaborations and licensing arrangements. We have concluded it is not probable that our current operating plans, existing cash and cash collections from existing revenue arrangements and product sales will be sufficient to fund our operations for the next 12 months.

We are currently pursuing various funding options, including seeking additional equity or debt financing, grants, and strategic collaborations or partnerships to obtain additional funding or expand our product offerings. While the recent acquisition of the Infectious Disease Business (“IDB”) from The Medicines Company (“Medicines”) does provide incremental revenues, the cost to further develop and commercialize Baxdela™ and to support the IDB products is expected to significantly exceed revenues for at least the next twelve months. While there can be no assurance that we will be successful in our efforts, we have a strong history of raising equity financing to fund our development activities. Should we be unable to obtain adequate financing in the near term, our business, result of operations, liquidity and financial condition would be materially and negatively affected, and we would be unable to continue as a going concern. Additionally, there can be no assurance that, assuming we are able to strengthen our cash position, we will achieve sufficient revenue or profitable operations to continue as a going concern.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation—The accompanying unaudited consolidated financial statements include the accounts and results of operations of Melinta and its wholly-owned subsidiaries. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The information reflects all adjustments (consisting of only normal, recurring adjustments) necessary for a fair presentation of the information. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates—The preparation of these unaudited consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Trade and Other Receivables—Trade receivables consist of amounts billed for product shipments. Receivables for product shipments are recorded as shipments are made and title to the product is transferred to the customer.

Other receivables consist of amounts billed, and amounts earned but unbilled, under our licensing agreements and our contracts with the Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services (“BARDA”). Receivables for license agreements are recorded as we achieve the requirements of the agreements, and receivables under the BARDA contracts are recorded as qualifying research activities are conducted and invoices from our vendors are received. Unbilled receivables are also recorded based upon work estimated to be complete for which we have not received vendor invoices.  

We carry our receivables less an allowance for doubtful accounts. On a periodic basis, we evaluate our receivables for collectability. We have not recorded an allowance for doubtful accounts as we believe all receivables are fully collectible.

Concentration of Credit Risk—Concentration of credit risk exists with respect to cash and cash equivalents and receivables. We maintain our cash and cash equivalents with federally insured financial institutions, and at times, the amounts may exceed the federally insured deposit limits. To date, we have not experienced any losses on our deposits of cash and cash equivalents. We believe that we are not exposed to significant credit risk due to the financial position of the depository institutions in which deposits are held.

4


 

Until we transition the management of our order-to-sales process for Vabomere™, Minocin® for injection (“Minocin”) and Orbactiv® to our third-party logistics provider in the second quarter of 2018, a significant portion of our trade receivables (74%) are due from a single customer for our products, ICS. ICS functions as our distributor for Vabomere, Minocin and Orbactiv, taking title to the products and re-selling them to the healthcare market.

Inventory—Inventory is stated at the lower of cost or estimated net realizable value. Inventory is valued on a first-in, first-out basis and consists primarily of third-party manufacturing costs, overhead—principally the cost of managing our manufacturers—and related transportation costs. We capitalize inventory upon regulatory approval when, based on our judgment, future commercialization is considered probable and future economic benefit is expected to be realized; otherwise, such costs are expensed. We review inventories on hand at least quarterly and record provisions for estimated excess, slow-moving and obsolete inventory, as well as inventory with a carrying value in excess of net realizable value. As of March 31, 2018, we had recorded no reserves for our inventory.

Fair Value of Financial Instruments—The carrying amounts of our financial instruments, which include cash and cash equivalents, trade and other receivables, accounts payable, accrued expenses, notes payable, royalty liability and common stock warrants, approximated their fair values at March 31, 2018, and December 31, 2017.

Debt Issuance Costs—Debt issuance costs represent legal and other direct costs incurred in connection with our notes payable. These costs were either recorded as debt issuance costs in the balance sheets at the time they were incurred, or as a contra-liability included in the notes payable line item, and amortized as a non-cash component of interest expense using the effective interest method over the term of the note payable.

Impairment of Long-Lived Assets—Long-lived assets consist primarily of property and equipment and intangible assets. We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. We have not recorded any significant impairment charges to date with respect to our long-lived assets.

Intangible Assets—Intangible assets consist of capitalized milestone payments for the licenses we use to make our products and the fair value of identifiable intangible assets, including in-process research and development (“IPRD”), acquired in the IDB transaction. We amortize the cost of intangible assets on a straight-line basis over the estimated economic life of each asset, generally the exclusivity period of each associated product. Amortization for IPRD does not begin until the associated product has received approval and sales have commenced.

Revenue Recognition—On January 1, 2018, we adopted Accounting Standards Update (“ASU” or “Update”) 2014-09, Revenue from Contracts with Customers (Topic 606), and all related amendments. For further information regarding the adoption of Topic 606, see the “Recently Issued and Adopted Accounting Pronouncements” section of this Note 2.  

Topic 606 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of this new revenue recognition guidance is that a company will recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Topic 606 defines the following five-step process to achieve this core principle, and in doing so, it is possible that significant judgment and estimates may be required within the revenue recognition process.  

 

1)

identify the contract(s) with a customer;

 

2)

identify the performance obligations in the contract;

 

3)

determine the transaction price;

 

4)

allocate the transaction price to the performance obligations in the contract; and

 

5)

recognize revenue when (or as) the entity satisfies a performance obligation.

The new guidance only applies the five-step model to arrangements that meet the definition of a contract under Topic 606, including the consideration of whether it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations; the assessment includes the evaluation of whether each promised good or service is distinct within the context of the contract. Under Topic 606, we recognize revenue separately for performance obligations that are “distinct.” Performance obligations are considered to be distinct if (a) the customer can benefit from the license or services either on its own or together with other resources that are readily available to the customer, and (b) our promise to transfer the license or services is separately identifiable from other promises in the contract. If a license or service is not individually distinct, we combine the license or service with other promised licenses and/or services until we identify a bundle of licenses and/or services that together are distinct.

5


 

We recognize, as revenue, the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. In determining the transaction price, we consider all forms of variable consideration, which can take various forms, including, but not limited to, prompt-pay discounts, rebates, credits, and milestone payments. We estimate variable consideration using either the “expected value” or “most likely amount” method, depending on which method better predicts the amount of consideration to which we will be entitled. The expected value method is a probability-weighted approach that considers all possible outcomes while the most likely approach uses the single most likely amount in a range of possible outcomes. We apply a variable consideration constraint to the estimated transaction price if we conclude that it is probable that there is a risk of significant reversal of revenue once the uncertainty related to the variable consideration is resolved.

Under the guidance of Topic 606, we recognize revenue for each performance obligation when the customer obtains control of the product and we have satisfied each of our respective obligations. Control is defined as the ability of the customer to direct the use of and obtain substantially all the benefits of the asset.

In addition, as of March 31, 2018, we do not have any contract assets or liabilities and our contracts do not have any significant financing components. And, we generally do not capitalize contract origination costs.  

Licensing Arrangements

We enter into license and collaboration agreements for the research and development and/or commercialization of therapeutic products. The terms of these agreements may include nonrefundable licensing fees, funding for research, development and manufacturing, milestone payments and royalties on any product sales derived from the collaborations in exchange for the delivery of licenses and rights to sell our products within specified territories outside the United States.

In the determination of whether our license and collaboration agreements are accounted for under Topic 606 or Accounting Standards Classification (“ASC”) 808, Contract Accounting, we first assess whether or not the partner in the arrangement is a customer. If the partner in the arrangement is deemed a customer as it relates to some or all of our performance obligations, then the consideration associated with those performance obligations is accounted for as revenue under Topic 606.

Our license agreements may include contingent or variable consideration based upon the achievement of regulatory- and sales-based milestones and future royalties based on a percentage of the partner’s net product sales. Performance obligations to deliver distinct licenses are recognized at a point in time. Milestone payments from licensees that are contingent and/or variable upon future regulatory events and product sales are not considered probable of being achieved until the milestones are earned and, therefore, the contingent revenue is subject to significant risk of reversal. As such, we constrain this variable consideration and do not include it in the transaction price (or recognize the revenue related to these milestones) until such time that the contingencies are resolved and generally recognized at a point in time. In addition, under the sales- or usage- based royalty exception in Topic 606, we do not estimate, at the onset of the arrangement, the variable consideration from future royalties or sales-based milestones. Instead, we wait to recognize royalty revenue until the future sales occur.

Adoption of Topic 606

We adopted Topic 606 on January 1, 2018, using the modified retrospective method applied to those contracts which were not complete as of January 1, 2018. Results for reporting periods beginning after January 1, 2018, are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with legacy U.S. GAAP under ASC 605. In our adoption of Topic 606, we did not use practical expedients. In addition, we have considered the nature, amount and timing of our different revenue sources. Accordingly, the disaggregation of revenue from contracts with customers is reflected in different captions within the condensed consolidated statement of operations. For our Eurofarma distribution arrangements under which revenue was previously deferred, revenue is now recognized at the point in time when the license is granted and has benefit to Eurofarma. These deferred revenues were originally expected to be recognized in future periods over the period of time over which we supplied Baxdela under the supply arrangement, which could have lasted up to 10 years or longer. The cumulative effect of the adoption was recognized as a decrease to opening accumulated deficit and a decrease to deferred revenue of $10,008 on January 1, 2018. The effect of the adoption of Topic 606 on our condensed consolidated balance sheet is as follows:

 

 

Balance at December 31, 2017

 

 

Adjustments Due to Topic 606

 

 

Balance at January 1, 2018

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

   Deferred revenue

$

10,008

 

 

$

(10,008

)

 

$

-

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

   Accumulated deficit

$

(572,659

)

 

$

10,008

 

 

$

(562,651

)

 

6


 

In connection with the adoption of Topic 606, we no longer recognize grant income as revenue (see Grant Income discussion below), but there was no change to the timing of historical recognition. Also, there was no change to the timing of recognition of contract revenue under our licensing agreements. However, unlike Topic 606, we believe that ASC 605 would have precluded revenue recognition for the recent launches of Baxdela and Vabomere for the initial stocking of product at wholesalers that had not sold through as of the end of the first quarter of 2018. As such, the following reflects what we believe our condensed consolidated balance sheet and condensed consolidated statement of operations would have been under ASC 605 compared to the recognition of revenue under Topic 606 as of, and for the three months ended, March 31, 2018:

 

 

Revenue Recognized

 

 

Adjustments Due to Topic 606

 

 

Pro Forma Revenue Under ASC 605

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Product sales, net

$

11,846

 

 

$

(2,218

)

 

$

9,628

 

Cost of goods sold

$

7,686

 

 

$

(1,054

)

 

$

6,632

 

Net loss

$

(29,432

)

 

$

(1,164

)

 

$

(30,596

)

Net loss per share

$

(0.95

)

 

 

 

 

 

$

(0.99

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

 

Adjustments Due to Topic 606

 

 

Pro Forma Balance Under ASC 605

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Prepaid and other current assets

$

7,322

 

 

$

1,054

 

 

$

8,376

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

$

-

 

 

$

2,218

 

 

$

2,218

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

$

(592,083

)

 

$

(1,164

)

 

$

(593,247

)

 

The table above does not reflect the reclassification of Grant income from Other income to Revenue under ASC 605. The reclassification would have no effect on net loss per share.

With respect to outstanding performance obligations, we had none as of January 1, 2018. Although we have agreements in place to supply Baxdela to our partners once they achieve regulatory approval in their respective territories, we concluded that the option to purchase Baxdela from us is not a material right because the product will not be priced at a significant discount. All performance obligations under our licensing arrangements were satisfied historically at a point in time. Variable consideration in the form of regulatory and sales-based milestones, which are payable under the terms of our licensing arrangements, has been constrained because of the risk of significant revenue reversal as in our revenue recognition policy included in Note 2.

Further, we recognize contract research revenue from Menarini as we incur the reimbursable development costs. We expect to continue these development efforts through early 2019, and we expect the related revenue to be consistent with the previous several quarters.

Product Sales

Historically, substantially all our revenue was related to licensing and contract research arrangements related to our Baxdela product, and we did not sell any products. Beginning in January of 2018, as a result of both the acquisition of IDB and the launch of Baxdela, we now distribute Baxdela, Orbactiv, Minocin and Vabomere products commercially in the United States. The majority of our product sales are made directly to wholesale customers who subsequently resell our products to hospitals or certain medical centers, as well as specialty pharmacy providers and other retail pharmacies. The wholesaler places orders with us for sufficient quantities of our products to maintain an appropriate level of inventory based on their customers’ historical purchase volumes and demand. We recognize revenue once we have transferred physical possession of the goods and the wholesaler obtains legal title to the product and accepts responsibility for all credit and collection activities with the resale customer.

In addition to distribution agreements with wholesaler customers, we enter into arrangements with health care providers and payers that provide for government mandated and/or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. The transaction price reflects the amount we expect to be entitled to in connection with the sale and transfer of control of product to our customers. Variable consideration is only included in the transaction price, to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. At the time the customer takes control of the product, which is when our performance obligation under the sales contracts is complete, we record product revenues net of applicable reserves for various types of variable consideration, most of which are subject to constraint while also considering the likelihood and the magnitude of any revenue reversal, based on our estimates of channel mix. The types of variable consideration in our product revenue are as follows:

 

Prompt pay discounts

 

Product returns

7


 

 

Chargebacks and rebates

 

Fee-for-service

 

Government rebates

 

Commercial payer rebates

 

Group Purchasing Organization (“GPO”) administration fees

 

MelintAssist voluntary patient assistance programs

In determining the amounts of certain allowances and accruals, we must make significant judgments and estimates. For example, in determining these amounts, we estimate hospital demand, buying patterns by hospitals, hospital systems and/or group purchasing organizations from wholesalers and the levels of inventory held by wholesalers and customers. Making these determinations involves analyzing third party industry data to determine whether trends in historical channel distribution patterns will predict future product sales. We receive data periodically from our wholesale customers on inventory levels and historical channel sales mix, and we consider this data when determining the amount of the allowances and accruals for variable consideration.  

The amount of variable consideration is estimated by using either of the following methods, depending on which method better predicts the amount of consideration to which we are entitled:

 

a)

The “expected value” is the sum of probability-weighted amounts in a range of possible consideration amounts. Under Topic 606, an expected value may be an appropriate estimate of the amount of variable consideration if we have many contracts with similar characteristics.

 

b)

The “most likely amount” is the single most likely amount in a range of possible consideration amounts (i.e., the single most likely outcome of the contract). Under Topic 606, the most likely amount may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes (i.e., either achieve or don’t achieve a threshold specified in a contract).

The method selected is applied consistently throughout the contract when estimating the effect of an uncertainty on an amount of variable consideration. In addition, we consider all the information (historical, current, and forecasts) that is reasonably available to us and shall identify a reasonable number of possible consideration amounts. The relevant factors used in this determination include, but are not limited to, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns.

In assessing whether a constraint is necessary, we consider both the likelihood and the magnitude of the revenue reversal. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. The specific considerations we use in estimating these amounts related to variable consideration associated with our products are as follows:

Prompt Pay Discounts – We provide wholesale customers with certain discounts if the wholesaler pays within the payment term, which is generally between 30 and 60 days. The discount percentage is reserved as a reduction of revenue in the period the related product revenue is recognized. The most likely amount methodology is used to determine the appropriate reserve that is applied, as there are only two outcomes: whether the wholesale customer takes the discount, or they do not.  

Product returns – Generally, our customers have the right to return any unopened product during the 18month period beginning six months prior to the labeled expiration date and ending 12 months after the labeled expiration date. Where historical rates of return exist, we use history as a basis to establish a returns reserve for product shipped to wholesalers. For our newly launched products, for which we currently do not have history of product returns, we estimate returns based on thirdparty industry data for comparable products in the market. As we distribute our products and establish historical sales over a longer period of time (i.e., two years), we will be able to place more reliance on historical purchasing and return patterns of our customers when evaluating our reserves for product return.

At the end of each reporting period for any of our products, we may decide to constrain revenue for product returns based on information from various sources, including channel inventory levels and dating and sell-through data, the expiration dates of product currently being shipped, price changes of competitive products and introductions of generic products. At March 31, 2018, incremental to the historically-based returns rate, we increased our returns reserve by approximately $0.3 million due to risk factors that were present in connection with the initial stocking of inventory for the launch of our new products.  

Chargebacks – Although we primarily sell products to wholesalers in the United States, we typically enter into agreements with medical centers, either directly or through GPOs acting on behalf of their hospital members, in connection with the hospitals’ purchases of products. Based on these agreements, most of our hospital customers have the right to receive a discounted price for products and volumebased rebates on product purchases. In the case of discounted pricing, we typically provide a credit to our wholesale customers (i.e., chargeback), representing the difference between the customer’s acquisition list price and the discounted price.

8


 

Feesforservice – We offer discounts and pay certain wholesalers service fees for sales order management, data, and distribution services which are explicitly stated at contractually determined rates in the customer’s contracts. In assessing if the consideration paid to the customer should be recorded as a reduction in the transaction price, we determine whether the payment is for a distinct good or service or a combination of both. Since our wholesaler fees are not specifically identifiable, we do not consider the fees separate from the wholesaler's purchase of the product. Additionally, wholesaler services generally cannot be provided by a third party. Because of these factors, the consideration paid is considered a reduction of revenue. We estimate our feeforservice accruals and allowances based on historical sales, wholesaler and distributor inventory levels and the applicable discount rate.    

Government Rebates – There are three rebate programs under various government programs that we participate in: Medicaid, TRICARE and Medicare Part D. At the time of the sale it is not known what the government rebate rate will be, but historical rates are used to estimate the current period accrual. Given that there is a range of possible consideration amounts, we use the expected value method as this is an appropriate estimate of the amount of variable consideration.

Medicaid – The Medicaid Drug Rebate Program is a program that includes The Centers for Medicare and Medicaid Services (CMS), State Medicaid agencies, and participating drug manufacturers that helps to offset the federal and state costs of most outpatient prescription drugs dispensed to Medicaid patients. The Medicaid Drug Rebate Program is jointly funded by the states and the federal government. The program reimburses hospitals, physicians, and pharmacies for providing care to qualifying recipients who cannot finance their own medical expenses.

TRICARE – TRICARE is a benefit established by law as the health care program for uniformed service members, retired service members, and their families. We must pay the Department of Defense (“DOD”) refunds for drugs entered into the normal commercial chain of transactions that end up as prescriptions given to TRICARE beneficiaries and paid for by the DOD. The refund amount is the portion of the price of the drug sold by us that exceeds the federal ceiling price. Refunds due to TRICARE are based solely on utilization of pharmaceutical agents dispensed through a TRICARE Retail Pharmacy (“TRRx”) to DOD beneficiaries.

Medicare Part D – We maintain contracts with Managed Care Organizations (“MCOs”) that administer prescription benefits for Medicare Part D. MCOs either own pharmacy benefit managers (“PBMs”) or contract with several PBMs to fulfill prescriptions for patients enrolled under their plans. As patients obtain their prescriptions, utilization data are reported to the MCOs, which generally submit claims for rebates quarterly.    

Commercial Payer Rebates – We contract with certain private payer organizations, primarily insurance companies and PBMs, for the payment of rebates with respect to utilization of Baxdela and contracted formulary status. We estimate these rebates and record reserves for such estimates in the same period the related revenue is recognized. Currently, the reserve for customer payer rebates considers future utilization based on third party studies of payer prescription data; the utilization is applied to product that remains in the distribution and retail pharmacy channel inventories at the end of each reporting period. As we distribute our products and establish historical sales over a longer period of time (i.e., two years), we will be able to place more reliance on historical data related to commercial payer rebates (i.e., actual utilization units) while continuing to rely on third party data related to payer prescriptions and utilization.

The amount of consideration to which we will be entitled is based on a range of possible consideration outcomes and, therefore, we use the expected value method as this is an appropriate estimate of the amount of variable consideration.

GPO Administration Fees – We contract with GPOs and pay administration fees related to contracting and membership management services provided. In assessing if the consideration paid to the GPO should be recorded as a reduction in the transaction price, we determine whether the payment is for a distinct good or service or a combination of both. Since our GPO fees are not specifically identifiable we do not consider the fees separate from the purchase of the product. Additionally, the GPO services generally cannot be provided by a third party. Because of these factors, the consideration paid is considered a deduction of revenue.

MelintAssist – We offer certain voluntary patient assistance programs for oral prescriptions, such as savings/co-pay cards, which are intended to provide financial assistance to qualified patients with full or partial prescription drug co-payments required by payers. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue but remains in the distribution and pharmacy channel inventories at the end of each reporting period. Given that there is a range of possible consideration amounts, we use the expected value method as this is an appropriate estimate of the amount of variable consideration.

9


 

At the end of each reporting period, we adjust our allowances for cash discounts, product returns, chargebacks, feesforservice and other rebates and discounts when believe actual experience may differ from current estimates. The following table provides a summary of activity with respect to our sales allowances and accruals during 2018:

 

 

Cash Discounts

 

 

Product Returns

 

 

Chargebacks

 

 

Fees-for-Service

 

 

MelintAssist

 

 

Government Rebates

 

 

Commercial Rebates

 

 

Admin Fee

 

Balance as of January 1, 2018

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Allowances for sales

 

328

 

 

 

817

 

 

 

2,354

 

 

 

1,003

 

 

 

440

 

 

 

350

 

 

 

483

 

 

 

177

 

Payments & credits issued

 

(76

)

 

 

(1

)

 

 

(1,295

)

 

 

(254

)

 

 

(32

)

 

 

-

 

 

 

(111

)

 

 

(15

)

Balance as of March 31, 2018

$

252

 

 

$

816

 

 

$

1,059

 

 

$

749

 

 

$

408

 

 

$

350

 

 

$

372

 

 

$

161

 

 

The allowances for cash discounts and chargebacks are recorded as contra-assets in trade receivables; the other balances are recorded in other accrued expenses.

Grant Income

We have several agreements with BARDA related to certain development costs for solithromycin and Vabomere. We concluded that BARDA is not a customer under Topic 606 because it does not engage with us in reciprocal transactions but, rather, provides contributions to our development efforts to encourage the development of more antibiotics for the welfare of society. As such, we view the income as a contribution and classify it within other income and expense, net, rather than in revenue. We recognize grant income under the BARDA contracts over time as qualifying research activities are conducted. In the first quarter of 2018, we and BARDA agreed to terminate the solithromycin BARDA contract and wind down the study, but we will continue to recognize grant income until the wind-down activities are completed later this year.

Comprehensive Loss—Comprehensive loss is equal to net loss as presented in the accompanying statements of operations.

Segment and Geographic Information—Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. We operate and manage our business as one operating segment. Although substantially all of our license and contract research revenue is generated from agreements with companies that are domiciled outside of the U.S., we do not operate outside of the U.S., nor do we have any significant assets in any foreign country. See Note 2 for further discussion of the license and contract research revenue.

Recently Issued and Adopted Accounting Pronouncements:

On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The standard outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of this new revenue recognition guidance is that a company will recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

The Financial Accounting Standards Board (“FASB”) has also issued certain clarifying guidance to Topic 606 that we have considered as follows:

 

ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), provides guidance for evaluating whether the nature of a company’s promise to the customer is to provide the underlying goods or services (i.e., the entity is the principal in the transaction) or to arrange for a third party to provide the underlying goods or services (i.e., the entity is the agent in the transaction). This update defines a specified good or service and provides guidance to help a company determine whether it controls a specified good or service before the good or service is transferred to the customer. ASU No. 2016-08 removes from the new revenue standard two of the five indicators used in the evaluation of control and reframes the remaining three indicators to help an entity determine when it is acting as a principal rather than as an agent.

 

ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, clarifies assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property.

 

ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, defines a completed contract as “a contract for which the entity has transferred all of the goods or services identified in accordance with revenue guidance that is in effect before the date of initial application.” The update also included the following clarifications or amendments to the guidance of Topic 606:

10


 

 

o

Allowed companies that elect the modified retrospective transition method to apply the guidance of Topic 606 to either: 1) all contracts, completed or not completed, or 2) only to contracts that were not completed. We elected to apply the new standard to contracts with our customers that were incomplete of January 1, 2018.

 

o

Clarified the objective of the entity’s collectability assessment (one of the five criteria of step 1 of the revenue recognition model) and provides new guidance on when an entity would recognize as revenue consideration it receives if the entity concludes that collectability is not probable.

 

o

Permitted an entity to present revenue net of sales taxes collected on behalf of governmental authorities (i.e., exclude sales taxes that meet certain criteria, from the transaction price).

 

o

Specifies that the fair value measurement date for noncash consideration to be received is the contract inception date. Subsequent changes in the fair value of noncash consideration after contract inception would be included in the transaction price as variable consideration (subject to the variable consideration constraint) only if the fair value varies for reasons other than the “form” of the consideration.  

 

ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, provides corrections or improvements to issues that affect narrow aspects of the guidance.

The new guidance provided for two transition methods, a full retrospective approach and a modified retrospective approach, and requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We utilized the modified retrospective method of adoption and recognized the cumulative effect of adoption as an adjustment to retained earnings at January 1, 2018, in the amount of $10,008, solely related to revenue that was previously deferred on a contract that has yet to be completed.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business, which narrows the definition of a business and requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, which would not constitute the acquisition of a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. We adopted this guidance as of January 1, 2018, and applied it in connection with the acquisition of IDB on January 5, 2018. The adoption did not have a material impact on our unaudited consolidated financial statements. See Note 11 Business Combinations for further information.  

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The objective of this update is to provide specific guidance on eight cash flow classification issues and reduce the existing diversity in practice, included debt prepayment and extinguishment costs, contingent consideration payments made after some business combination and proceeds from the settlement of insurance claims. We adopted this guidance on January 1, 2018, and it did not have a material impact to our unaudited consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize assets and liabilities for most leases with terms of more than 12 months on the balance sheet but recognize expense on the income statement in a manner similar to current accounting. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements and is effective for us in the first quarter of 2019. Early adoption of ASU 2016-02 is permitted. We lease certain office equipment and vehicles as well as our corporate office building in Lincolnshire, Illinois, our research and administrative facility in New Haven, Connecticut and our office facilities in Chapel Hill, North Carolina. We are evaluating the impact of ASU 2016-02, which we plan to adopt on January 1, 2019, on our unaudited consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which removes step two from the goodwill impairment test. Step two measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The new guidance requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of adoption of this ASU on our methodology for evaluating goodwill for impairment subsequent to adoption of this standard.

11


 

NOTE 3 – BALANCE SHEET COMPONENTS

Cash, Cash Equivalents and Restricted Cash—Cash, cash equivalents and restricted cash, as presented on the Consolidated Statements of Cash Flows, consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

91,479

 

 

$

128,387

 

Restricted cash (included in Other Assets)

 

 

200

 

 

 

200

 

Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows

 

$

91,679

 

 

$

128,587

 

 

Inventory—Inventory consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Raw materials

 

$

17,401

 

 

$

5,545

 

Work in process

 

 

3,240

 

 

 

181

 

Finished goods

 

 

7,579

 

 

 

5,099

 

Total inventory

 

$

28,220

 

 

$

10,825

 

 

Other Assets—Other assets consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Deerfield disbursement option

 

$

7,609

 

 

$

-

 

Long-term inventory deposits

 

 

13,291

 

 

 

-

 

VAT receivable

 

 

665

 

 

 

248

 

Research study deposit

 

 

500

 

 

 

500

 

Security deposits

 

 

413

 

 

 

465

 

Restricted cash

 

 

200

 

 

 

200

 

Total other assets

 

$

22,678

 

 

$

1,413

 

 

Accrued Expenses—Accrued expenses consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Accrued contracted services

 

$

4,038

 

 

$

5,596

 

Payroll related expenses

 

 

8,740

 

 

 

9,885

 

Professional fees

 

 

3,423

 

 

 

3,621

 

Accrued royalty payment

 

 

2,795

 

 

 

2,040

 

Accrued sales allowances

 

 

2,856

 

 

 

-

 

Accrued other

 

 

7,585

 

 

 

2,899

 

Total accrued expenses

 

$

29,437

 

 

$

24,041

 

 

Accrued contracted services are primarily comprised of amounts owed to third-party clinical research organizations and contract manufacturers for research and development work performed on behalf of Melinta, and amounts owed to third-party marketing organizations for work performed to support the commercialization and sale of our products.

Accrued payroll related expenses are primarily comprised of accrued employee termination benefits, bonus and vacation.

The amounts accrued represent our best estimate of amounts owed through period-end. Such estimates are subject to change as additional information becomes available.

 

12


 

NOTE 4 – FINANCING ARRANGEMENTS

Melinta’s outstanding debt balances consisted of the following as of March 31, 2018 and December 31, 2017:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Principal balance under loan agreements

 

$

115,268

 

 

$

40,000

 

Debt discount and deferred financing costs for loan agreements

 

 

(9,178

)

 

 

(445

)

Long-term balance under the loan agreements

 

$

106,090

 

 

$

39,555

 

2014 Loan Agreement

In December 2014, we entered into an agreement with a lender pursuant to which we borrowed an initial term loan amount of $20,000 (the “2014 Loan Agreement”). In December 2015, pursuant to the achievement of certain milestones with respect to the terms in the 2014 Loan Agreement, we borrowed an additional term loan advance in the amount of $10,000.

We were obligated to make monthly payments in arrears of interest only, at a rate of the greater of 8.25% or the sum of 8.25% plus the prime rate minus 4.5% per annum, commencing on January 1, 2015, and continuing on the first day of each successive month thereafter through and including June 1, 2016. Commencing on July 1, 2016, and continuing on the first day of each month through and including June 1, 2018, we were required to make consecutive equal monthly payments of principal and interest. All unpaid principal and accrued and unpaid interest with respect to the 2014 Loan Agreement were due and payable in full on June 1, 2018.

In June 2017, we repaid the outstanding principal under the 2014 Loan Agreement (see discussion below under 2017 Loan Agreement). In the three months ended March 31, 2017, we recognized $1,155 of interest expense related to the 2014 Loan Agreement.

2017 Loan Agreement

On May 2, 2017, we entered into a Loan and Security Agreement with a new lender (the “2017 Loan Agreement”). Under the 2017 Loan Agreement, the lender made available to us up to $80,000 in debt financing and up to $10,000 in equity financing.

The 2017 Loan Agreement bore an annual interest rate equal to the greater of 8.25% or the sum of 8.25% plus the prime rate minus 4.5%. We were also required to pay the lender an end of term fee upon the termination of the arrangement. If the outstanding principal was at or below $40,000, the 2017 Loan Agreement required interest-only monthly payments for 18 months from the funding of the first tranche, at which time we would have had the option to pay the principal due or convert the outstanding loan to an interest plus royalty-bearing note.

On June 28, 2017, we drew the first tranche of financing under the 2017 Loan Agreement, the gross proceeds of which were $30,000. We used the proceeds to retire amounts outstanding under the 2014 Loan Agreement. In August 2017, we drew the second tranche of financing, receiving $10,000. We retired the 2017 Loan Agreement in January 2018 (see discussion below).

Facility Agreement

On January 5, 2018 (the “Agreement Date”), in connection with the IDB acquisition, we entered into the Facility Agreement (the “Facility Agreement”) with affiliates of Deerfield Management Company, L.P. (collectively, “Deerfield”). Pursuant to the terms of the Facility Agreement, Deerfield agreed to loan to us $147,774 as an initial disbursement (the “Term Loan”). The Facility Agreement also provides us the right to draw from Deerfield additional disbursements up to $50,000 (the “Disbursement Option”), which may be made available upon the satisfaction of certain conditions, such as our having achieved annualized net sales of at least $75,000 during the applicable period. We agreed to pay Deerfield an upfront fee and a yield enhancement fee, both equal to 2% of the principal amount of the funds disbursed pursuant to the Facility Agreement.

The Term Loan bears interest at a rate of 11.75%, while funds distributed pursuant to the Disbursement Option will bear interest at a rate of 14.75%. We are also required to pay Deerfield an exit fee of 2% of the amount of any loans on the payment, repayment, redemption or prepayment thereof. The principal of the Term Loan must be paid by January 5, 2024. The Facility Agreement requires the outstanding principal amount of the Term Loan and any loans drawn pursuant to the Disbursement Option to be repaid in equal monthly cash amortization payments between the fourth and the sixth anniversary of the Agreement Date. The Term Loan and any loans drawn pursuant to the Disbursement Option are not permitted to be prepaid prior to January 6, 2021 under the terms of the Facility Agreement and are subject to certain prepayment fees for prepayments occurring on or after such date. In addition, the Facility Agreement allows for us to secure a revolving credit line of up to $20,000 from a different lender. Deerfield holds a first lien on all our assets, including our intellectual property, but would hold a second lien behind a revolver for working capital accounts. The Facility Agreement includes normal covenants, including periodic financial reporting and a restriction on the payment of dividends.

13


 

In connection with the Facility Agreement, we also issued 3,127,846 shares of our common stock to Deerfield at a price of $13.50 on January 5, 2018, pursuant to a Securities Purchase Agreement. We received proceeds of $42,226 from this issuance of common stock. We received total proceeds of $190,000 from the Term Loan and the issuance of common stock together.

We used these proceeds to fund the IDB acquisition, to retire the $40,000 of principal balance outstanding under our then-existing loan agreement and to fund ongoing working capital requirements and other general corporate expenses. As a result, we recognized a debt extinguishment loss of $2,595, comprised of prepayment penalties and exit fees totaling $2,150 and unamortized debt issuance costs of $445.

In connection with the Facility Agreement and the Securities Purchase Agreement, we entered into the following freestanding instruments with Deerfield as a counterparty on January 5, 2018:

 

Term Loan with stated principal of $147,774 with a 11.75% interest rate;

 

Disbursement Option for additional draw of up to $50,000;

 

3,127,846 shares of our common stock;

 

Warrants to purchase 3,792,868 shares of our common stock with a purchase price of $16.50 and expiration date of January 5, 2025 (the “Warrants”); and

 

Rights to royalty payments equal to between 2% and 3% of certain U.S. sales of Vabomere for a period of 7 years, ending on December 31, 2024, as further described below (the “Royalty Agreement”).

For accounting purposes, because there are multiple freestanding instruments within the arrangement to which we are required to assign value under U.S. GAAP, we performed a valuation to determine the allocation of the gross proceeds of $190,000 to the five financial instruments listed above. We first calculated the fair value of the warrants, and then we allocated the remaining proceeds across the other four instruments using the relative fair value approach. The relative fair values of these financial instruments, which approximated their respective fair values as of the Agreement Date, were as follows (in thousands):

 

Term Loan

 

$

111,421

 

Warrants

 

 

33,264

 

Royalty Agreement

 

 

1,472

 

Disbursement Option

 

 

(7,609

)

Common Stock Consideration

 

 

51,452

 

  Total Consideration

 

$

190,000

 

 

The terms of these instruments and the methodology and assumptions used to value each of them are discussed below.

Term Loan

The relative fair value of the term loan was estimated to be $111,421 using a discounted cash flow model. We used a risk-adjusted discount rate of 19.82%. In connection with the Facility Agreement, $6,455 of upfront term loan fees and legal debt issuance costs were paid for the total consideration received. For accounting purposes, we elected to allocate these upfront fees and costs all to the term loan, leaving a net carrying value of $104,966.    

The $6,455 of upfront fees and costs was recorded as debt discount and is being amortized as additional interest expense over the term of the loan. In addition, a 2% exit fee of $2,956 is payable as the loan principal payments are made. Therefore, total required future cash payments are $150,730 (term loan principal of $147,774 plus exit fee of $2,956). The exit fee cost is also being amortized as additional interest expense over the life of the loan. The total cost of all items (cash-based interest payments, upfront fees and costs, and the 2% exit fee) is being expensed as interest expense using an effective interest rate of 21.38%. During the first quarter of 2018, we recorded cash interest expense and term loan accretion expense of $4,196 and $1,124, respectively. Both amounts were recorded as interest expense in our statement of operations.

14


 

The accretion of the principal of the term loan and the future payments, including the 2% exit fee due at the end of the term, and excluding the 11.75% rate applied to the $147,774 note per the form of the Facility Agreement, are as follows:

 

 

 

Beginning Balance

 

 

Accretion of Interest Expense

 

 

Principal Payments and Exit Fee

 

 

Ending Balance

 

January 5 - March 31, 2018

 

$

104,966

 

 

$

1,124

 

 

$

-

 

 

$

106,090

 

April 1 - December 31, 2018

 

 

106,090

 

 

 

4,484

 

 

 

-

 

 

 

110,574

 

Year Ending December 31, 2019

 

 

110,574

 

 

 

7,040

 

 

 

-

 

 

 

117,614

 

Year Ending December 31, 2020

 

 

117,614

 

 

 

8,637

 

 

 

-

 

 

 

126,251

 

Year Ending December 31, 2021

 

 

126,251

 

 

 

10,798

 

 

 

-

 

 

 

137,049

 

Year Ending December 31, 2022

 

 

137,049

 

 

 

9,826

 

 

 

(69,085

)

 

 

77,790

 

Year Ending December 31, 2023

 

 

77,790

 

 

 

3,846

 

 

 

(75,365

)

 

 

6,271

 

Year Ending December 31, 2024

 

 

6,271

 

 

 

9

 

 

 

(6,280

)

 

 

-

 

Total

 

 

 

 

 

$

45,764

 

 

$

(150,730

)

 

 

 

 

 

Warrants

Under the terms of the Facility Agreement, we issued Warrants to Deerfield to purchase 3,792,868 shares of common stock with an exercise price of $16.50 and a term of seven years. The holders of the Warrants may exercise the Warrants for cash, on a cashless basis or through a reduction of an amount of principal outstanding under the Term Loan or any subsequent disbursements pursuant to the Disbursement Option. In connection with certain major transactions, the holders may have the option to convert the Warrants, in whole or in part, into the right to receive the transaction consideration payable upon consummation of such major transaction in respect of a number of shares of common stock of the Company equal to the Black-Scholes value of the Warrants, as defined therein, and in the case of other major transactions, the holders may have the right to exercise the Warrants, in whole or in part, for a number of shares of common stock of the Company equal to the Black-Scholes value of the Warrants.

We used the Black-Scholes option-pricing model to estimate the fair value of the Warrants, which resulted in a fair value of $33,264 on the Agreement Date. To measure the Warrants at January 5, 2018, the assumptions used in the Black-Scholes option-pricing model were: the price of the common stock on January 5, 2018, an expected life of 7 years, a risk-free interest rate of 2.39% and an expected volatility of 50.0%.

We classified the Warrants as a liability in our balance sheet and are required to remeasure the carrying value of these Warrants to fair value at each balance sheet date, with adjustments for changes in fair value recorded to other income or expense in our statements of operations. As of March 31, 2018, the fair value of the Warrants was $9,179, resulting in a gain of $24,085. To remeasure the Warrants at March 31, 2018, the assumptions used in the Black-Scholes option-pricing model were: the price of the common stock on March 31, 2018, an expected life of 6.77 years, a risk-free interest rate of 2.67% and an expected volatility of 50.0%.

Royalty Agreement  

In connection with the Facility Agreement, we entered into a Royalty Agreement with Deerfield, pursuant to which we agreed to make royalty payments equal to 3% (or 2%, following the satisfaction of all our obligations under the Facility Agreement and other loan documents) of annual U.S. sales of Vabomere exceeding $75,000 ($74,178 for 2018) and less than or equal to $500,000 for a seven-year period. To determine the fair value of the obligation under the Royalty Agreement, we applied a Monte Carlo simulation model to our revenue forecasts for Vabomere, which was discounted using an adjusted weighted average cost of capital (“WACC”). The WACC incorporated our estimated senior unsecured discount rate, our expected tax rate, and our estimated cost of equity, and then was adjusted for operational leverage.

On January 5, 2018, we estimated the fair market value of the royalty liability under the Royalty Agreement to be $1,472. Over the seven-year term, we will accrete the royalty liability using an effective interest rate of 42.88% and reduce the liability for any royalty payments made to Deerfield. During the first quarter of 2018, we recorded interest expense of $152, increasing the value of the liability to $1,624 at March 31, 2018. At the end of each quarter, we are required to prospectively revise the rate of accretion if there are any significant changes in our sales forecasts. There were no such changes in the first quarter of 2018.

Disbursement Option

The Disbursement Option allows us to draw additional funds up to $50,000 once we achieve annual net product sales of at least $75,000. The annual net sales target is measured by using the sales result for the preceding six months and multiplying by two. The disbursement must be drawn within two years from the effective date of the transaction and requires quarterly interest payments at a rate of 14.75% and requires the principal amount outstanding to be repaid in equal monthly cash amortization payments between the fourth and the sixth anniversary of the effective date of the agreement.

15


 

We calculated the fair value of the Disbursement Option using a discounted cash flow model, under which estimated cash flows were discounted using a risk-adjusted rate that aligns with the lender’s estimated credit risk to disburse the $50.0 million. We estimated the relative fair value of the Disbursement Option to be $7,609 as of the effective date of the transaction, which we recorded as a long-term asset on our balance sheet to be carried at that cost until settlement.

Common Stock Consideration

Pursuant to the terms of the Securities Purchase Agreement, we issued 3,127,846 shares of our common stock to Deerfield at a price of $13.50 on January 5, 2018. Based on our closing stock price on January 5, 2018, of $16.45, the fair value of this consideration was $51,452, which was recorded as additional paid-in capital in stockholders’ equity.

NOTE 5 – FAIR VALUE MEASUREMENTS

The following table lists our assets and liabilities that are measured at fair value and the level of inputs used to measure their fair value at March 31, 2018, and December 31, 2017. The money market fund is included in cash & cash equivalents on the balance sheet; the other items are in the captioned line of the balance sheet.

 

 

As of March 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market fund

 

$

73,977

 

 

$

-

 

 

$

-

 

 

$

73,977

 

Total assets at fair value

 

$

73,977

 

 

$

-

 

 

$

-

 

 

$

73,977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty liability in current deferred purchase price

 

$

-

 

 

$

-

 

 

$

(1,330

)

 

$

(1,330

)

Royalty liability in noncurrent deferred purchase price

 

 

-

 

 

 

-

 

 

 

(13,891

)

 

 

(13,891

)

Contingent milestone payments

 

 

-

 

 

 

-

 

 

 

(27,184

)

 

 

(27,184

)

Royalty liability in other long-term liabilities

 

 

-

 

 

 

-

 

 

 

(1,624

)

 

 

(1,624

)

Common stock warrants

 

 

-

 

 

 

-

 

 

 

(9,179

)

 

 

(9,179

)

Total liabilities at fair value

 

$

-

 

 

$

-

 

 

$

(53,208

)

 

$

(53,208

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market fund

 

$

76,777

 

 

$

-

 

 

$

-

 

 

$

76,777

 

Total assets at fair value

 

$

76,777

 

 

$

-

 

 

$

-

 

 

$

76,777

 

The common stock warrants were valued using a Black-Scholes option-pricing model and Level 3 unobservable inputs. The significant unobservable inputs include the risk-free interest rate, remaining contractual term, and expected volatility. Significant increases or decreases in any of these inputs in isolation would result in a significantly different fair value measurement. An increase in the risk-free interest rate, and/or an increase in the remaining contractual term or expected volatility, would result in an increase in the fair value of the warrants.

The following tables summarize the changes in fair value of our Level 3 assets and liabilities for the three months ended March 31, 2018:

Level 3 Liabilities

 

Fair Value at December 31, 2017

 

 

Realized Gains (Losses)

 

 

Change in Unrealized Gains (Losses)

 

 

(Issuances) Settlements

 

 

Net Transfer (In) Out of Level 3

 

 

Fair Value at March 31, 2018

 

Royalty liability in current deferred purchase price

 

$

-

 

 

$

-

 

 

$

(152

)

 

$

(1,178

)

 

$

-

 

 

$

(1,330

)

Royalty liability in noncurrent deferred purchase price

 

 

-

 

 

 

-

 

 

 

(1,475

)

 

 

(12,416

)