UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
(Exact name of Registrant as specified in its charter)
England and Wales |
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Not Applicable |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol |
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Name of exchange on which registered |
American Depositary Shares, each representing 12 Ordinary Shares, par value £0.001 per share |
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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 |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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,
Table of Contents
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Page |
PART I. |
1 |
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Item 1. |
Financial Statements (Unaudited) |
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Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 |
1 |
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2 |
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3 |
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4 |
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Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 |
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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. |
23 |
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Item 4. |
23 |
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PART II. |
25 |
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Item 1. |
25 |
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Item 1A. |
25 |
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Item 6. |
29 |
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30 |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GW PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
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June 30, |
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December 31, |
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2019 |
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2018 |
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Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventory |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant, and equipment, net |
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Operating lease assets |
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— |
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Goodwill |
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Deferred tax assets |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and stockholders’ equity |
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Accounts payable |
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$ |
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$ |
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Accrued liabilities |
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Current tax liabilities |
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— |
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Other current liabilities |
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Total current liabilities |
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Long-term liabilities: |
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Finance lease liabilities |
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Operating lease liabilities |
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— |
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Other liabilities |
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Total long-term liabilities |
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Total liabilities |
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Commitments and contingencies (Note 8) |
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Stockholders’ equity: |
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Common stock - Ordinary shares par value £ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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( |
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Accumulated other comprehensive loss |
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( |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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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)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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Revenues |
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Product net sales |
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$ |
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$ |
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$ |
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$ |
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Other revenue |
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Total revenues |
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Operating expenses |
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Cost of product sales |
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Research and development |
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Selling, general and administrative |
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Total operating expenses |
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Loss from operations |
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( |
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( |
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( |
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( |
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Interest income |
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Interest expense |
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( |
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( |
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( |
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( |
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Other income |
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— |
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— |
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Foreign exchange gain (loss) |
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( |
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( |
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Income (loss) before income taxes |
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( |
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( |
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Income tax (benefit) expense |
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( |
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( |
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( |
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Net income (loss) |
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$ |
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$ |
( |
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$ |
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$ |
( |
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Net income (loss) per share: |
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Basic |
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$ |
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$ |
( |
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$ |
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$ |
( |
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Diluted |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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See accompanying notes to these condensed consolidated financial statements.
2
GW PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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Net income (loss) |
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$ |
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$ |
( |
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$ |
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$ |
( |
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Foreign currency translation adjustments |
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( |
) |
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( |
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( |
) |
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( |
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Comprehensive income (loss) |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
) |
See accompanying notes to these condensed consolidated financial statements.
3
GW PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-in |
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Accumulated |
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Comprehensive |
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Stockholders' |
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Shares |
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Amount |
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Capital |
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Deficit |
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Loss |
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Equity |
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Balances at December 31, 2018 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Issuance of common stock from exercise of stock options |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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Balances at March 31, 2019 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Issuance of common stock from exercise of stock options |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Balances at June 30, 2019 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-in |
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Accumulated |
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Comprehensive |
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Stockholders' |
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Shares |
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Amount |
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Capital |
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Deficit |
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Loss |
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Equity |
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Balances at December 31, 2017 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Issuance of common stock from exercise of stock options |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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Balances at March 31, 2018 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Issuance of common stock from exercise of stock options |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Balances at June 30, 2018 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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|
See accompanying notes to these condensed consolidated financial statements.
4
GW PHARMACEUTICALS PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Six Months Ended June 30, |
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2019 |
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2018 |
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Cash flows from operating activities |
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Net income (loss) |
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$ |
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$ |
( |
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Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Foreign exchange loss |
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Share-based compensation |
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Depreciation and amortization |
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Deferred income taxes |
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— |
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Gain from sale of priority review voucher |
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( |
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— |
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Other |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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( |
) |
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( |
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Inventory |
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( |
) |
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Prepaid expenses and other current assets |
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( |
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Other assets |
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( |
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Accounts payable |
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Current tax liabilities |
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( |
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Accrued liabilities |
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Other liabilities |
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( |
) |
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Net cash used in operating activities |
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( |
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( |
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Cash flows from investing activities |
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Proceeds from sale of priority review voucher |
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— |
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Additions to property, plant and equipment |
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( |
) |
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( |
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Additions to capitalized software |
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( |
) |
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( |
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Net cash provided by (used in) investing activities |
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( |
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Cash flows from financing activities |
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Proceeds from exercise of stock options |
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Payments on finance leases |
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( |
) |
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( |
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Payments on landlord financing obligation |
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( |
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( |
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Net cash provided by (used in) financing activities |
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( |
) |
Effect of exchange rate changes on cash |
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( |
) |
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( |
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Net decrease in cash and cash equivalents |
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( |
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( |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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Supplemental disclosure of cash flow information: |
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Income taxes paid |
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Interest paid |
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( |
) |
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( |
) |
Supplemental disclosure of noncash information: |
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Property and equipment purchases in accounts payable and accrued liabilities |
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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.
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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
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.
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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 $
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.
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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
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 $
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 $
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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 $
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:
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Property, plant and equipment, net, consisted of the following:
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Buildings |
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Office and IT equipment |
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