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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2020

OR

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

For the transition period from              to             

Commission File Number: 001-37519

 

AIMMUNE THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

45-2748244

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

8000 Marina Blvd., Suite 300

Brisbane, California 94005

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (650614-5220

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

AIMT

 

NASDAQ Global Select 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, a 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 April 30, 2020, the registrant had 65,250,758 shares of common stock, $0.0001 par value per share, outstanding.

 

 


AIMMUNE THERAPEUTICS, INC.

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

 

 

PART I. – FINANCIAL INFORMATION

 

3

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

 

3

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

 

3

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Quarters Ended March 31, 2020 and 2019

 

4

 

  

Condensed Consolidated Statements of Stockholders’ Equity as of March 31, 2020 and 2019

 

5

 

 

Condensed Consolidated Statements of Cash Flows for the Quarters Ended March 31, 2020 and 2019

 

7

 

 

Notes to Condensed Consolidated Financial Statements

 

8

Item 2.

 

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

 

21

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

28

Item 4.

 

Controls and Procedures

 

28

 

 

 

 

 

PART II. – OTHER INFORMATION

 

30

Item 1.

 

Legal Proceedings

 

30

Item 1A.

 

Risk Factors

 

30

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

74

Item 3.

 

Defaults Upon Senior Securities

 

74

Item 4.

 

Mine Safety Disclosures

 

74

Item 5.

 

Other Information

 

74

Item 6.

 

Exhibits

 

75

SIGNATURES

 

77

 

 

 


PART I. – FINANCIAL INFORMATION

Item 1. Financial Statements

AIMMUNE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

298,418

 

 

$

79,880

 

Short-term investments

 

 

59,933

 

 

 

63,633

 

Trade receivables, net

 

 

772

 

 

 

 

Inventories

 

 

4,076

 

 

 

 

Prepaid expenses and other current assets

 

 

4,621

 

 

 

5,564

 

Total current assets

 

 

367,820

 

 

 

149,077

 

Long-term investments

 

 

13,256

 

 

 

14,661

 

Property and equipment, net

 

 

27,506

 

 

 

28,604

 

Operating lease right-of-use assets

 

 

10,913

 

 

 

11,512

 

Prepaid expenses and other assets

 

 

557

 

 

 

515

 

Total assets

 

$

420,052

 

 

$

204,369

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

13,952

 

 

$

13,882

 

Accrued liabilities

 

 

29,128

 

 

 

31,286

 

Operating lease liabilities, current

 

 

2,315

 

 

 

2,257

 

Other current liabilities

 

 

24

 

 

 

23

 

Total current liabilities

 

 

45,419

 

 

 

47,448

 

Long term debt, net of discount

 

 

128,250

 

 

 

41,028

 

Operating lease liabilities

 

 

9,824

 

 

 

10,524

 

Other liabilities

 

 

1,512

 

 

 

1,345

 

Total liabilities

 

 

185,005

 

 

 

100,345

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

   Preferred stock, par value $0.0001 per share— 10,000 shares authorized at

     March 31, 2020 and December 31, 2019; 526 and 0 shares issued and

     outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

 

 

 

 

Common stock, par value $0.0001 per share—290,000 shares authorized as of

  March 31, 2020 and December 31, 2019; 65,223 and 63,779 shares issued and

  outstanding as of March 31, 2020 and December 31, 2019, respectively

 

 

7

 

 

 

6

 

Additional paid-in capital

 

 

1,045,989

 

 

 

828,618

 

Accumulated other comprehensive income

 

 

163

 

 

 

80

 

Accumulated deficit

 

 

(811,112

)

 

 

(724,680

)

Total stockholders’ equity

 

 

235,047

 

 

 

104,024

 

Total liabilities and stockholders’ equity

 

$

420,052

 

 

$

204,369

 

 

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

3


AIMMUNE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(Unaudited)

 

 

Quarter Ended March 31,

 

 

 

2020

 

 

2019

 

Product revenue, net

 

$

575

 

 

$

 

Costs and operating expenses

 

 

 

 

 

 

 

 

Cost of revenue

 

 

257

 

 

 

 

Research and development

 

 

36,463

 

 

 

31,316

 

Selling, general and administrative

 

 

49,138

 

 

 

23,712

 

Total costs and operating expenses

 

 

85,858

 

 

 

55,028

 

Loss from operations

 

 

(85,283

)

 

 

(55,028

)

Interest income

 

 

978

 

 

 

1,901

 

Interest expense

 

 

(2,229

)

 

 

(1,144

)

Other income, net

 

 

221

 

 

 

34

 

Loss before provision for income taxes

 

 

(86,313

)

 

 

(54,237

)

Provision for income taxes

 

 

119

 

 

 

29

 

Net loss

 

$

(86,432

)

 

$

(54,266

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

10

 

 

$

 

Unrealized gain on available-for-sale investments

 

 

73

 

 

 

171

 

Comprehensive loss

 

$

(86,349

)

 

$

(54,095

)

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(1.34

)

 

$

(0.87

)

Weighted average shares used in computing net loss per common

   share, basic and diluted

 

 

64,514

 

 

 

62,022

 

 

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

 


4


AIMMUNE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balance as of December 31, 2019

 

 

 

 

$

 

 

 

63,779

 

 

$

6

 

 

$

828,618

 

 

$

80

 

 

$

(724,680

)

 

$

104,024

 

Issuance of common stock

   pursuant to development

   arrangement

 

 

 

 

 

 

 

 

156

 

 

 

 

 

 

5,000

 

 

 

 

 

 

 

 

 

5,000

 

Issuance of preferred and

   common stock pursuant

   to financing arrangement

 

 

526

 

 

 

 

 

 

1,000

 

 

 

1

 

 

 

199,906

 

 

 

 

 

 

 

 

 

199,907

 

Issuance of common stock

   upon exercise of vested

   options and vesting of

   restricted stock units

 

 

 

 

 

 

 

 

288

 

 

 

 

 

 

2,098

 

 

 

 

 

 

 

 

 

2,098

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,367

 

 

 

 

 

 

 

 

 

10,367

 

Foreign currency translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

10

 

Unrealized gain on available-

   for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

73

 

 

 

 

 

 

73

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(86,432

)

 

 

(86,432

)

Balance as of March 31, 2020

 

 

526

 

 

$

 

 

 

65,223

 

 

$

7

 

 

$

1,045,989

 

 

$

163

 

 

$

(811,112

)

 

$

235,047

 

 

 

 

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

5


AIMMUNE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

 

62,142

 

 

$

6

 

 

$

775,283

 

 

$

(108

)

 

$

(476,234

)

 

$

298,947

 

Issuance of common stock

   upon exercise of vested

   options and vesting of

   restricted stock units

 

 

328

 

 

 

 

 

 

3,633

 

 

 

 

 

 

 

 

 

3,633

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

7,765

 

 

 

 

 

 

 

 

 

7,765

 

Unrealized gain on available-

   for-sale investments

 

 

 

 

 

 

 

 

 

 

 

171

 

 

 

 

 

 

171

 

Accumulated depreciation upon

   adoption of ASU Topic 842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51

 

 

 

51

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(54,266

)

 

 

(54,266

)

Balance as of March 31, 2019

 

 

62,470

 

 

$

6

 

 

$

786,681

 

 

$

63

 

 

$

(530,449

)

 

$

256,301

 

 

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

 

 

6


AIMMUNE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Quarter Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(86,432

)

 

$

(54,266

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

1,298

 

 

 

666

 

Stock-based compensation expense

 

 

10,303

 

 

 

7,765

 

Non-cash interest expense

 

 

2,223

 

 

 

1,065

 

Amortization of premium on investment securities

 

 

(6

)

 

 

(542

)

Research and development expenses recognized from issuance of common stock

 

 

5,000

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables, net

 

 

(772

)

 

 

 

Inventories

 

 

(4,012

)

 

 

 

Prepaid expenses and other assets

 

 

2,429

 

 

 

1,433

 

Accounts payable

 

 

191

 

 

 

1,945

 

Accrued liabilities

 

 

(2,159

)

 

 

(3,555

)

Other liabilities

 

 

125

 

 

 

(340

)

Net cash used in operating activities

 

 

(71,812

)

 

 

(45,829

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(319

)

 

 

(1,372

)

Purchase of investments

 

 

(32,457

)

 

 

(85,564

)

Maturities of investments

 

 

37,640

 

 

 

67,408

 

Net cash provided by (used in) investing activities

 

 

4,864

 

 

 

(19,528

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under debt agreement

 

 

85,000

 

 

 

40,000

 

Debt issuance costs

 

 

 

 

 

(3,856

)

Net proceeds from issuance of preferred and common stock

 

 

199,907

 

 

 

 

Net cash proceeds from exercise of stock options

 

 

1,996

 

 

 

3,250

 

Tax withholdings related to net share settlements of restricted stock units

 

 

(1,427

)

 

 

(490

)

Net cash provided by financing activities

 

 

285,476

 

 

 

38,904

 

Effects of changes in foreign exchange rates

 

 

10

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

218,538

 

 

 

(26,453

)

Cash and cash equivalents at the beginning of the period

 

 

79,880

 

 

 

107,511

 

Cash and cash equivalents at the end of the period

 

$

298,418

 

 

$

81,058

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable and accrued liabilities

 

$

120

 

 

$

1,051

 

Receivable for stock option exercises

 

$

 

 

$

383

 

 

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

 

 

7


AIMMUNE THERAPEUTICS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

 

1. Formation and Business of the Company

 

Aimmune Therapeutics, Inc., or the Company, is a biopharmaceutical company focused on developing and commercializing new therapeutic approaches, including the development of proprietary product candidates, for the treatment of peanut and other food allergies. We are headquartered in Brisbane, California, and were incorporated in the state of Delaware on June 24, 2011.

 

Our main therapeutic approach, which we refer to as Characterized Oral Desensitization Immunotherapy, or CODITTM, is designed to desensitize patients to food allergens and thereby reduce the risk of having an allergic reaction upon accidental exposure or reduce symptom severity should an allergic reaction occur.

 

PALFORZIA TM (Peanut (Arachis hypogaea) Allergen Powder-dnfp) (formerly AR101) is our lead internally developed product utilizing CODIT and was approved by the FDA for marketing and sale in the United States in January 2020. PALFORZIA is an oral immunotherapy indicated for the mitigation of allergic reactions, including anaphylaxis, that may occur with accidental exposure to peanut. Initiation of PALFORZIA is approved in patients aged 4 through 17 years with a confirmed diagnosis of peanut allergy. PALFORZIA may be continued in patients 18 years of age and older. PALFORZIA is to be used in conjunction with a peanut-avoidant diet. We are currently commercializing PALFORZIA in the United States through a specialty sales force of approximately 80 Practice Account Managers targeting practicing allergists.

 

Since inception, we have incurred net losses and negative cash flows from operations. During the quarter ended March 31, 2020, we incurred a net loss of $86.4 million and we used $71.8 million of cash in operations. As of March 31, 2020, we had an accumulated deficit of $811.1 million, and we do not expect to experience positive cash flows in the near future. As of March 31, 2020, we had cash, cash equivalents and investments of $371.6 million. In February 2020, we received gross proceeds from Nestlé Health Science’s $200.0 million equity investment and the draw of the second loan tranche from KKR of $85.0 million. In light of the launch delay caused by COVID-19, we are taking numerous active steps to conserve financial resources. We anticipate that based on our current business plan, our financial resources will fully fund us. We have financed our operations to date primarily through private placements of our equity securities, our initial public offering, or IPO, of common stock in August 2015, an underwritten public offering of common stock in February and March 2018 and our loan agreement entered into in January 2019. Our ability to continue to meet our obligations and to achieve our business objectives is dependent upon a number of factors, which include commercializing PALFORZIA, obtaining European Medicines Agency, or EMA, approval of our Marketing Authorization Application for PALFORZIA, raising additional capital, the successful and timely completion of our clinical trials, our ability to control expenses and generating sufficient revenue in the United States and Europe. Failure to generate sufficient revenue in the United States, manage discretionary expenditures, or raise additional financing, as required, may adversely impact our ability to achieve our intended business objectives.

 

2. Summary of Significant Accounting Policies

 

Basis of Preparation

 

The accompanying condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles, or GAAP, in the United States and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2019, has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements have been prepared on the same basis as our annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of our financial information. The results of operations for the quarter ended March 31, 2020, are not necessarily indicative of the results to be expected for the year ending December 31, 2020, or for any other interim period or for any other future year. We operate in one reportable segment.

 

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2019, included in our Annual Report on Form 10-K filed with the SEC.

 

Basis of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.

8


Use of Estimates

 

The preparation of the accompanying condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenue, costs and expenses recognized during the reporting periods. We base our estimates and assumptions on historical experience when available and on various factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results could differ from these estimates under different assumptions or conditions.

 

Significant Accounting Policies

 

There have been no significant changes to the accounting policies during the three months ended March 31, 2020, as compared to the significant accounting policies described in Note 2 of the “Notes to Consolidated Financial Statements” in our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, except as noted below.

 

Foreign Currency Translation

 

The functional currency of our foreign subsidiaries is either the U.S. dollar or the Euro. For foreign subsidiaries with the functional currency of the Euro, assets and liabilities are translated to U.S. dollars using the exchange rates at the balance sheet date and expenses are translated using the monthly average exchange rates in effect during the period in which the transactions occur. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.

 

Monetary assets and liabilities in the non-functional currency of our subsidiaries are remeasured using exchange rates in effect at the end of the period. Costs in the non-functional currency are remeasured using average exchange rates for the period, except for costs related to those balance sheet items that are remeasured using historical exchange rates. The resulting transaction gains and losses are included in the consolidated statements of comprehensive loss as incurred and have not been material for all periods presented.

 

Concentration of Risk

  

Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, trade receivables, and investments. Our investment policy limits investments to certain types of debt securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. We are exposed to credit risk in the event of a default by the financial institutions holding our cash, cash equivalents and investments and issuers of investments to the extent recorded on the consolidated balance sheets.

 

          We are dependent on a small number of third-party manufacturers to manufacture our drugs and drug candidates. We could be adversely affected by a significant interruption in the supply of bulk drug substances and the manufacturing activities to produce, package and distribute PALFORZIA.

 

During the quarter ended March 31, 2020, we had four customers, of whom three accounted for approximately 75%, 13% and 12% of total net revenues. We had no such concentration during the three months ended March 31, 2019.

 

In March 2020, the World Health Organization declared the global novel coronavirus, or COVID-19, outbreak a pandemic. To date, our operations have been significantly impacted by the COVID-19 pandemic, including with respect to the commercial launch of PALFORZIA and enrollment in our Phase 2 clinical trial for AR201. However, we cannot at this time predict the specific extent, duration or full impact that the COVID-19 pandemic will have on our financial condition and results of operations. The impact of the COVID-19 pandemic on our financial performance will depend on future developments, including the duration and spread of the COVID-19 pandemic and related governmental advisories and restrictions. These developments and the impact of COVID-19 on the financial markets and the overall economy are also highly uncertain. If the financial markets and/or the overall economy are impacted for an extended period, our business, financial condition, results of operations and prospects may be adversely affected.  

 

Trade Receivables, net

          

Trade receivables are recorded net of estimates for which reserves are established for distributor fees, prompt pay discounts and other distributor costs that are offered within contracts between us and a limited number of specialty distributors and pharmacies in the United States, which we refer to herein as Customers. These reserves are classified as reductions of trade receivables. Refer to our Revenue Recognition policy for additional information.

 

9


Accounts outstanding longer than the contractual payment terms are considered past due. We write off accounts receivable when they are deemed uncollectible and such write-offs, net of payments received, are recorded as a reduction to the allowance. As of March 31, 2020, and March 31, 2019, we did not have any allowances for doubtful accounts.

 

Inventories

 

Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out, or FIFO, basis. We use actual costs to determine our cost basis for inventories. Inventories consist of raw materials, work-in-process and finished goods.

 

Prior to regulatory approval of our product candidates, expenses incurred to manufacture drug products are recorded as research and development expense. We begin capitalizing these expenses as inventory upon regulatory approval.

 

We assess our inventory levels each reporting period and write-down inventory that is expected to be at risk of expiration, that has a cost basis in excess of its expected net realizable value and inventory quantities in excess of expected requirements. In evaluating the sufficiency of our inventory reserves or liabilities for firm purchase commitments, we also take into consideration our firm purchase commitments for future inventory production. When we recognize a loss on such inventory or firm purchase commitments, such amounts are recognized as cost of revenues.

 

Revenue Recognition

 

Pursuant to ASC Topic 606, Revenue from Contracts with Customers, or ASC 606, we recognize revenue upon transfer of control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.

 

To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps:

 

(i)

identify the contract(s) with a customer;

 

(ii)

identify the performance obligations in the contract(s);

 

(iii)

determine the transaction price;

 

(iv)

allocate the transaction price to the performance obligations in the contract(s); and

 

(v)

recognize revenue when (or as) we satisfy a performance obligation.

 

We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.

 

Product Revenue, Net

 

Our product revenue consists of U.S. sales of PALFROZIA, which we began shipping to Customers in March 2020. Prior to March 2020 we had no product revenue. We sell PALFROZIA to a limited number of Customers under a Risk Evaluation and Mitigation Strategy, a drug safety program that the FDA requires for certain medications with safety concerns to help ensure the benefits of the medication outweigh its risks. Revenue from product sales are recognized when the performance obligation under the agreements with our Customers are fulfilled, which is when the product has been delivered to our Customers. These Customers subsequently resell our products to patients and sometimes to hospitals, pharmacies and allergists.

 

Shipping and handling activities are considered to be fulfillment activities rather than a separate performance obligation and are recorded as cost of revenue.

 

Reserves for Variable Consideration

        

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from distribution fees, prompt pay discounts, expected product returns, chargebacks, rebates, co-pay assistance and other allowances that are offered relating to our product sales. These reserves as detailed below are based on the amounts earned or to be claimed on the related sales and are classified as reductions of trade receivables or accrued liabilities. Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted in accordance with the expected value method under ASC 606 for relevant factors. These factors include current contractual and statutory requirements, specific known market events and trends, industry data, and/or forecasted customer buying and payment patterns. Overall, these reserves are factored into our net estimate of transaction price and reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the respective underlying contracts.

 

The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur

10


in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

 

Distribution Fees: Under our inventory management agreements with our Customers, we pay them a fee primarily for compliance with certain contractually determined covenants such as the maintenance of agreed upon inventory levels. These distribution fees are based on a contractually determined fixed percentage of sales. We record these distribution fees as a reduction of trade receivables.

 

Prompt Pay Discounts: Our Customers receive a contractually agreed discount for prompt payment. We expect our Customers will earn 100% of their prompt pay discounts and we record these discounts as a reduction of trade receivables.

 

Product Returns: We generally offer our Customers a right of return based on the product’s expiration date or other market-based factors for product that has been purchased from us. We estimate the amount of our product sales that may be returned by our Customers and record the estimates as an accrued liability. We currently estimate product returns using available industry data, our own sales information and our visibility into the inventory remaining in the distribution channel.

 

Rebates: We are subject to government mandated rebates under the Medicaid Drug Rebate Program and other government health care programs in the United States. Rebate amounts are based upon contractual agreements or legal requirements with public sector benefit providers. We use the expected-value method for estimating these rebates based on statutory discount rates and expected utilization. The expected utilization of such rebates is estimated based on third party market research data and data received from our Customers. Estimates for these rebates are adjusted quarterly to reflect the most recent information. We record the estimated rebates as an accrued liability.

 

Co-Pay Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-pay assistance. We record the estimated amounts as an accrued liability. Co-pay assistance is based on actual program participation on a patient-by-patient basis and estimates of program redemption using our patient data provided by the third-party administrator of our co-pay program. Estimates for these rebates are adjusted quarterly to reflect the most recent information.

 

Other Customer Credits: We pay fees to the specialty distributors and pharmacies for account management, data management and other administrative services. We have determined such services received to date are not distinct from our sale of products to the specialty distributors and pharmacies and, therefore, a fair market value for these services may not be reasonably determined for accounting purposes. We record these fees as an accrued liability.

 

Cost of Revenue

 

Cost of revenue consists primarily of direct and indirect costs related to the manufacturing of PALFROZIA units sold, including raw materials, third-party contract manufacturing and packaging costs, freight costs, storage costs, allocation of overhead costs of employees involved with production of PALFORZIA and costs paid to our contract manufacturers, if any, for anticipated shortfall in product demand relative to committed volumes. Such product costs incurred prior to FDA approval of PALFORZIA in January 2020 have been recorded as research and development expense in our condensed consolidated statement of operations.

 

Income Taxes

 

On March 18, 2020, the Families First Coronavirus Response Act, or the FFCR Act, and on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The FFCR Act and CARES Act did not have a material impact on our condensed consolidated financial statements as of March 31, 2020; however, we continue to examine the impacts the FFCR Act and CARES Act may have on our business, results of operations, financial condition and liquidity.

 

Recently Adopted Accounting Pronouncements

 

We adopted Accounting Standards Update, or ASU, No. 2018-15, Intangibles-Goodwill and Other – Internal Use Software: Subtopic 340-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, as of January 1, 2020. This guidance required companies to apply the internal-use software guidance in Accounting Standards Codification, or ASC, 340-40 to implementation costs incurred in a hosting arrangement that is a service contract to determine whether to capitalize certain implantation costs or expense them as incurred. The adoption of ASU No. 2018-15 did not have a material impact on our consolidated financial statements.  

 

11


We adopted ASU No. 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, as of January 1, 2020. The ASU adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. The adoption of ASU No. 2018-13 did not have a material impact on our consolidated financial statements.

 

We adopted ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as of January 1, 2020. The ASU requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 modifies the other-than-temporary impairment model for available-for-sale debt securities and requires an estimate of expected credit losses when the fair value is below the amortized cost of the asset. The adoption of ASU No. 2016-13 did not have a material impact on our consolidated financial statements.

 

We adopted ASU No. 2019-12, Simplifying the Accounting for Income Taxes, in the fourth quarter of 2019. The ASU, as part of the Financial Accounting Standards Board’s Simplification Initiative to reduce the cost and complexity in accounting for income taxes, removes certain exceptions related to the approach for intraperiod tax allocation, which is the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP.  The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The adoption of ASU No. 2019-12 did not have a material impact on our consolidated financial statements.

 

3. Available-for-Sale Securities and Fair Value Measurements

 

We define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

Our valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. We classify these inputs into the following hierarchy:

 

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

 

The following tables set forth our financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

 

 

 

March 31, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

298,418

 

 

$

 

 

$

 

 

$

298,418

 

Total cash and cash equivalents

 

$

298,418

 

 

$

 

 

$

 

 

$

298,418

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency securities

 

$

 

 

$

7,507

 

 

$

 

 

$

7,507

 

Corporate securities

 

 

 

 

 

30,970

 

 

 

 

 

 

30,970

 

Commercial paper

 

 

 

 

 

9,942

 

 

 

 

 

 

9,942

 

U.S. government securities

 

 

 

 

 

24,770

 

 

 

 

 

 

24,770

 

Total investments

 

$

 

 

$

73,189

 

 

$

 

 

$

73,189

 

12


 

 

 

December 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

79,880

 

 

$

 

 

$

 

 

$

79,880

 

Total cash and cash equivalents

 

$

79,880

 

 

$

 

 

$

 

 

$

79,880

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency securities

 

 

 

 

 

8,862

 

 

 

 

 

 

8,862

 

Corporate securities

 

 

 

 

 

30,338

 

 

 

 

 

 

30,338

 

Commercial paper

 

 

 

 

 

7,949

 

 

 

 

 

 

7,949

 

U.S. government securities