gwph-10q_20190630.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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, 2019

OR

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

Commission File Number 001-35892

 

 

GW PHARMACEUTICALS PLC

(Exact name of Registrant as specified in its charter)

 

 

England and Wales

 

Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

Sovereign House, Vision Park
Chivers Way, Histon
Cambridge, CB24 9BZ
United Kingdom

 

+44 1223 266800

(Address of principal executive offices)

 

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of exchange on which registered

American Depositary Shares, each representing 12 Ordinary Shares, par value £0.001 per share

 

GWPH

 

The Nasdaq Global Market

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES   NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

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 July 31, 2019, 370,628,720 shares were outstanding including 355,936,128 shares held as American Depositary Shares, each representing twelve Ordinary Shares, par value of £0.001 per share and 14,692,592 Ordinary Shares.

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018

1

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018

2

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2018

3

 

Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018

4

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

23

 

 

 

PART II.

OTHER INFORMATION

25

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 6.

Exhibits

29

Signatures

30

 

 

 


PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GW PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

583,683

 

 

$

591,497

 

Accounts receivable, net

 

 

32,113

 

 

 

4,192

 

Inventory

 

 

60,042

 

 

 

33,030

 

Prepaid expenses and other current assets

 

 

21,693

 

 

 

17,903

 

Total current assets

 

 

697,531

 

 

 

646,622

 

Property, plant, and equipment, net

 

 

107,332

 

 

 

90,832

 

Operating lease assets

 

 

18,739

 

 

 

 

Goodwill

 

 

6,959

 

 

 

6,959

 

Deferred tax assets

 

 

8,726

 

 

 

8,720

 

Other assets

 

 

3,490

 

 

 

2,935

 

Total assets

 

$

842,777

 

 

$

756,068

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,757

 

 

$

9,796

 

Accrued liabilities

 

 

66,434

 

 

 

52,477

 

Current tax liabilities

 

 

 

 

 

2,384

 

Other current liabilities

 

 

5,757

 

 

 

1,559

 

Total current liabilities

 

 

83,948

 

 

 

66,216

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Finance lease liabilities

 

 

5,536

 

 

 

5,690

 

Operating lease liabilities

 

 

15,139

 

 

 

 

Other liabilities

 

 

9,262

 

 

 

10,082

 

Total long-term liabilities

 

 

29,937

 

 

 

15,772

 

Total liabilities

 

 

113,885

 

 

 

81,988

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock - Ordinary shares par value £0.001;

   370,621,184 shares outstanding as of June 30, 2019;

   366,616,688 shares outstanding as of December 31, 2018

 

 

570

 

 

 

564

 

Additional paid-in capital

 

 

1,607,346

 

 

 

1,581,144

 

Accumulated deficit

 

 

(799,256

)

 

 

(828,940

)

Accumulated other comprehensive loss

 

 

(79,768

)

 

 

(78,688

)

Total stockholders’ equity

 

 

728,892

 

 

 

674,080

 

Total liabilities and stockholders’ equity

 

$

842,777

 

 

$

756,068

 

 

See accompanying notes to these condensed consolidated financial statements.

1


GW PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product net sales

 

$

71,489

 

 

$

3,094

 

 

$

110,463

 

 

$

5,906

 

Other revenue

 

 

549

 

 

 

190

 

 

 

822

 

 

 

419

 

Total revenues

 

 

72,038

 

 

 

3,284

 

 

 

111,285

 

 

 

6,325

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales

 

 

6,620

 

 

 

1,791

 

 

 

11,751

 

 

 

3,416

 

Research and development

 

 

32,467

 

 

 

45,113

 

 

 

62,842

 

 

 

88,598

 

Selling, general and administrative

 

 

62,273

 

 

 

37,786

 

 

 

117,351

 

 

 

63,959

 

Total operating expenses

 

 

101,360

 

 

 

84,690

 

 

 

191,944

 

 

 

155,973

 

Loss from operations

 

 

(29,322

)

 

 

(81,406

)

 

 

(80,659

)

 

 

(149,648

)

Interest income

 

 

2,310

 

 

 

999

 

 

 

4,397

 

 

 

1,758

 

Interest expense

 

 

(268

)

 

 

(313

)

 

 

(533

)

 

 

(638

)

Other income

 

 

104,117

 

 

 

 

 

 

104,117

 

 

 

 

Foreign exchange gain (loss)

 

 

2,026

 

 

 

(3,660

)

 

 

912

 

 

 

(4,300

)

Income (loss) before income taxes

 

 

78,863

 

 

 

(84,380

)

 

 

28,234

 

 

 

(152,828

)

Income tax (benefit) expense

 

 

(885

)

 

 

(369

)

 

 

(1,450

)

 

 

644

 

Net income (loss)

 

$

79,748

 

 

$

(84,011

)

 

$

29,684

 

 

$

(153,472

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.21

 

 

$

(0.25

)

 

$

0.08

 

 

$

(0.45

)

Diluted

 

$

0.21

 

 

$

(0.25

)

 

$

0.08

 

 

$

(0.45

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

371,712

 

 

 

340,457

 

 

 

370,776

 

 

 

340,355

 

Diluted

 

 

377,435

 

 

 

340,457

 

 

 

376,674

 

 

 

340,355

 

 

See accompanying notes to these condensed consolidated financial statements.

2


GW PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income (loss)

 

$

79,748

 

 

$

(84,011

)

 

$

29,684

 

 

$

(153,472

)

Foreign currency translation adjustments

 

 

(4,878

)

 

 

(5,911

)

 

 

(1,080

)

 

 

(1,803

)

Comprehensive income (loss)

 

$

74,870

 

 

$

(89,922

)

 

$

28,604

 

 

$

(155,275

)

 

See accompanying notes to these condensed consolidated financial statements.

3


GW PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balances at December 31, 2018

 

 

366,617

 

 

$

564

 

 

$

1,581,144

 

 

$

(828,940

)

 

$

(78,688

)

 

$

674,080

 

Issuance of common stock from exercise of

   stock options

 

 

1,996

 

 

 

3

 

 

 

770

 

 

 

 

 

 

 

 

 

773

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(50,064

)

 

 

 

 

 

(50,064

)

Share-based compensation

 

 

 

 

 

 

 

 

11,142

 

 

 

 

 

 

 

 

 

11,142

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,798

 

 

 

3,798

 

Balances at March 31, 2019

 

 

368,613

 

 

$

567

 

 

$

1,593,056

 

 

$

(879,004

)

 

$

(74,890

)

 

$

639,729

 

Issuance of common stock from exercise of

   stock options

 

 

2,008

 

 

 

3

 

 

 

2,102

 

 

 

 

 

 

 

 

 

2,105

 

Net income

 

 

 

 

 

 

 

 

 

 

 

79,748

 

 

 

 

 

 

79,748

 

Share-based compensation

 

 

 

 

 

 

 

 

12,188

 

 

 

 

 

 

 

 

 

12,188

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,878

)

 

 

(4,878

)

Balances at June 30, 2019

 

 

370,621

 

 

$

570

 

 

$

1,607,346

 

 

$

(799,256

)

 

$

(79,768

)

 

$

728,892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balances at December 31, 2017

 

 

337,964

 

 

$

527

 

 

$

1,220,206

 

 

$

(523,683

)

 

$

(73,952

)

 

$

623,098

 

Issuance of common stock from exercise of

   stock options

 

 

549

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(69,461

)

 

 

 

 

 

(69,461

)

Share-based compensation

 

 

 

 

 

 

 

 

6,858

 

 

 

 

 

 

 

 

 

6,858

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,108

 

 

 

4,108

 

Balances at March 31, 2018

 

 

338,513

 

 

$

528

 

 

$

1,227,064

 

 

$

(593,144

)

 

$

(69,844

)

 

$

564,604

 

Issuance of common stock from exercise of

   stock options

 

 

634

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(84,011

)

 

 

 

 

 

(84,011

)

Share-based compensation

 

 

 

 

 

 

 

 

9,568

 

 

 

 

 

 

 

 

 

9,568

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,911

)

 

 

(5,911

)

Balances at June 30, 2018

 

 

339,147

 

 

$

529

 

 

$

1,236,632

 

 

$

(677,155

)

 

$

(75,755

)

 

$

484,251

 

 

See accompanying notes to these condensed consolidated financial statements.

4


GW PHARMACEUTICALS PLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

29,684

 

 

$

(153,472

)

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

   operating activities:

 

 

 

 

 

 

 

 

Foreign exchange loss

 

 

882

 

 

 

3,930

 

Share-based compensation

 

 

23,330

 

 

 

16,426

 

Depreciation and amortization

 

 

4,808

 

 

 

4,720

 

Deferred income taxes

 

 

 

 

 

1,407

 

Gain from sale of priority review voucher

 

 

(104,117

)

 

 

 

Other

 

 

21

 

 

 

148

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(27,924

)

 

 

(423

)

Inventory

 

 

(27,070

)

 

 

2,501

 

Prepaid expenses and other current assets

 

 

(6,819

)

 

 

22,139

 

Other assets

 

 

1,542

 

 

 

(249

)

Accounts payable

 

 

3,488

 

 

 

3,156

 

Current tax liabilities

 

 

619

 

 

 

(3,458

)

Accrued liabilities

 

 

13,887

 

 

 

3,599

 

Other liabilities

 

 

(2,192

)

 

 

1,265

 

Net cash used in operating activities

 

 

(89,861

)

 

 

(98,311

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from sale of priority review voucher

 

 

104,117

 

 

 

 

Additions to property, plant and equipment

 

 

(22,515

)

 

 

(14,675

)

Additions to capitalized software

 

 

(1,017

)

 

 

(983

)

Net cash provided by (used in) investing activities

 

 

80,585

 

 

 

(15,658

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

2,878

 

 

 

2

 

Payments on finance leases

 

 

(250

)

 

 

(143

)

Payments on landlord financing obligation

 

 

(273

)

 

 

(271

)

Net cash provided by (used in) financing activities

 

 

2,355

 

 

 

(412

)

Effect of exchange rate changes on cash

 

 

(893

)

 

 

(4,906

)

Net decrease in cash and cash equivalents

 

 

(7,814

)

 

 

(119,287

)

Cash and cash equivalents at beginning of period

 

 

591,497

 

 

 

559,227

 

Cash and cash equivalents at end of period

 

$

583,683

 

 

$

439,940

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Income taxes paid

 

 

3,907

 

 

 

3,240

 

Interest paid

 

 

(533

)

 

 

(638

)

Supplemental disclosure of noncash information:

 

 

 

 

 

 

 

 

Property and equipment purchases in accounts payable and accrued liabilities

 

 

856

 

 

 

181

 

 

See accompanying notes to these condensed consolidated financial statements.

5


GW PHARMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Business Overview

GW Pharmaceuticals plc and its subsidiaries (referred to herein as “we,” “us,” “our,” and the “Company”) is a biopharmaceutical company focused on discovering, developing and commercializing novel therapeutics from our proprietary cannabinoid product platform in a broad range of disease areas. The Company is developing a portfolio of cannabinoid medicines, of which the lead product is Epidiolex®, an oral medicine for the treatment of certain refractory childhood epilepsies.

 

The Company is a public limited company, which has had American Depository Shares (ADSs) registered with the U.S. Securities and Exchange Commission (SEC) and has been listed on Nasdaq since May 1, 2013. The Company’s ADSs each represent twelve ordinary shares of GW Pharmaceuticals plc. The Company is incorporated and domiciled in the United Kingdom. The address of the Company’s registered office and principal place of business is Sovereign House, Vision Park, Histon, Cambridgeshire.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete annual financial statements. These accounting principles were applied on a basis consistent with those of the consolidated financial statements contained in the Company’s Annual Report on Form 10-KT for the three-month transition period ended December 31, 2018. In the Company’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of our financial statements for interim periods.

The condensed consolidated balance sheet as of December 31, 2018 was derived from audited annual financial statements but does not include all annual disclosures required by U.S. GAAP. These interim financial statements should be read in conjunction with the audited financial statements for the transition period ended December 31, 2018 included in our Annual Report on Form 10-KT. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year or any other future periods.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure 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 these estimates.

Fair Value of Financial Instruments

The carrying values of the Company’s financial instruments, consisting of cash and cash equivalents, trade receivables, interest and other receivables, and accounts payable and accrued liabilities, approximate fair value due to the relative short-term nature of these instruments.

6


Accounts Receivable

Accounts receivable are recorded net of customer allowances for prompt payment discounts, chargebacks, and doubtful accounts. Allowances for prompt payment discounts and chargebacks are based on contractual terms. The Company estimates the allowance for doubtful accounts based on existing contractual payment terms, actual payment patterns of its customers and individual customer circumstances. As of June 30, 2019 and December 31, 2018, the Company determined that an allowance for doubtful accounts was not required and no accounts were written off during the periods presented.

Inventory

Inventory is stated at the lower of cost or estimated net realizable value. The Company uses a combination of standard and actual costing methodologies to determine the cost basis for its inventories which approximates actual cost. Inventory is valued on a first-in, first-out basis. The Company reduces its inventory to net realizable value for potentially excess, dated or obsolete inventory based on an analysis of forecasted demand compared to quantities on hand, as well as product shelf life.

The Company capitalizes inventory costs associated with its products upon regulatory approval when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed. Prior to approval of Epidiolex by the United States Food and Drug Administration (FDA), all costs related to the manufacturing of Epidiolex were charged to research and development expense in the period incurred.

Revenue Recognition

The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when 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, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Revenue for the Company’s product sales has not been adjusted for the effects of a financing component as the Company expects, at contract inception, that the period between when the Company’s transfers control of the product and when the Company receives payment will be one year or less. Product shipping and handling costs are included in cost of product sales.

Epidiolex Product Net Sales

Epidiolex was approved by the FDA in June 2018. Subsequent to the approval by the FDA, the United States Drug Enforcement Agency (DEA) took action to change the classification of Epidiolex from a Schedule I controlled substance to a Schedule V controlled substance, thereby allowing Epidiolex to be prescribed and distributed in the United States. On November 1, 2018, the Company launched sales of Epidiolex to specialty pharmacies (SPs) and specialty distributors (SDs). The Company recognizes revenue from product sales upon receipt of product at the SPs and SDs, the date at which the control is transferred, net of the following allowances which are reflected either as a reduction to the related account receivable or as an accrued liability, depending on how the allowance is settled:

Distribution Fees: Distribution fees include distribution service fees paid to the SPs and SDs based on a contractually fixed percentage of the wholesale acquisition cost (WAC), and prompt payment discounts. Distribution fees are recorded as an offset to revenue based on contractual terms at the time revenue from the sale is recognized.

7


Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program and the Medicare Part D prescription drug benefit, and contractual rebates with commercial payers. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements with, or statutory requirements pertaining to, Medicaid and Medicare benefit providers. The allowance for rebates is based on statutory discount rates and expected utilization. The Company’s estimates for expected utilization of rebates is based on utilization data received from the SPs since product launch. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for prior quarters’ unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Chargebacks: Chargebacks are discounts and fees that relate to contracts with government and other entities purchasing from the SDs at a discounted price. The SDs charge back to the Company the difference between the price initially paid by the SDs and the discounted price paid to the SDs by these entities. The Company also incurs group purchasing organization fees for transactions through certain purchasing organizations. The Company estimates sales with these entities and accrues for anticipated chargebacks and organization fees, based on the applicable contractual terms. If actual future chargebacks vary from these estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Co-Payment Assistance: The Company offers co-payment assistance to commercially insured patients meeting certain eligibility requirements. Co-payment assistance is accrued for based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Product Returns: Consistent with industry practice, the Company offers the SPs and SDs limited product return rights for damages, shipment errors, and expiring product, provided that the return is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement. The Company does not allow product returns for product that has been dispensed to a patient. As the Company receives inventory reports from the SPs and SDs and has the ability to control the amount of product that is sold to the SPs and SDs, it is able to make a reasonable estimate of future potential product returns based on this on-hand channel inventory data and sell-through data obtained from the SPs and SDs. In arriving at its estimate, the Company also considers historical product returns, the underlying product demand, and industry data specific to the specialty pharmaceutical distribution industry.

The total amount deducted from gross sales for the allowances described above for the three and six months ended June 30, 2019 was $14.5 million and $22.0 million, respectively.

Sativex Product Net Sales

Sales of Sativex, which is currently being commercialized for spasticity due to multiple sclerosis (MS) outside the United States, are made pursuant to license agreements with commercial partners. The Company has entered into license agreements for the commercialization of Sativex in Europe, Canada, Israel, Mexico, and South America. Under these license agreements, the Company sells fully labeled Sativex vials to its commercial partners for a contractually agreed price, which is generally based on percentages of the commercial partners’ in-market net selling price charged to end customers. Product net sales revenue related to Sativex shipments to commercial license partners is recognized when shipped, the date at which the control is transferred. The Company commercializes Sativex in Australia and New Zealand through a consignment relationship with a local distributor. Product net sales revenue related to Sativex sales in Australia and New Zealand are recognized when the product is sold through to the end customer.

Other Revenue

The Company’s other revenue primarily consists of research and development fee revenue for research and development services provided under a collaboration agreement with Otsuka Pharmaceutical Co. Ltd (Otsuka) that was terminated in December 2017 and variable consideration milestone payments related to the Sativex license agreements.

The research and development fee revenue is recognized at the time the underlying services are performed.

8


The Sativex license agreements contain provisions for the Company to earn variable consideration in the form of regulatory milestone payments, sales-based milestone payments, and royalty payments. The Company has no further performance obligations related to the regulatory milestone payments and these amounts are recognized in accordance with Topic 606 when receipt of these payments becomes probable and there is no significant risk of revenue reversal. Revenue related to the sales-based milestone payments and product royalty payments are subject to the sales-based royalty exception under Topic 606 and will be recognized when the underlying sales are made.

Research and Development Expenses

Research and development expenses are charged to operations as incurred. Research and development expenses include, among other things, internal and external costs associated with preclinical development, pre-commercialization manufacturing expenses, and clinical trials. The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial or services provided and the invoices received from its external service providers. In the case of clinical trials, a portion of the estimated cost normally relates to the projected cost to treat a patient in the trials, and this cost is recognized based on the number of patients enrolled in the trial. As actual costs become known, the Company adjusts its accruals accordingly.

Research and development expense is presented net of reimbursements from reimbursable tax and expenditure credits from the U.K. government. Reimbursable research and development tax and expenditure credits were $0.7 million and $1.5 million for the three and six months ended June 30, 2019 respectively, compared to $0.5 million and $1.6 million for the same periods in 2018.

Concentration Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, principally consist of cash, cash equivalents, and accounts receivable. The Company’s cash and cash equivalents balances are primarily in depository accounts at major financial institutions in accordance with the Company’s investment policy. The Company’s investment policy defines allowable investments and establishes guidelines relating to credit quality, diversification, and maturities of its investments to preserve principal and maintain liquidity. Further, the Company specifies credit quality standards for its customers that are designed to limit the Company’s credit exposure to any single party.

Share-based Compensation

The Company recognizes share-based compensation expense for grants of stock options under the Company’s Long-Term Incentive Plans to employees and non-employee members of the Company’s board of directors based on the grant-date fair value of those awards. The grant-date fair value of an award is generally recognized as compensation expense over the award’s requisite service period. Expense related to awards with graded vesting is generally recognized over the vesting period using the accelerated attribution method.

Income Taxes

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities along with net operating loss and tax credit carryovers. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.

For UK tax purposes, the $104.1 million gain on the sale of the priority review voucher (PRV) is expected to be fully offset by current year operating tax losses generated in the UK.

9


Uncertain tax positions, for which management's assessment is that there is more than a 50% probability of sustaining the position upon challenge by a taxing authority based upon its technical merits, are subjected to certain recognition and measurement criteria. The Company re-evaluates uncertain tax positions and considers various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, and changes in facts or circumstances related to a tax position. The Company adjusts the level of the liability to reflect any subsequent changes in the relevant facts and circumstances surrounding the uncertain positions. The Company recognizes interest and penalties related to income tax matters in income tax expense.

New Accounting Pronouncements

On January 1, 2019, the Company adopted a new accounting standard issued by the Financial Accounting Standards Board (FASB) on accounting for leases using the modified retrospective method. This new accounting standard requires a lessee to recognize an asset and liability for most leases on its balance sheet. The Company elected the optional transition method that allowed for a cumulative-effect adjustment as of January 1, 2019 and did not restate previously reported results in the comparative periods. The Company also elected to adopt certain practical expedients allowed by the new standard, which among other things, allowed the Company to carry forward its historical lease classification.

As a result of adoption of the new standard, the Company recorded operating lease assets and liabilities of approximately $20.5 million and $21.1 million, respectively as of January 1, 2019. The operating lease liability was determined based on the present value of the remaining minimum rental payments and the operating lease asset was determined based on the value of the lease liability, adjusted for existing deferred rent balances, which were previously included in other current liabilities and other liabilities. Accounting for the Company’s finance leases remains substantially unchanged. As a result of the adoption of the new leasing accounting standard, the Company’s build-to-suit asset has been reclassified to buildings and the build-to-suit financing obligation has been reclassified to finance lease obligation in the condensed consolidated balance sheets. The adoption of the new standard did not materially impact the Company’s consolidated results of operations or cash flows.

In addition, the adoption of this new accounting standard resulted in increased qualitative and quantitative disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. For further details, see Note 9 Leases.

Note 3: Fair Value Measurements

At June 30, 2019 and December 31, 2018, the Company’s cash equivalents consisted of money market funds, which are classified as Level 1 within the fair value hierarchy defined by authoritative guidance.

Investment securities classified as Level 1 are valued using quoted market prices. The Company does not hold any securities classified as Level 2, which are securities valued using inputs that are either directly or indirectly observable, or Level 3, which are securities valued using unobservable inputs. The Company has not transferred any investment securities between the classification levels.

Note 4: Composition of Certain Balance Sheet Captions:

Inventory consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Raw materials

 

$

1,375

 

 

$

676

 

Work in process

 

 

52,567

 

 

 

28,709

 

Finished goods

 

 

6,100

 

 

 

3,645

 

 

 

$

60,042

 

 

$

33,030

 

 

10


Property, plant and equipment, net, consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Buildings

 

$

4,567

 

 

$

4,573

 

Machinery and equipment

 

 

34,402

 

 

 

32,598

 

Leasehold improvements

 

 

36,560

 

 

 

36,004

 

Office and IT equipment

 

 

2,769

 

 

 

2,481

 

Construction-in-process

 

 

62,067

 

 

 

44,546

 

 

 

 

140,365

 

 

 

120,202

 

Accumulated depreciation

 

 

(33,033

)