mlnt-10q_20180630.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 June 30, 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)

(908) 617-1309

(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 August 3, 2018, there were 56,010,254 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

  

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  

36

 

 

 

 

 

Item 4.

 

Controls and Procedures

  

36

 

 

 

 

 

PART II—OTHER INFORMATION

 

37

 

 

 

 

 

Item 1A.

 

Risk Factors

 

37

 

 

 

 

 

Item 6.

 

Exhibits

 

38

 

 

 

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)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

150,087

 

 

$

128,387

 

Trade receivables

 

 

8,064

 

 

 

-

 

Other receivables

 

 

12,546

 

 

 

7,564

 

Inventory

 

 

33,960

 

 

 

10,825

 

Prepaid expenses and other current assets

 

 

5,510

 

 

 

2,988

 

Total current assets

 

 

210,167

 

 

 

149,764

 

Property and equipment, net

 

 

2,459

 

 

 

1,596

 

In-process research and development

 

 

19,859

 

 

 

-

 

Other intangible assets

 

 

221,877

 

 

 

7,500

 

Goodwill

 

 

17,614

 

 

 

-

 

Other assets

 

 

42,671

 

 

 

1,413

 

Total assets

 

$

514,647

 

 

$

160,273

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

13,352

 

 

$

7,405

 

Accrued expenses

 

 

31,386

 

 

 

24,041

 

Warrant liability

 

 

6,790

 

 

 

-

 

Current deferred purchase price and contingent consideration

 

 

23,925

 

 

 

-

 

Contingent milestone payments

 

 

27,052

 

 

 

-

 

Accrued interest on notes payable

 

 

4,389

 

 

 

284

 

Total current liabilities

 

 

106,894

 

 

 

31,730

 

Long-term liabilities

 

 

 

 

 

 

 

 

Notes payable, net of debt discount

 

 

107,463

 

 

 

39,555

 

Deferred revenues

 

 

-

 

 

 

10,008

 

Deferred purchase price and contingent consideration

 

 

31,289

 

 

 

 

 

Other long-term liabilities

 

 

8,027

 

 

 

6,644

 

Total long-term liabilities

 

 

146,779

 

 

 

56,207

 

Total liabilities

 

 

253,673

 

 

 

87,937

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

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

   outstanding at June 30, 2018, and December 31, 2017, respectively

 

 

-

 

 

 

-

 

Common stock; $.001 par value; 80,000,000 shares authorized; 56,010,254

   and 21,998,942 issued and outstanding at June 30, 2018, and

   December 31, 2017, respectively

 

 

56

 

 

 

22

 

Additional paid-in capital

 

 

908,781

 

 

 

644,973

 

Accumulated deficit

 

 

(647,863

)

 

 

(572,659

)

Total shareholders’ equity

 

 

260,974

 

 

 

72,336

 

Total liabilities and shareholders’ equity

 

$

514,647

 

 

$

160,273

 

 

 

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

1


 

MELINTA THERAPEUTICS, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales, net

 

$

9,152

 

 

$

-

 

 

$

20,998

 

 

$

-

 

Contract research

 

 

2,870

 

 

 

3,979

 

 

 

5,865

 

 

 

6,538

 

License

 

 

-

 

 

 

-

 

 

 

-

 

 

 

19,905

 

Total revenue

 

 

12,022

 

 

 

3,979

 

 

 

26,863

 

 

 

26,443

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

10,989

 

 

 

-

 

 

 

18,675

 

 

 

-

 

Research and development

 

 

15,813

 

 

 

14,075

 

 

 

31,942

 

 

 

26,992

 

Selling, general and administrative

 

 

34,946

 

 

 

7,699

 

 

 

69,570

 

 

 

15,672

 

Total operating expenses

 

 

61,748

 

 

 

21,774

 

 

 

120,187

 

 

 

42,664

 

Loss from operations

 

 

(49,726

)

 

 

(17,795

)

 

 

(93,324

)

 

 

(16,221

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

63

 

 

 

12

 

 

 

273

 

 

 

18

 

Interest expense

 

 

(10,659

)

 

 

(1,762

)

 

 

(20,855

)

 

 

(3,384

)

Change in fair value of warrant liability

 

 

2,389

 

 

 

(311

)

 

 

26,474

 

 

 

(366

)

Loss on extinguishment of debt

 

 

-

 

 

 

(607

)

 

 

(2,595

)

 

 

(607

)

Other income

 

 

32

 

 

 

37

 

 

 

36

 

 

 

61

 

Grant income

 

 

2,121

 

 

 

-

 

 

 

4,779

 

 

 

-

 

Other income (expense), net

 

 

(6,054

)

 

 

(2,631

)

 

 

8,112

 

 

 

(4,278

)

Net loss

 

$

(55,780

)

 

$

(20,426

)

 

$

(85,212

)

 

$

(20,499

)

Accretion to redemption value of convertible preferred

   stock

 

 

-

 

 

 

(5,721

)

 

 

 

 

 

 

(11,441

)

Net loss attributable to common shareholders

 

 

(55,780

)

 

 

(26,147

)

 

 

(85,212

)

 

 

(31,940

)

Basic and diluted net loss per share

 

$

(1.38

)

 

$

(884.09

)

 

$

(2.39

)

 

$

(1,112.50

)

Basic and diluted weighted average shares outstanding

 

 

40,297,364

 

 

 

29,575

 

 

 

35,633,443

 

 

 

28,710

 

 

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

2


 

MELINTA THERAPEUTICS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(85,212

)

 

$

(20,499

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,494

 

 

 

221

 

Non-cash interest expense

 

 

12,225

 

 

 

2,498

 

Share-based compensation

 

 

2,373

 

 

 

1,080

 

Change in fair value of warrant liability

 

 

(26,474

)

 

 

366

 

Loss on disposal of assets

 

 

-

 

 

 

42

 

Loss on extinguishment of debt

 

 

2,595

 

 

 

607

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Receivables

 

 

(3,169

)

 

 

(3,825

)

Inventory

 

 

(2,096

)

 

 

(551

)

Prepaid expenses and other current assets

 

 

519

 

 

 

634

 

Accounts payable

 

 

4,632

 

 

 

3,435

 

Accrued expenses

 

 

(1,323

)

 

 

2,218

 

Accrued interest on notes payable

 

 

4,105

 

 

 

(153

)

Deferred revenues

 

 

-

 

 

 

-

 

Other non-current assets and liabilities

 

 

(22,418

)

 

 

(508

)

Net cash used in operating activities

 

 

(105,749

)

 

 

(14,435

)

Investing activities

 

 

 

 

 

 

 

 

IDB acquisition

 

 

(166,383

)

 

 

-

 

Purchases of intangible assets

 

 

(2,000

)

 

 

(2,000

)

Purchases of property and equipment

 

 

(927

)

 

 

(593

)

Net cash used in investing activities

 

 

(169,310

)

 

 

(2,593

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from financing (see Note 4):

 

 

 

 

 

 

 

 

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

 

 

104,966

 

 

 

30,000

 

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, to lender

 

 

51,452

 

 

 

-

 

Other financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net

 

 

155,759

 

 

 

-

 

Proceeds from the issuance of convertible notes payable

 

 

-

 

 

 

24,526

 

Debt extinguishment

 

 

(2,150

)

 

 

(1,240

)

IDB acquisition contingent payments

 

 

(398

)

 

 

-

 

Proceeds from the exercise of stock options, net of cancellations

 

 

3

 

 

 

95

 

Principal payments on notes payable

 

 

(40,000

)

 

 

(24,503

)

Net cash provided by financing activities

 

 

296,759

 

 

 

28,878

 

Net change in cash and equivalents

 

 

21,700

 

 

 

11,850

 

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

 

$

150,287

 

 

$

23,259

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,480

 

 

$

1,867

 

Supplemental non-cash flow information:

 

 

 

 

 

 

 

 

Accrued payments for intangible assets

 

$

-

 

 

$

5,500

 

Accrued purchases of fixed assets

 

$

366

 

 

$

112

 

Accrued notes payable issuance costs

 

$

-

 

 

$

1,028

 

 

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

3


 

MELINTA THERAPEUTICS, INC.

June 30, 2018

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

NOTE 1 – FINANCIAL STATEMENTS

The accompanying unaudited condensed 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 incurred losses from operations since our inception and had an accumulated deficit of $647,863 as of June 30, 2018, and we expect to incur substantial expenses and further losses in the short term for the research, development, and commercialization of our product candidates and approved products. Our future cash flows are dependent on key variables such as our success with out-licensing products in our portfolio, our ability to access additional debt capital under our Deerfield Facility or the working capital revolver allowed under the Deerfield Facility and, most notably, the level of sales achievement of our four marketed products. Our current operation plans include assumptions about our projected levels of sales growth in the next 12 months in relation to our planned operating expenses. Revenue projections are inherently uncertain but have a higher degree of uncertainty in an early-stage commercial launch, which we have in Baxdela and Vabomere, where there is not yet a demonstrated sales history. While we are confident in achieving the current expected sales levels of our products, including those of our early-stage commercial products, in relation to our operating spend, we are unable to conclude based on applying the requirements of FASB Accounting Standards Codification 205-40, Presentation of Financial Statements – Going Concern that it is probable (as defined under this accounting standard) that the actions discussed below will be effective in mitigating the risk that our current operating plans, existing cash and cash collections from existing revenue arrangements and product sales may not be sufficient to fund our operations for the next 12 months. As such, we believe there is substantial doubt about our ability to continue as a going concern. 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.

 In May 2018, the Company successfully completed a follow-on offering in which we raised proceeds, net of issuance costs, of $115,300.  In addition to our focus on the successful continued commercialization of our four marketed products, we are currently in discussions with several parties to out-license certain products which would increase our license revenues. And, if needed, we also plan to access additional capacity under our existing Deerfield Facility, where we can draw an additional $50,000 dependent on the achievement of certain sales milestones.  We also plan to put a working capital revolver in place for up to $20,000 that would provide additional funding to Melinta under the Deerfield Facility if needed, which is subject to certain conditions.   Finally, if our cash collections from revenue arrangements, including product sales, and other financing sources are not sufficient, we also plan to control spending and would take actions to adjust the spending level for operations if required.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation—The accompanying unaudited condensed consolidated financial statements include the accounts and results of operations of Melinta and its wholly-owned subsidiaries. The condensed 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 condensed 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 net of 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.

4


 

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.

A significant portion of our trade receivables is due from three large wholesaler customers for our products, which constitute 34%, 30% and 23%, respectively, of our trade receivable balance at June 30, 2018.

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.

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 June 30, 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 recorded as debt issuance costs in the balance sheets  and amortized as a non-cash component of interest expense using the effective interest method over the term of the note payable.

Long-Lived Assets—Long-lived assets consist primarily of property and equipment and intangible assets with a definite life. 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. If impairment indicators are present, we assess whether the future estimated undiscounted cash flows attributable to the assets in question are greater than their carrying amounts. If these future estimated cash flows are less than carrying value, we then measure an impairment loss for the amount that carrying value exceeds fair value of the assets. We have not recorded any significant impairment charges to date with respect to our long-lived assets.

Amortization of intangible assets was $3.5 million and $8.2 million for the three and six months ended June 30, 2018, respectively. Based on the intangible asset balances as of June 30, 2018, amortization expense is expected to be approximately $8.5 million for the remaining six months of 2018 and $17.0 million in each of the years 2019 through 2022.

Goodwill and 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 (“IPR&D”), acquired in the IDB transaction. Given the uncertainty of forecasts of future revenue for our products, 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 IPR&D does not begin until the associated product has received approval and sales have commenced.

Goodwill and indefinite-lived assets, including IPR&D, are not amortized, but are subject to an impairment review annually and more frequently when indicators of impairment exist. An impairment of goodwill could occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. An impairment of indefinite-lived intangible assets would occur if the fair value of the intangible asset is less than the carrying value.

The Company tests its goodwill, IPR&D and indefinite-lived assets for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. If the Company concludes it is more likely than not that the fair value of the asset under review is less than its carrying amount, a quantitative impairment test is performed. For its quantitative impairment tests, the Company uses both and income and market approach. The income approach involves an estimate of future cash flows are based on internal projection models, industry projections and other assumptions deemed reasonable by management. The market approach utilizes analysis of recent sales, offerings, and financial multiples of comparable businesses. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the assets and potentially result in different impacts to the Company's results of operations. Actual results may differ from the company's estimates.

Revenue Recognition—On January 1, 2018, we adopted Accounting Standards Update (“ASU”) 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;

5


 

 

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.

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 June 30, 2018, we do not have any contract assets or liabilities and our contracts do not have any significant financing components. And, we have not capitalized 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

6


 

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

)

 

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 reporting period. 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 and six months ended, June 30, 2018:

 

 

Three Months Ended June 30, 2018

 

 

Revenue

Recognized

 

 

Adjustments Due to

Topic 606

 

 

Pro Forma Balance

Under ASC 605

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Product sales, net

$

9,152

 

 

$

(442

)

 

$

8,710

 

Cost of goods sold

$

10,989

 

 

$

(394

)

 

$

10,595

 

Net loss

$

(55,780

)

 

$

(48

)

 

$

(55,828

)

Net loss per share

$

(1.38

)

 

 

 

 

 

$

(1.39

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

 

Revenue

Recognized

 

 

Adjustments Due to

Topic 606

 

 

Pro Forma Balance

Under ASC 605

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Product sales, net

$

20,998

 

 

$

(2,660

)

 

$

18,338

 

Cost of goods sold

$

18,675

 

 

$

(1,448

)

 

$

17,227

 

Net loss

$

(85,212

)

 

$

(1,212

)

 

$

(86,424

)

Net loss per share

$

(2.39

)

 

 

 

 

 

$

(2.43

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June

30, 2018

 

 

Adjustments Due to

Topic 606

 

 

Pro Forma Balance

Under ASC 605

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Prepaid and other current assets

$

5,510

 

 

$

1,448

 

 

$

6,958

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

$

-

 

 

$

10,008

 

 

$

10,008

 

Shareholders' equity:

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

$

(647,863

)

 

$

(1,212

)

 

$

(649,075

)

 

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.

We have no outstanding performance obligations,  as of June 30, 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 this 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, although we expect the related revenue to decline through that timeframe, as the associated development effort winds down.

7


 

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, Vabomere, Orbactiv®, and Minocin® products commercially in the United States. While we sell some of our products directly to certain hospitals and clinics, the majority of our product sales are made 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, we enter into arrangements with health care providers that purchase our products from wholesalers—as well as payers and certain other customers—that provide for government mandated and/or privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. The transaction price that we recognize as revenue 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 that our customers take 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

 

Chargebacks and rebates

 

Fee-for-service

 

Government rebates

 

Commercial payer and other 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.  

8


 

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. In the three months ended 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. At June 30, 2018, we maintained this reserve on our balance sheet.  

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 volume‐based 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.

Fees‐for‐service – 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 fee‐for‐service accruals and allowances based on historical sales, wholesaler and distributor inventory levels and the applicable discount rate.    

Government Rebates – We participate in three rebate programs under various government programs: 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, 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 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 and Other 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. In addition, we offer rebates to certain customers based on the volume of product purchased over an agreed period of time.

9


 

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 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.

At the end of each reporting period, we adjust our allowances for cash discounts, product returns, chargebacks, fees‐for‐service 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

 

531

 

 

 

1,161

 

 

 

3,247

 

 

 

1,554

 

 

 

437

 

 

 

417

 

 

 

675

 

 

 

256

 

Payments & credits issued

 

(349

)

 

 

(9

)

 

 

(2,319

)

 

 

(782

)

 

 

(100

)

 

 

(4

)

 

 

(237

)

 

 

(106

)

Balance as of June 30, 2018

$

182

 

 

$

1,152

 

 

$

928

 

 

$

772

 

 

$

337

 

 

$

413

 

 

$

438

 

 

$

150

 

 

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.

In addition, in May 2018, we announced that we had entered into a partnership with the Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator (“CARB-X”), under which Melinta will be awarded up to $6.2 million to support the development of the company’s investigational pyrrolocytosine compounds. CARB-X was established in 2016 by BARDA and the National Institute of Allergy and Infectious Diseases of the U.S. Department of Health and Human Services and the Wellcome Trust, a global charitable foundation dedicated to improving health, to accelerate pre-clinical product development in the area of antibiotic-resistant infections, one of the world’s greatest health threats. Under the terms of the partnership, we will receive an initial award of up to $2.3 million from CARB-X, with the possibility of $3.9 million in additional awards based on the achievement of certain project milestones. Our pyrrolocytosine compounds are a novel class of antibiotics from our ESKAPE Pathogen Program, a program based on Melinta’s proprietary drug discovery platform focused on developing breakthrough antibiotics for bacterial “superbugs” by targeting the bacterial ribosome. 

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

Business Combinations—We account for acquired businesses using the acquisition method of accounting. This method requires that most assets acquired and liabilities assumed be recognized as of the acquisition date. On January 1, 2018, we adopted 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

10


 

business to include at least one substantive process and narrows the definition of outputs. There is often judgment involved in assessing whether an acquisition transaction is a business combination under Topic 805 or an acquisition of assets. In our IDB acquisition, we evaluated the transaction and concluded that the IDB qualified as a “business” under Topic 805 as it has both inputs and processes with the ability to create outputs. Among IDB’s inputs are developed product rights, in-process research and development and intellectual property across multiple classes of drugs and indications, third-party contract manufacturing agreements and tangible assets from which there is potential to create value and outputs.

With respect to business combinations, we determine the purchase price, including contingent consideration, and allocate the purchase price of acquired businesses to the tangible and intangible assets acquired and liabilities assumed, based on estimated fair values. The excess of the purchase price over the identifiable assets acquired and liabilities assumed is recorded as goodwill. With respect to the purchase of assets that do not meet the definition of a business under Topic 805, goodwill is not recognized in connection with the transaction and the purchase price is allocated to the individual assets acquired or liabilities assumed based on their relative fair values.

We engage a third-party professional service provider to assist us in determining the fair values of the purchase consideration, assets acquired, and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to contingent liabilities associated with the purchase price and intangible assets, such as developed product rights and in-process research and development programs. Critical estimates that we have used in valuing these elements include, but are not limited to, future expected cash flows using valuation techniques (i.e., Monte Carlo simulation models) and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.

We record contingent consideration resulting from a business combination at its fair value on the acquisition date. The purchase price of IDB included contingent consideration related to the achievement of future regulatory milestones, sales-based milestones associated with the products we acquired, and certain royalty payments based on tiered net sales of the acquired products. The sales-based milestones were assumed contingent liabilities from Medicines at the time of the acquisition.

Changes to contingent consideration obligations can result from adjustments related, but not limited, to changes in discount rates and the number of remaining periods to which the discount rate is applied, updates in the assumed achievement or timing of any development or commercial milestone or changes in the probability of certain clinical events, changes in our forecasted sales of products acquired, the passage of time and changes in the assumed probability associated with regulatory approval. At the end of each reporting period, we revalue these obligations and record increases or decreases in their fair value in selling, general and administrative expenses within the accompanying condensed consolidated statements of operations. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, any change in the assumptions described above, could have a material impact on the amount we may be obligated to pay as well as the results of our unaudited condensed consolidated results of operations in any given reporting period. During the six months ended June 30, 2018, we did not record any adjustments to the liabilities discussed above.  

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 this 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.

11


 

 

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:

 

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.

 

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 office building in Lincolnshire, Illinois, our research and administrative facility in New Haven, Connecticut, our office facilities in Chapel Hill, North Carolina and Morristown, New Jersey. We are evaluating the impact of ASU 2016-02, which we plan to adopt on January 1, 2019, on our consolidated financial statements. To date, we have begun a comprehensive review of all our leases, and a review of our material contracts to determine if they contain imbedded leases. We anticipate that adoption of ASU 2016-02 will result in the recognition of additional assets and lease liabilities, along with the associated recognition of amortization expense for the right-to-use assets.

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.

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NOTE 3 – BALANCE SHEET COMPONENTS

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

150,087

 

 

$

128,387

 

Restricted cash (included in Other Assets)

 

 

200

 

 

 

200

 

Total cash, cash equivalents and restricted cash shown in the Condensed

   Consolidated Statements of Cash Flows

 

$

150,287

 

 

$

128,587

 

 

Inventory—Inventory consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Raw materials

 

$

15,874

 

 

$

5,545

 

Work in process

 

 

7,663

 

 

 

181

 

Finished goods

 

 

12,775

 

 

 

5,099

 

Gross value of inventory

 

 

36,312

 

 

 

10,825

 

Less: valuation reserves

 

 

(2,352

)

 

 

-

 

Total inventory

 

$

33,960

 

 

$

10,825

 

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. During the three months ended June 30, 2018, we recorded reserves for our inventory totaling $2,352.

Other Assets—Other assets consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Deerfield disbursement option (see Note 4)

 

$

7,609

 

 

$

-

 

Long-term inventory deposits

 

 

33,345

 

 

 

-

 

VAT receivable

 

 

793

 

 

 

248

 

Research study deposit

 

 

-

 

 

 

500

 

Security deposits

 

 

724

 

 

 

465

 

Restricted cash

 

 

200

 

 

 

200

 

Total other assets

 

$

42,671

 

 

$

1,413

 

 

Long-term inventory deposits consist of pre-payments made to contract manufacturers for future production of drug products, principally Vabomere.

Accrued Expenses—Accrued expenses consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Accrued contracted services

 

$

10,520

 

 

$

5,596

 

Payroll related expenses

 

 

10,064

 

 

 

9,885

 

Professional fees

 

 

1,391

 

 

 

3,621

 

Accrued royalty payment

 

 

747

 

 

 

2,040

 

Accrued sales allowances

 

 

3,263

 

 

 

-

 

Accrued other

 

 

5,401

 

 

 

2,899

 

Total accrued expenses

 

$

31,386

 

 

$

24,041

 

 

Accrued contracted services are primarily comprised of amounts owed to third-party clinical research organizations for research and development work and contract manufacturers for research and commercial drug product manufacturing 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.

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

 

NOTE 4 – FINANCING ARRANGEMENTS

Melinta’s outstanding debt balances consisted of the following as of June 30, 2018 and December 31, 2017:

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Principal balance under loan agreements

 

$

116,358

 

 

$

40,000

 

Debt discount and deferred debt issuance costs for loan agreements

 

 

(8,895

)

 

 

(445

)

Long-term balance under the loan agreements

 

$

107,463

 

 

$

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 the maturity date of June 1, 2018, we were required to make consecutive equal monthly payments of principal and interest.  

In June 2017, we repaid the entire outstanding balance under the 2014 Loan Agreement (see discussion below under “2017 Loan Agreement”). In the three and six months ended June 30, 2017, we recognized $662 and $1,229 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 2.0% 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 permits 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, except for working capital accounts, for which they hold a second lien while any revolving credit line with a different lender is in place. The Facility Agreement, while it is outstanding, will limit our ability to raise debt

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financing in future periods outside of the $20.0 million revolver permitted thereunder. The Facility Agreement has a financial maintenance covenant requiring us to maintain a minimum cash balance of $25.0 million, a requirement that we achieve product sales of at least $45.0 million during 2018, and other normal covenants, including periodic financial reporting and a restriction on the payment of dividends.

In connection with the Facility Agreement, we 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 the 2017 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 related to retiring the 2017 Loan Agreement 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 19.8%. In connection with the Facility Agreement, we paid $6,455 of upfront term loan fees and legal debt issuance costs. 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 upfront fees and costs were recorded as debt discount and are 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 21.4%. During the three and six months ended June 30, 2018, we recorded cash interest expense and term loan accretion expense of $4,389 and $8,585, and $1,373 and $2,497, respectively. All amounts were recorded as interest expense in our statement of operations.

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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 - June 30, 2018

 

$

104,966

 

 

$

2,496

 

 

$

-

 

 

$

107,462

 

July 1 - December 31, 2018

 

 

107,462

 

 

 

3,112

 

 

 

-

 

 

 

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