PDL BIOPHARMA, INC. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts are "forward-looking statements" for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, including any statements concerning our monetization strategy, plan of liquidation, potential dissolution, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "intends," "plans," "believes," "anticipates," "expects," "estimates," "predicts," "potential," "continue" or "opportunity," or the negative thereof or other comparable terminology. The forward-looking statements in this quarterly report are only predictions. Although we believe that the expectations presented in the forward-looking statements contained herein are reasonable at the time they were made, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct. These forward-looking statements, including with regards to our future financial condition and results of operations, are subject to inherent risks and uncertainties, including but not limited to the risk factors set forth below or incorporated by reference herein, and for the reasons described elsewhere in this Quarterly Report on Form 10-Q. All forward-looking statements and reasons why results may differ included in this Quarterly Report on Form 10-Q are made as of the date hereof. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
OVERVIEW
Throughout our history, our mission has been to improve the lives of patients by aiding in the successful development of innovative therapeutics and healthcare technologies.PDL BioPharma was founded in 1986 asProtein Design Labs, Inc. when it pioneered the humanization of monoclonal antibodies, enabling the discovery of a new generation of targeted treatments that have had a profound impact on patients living with different cancers as well as a variety of other debilitating diseases. In 2006, we changed our name toPDL BioPharma, Inc. Historically, we generated a substantial portion of our revenues through the license agreements related to patents covering the humanization of antibodies, which we refer to as the Queen et al. patents. In 2012, and in anticipation of declining revenues from the Queen et al. patents, we began providing alternative sources of capital through royalty monetization and debt facilities, and, in 2016, we began acquiring commercial-stage products and launching specialized companies dedicated to the commercialization of these products first with our acquisition of branded prescription pharmaceutical drugs from Novartis AG,Novartis Pharma AG andSpeedel Holding AG (collectively, "Novartis") in 2016 and, in 2017, with the acquisition of LENSAR, Inc. ("LENSAR"), a medical device ophthalmology equipment manufacturing company. In 2019, we entered into a securities purchase agreement with Evofem Biosciences, Inc. ("Evofem"), pursuant to which we invested$60.0 million in a private placement of securities. These investments provided funding for Evofem's pre-commercial activities for PhexxiTM, its investigational, non-hormonal, on-demand prescription contraceptive gel for women.
Based on the nature of our investments and as further discussed below, where applicable, our operations were structured in four segments designated as Pharmaceutical, Medical Devices, Income Generating Assets and Strategic Positions.
Our Pharmaceutical segment consisted of revenue derived from branded prescription medicine products acquired by our subsidiary,Noden Pharma DAC, Inc. ("Noden DAC") from Novartis and sold under the name Tekturna® and Tekturna HCT® inthe United States , Rasilez® and Rasilez HCT® in the rest of the world, and from revenue generated from the sale of an authorized generic form of Tekturna launched byNoden Pharma USA Inc. ("Noden USA ") inthe United States (collectively, the "Noden Products"). Our Medical Devices segment consists of revenue derived from the sale and lease of the LENSAR® Laser System, which may include equipment, Patient Interface Devices ("PIDs"), procedure licenses, training, installation, warranty and maintenance agreements. 50 -------------------------------------------------------------------------------- Our Income Generating Assets segment consists of revenue derived from (i) notes and other long-term receivables, (ii) royalty rights and hybrid notes/royalty receivables, (iii) equity investments and (iv) royalties from issued patents inthe United States and elsewhere covering the humanization of antibodies, which we refer to as the Queen et al. patents.
Our Strategic Positions segment consisted of our investment in Evofem.
InSeptember 2019 , we engaged financial and legal advisors and initiated a review of our strategy. This review was completed inDecember 2019 . At such time, we disclosed that we planned to halt the execution of our growth strategy, cease making additional strategic transactions and investments and instead pursue a formal process to unlock the value of our portfolio by monetizing our assets and ultimately distributing net proceeds to stockholders (the "monetization strategy"). Pursuant to our monetization strategy, we do not expect to enter into any additional strategic investments. We further announced inDecember 2019 that we would explore a variety of potential transactions in connection with the monetization strategy, including a whole Company sale, divestiture of our assets, spin-offs of operating entities, merger opportunities or a combination thereof. Over the subsequent months, our board of directors (the "Board") and management analyzed, together with our outside financial and legal advisors, how to best capture value pursuant to our monetization strategy and best return the significant intrinsic value of the assets in our portfolio to the stockholders. InFebruary 2020 , the Board approved a plan of complete liquidation (the "Plan of Liquidation") of our assets and passed a resolution to seek stockholder approval to dissolve our company. At our Annual Meeting of Stockholders inAugust 2020 , the proposal to liquidate and dissolve our company pursuant to a plan of dissolution was approved by our stockholders. OnNovember 5, 2020 , our Board approved filing a certificate of dissolution with the Secretary ofState of Delaware onJanuary 4, 2021 and proceeding to complete the dissolution process for our company in accordance with the Delaware General Corporate Law. As a consequence of the filing of the certificate of dissolution, we will close our stock transfer books as of the Final Record Date. After such time, we will not record any further transfers of our common stock, except pursuant to the provisions of a deceased stockholder's will, intestate succession, or by operation of law and we will not issue any new stock certificates, other than replacement certificates. In addition, after the Final Record Date, we will not issue any shares of our common stock upon exercise of outstanding stock options. As a result of the closing of our transfer books, it is anticipated that distributions, if any, made in connection with the dissolution will be made pro rata to the same stockholders of record as the stockholders of record as of the Final Record Date, and it is anticipated that no further trading of our common stock will occur after the Final Record Date. In accordance with our dissolution plan, we intend to begin the voluntary delisting process from theNasdaq Stock Market exchange so that such delisting will occur at market close onDecember 31, 2020 and we do not anticipate transferring into OTC trading. Pursuant to our monetization strategy, we explored a variety of potential transactions, including a whole Company sale, divestiture of assets, spin-offs of operating entities, merger opportunities or a combination thereof. In addition, we analyzed, and continue to analyze, optimal mechanisms for returning value to stockholders in a tax-efficient manner, including share repurchases, cash dividends and other distributions of assets. Despite the challenges of COVID-19, we made significant progress in our monetization strategy during 2020, including monetizing most of our key assets and resolving a longstanding legal issue as follows: •InMay 2020 , we distributed all of our common stock in Evofem to our stockholders •InAugust 2020 , we entered into a settlement agreement (the " Settlement Agreement") with related entities ofDefined Diagnostics, LLC (f/k/aWellstat Diagnostics, LLC ) ("Wellstat Diagnostics " and, together with such related entities, the "Wellstat Parties") resolving previously reported litigation relating to loans made toWellstat Diagnostics by us •InAugust 2020 , we sold three royalty interests related to third party sales of Kybella®, Zalviso®, and Coflex® •InSeptember 2020 , we completed the previously announced sale of our interest inNoden DAC and Noden USA •InOctober 2020 , we completed the previously announced spin-off of LENSAR, our majority-owned medical device company, whereby we distributed in the form of a dividend all of our shares of LENSAR common stock to our stockholders as ofSeptember 22, 2020 . The Settlement Agreement with the Wellstat Parties provides for the payment of$7.5 million upon the signing of the Settlement Agreement, which has been received, and either (1)$5.0 million byFebruary 10, 2021 and$55.0 million byJuly 26, 2021 ; or (2)$67.5 million byJuly 26, 2021 . If the Wellstat Parties fail to make payment in full byJuly 26, 2021 , we are authorized to record and confess judgment against the Wellstat Parties for an amount of$92.5 million or such lesser amount as may be owed under the Settlement Agreement. 51 -------------------------------------------------------------------------------- The proceeds from the sale of the three royalty interests total$4.35 million , 90% of which was received at the closing of the transaction. The remaining 10% is currently held in escrow against certain potential contingencies and is to be released on the one-year anniversary of the closing, subject to the satisfaction of any such potential contingencies. OnJuly 30, 2020 , we signed a definitive agreement for the sale of our interest inNoden DAC and Noden USA toCAT Capital Bidco Limited ("Stanley Capital "). In accordance with the terms of the agreement, we will receive consideration of up to$52.8 million .Stanley Capital made an initial cash payment to us of$12.2 million on theSeptember 9, 2020 closing date. We are also entitled to recover$0.5 million related to value-added tax ("VAT") for inventory purchases from Novartis. The agreement provides for an additional$33.3 million to be paid to us in twelve equal quarterly installments fromJanuary 2021 toOctober 2023 . An additional$3.9 million will be paid in four equal quarterly installments fromJanuary 2023 toOctober 2023 . The agreement also provides for the potential for additional contingent payments to us. We are entitled to receive$2.5 million uponStanley Capital or any of its affiliates entering into a binding agreement for a specified transaction within one year of the closing date. We are also entitled to 50% of a license fee from a third party distributor within 10 days of receipt byNoden . Upon closing, we recorded a gain of$0.2 million . In connection with the closing of the transaction, the guaranty agreement between Novartis and us which guaranteed certain payments owed to Novartis byNoden was terminated. We intend to pursue monetization of our remaining assets in a disciplined and cost-effective manner to maximize returns to stockholders. At the same time, we recognize that accelerating the timeline to complete our monetization process, while continuing to optimize asset value, could increase returns to stockholders due to reduced general and administrative expenses as well as provide for faster returns to stockholders. While we are cognizant that an accelerated timeline may provide greater and faster returns to our stockholders, we also recognize that the duration and extent of the public health issues related to the COVID-19 pandemic make it possible, and perhaps probable, that the timing of the sale of all or substantially all of our remaining assets may require additional time to execute or for us to pursue alternatives to the sale of these assets. For example, if a suitable offer to purchase the remaining royalty assets is not received prior to or during the dissolution process, they could be retained by the dissolved entity and ultimately placed in a liquidating trust. The available proceeds from either the ongoing collection of royalty income or from the sale of the royalty assets would ultimately be distributed to our stockholders. We will continue to assess the market for our remaining assets to determine the appropriate time to sell them or to opt for alternative paths to return their value to our stockholders.
Following is a discussion of our current and historical segments.
Medical Devices
LENSAR
LENSAR is a commercial-stage medical device company focused on designing, developing and marketing an advanced femtosecond laser system for the treatment of cataracts and the management of pre-existing or surgically induced corneal astigmatism. LENSAR's femtosecond laser uses proprietary advanced imaging and laser technology to customize planning and treatments, allowing faster visual recovery and improved outcomes, as compared to conventional cataract surgery, a more manual procedure combined with ultrasound, referred to as phacoemulsification. LENSAR has developed the LENSAR® Laser System, which is the only femtosecond cataract laser built specifically for refractive cataract surgery. LENSAR has over 95 granted patents inthe United States and the rest of the world and over 55 pending patent applications inthe United States and the rest of the world. Cataract surgery is the highest volume surgical procedure performed worldwide; prior to the COVID-19 pandemic, 30 million surgeries were projected to be completed in 2020, the majority of which were expected to use conventional phacoemulsification techniques. LENSAR is currently focusing its research and development efforts on a next-generation, integrated workstation, ALLYTM, which combines an enhanced femtosecond laser with a phacoemulsification system in a compact, mobile workstation that is designed to allow surgeons to perform a femtosecond laser assisted cataract procedure in a single operating room using a single device. LENSAR's recent acquisitions of certain intellectual property uniquely position LENSAR to develop a system that can perform all cataract surgeries in a single platform. LENSAR expects this combination product would be a meaningful advancement and will provide significant administrative and financial benefit to a surgeon's practice at a cost that is less than the cost of its current system.
The LENSAR® Laser System offers cataract surgeons automation and customization for their astigmatism treatment planning and other essential steps of the refractive cataract surgery procedure with the highest levels of precision, accuracy, and efficiency. These features assist surgeons in managing their astigmatism treatment plans for optimal overall visual outcomes.
52
--------------------------------------------------------------------------------
The LENSAR® Laser System has been cleared by the Food and Drug Administration
("FDA") for anterior capsulotomy, lens fragmentation, corneal and arcuate
incisions. The LENSAR Laser with Augmented Reality™ provides an accurate 3-D
model of the relevant anatomical features of each patient's anterior segment,
allowing precise laser delivery and enhanced surgical confidence in
performing accurate corneal incisions, precise size, shape and location of
free-floating capsulotomies, and efficient lens fragmentation for all grades of
cataracts. The LENSAR® Laser System - fs 3D (LLS-fs 3D) with Streamline™
includes the integration with multiple pre-operative diagnostic devices,
utilizing automated Iris Registration with automatic cyclorotation adjustment.
IntelliAxis-C™ (corneal) and IntelliAxis-L™ (lens capsule) markers provide the
surgeon tools for simple and precise alignment without errors associated with
manually transposing the preoperative data, and marking the eye for incisions
and implantation of Toric IOLs as well as treatment planning tools for precision
guided laser treatments. The corneal incision-only mode, expanded remote
diagnostics capabilities, additional pre-programmable preferences, thoughtful
ergonomics, and up to 20 seconds faster laser treatment times with Streamline™
allow for seamless integration and maximum surgical efficiency with patient
comfort.
On October 1, 2020 of all outstanding shares of LENSAR common stock held by us
were distributed to our holders of common stock as of September 22, 2020 (the
"Record Date"). On October 1 , each of our stockholders as of the Record Date
received 0.075879 shares of LENSAR common stock for every one share of our
common stock held by such holders. LENSAR continues to own and operate its
femtosecond laser system business following completion of the distribution. As
of October 1, 2020 LENSAR became an independent, publicly traded company listed
on the Nasdaq Stock Market under the symbol "LNSR."
Strategic Positions
Evofem
We invested$60.0 million in Evofem in the second quarter of 2019, representing approximately a 27% ownership interest in the company as ofMarch 31, 2020 . The transaction was structured in two tranches. The first tranche comprised$30.0 million , which was funded onApril 11, 2019 . We invested an additional$30.0 million in a second tranche onJune 10, 2019 , alongside two existing Evofem stockholders,who each invested an additional$10.0 million . OnMay 21, 2020 we announced that we had completed the distribution of all of our 13,333,334 shares of common stock of Evofem to our stockholders, which represented approximately 26.7% of the outstanding shares of Evofem common stock as of the close of business onMay 15, 2020 . Following the distribution, we continue to hold warrants to purchase up to 3,333,334 shares of Evofem common stock. Evofem is a commercial-stage biopharmaceutical company committed to developing and commercializing innovative products to address unmet needs in women's sexual and reproductive health. Evofem is leveraging its proprietary Multipurpose Vaginal pH Regulator (MVP-R™) platform for its first commercial product PhexxiTM (L-lactic acid, citric acid and potassium bitartrate) for hormone-free birth control. OnMay 22, 2020 PhexxiTM was approved by theU.S. Food and Drug Administration for the prevention of pregnancy in womenwho choose to use on demand methods for their contraceptive needs.
As of
PharmaceuticalNoden OnJuly 1, 2016 , our subsidiary, Noden DAC, entered into an asset purchase agreement ("Noden Purchase Agreement") whereby it purchased from Novartis the exclusive worldwide rights to manufacture, market, and sell the Noden Products and certain related assets and assumed certain related liabilities (the "Noden Transaction").Noden DAC and Noden USA , together, and including their respective subsidiaries represented deployed capital of$191.2 million . Tekturna (or Rasilez outside ofthe United States ) contains aliskiren, a direct renin inhibitor, for the treatment of hypertension. While indicated as a first line treatment, it is more commonly used as a third line treatment in those patientswho are intolerant of angiotensin-receptor blockers ("ARBs") or angiotensin converting enzyme inhibitors ("ACEIs"). Studies indicate that approximately 12% of hypertension patients are ARB/ACEI intolerant. Tekturna and Rasilez are not indicated for use with ARBs and ACEIs in patients with diabetes or renal impairment and are contraindicated for use by pregnant women. In March 53 --------------------------------------------------------------------------------
2019, we launched an authorized generic ("AG") form of Tekturna, aliskiren
hemifumarate 150 mg and 300 mg tablets with the same drug formulation as
Tekturna. The AG is distributed by
Tekturna HCT is a combination of aliskiren and hydrochlorothiazide, a diuretic, for the treatment of hypertension in patients not adequately controlled by monotherapy and as an initial therapy in patients likely to need multiple drugs to achieve their blood pressure goals. It is not indicated for use with ACEIs and ARBs in patient with diabetes or renal impairment, or for use in patients with known anuria or hypersensitivity to sulfonamide derived drugs and is contraindicated for use by pregnant women. The Noden Products are protected by multiple patents worldwide, which specifically cover the composition of matter, the pharmaceutical formulations and methods of production. Inthe United States , the FDA Orange Book for Tekturna listsU.S. Patent No. 8,617,595, which covers certain compositions comprising aliskiren, together with other formulation components, and will expire onFebruary 19, 2026 . The FDA Orange Book for Tekturna HCT listsU.S. patent Nos. 8,618,172, which expires onJuly 13, 2028 and 9,023,893, which expiresMarch 3, 2022 , which patents cover certain compositions comprising aliskiren and hydrochlorothiazide, together with other formulation components. InEurope , European patent No. 678 503B (the "'503B Patent") expired in 2015. However, numerous Supplementary Protection Certificates ("SPCs") have been granted which are based on the '503B Patent and which provide for extended protection. These SPCs generally expired in April of 2020. European Patent Publication Number 2 305 232, which covers certain pharmaceutical compositions comprising aliskiren and HCT, will expire inDecember 2021 .
On
Income Generating Assets
Our income generating assets segment is comprised of (i) notes and other long-term receivables, (ii) royalty rights and hybrid notes/royalty receivables, (iii) equity investments and (iv) royalties from the Queen et. al patents.. Following is a summary of our more significant investments included in the Income Generating Assets segment:
Deployed Capital (2)
Investment Investment Type (in millions)
Assertio (1) Royalty $ 260.5
U-M Royalty $ 65.6
CareView Communications, Inc. ("CareView") Debt $ 20.0
______________
(1)Formerly Depomed, Inc.
(2)Excludes transaction costs.
Additionally, we have several other investments in our Income Generating Assets
segment included in our condensed consolidated balance sheet not reflected above
and the rights to proceeds from additional contractual and other sources
associated with previous investments which are not included in our condensed
consolidated balance sheet as they are not considered probable of providing
future economic benefit at this time. Additional assets included in our
condensed consolidated balance sheet include:
•Warrants to purchase shares of common stock of Evofem, as discussed further
below
•Warrants to purchase common stock of CareView
•Our equity investment in AEON and Alphaeon 1, LLC (formerly Alphaeon
Corporation and currently and collectively referred to as "AEON"))
Following is further discussion of the assets included in the Income Generating Assets segment:
54
--------------------------------------------------------------------------------Royalty Rights - At Fair Value
We have entered into various royalty purchase agreements with counterparties, whereby the counterparties convey to us the right to receive royalties that are typically payable on sales revenue generated by the sale, distribution or other use of the counterparties' products. Our royalty rights are classified as held for sale. We record the royalty rights at fair value using discounted cash flows related to the expected future cash flows to be received less estimated selling costs. We use significant judgment in determining our valuation inputs, including estimates as to the probability and timing of future sales of the licensed product. A third-party expert is generally engaged to assist us with our estimate of the expected future cash flows. The estimated fair value of the asset is subject to variation should those cash flows vary significantly from our estimates. At each reporting period, an evaluation is performed to assess those estimates, discount rates utilized and general market conditions affecting fair market value. During the third quarter of 2020 we sold our royalty interests for Coflex®, Zalviso®, and Kybella® toSWK Funding, LLC , a wholly owned subsidiary of SWK Holdings Corporation. AtSeptember 30, 2020 , we had two royalty rights transactions outstanding.
Notes and Other Long-Term Receivables
We have entered into credit agreements with borrowers across the healthcare industry, under which we made available cash loans to be used by the borrower. Obligations under these credit agreements are typically secured by a pledge of substantially all the assets of the borrower and any of its subsidiaries. AtSeptember 30, 2020 , we had one note receivable transaction outstanding.
Equity Investments
In the past, we have received equity instruments, including shares of stock or warrants to acquire shares of stock, in connection with credit agreements we entered into with borrowers in the healthcare industry. Our investment objective with respect to these equity investments was to maximize our return through capital appreciation and, when appropriate, to capture the value through optimally timed exit strategies. AtSeptember 30, 2020 , our equity investments consisted of shares of common stock inAEON Biopharma, Inc. andAlphaeon 1, LLC, received in connection with the loans made to LENSAR by us prior to our acquisition of LENSAR and warrants to acquire shares of common stock of CareView that were received in connection with our loan.
Royalties from Queen et al. patents and know-how
We have been issued patents inthe United States and elsewhere, covering the humanization of antibodies, which we refer to as our Queen et al. patents. Our Queen et al. patents, for which final patent expiry was inDecember 2014 , covered, among other things, humanized antibodies, methods for humanizing antibodies, polynucleotide encoding in humanized antibodies and methods of producing humanized antibodies. We previously entered into licensing agreements under our Queen et al. patents with numerous entities that are independently developing or have developed humanized antibodies. Under our licensing agreements, we were typically entitled to receive a flat-rate royalty based upon our licensees' net sales of covered antibodies. The royalties under these agreements have substantially ended with the exception of solanezumab, a Lilly-licensed humanized monoclonal antibody being tested in a study of older individualswho may be at risk of memory loss and cognitive decline due to Alzheimer's disease. Lilly has characterized the study as an assessment of whether an anti-amyloid investigational drug (solanezumab) in older individualswho do not yet show symptoms of Alzheimer's disease cognitive impairment or dementia can slow memory loss and cognitive decline. The study will also test whether solanezumab treatment can delay the progression of Alzheimer's disease-related brain injury on imaging and other biomarkers. If solanezumab is approved and commercialized pursuant to this clinical trial or another, we would be entitled to receive a royalty based on a "know-how" license for technology provided in the design of this antibody. The 2% royalty on net sales is payable for 12.5 years after the product's first commercial sale. The above described study is currently in Phase 3 testing with an estimated study completion date of January, 2023. 55 --------------------------------------------------------------------------------
Economic and Industry-wide Factors
Various economic and industry-wide factors are relevant to our business, including changes to laws and interpretation of those laws that protect our intellectual property rights, our licensees' ability to obtain or retain regulatory approval for products licensed under our patents, fluctuations in foreign currency exchange rates, the ability to attract, retain and integrate qualified personnel, as well as overall global economic conditions. We actively monitor economic, industry and market factors affecting our business; however, we cannot predict the impact such factors may have on our future results of operations, liquidity and cash flows. OnMarch 11, 2020 , theWorld Health Organization declared a global pandemic, as the outbreak of a novel strain of coronavirus spread throughout the world. The outbreak of COVID-19 has disrupted our business operations and has adversely impacted LENSAR. Actions taken to mitigate coronavirus have had and are expected to continue to have an adverse impact on the geographical areas in which LENSAR operates. Cataract surgery is typically considered an elective surgery and as such the majority of LENSAR's customers are not utilizing the LENSAR Laser Systems as they normally would at this time. LENSAR has also experienced minor supply chain disruptions. The full extent to which the COVID-19 outbreak will impact our business, results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and the estimates of the impact on our business may change based on new information that may emerge concerning COVID-19 and the actions to contain it or treat its impact and the economic impact on local, regional, national and international markets. The Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law at the end ofMarch 2020 and contains numerous forms of economic stimulus, including SBA guaranteed loans and certain income tax provisions. The tax provisions of the CARES Act, among other things, allows for a five year carryback of net operating losses for tax years 2018-2020. See also the risk factors included herein in "Item 1A. Risk Factors" and in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 and in subsequent filings for additional factors that may impact our business and results of operations.
Critical Accounting Policies and Use of Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance withU.S. generally accepted accounting principles. As discussed further below, the results of operations for the two and eight months endedAugust 31, 2020 and for the 2019 periods have been prepared under the going concern basis of accounting ("Going Concern Basis") whereas the financial statement information presented as of and for the one month period endedSeptember 30, 2020 is prepared under the liquidation basis of accounting ("Liquidation Basis"). The preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. The accounting estimates that require management's most significant, difficult and subjective judgments include the estimated sales proceeds of our assets in liquidation and estimated settlement amounts of our liabilities as well as the estimated revenue and operating expenses during dissolution that are projected under the Liquidation Basis, the valuation of royalty rights, assets and liabilities held for sale, product revenue recognition and allowance for customer rebates and allowances, the valuation of notes receivable and inventory, the assessment of recoverability of intangible assets and their estimated useful lives, the valuation and recognition of stock-based compensation, the recognition and measurement of current and deferred income tax assets and liabilities, including amounts recoverable under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, and the valuation of warrants to acquire shares of common stock. Furthermore, the impact on accounting estimates and judgments on our financial condition and results of operations due to COVID-19 has introduced additional uncertainties. We base our estimates, where possible, on our historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. During the quarter endedMarch 31, 2020 , we reclassified our Pharmaceutical segment and the royalty right assets within the Income Generating Assets segment to assets held for sale. During the quarter endedJune 30, 2020 , we distributed the shares of Evofem common stock within the Strategic Positions segment and reclassified the financial results of that segment as discontinued operations and the remaining assets are reclassified as held for sale. Assets and liabilities are classified as held for 56 -------------------------------------------------------------------------------- sale when all of the following criteria for a plan of sale have been met: (1) management, having the authority to approve the action, commits to a plan to sell the assets; (2) the assets are available for immediate sale, in their present condition, subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated; (4) the sale of the assets is probable and is expected to be completed within one year; (5) the assets are being actively marketed for a price that is reasonable in relation to their current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. When all of these criteria have been met, the assets (and liabilities) are classified as held for sale in the balance sheet for the current and comparative reporting periods. Assets classified as held for sale are reported at the lower of their carrying value or fair value less costs to sell. Depreciation and amortization of assets ceases upon designation as held for sale. The assets and liabilities held for sale are recorded on our Condensed Consolidated Balance Sheet as Assets held for sale and Liabilities held for sale, respectively, as ofDecember 31, 2019 . The profits and losses are presented on the Condensed Consolidated Statements of Operations as discontinued operations for the applicable current and prior periods. InAugust 2020 , as a result of the approval of our stockholders to pursue dissolution of our company and return capital to our stockholders, our basis of accounting in accordance with GAAP transitioned from the Going Concern Basis to the Liquidation Basis, effectiveSeptember 1, 2020 . Under the Liquidation Basis, all assets are stated at their estimated liquidation value. Contractual liabilities under the Liquidation Basis are measured in accordance with applicable GAAP and all other liabilities are stated at their estimated settlement amounts over the remaining estimated liquidation period. Other than the adoption of the Liquidation Basis of Accounting onSeptember 1, 2020 , there have not been any other significant changes to our critical accounting policies and estimates during the nine months endedSeptember 30, 2020 , from those presented in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , that are of significance, or potential significance, to us. Summarized below are the accounting pronouncements and policies adopted subsequent toDecember 31, 2019 .
Adopted Accounting Pronouncements
InJune 2016 , the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The guidance amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses. The Company adopted ASU No. 2016-13 onJanuary 1, 2020 using a modified retrospective approach. The adoption of this standard did not have a material impact on the Company's consolidated financial statements. As a consequence of adopting ASU 2016-13, the Company's accounts receivable accounting policy has been updated, as follows:
Accounts and Notes Receivable
The Company makes estimates of the collectability of accounts receivable. In doing so, the Company analyzes historical bad debt trends, customer credit worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for credit losses. Amounts are charged off against the allowance for credit losses when the Company determines that recovery is unlikely and the Company ceases collection efforts. The Company applies the practical expedient for its collateral-dependent notes receivable. Estimated credit losses are based on the fair value of the collateral (less costs to sell, as applicable). InApril 2020 , the FASB issued a staff question-and-answer document, "Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic" (the "COVID-19 Q&A"), to address certain frequently-asked questions pertaining to lease concessions arising from the effects of the COVID-19 pandemic. Existing lease guidance requires entities to determine if a lease concession was a result of a new arrangement reached with the lessee (which would be addressed under the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (which would not fall under the lease modification framework). The COVID-19 Q&A clarifies that entities may elect to not evaluate whether lease-related relief granted in light of the effects of COVID-19 is a lease or obligations of the lease. This election is available for concessions that result in the total payments required by the modified contract being substantially the same or less than the total payments required by the original contract. As a result of the COVID-19 pandemic, LENSAR entered into agreements with 23 customers through which LENSAR agreed to waive monthly rental and minimum monthly license fees ranging from one to four months for an aggregate of$0.9 million of revenue for the eight months endedAugust 31, 2020 , consisting of$0.5 million in Product revenue,$0.3 million in Lease 57 -------------------------------------------------------------------------------- revenue, and$0.1 million in Service revenue. In return for these concessions the related contracts were extended by the same number of months waived. No amounts of accounts receivable or notes receivable were deemed uncollectible due to COVID-19 during the 2020 periods presented herein; however, the Company considered the effects of COVID-19 in estimating its credit losses for the period. InAugust 2018 , the FASB issued ASU No. 2018-13, Fair Value Measurement. The new guidance modifies disclosure requirements related to fair value measurement. The Company adopted ASU No. 2018-13 onJanuary 1, 2020 . The adoption did not have an effect on the Consolidated Financial Statements on the adoption date and no adjustment to prior year Consolidated Financial Statements was required. InAugust 2018 , the FASB issued ASU No. 2018-15, Intangibles-Goodwill andOther-Internal-Use Software . The new guidance reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The Company adopted ASU No. 2018-15 onJanuary 1, 2020 using the prospective transition option. The adoption did not have an effect on the Consolidated Financial Statements on the adoption date and no adjustment to prior year Consolidated Financial Statements was required.
Recently Issued Accounting Pronouncements
InDecember 2019 , the FASB issued ASU 2019-12, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. For public companies, the amendments in ASU No. 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2020 , with early adoption permitted. The Company is currently evaluating the impact of this guidance on its Consolidated Financial Statements. 58 --------------------------------------------------------------------------------
Operating Results
As noted above, during the quarter endedMarch 31, 2020 , we reclassified our Pharmaceutical segment and the royalty right assets within the Income Generating Assets segment to assets held for sale. When the held for sale criteria have been met, depreciation and amortization of those assets is suspended and the profits and losses are presented on the Condensed Consolidated Statements of Operations as discontinued operations. During the quarter endedJune 30, 2020 , we distributed the Evofem common stock and reclassified the investment as a discontinued operation. The operating results presented below are segregated between continuing operations and discontinued operations. Results from the prior year comparative period are classified consistently with the current year presentation. During the quarter endedSeptember 30, 2020 , we transitioned from the Going Concern Basis of accounting to the Liquidation Basis of accounting. Our results of operations presented below discuss the two and eight month periods endedAugust 31, 2020 and the three and nine month periods endedSeptember 30, 2019 under the Going Concern Basis. Two and eight months endedAugust 31, 2020 , compared to three and nine months endedSeptember 30, 2019 Revenues Two Months Three Months Eight Months Nine Months Ended Ended Ended Ended August 31, September 30, Change from Prior August 31, September 30, Change from Prior (dollars in thousands) 2020 2019 Year % 2020 2019 Year % Revenues Product revenue, net(1)$ 2,831 $ 5,856 (52%)$ 10,946 $ 15,860 (31%) Lease revenue 703 1,322 (47%) 2,139 3,854 (44%) Service revenue 544 898 (39%) 2,126 2,510 (15%) Royalties from Queen et al. patents - - N/M - 9 N/M License and other 37 (45) (182%) 110 (48) (329%) Total revenues$ 4,115 $ 8,031 (49%)$ 15,321 $ 22,185 (31%) ________________________ N/M Not meaningful (1) Our Product revenue, net, Lease revenue, and Service revenue consists entirely of revenue from our Medical Devices segment. We record Product revenue, net from our LENSAR product sales which include LENSAR® Laser Systems, disposable consumables, procedure licenses, training, and installation. We record Lease revenue from the lease of LENSAR® Laser Systems. We record Service revenue from warranty and maintenance services. Product sales for our Pharmaceutical segment are included in Income (loss) from discontinued operations and are net of estimated product returns, pricing discounts, including rebates offered pursuant to mandatory federal and state government programs, chargebacks, prompt pay discounts, distribution fees and co-pay assistance for product sales each period. See Note 3, Discontinued Operations Classified as Assets Held for Sale under Going Concern Basis, for additional information on our Pharmaceutical product sales.
Two Months Ended
Total revenues were$4.1 million for the two months endedAugust 31, 2020 , compared with$8.0 million for the three months endedSeptember 30, 2019 . Our total revenues decreased by 49%, or$3.9 million , for the two months endedAugust 31, 2020 , when compared to the prior year three-month period. The decrease was driven by the impact of the COVID-19 pandemic on the Medical Devices segment and the associated decline in elective surgical procedures inNorth America and the rest of the world in addition to the shorter measurement period in the current year due to the transition to Liquidation Basis of accounting onSeptember 1, 2020 . 59 --------------------------------------------------------------------------------
Eight Months Ended
Total revenues were$15.3 million for the eight months endedAugust 31, 2020 , compared with$22.2 million for the nine months endedSeptember 30, 2019 . Our total revenues decreased by 31%, or$6.9 million , for the eight months endedAugust 31, 2020 , when compared to the prior year nine-month period. The decrease was primarily driven by the impact of the COVID-19 pandemic on the Medical Devices segment and the associated decline in elective surgical procedures in addition to the shorter measurement period in the current year. Operating Expenses Two Months Three Months Eight Months Nine Months Ended Ended Ended Ended September August 31, September 30, Change from Prior August 31, 30, Change from Prior (dollars in thousands) 2020 2019 Year % 2020 2019 Year % Cost of product revenue, (excluding intangible amortization)$ 1,127 $ 4,765 (76)%$ 6,626 $ 13,494
(51)%
Amortization of intangible assets 204 321 (36)% 841 983 (14)% General and administrative 7,224 10,062 (28)% 29,695 27,067 10% Severance and retention 2,400 - N/M 24,713 - N/M Sales and marketing 835 1,545 (46)% 3,322 4,980 (33)% Research and development 1,053 4,310 (76)% 4,374 6,106 (28)% Total operating expenses$ 12,843 $ 21,003 (39)%$ 69,571 $ 52,630 32% Percentage of total revenues 312 % 262 % 454 % 237 % _______________________ N/M Not meaningful
Two Months Ended
Total operating expenses were$12.8 million for the two months endedAugust 31, 2020 , compared with$21.0 million for the three months endedSeptember 30, 2019 reflecting a decrease of$8.2 million or 39%. The decrease was primarily a result of: •lower general and administrative expenses, primarily due to a shorter measurement period due to our transition to the Liquidation Basis of accounting, •lower research and development in our Medical Devices segment as LENSAR expensed acquired intellectual property acquired in the prior period, •lower cost of product revenue, due to decreased sales in our Medical Devices segment for the above-noted reasons, and •lower sales and marketing expenses in our Medical Devices segment due to the impact of COVID-19, partially offset by •severance and retention recorded in the current year period with no corresponding expense in the prior year period.
General and administrative expenses for the two months ended
60
--------------------------------------------------------------------------------
Two Months Ended August 31, 2020 Three Months Ended September 30, 2019
Income Income
Medical Generating Medical Generating
(in thousands) Devices Assets Total Devices Assets Total
Compensation $ 463 $ 1,319 $ 1,782 $ 855 $ 4,867 $ 5,722
Salaries and Wages (including
taxes) 449 885 1,334 454 1,449 1,903
Bonuses (including accruals) (192) 404 212 261 1,465 1,726 Equity 206 30 236 140 1,953 2,093 Asset management - 1,499 1,499 - 418 418 Business development - 123 123 - 614 614 Accounting and tax services 720 1,821 2,541 6 834 840 Other professional services 77 398 475 291 450 741 Other 256 548 804 462 1,265 1,727 Total general and administrative(1)$ 1,516 $ 5,708 $ 7,224 $ 1,614 $ 8,448 $ 10,062 ________________ (1) No general and administrative operating expenses were attributable to the Pharmaceutical or Strategic Positions segments for the two months endedAugust 31, 2020 or the three months endedSeptember 30, 2019 . See Assets held for sale and discontinued operations below, for additional information on our Pharmaceutical segment.
Eight Months Ended
Total operating expenses were$69.6 million for the eight months endedAugust 31, 2020 , compared with$52.6 million for the nine months endedSeptember 30, 2019 reflecting an increase of$16.9 million or 32%. The increase was primarily a result of: •provisions under our Wind-Down Retention Plan, which, as a result of the adoption of the Plan of Liquidation, accelerated the vesting of outstanding stock awards for employees in the first quarter of 2020, and •higher general and administrative expenses of$2.6 million , or 10% from the prior period, primarily due to increased professional fees associated with our monetization plan, partially offset by •lower research and development expenses in our Medical Devices segment, •lower cost of product revenue, due to decreased sales in our Medical Devices segment, and •lower sales and marketing expenses in our Medical Devices segment due to the impact of COVID-19. After we announced our monetization strategy, we recognized that our ability to execute on our plan and optimize returns to our stockholders depended to a large extent on our ability to retain the necessary expertise to effectively transact with respect to our assets. OnDecember 21, 2019 , the Compensation Committee of the Board adopted the Wind Down Retention Plan in which our executive officers and other employeeswho are participants in our Severance Plan are eligible to participate. Under the Wind Down Retention Plan, participants are eligible to earn a retention benefit in consideration for their continued employment with us. The Wind Down Retention benefits are equivalent to previously disclosed compensation payments contemplated in connection with a change in control under our existing Severance Plan. Under the Wind Down Retention Plan, payment of the retention benefit to any participant will occur upon termination of the participant's employment with us either by us without cause or by the participant for good reason. The retention benefit, if paid, would be in lieu of (and not in addition to) any other severance compensation that could become payable to the participant under our Severance Plan. In connection with the adoption of the Wind Down Retention Plan, a severance liability was being recorded over the remaining service period for the participating employees under the Going Concern Basis. Upon the adoption of the Liquidation Basis onSeptember 1, 2020 , all remaining estimated severance and retention costs were accrued. As ofSeptember 30, 2020 , we had an estimated severance liability of$10.9 million . Expenses associated with severance payments and accruals are reflected in Severance and retention on our Condensed Consolidated Statements of Operations. The Wind Down Retention Plan also provides that, consistent with the existing terms of the our Amended and Restated 2005 Equity Incentive Plan (the "Equity Plan"), the vesting of all outstanding equity awards held by participants as of the date the Wind Down Retention Plan was adopted will be accelerated upon the earlier of: (i) a termination of the participant's employment with us either by us without cause or by the participant for good reason or (ii) the consummation of a change in control (as defined in the Equity Plan) of our company. In addition, the post-termination exercise period for all outstanding stock options will be extended until their expiration date. In connection with the Board adopting the Plan of Liquidation in the 61 -------------------------------------------------------------------------------- first quarter of 2020, all of the outstanding and unvested stock options and restricted stock granted to our employees, executive officers and directors, with the exception of certain outstanding awards under the 2016/20 Long-Term Incentive Plan, accelerated and vested under the change in control definition in the Equity Plan. The expense associated with the accelerated vesting, totaled$15.7 million and is also reflected in Severance and retention on our Condensed Consolidated Statements of Operations.
General and administrative expenses for the eight months ended
Eight Months Ended August 31, 2020 Nine Months Ended September 30, 2019
Income Income
Medical Generating Medical Generating
(in thousands) Device Assets Total Device Assets Total
Compensation $ 2,464 $ 8,633 $ 11,097 $ 2,798 $ 12,651 $ 15,449
Salaries and Wages (including
taxes) 1,666 4,468 6,134 1,426 4,639 6,065
Bonuses (including accruals) 410 1,890 2,300 831 2,894 3,725 Equity 388 2,275 2,663 541 5,118 5,659 Asset management - 5,299 5,299 - 807 807 Business development - 650 650 - 1,211 1,211 Accounting and tax services 2,221 4,156 6,377 46 2,482
2,528
Other professional services 369 2,365 2,734 993 1,253 2,246 Other 1,184 2,354 3,538 1,316 3,510 4,826 Total general and administrative (1)$ 6,238 $ 23,457 $ 29,695 $ 5,153 $ 21,914 $ 27,067 ________________ (1) No general and administrative expenses were attributable to the Pharmaceutical or Strategic Positions segment for the eight months endedAugust 31, 2020 or the nine months endedSeptember 30, 2019 . See Assets held for sale and discontinued Operations below, for additional information on our Pharmaceutical segment. Non-operating Expense, Net Two Months Three Months Eight Months Nine Months Ended Ended Ended Ended August 31, September 30, Change from Prior August 31, September 30, Change from Prior (dollars in thousands) 2020 2019 Year % 2020 2019 Year % Interest and other income, net$ 26 $ 1,460 (98%)$ 608 $ 4,984 (88%) Interest expense (210) (3,011) (93%) (996) (8,950) (89%) Loss on investment (5,576) - N/M (5,576) - N/M Gain on sale of intangible assets - 3,476 N/M - 3,476
N/M
Loss on extinguishment of convertible notes - (3,900) N/M (606) (3,900)
(84%)
Total non-operating expense, net$ (5,760) $ (1,975) 192%$ (6,570) $ (4,390) 50% ________________________ N/M Not meaningful
Two Months Ended
Net non-operating expense increased for the two months endedAugust 31, 2020 , as compared to the three months endedSeptember 30, 2019 , primarily due to: •a shorter measurement period due to the transition to Liquidation Basis of accounting onSeptember 1, 2020 , •lower interest expense in conjunction with the extinguishment of a substantial portion of our convertible notes, •the loss on extinguishment of convertible notes in the prior period with not charge in the current period, and •a decrease in the value of our investment in AEON, partially offset by •a decrease in interest and other income due to lower cash balances in the current period. 62 --------------------------------------------------------------------------------
Eight Months Ended
Net non-operating expense increased for the eight months endedAugust 31, 2020 , as compared to the nine months endedSeptember 30, 2019 , primarily due to: •a shorter measurement period due to the transition to Liquidation Basis of accounting onSeptember 1, 2020 , •lower interest expense in conjunction with the extinguishment of a substantial portion of our convertible notes, •a smaller loss on extinguishment of convertible notes recorded in the eight months endedAugust 31, 2020 compared to the prior year period, and •a decrease in the value of our investment in AEON, partially offset by •lower interest and other income due to lower cash balances in the current period. Income Taxes OnMarch 27, 2020 the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other provisions, permits Net Operating Loss ("NOL") carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. We were a significant taxpayer in the earlier eligible carryback years and expects that the NOL carryback provision of the CARES Act to result in a material cash benefit as a result of the 2020 ordinary tax losses being generated and, to a lesser degree, for the 2019 tax year. Historically, we calculated our provision for income taxes during interim reporting periods by applying the estimated annual effective tax rate for the full fiscal year to pre-tax income or loss. Upon the Company's adoption of the liquidation basis of accounting, we employ the discrete method of determining our tax provision based on the pre-tax results for the eight month period endingAugust 31, 2020 and the one month period endingSeptember 30, 2020 . Income tax benefit from continuing operations for the two months endedAugust 31, 2020 and three months endedSeptember 30, 2019 , was$3.6 million and$3.1 million , respectively, and for the eight months endedAugust 31, 2020 and nine months endedSeptember 30, 2019 , was$17.8 million and$6.6 million , respectively, which in the current period resulted primarily from anticipated use of NOL carrybacks as allowed by the CARES Act. Our effective tax rate for the current year periods differs from theU.S. federal statutory rate of 21% due primarily to the effect of state income taxes, non-deductible executive compensation and the tax provisions of the CARES Act. The CARES Act receivable included in Income tax receivable on the Condensed, Consolidated Statement of Net Assets as ofSeptember 30, 2020 is$80.5 million and includes, in addition to the losses from operations, the ordinary losses incurred on theNoden transaction and the sale of the royalty assets. See Note 21, Subsequent Events, for additional information on the LENSAR spin-off. The Income tax receivable as ofSeptember 30, 2020 also includes a refund of$7.9 million for a prior year overpayment that was requested after the 2016 Internal Revenue Service (the "IRS") audit was settled. The uncertain tax positions decreased by$4.4 million inSeptember 2020 upon settlement of theIRS audit for the tax year 2016. We recorded$1.9 million and$2.0 million of interest related to uncertain tax positions during the eight months endedAugust 31, 2020 and the nine months endedSeptember 30, 2019 , respectively. Our income tax returns are subject to examination byU.S. federal, foreign, state and local tax authorities for tax years 2000 forward. InSeptember 2020 , the Company settled theIRS audit for the tax year 2016. We are currently under audit by the California Franchise Tax Board (the "CFTB") for the tax years 2009 through 2015. The timing of the resolutions to the CFTB audit and the amount to be ultimately paid, if any, is uncertain. Final resolution of this complex matter could have a material impact on our Condensed Consolidated Financial Statements. We believe our accrual for income tax liabilities is appropriate based on past experience, interpretations of tax law and judgments; however, the outcome of these audits could result in the payment of tax amounts that substantially differ from the amounts we have reserved resulting in incremental expense or a reversal of our reserves in a future period. At this time, we do not anticipate a material change in the unrecognized tax benefits related to the CFTB audit that would affect the effective tax rate or deferred tax assets over the next 12 months. 63 --------------------------------------------------------------------------------
Assets held for sale and discontinued operations
The Pharmaceutical segment, the royalty right assets in the Income Generating
Assets segment and the Evofem investment in the Strategic Positions segment have
been classified as held for sale and reported as discontinued operations. The
operating results from discontinued operations are presented separately in our
Condensed Consolidated statements of Operations as discontinued operations.
Components of amounts reflected in Income (Loss) from discontinued operations
are as follows (in thousands):
Two Months Three Months Eight Months Nine Months
Ended Ended Ended Ended
August 31,
2020 2019 2020 2019
Revenues
Product revenue, net$ 6,281
(1,893) 23,865 (8,804) (4,277)
Total revenues 4,388 36,134 20,675 38,367
Operating expenses Cost of product revenue (excluding intangible asset amortization)
3,894 10,268 17,576 26,697
Amortization of intangible assets - 1,253 389 3,760
General and administrative 1,540 2,029 6,105 5,969
Sales and marketing 59 168 257 1,536
Research and development - - - (41)
Total operating expenses 5,493 13,718 24,327 37,921
Operating (loss) income from discontinued
operations (1,105) 22,416 (3,652) 446
Non-operating income (expense), net
Equity affiliate - change in fair value 1,296 (27,378) (25,365) 18,109
Loss on classification as held for sale - - (28,904) -
Total non-operating income (expense), net 1,296 (27,378) (54,269) 18,109
Income (loss) from discontinued operations before
income taxes 191 (4,962) (57,921) 18,555
Income tax (benefit) expense from discontinued
operations (15,045) 1,193 (23,006) 6,141
Income (loss) from discontinued operations $ 15,236
Two Months Ended
Income from discontinued operations for the two months endedAugust 31, 2020 was$15.2 million , a$21.4 million increase from the$6.2 million loss recognized for the three months endedSeptember 30, 2019 . The favorable change was primarily a result of: •An unrecognized loss of$27.4 million in the three months endedSeptember 30, 2019 as compared to a$1.3 million unrecognized gain in the two months endedAugust 31, 2020 . These amounts were partially offset by: •A$6.0 million , or 49%, decline in revenue from our Pharmaceutical segment for the two months endedAugust 31, 2020 as compared to the same period in the prior year. The decrease in revenue from our Pharmaceutical segment is primarily due to lower net revenues inthe United States and the shorter measurement period. The decrease in revenue from our Pharmaceutical segment inthe United States for the two months endedAugust 31, 2020 is due to the increased sales of our authorized generic and lower sales of our branded drug as compared to the third quarter of 2019. •Revenue from our royalty right assets of negative$1.9 million for the two months endedAugust 31, 2020 as compared with revenue of$23.9 million for the three months endedSeptember 30, 2019 . The difference was primarily due to an increase in fair value in the third quarter of 2019 primarily resulting from the Assertio asset. 64 -------------------------------------------------------------------------------- •The royalty right assets in our Income Generating Assets segment generated cash flows of$10.1 million and a loss from the decrease in fair value of$12.0 million in the two months endedAugust 31, 2020 compared with cash flows of$25.6 million and a decrease in fair value of$1.7 million in the three month period endedSeptember 30, 2019 . The following tables provides a summary of activity with respect to our royalty rights - change in fair value for the two months endedAugust 31, 2020 and three months endedSeptember 30,2019 : Two Months Ended August 31, 2020 Change in Royalty Rights - (in thousands) Cash Royalties Fair Value Change in Fair Value Assertio$ 9,910 $ (11,771) $ (1,861) VB 137 (208) (71) U-M - - - AcelRx 37 - 37 KYBELLA - - - Total$ 10,084 $ (11,979) $ (1,895) Three Months Ended September 30, 2019 Change in Royalty Rights - (in thousands) Cash Royalties Fair Value Change in Fair Value Assertio$ 23,597 $ 1,058 $ 24,655 VB 254 89 343 U-M 1,574 (3,063) (1,489) AcelRx 80 236 316 KYBELLA 59 (19) 40 Total$ 25,564 $ (1,699) $ 23,865
Eight Months Ended
Loss from discontinued operations for the eight months endedAugust 31, 2020 was$34.9 million , a$47.3 million decrease from the$12.4 million of income recognized for the nine months endedSeptember 30, 2019 . The unfavorable change was primarily a result of: •A$43.5 million change in the fair value of our equity affiliate from an unrecognized gain of$18.1 million in the nine months endedSeptember 30, 2019 as compared to a$25.4 million unrecognized loss in the eight months endedAugust 31, 2020 . •A$23.5 million write down of our Pharmaceutical segment in the current year due to a decrease in the value ofNoden prior to its sale. •A$13.2 million , or 31%, decline in revenue from our Pharmaceutical segment for the eight months endedAugust 31, 2020 , as compared to the nine months period endedSeptember 30, 2019 . The decrease in revenue from our Pharmaceutical segment reflects lower net revenues inthe United States and the rest of the world. The decrease in revenue from our Pharmaceutical segment inthe United States for the eight months endedAugust 31, 2020 reflects the introduction of our authorized generic of Tekturna and a third-party generic of aliskiren late in the first quarter of 2019. The decrease in revenue for the rest of the world is due to lower sales volume of Rasilez in certain territories. •Revenue from the royalty right assets in our Income Generating Assets segment for the eight months endedAugust 31, 2020 of negative$8.8 million as compared with negative revenue of$4.3 million for the nine month period of the prior year. The difference was primarily due to a larger decrease in fair value in the nine months endedSeptember 30, 2019 resulting from the$60.0 million AcelRx write-down as compared to the current year period, which includes the fair value adjustments as informed by bids received during our monetization process. 65 -------------------------------------------------------------------------------- •The royalty right assets generated cash flows of$35.1 million in the eight months endedAugust 31, 2020 compared to$58.3 million in the nine months endedSeptember 30, 2019 . The following tables provides a summary of activity with respect to our royalty rights - change in fair value for the eight months endedAugust 31, 2020 and nine months endedSeptember 30, 2019 : Eight Months Ended August 31, 2020 Change in Royalty Rights - (in thousands) Cash Royalties Fair Value Change in Fair Value Assertio$ 29,927 $ (18,209) $ 11,718 VB 612 (9,408) (8,796) U-M 4,355 (2,948) 1,407 AcelRx 194 (12,952) (12,758) KYBELLA 42 (416) (374) Total$ 35,130 $ (43,933) $ (8,803) Nine Months Ended September 30, 2019 Change in Royalty Rights - (in thousands) Cash Royalties Fair Value Change in Fair Value Assertio$ 52,980 $ 599 $ 53,579 VB 748 354 1,102 U-M 4,212 (4,379) (167) AcelRx 241 (57,650) (57,409) KYBELLA 109 (1,491) (1,382) Total$ 58,290 $ (62,567) $ (4,277) Net Income (Loss) Per Share
Net income (loss) per share for the two and eight months ended
Two Months Three Months Eight Months Nine Months
Ended Ended Ended Ended
August 31, September 30, August 31, September 30,
2020 2019 2020 2019
Net income (loss) per share - basic:
Continuing operations $ (0.10) $ (0.10) $ (0.36) $ (0.23)
Discontinued operations 0.14 (0.06) (0.30) 0.10
Net income (loss) attributable to PDL's stockholders per basic share
$ 0.04 $
(0.16)
Net income (loss) per share - diluted: Continuing operations$ (0.10) $ (0.10) $ (0.36) $ (0.23) Discontinued operations 0.14 (0.06) (0.30) 0.10 Net income (loss) attributable to PDL's stockholders per diluted share$ 0.04 $ (0.16) $ (0.66) $ (0.13) 66
--------------------------------------------------------------------------------
Weighted-average basic and diluted shares used in the computation of Net income (loss) per share are as follows (in thousands):
Two Months Ended Three Months Ended Eight Months Ended Nine Months Ended
August 31, September 30, August 31, September 30,
2020 2019 2020 2019
Basic 113,889 112,986 118,001 119,966
Diluted 113,889 112,986 118,001 119,966
Liquidity and Capital Resources
We have previously financed our operations primarily through royalty and other license-related revenues, public and private placements of debt and equity securities, interest income on invested capital and cash generated from pharmaceutical and medical device product sales. We plan to continue to finance our operations in the near term primarily through existing cash and cash proceeds from our monetization efforts and our royalty rights assets until such assets are disposed. InSeptember 2019 , we engaged financial and legal advisors and initiated a review of our strategy. InDecember 2019 , we disclosed that we planned to halt the execution of our growth strategy, cease making additional strategic transactions and investments and pursue a formal process to unlock the value of our portfolio by monetizing our assets and ultimately returning net proceeds to our stockholders. Over the subsequent months, our Board and management analyzed, together with its outside financial and legal advisors, how to best capture value pursuant to its monetization strategy and best return the significant intrinsic value of the assets in its portfolio to the stockholders. InFebruary 2020 , our Board approved a plan of complete liquidation of our assets. InAugust 2020 we received stockholder approval to dissolve our Company underDelaware law. We plan to file a certificate of dissolution inDelaware inJanuary 2021 and proceed to wind-down and dissolve our Company in accordance withDelaware General Corporate Law. Pursuant to our monetization strategy, we are explored a variety of potential transactions, including a whole Company sale, divestiture of assets, spin-offs of operating entities, merger opportunities or a combination thereof. In addition, we have analyzed, and continue to analyze, the optimal mechanisms for returning value to stockholders in a tax-efficient manner, including via share repurchases, cash dividends and other distributions of assets. We intend to pursue monetization in a disciplined and cost-effective manner to maximize returns to stockholders. We recognize, however, that accelerating the timeline, while continuing to optimize asset value, could increase returns to stockholders due to reduced general and administrative expenses as well as provide faster returns to stockholders. As a result of this monetization strategy, we expect to generate additional cash from the sale of one or more of the assets in our portfolio, including from the recovery of previous taxes paid under the CARES Act, with the intention of managing the successful wind down of our business and distributing the remaining net proceeds to our stockholders. Our future capital requirements are difficult to forecast and will depend upon many factors, including the type of distributions we make, the amount of net cash proceeds we receive, after transaction costs, and the time it takes to monetize our assets. Our future capital requirements will also depend on the amount of common stock and convertible notes we repurchase under our repurchase program. The general cash needs of our Medical Devices, Strategic Positions, Pharmaceutical and Income Generating Assets segments can vary significantly. •OnOctober 1, 2020 , we distributed in the form of a dividend all outstanding shares of LENSAR common stock held by us to our stockholders of record as ofSeptember 22, 2020 . As a result, LENSAR became an independent, publicly traded company and we do not anticipate any additional cash needs for this entity to be provided by PDL. •Our Pharmaceutical segment was sold in the three months endedSeptember 30, 2020 and we do not anticipate any additional cash funding to be provided by PDL for this segment. •The cash needs of our Income Generating Assets segment tend to be driven by employee compensation, legal and professional service fees required for operating a publicly traded company, as well as the funding of potential repurchases of our common stock and convertible notes. 67 -------------------------------------------------------------------------------- OnDecember 9, 2019 , we announced that our Board authorized the repurchase of issued and outstanding shares of our common stock and convertible notes up to an aggregate value of$200.0 million pursuant to a share repurchase program. OnDecember 16, 2019 , we announced that our Board approved a$75.0 million increase to this repurchase program. Repurchases under this repurchase program can be made from time to time in the open market or in privately negotiated transactions and funded from our working capital. The amount and timing of such repurchases will depend upon the price and availability of shares or convertible notes, general market conditions and the availability of cash. Common stock and convertible note repurchases were also eligible to be made under a trading plan under Rule 10b5-1, which would permit shares and convertible notes to be repurchased when we might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. In consideration of the impact and uncertainty introduced by the COVID-19 pandemic on our monetization process, the 10b5-1 plan was terminated onMay 31, 2020 and no common stock was repurchased after this date. All shares of common stock repurchased under our repurchase program were retired and restored to authorized but unissued shares of common stock. All convertible notes repurchased under the program will be retired. As ofSeptember 30, 2020 , we had repurchased$50.2 million in aggregate principal amount ofDecember 2021 Notes and$85.0 million in aggregate principal amount ofDecember 2024 Notes under the Board authorized repurchase program. As ofSeptember 30, 2020 approximately$14.8 million in aggregate principal amount of the convertible notes remain outstanding. Pursuant to the convertible note repurchase transactions and the unwinding of a portion of the capped call transaction entered into for the notes, we also repurchased 3.2 million shares of our common stock under this program directly from our capped call counterparty. We repurchased 12.3 million shares of our common stock under this repurchase program during the eight months endedAugust 31, 2020 , for an aggregate purchase price of$39.4 million , or an average cost of$3.20 per share, including trading commissions. This repurchase program may be suspended at any time without notice. Our debt service obligations consist of interest payments and repayment of the remaining amount of ourDecember 2021 Notes andDecember 2024 Notes. We may continue our efforts to repurchase the remaining outstanding convertible notes. We expect to finance such repurchases with cash on hand. We had cash and cash equivalents in the aggregate of$125.7 million and$169.0 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively, representing a decrease of$43.3 million . The decrease was primarily attributable to: •the repurchase of our common stock for$39.4 million , •the net cash used for the repurchase of our convertible notes of$18.0 million , and •cash that transferred with theNoden business in connection with the sale of our interest inNoden DAC and Noden USA , partially offset by •proceeds from royalty right payments of$42.6 million . We believe that cash on hand and cash generated from future revenues and from asset sales, net of operating expenses, debt service and income taxes, will be sufficient to fund our operations until all net proceeds are distributed to our stockholders. Our continued success is dependent on our ability to execute on our planned strategy to monetize our assets, in order to return capital to our stockholders and service our remaining debt. As noted above, inSeptember 2020 , we sold our interests inNoden DAC and Noden USA which comprised our Pharmaceutical segment. Upon closing, we were released of our guarantee to Novartis underNoden's supply agreement. Under the terms of the sale of our interests inNoden DAC and Noden USA , we received proceeds of$12.2 million at the closing of the transaction and are due an additional$33.0 million to be paid in 12 equal quarterly installments fromJanuary 2021 toOctober 2023 and two contingent payments totaling$3.78 million . There is an additional$3.86 million to be paid to us in four equal quarterly installments fromJanuary 2023 toOctober 2023 .
Off-Balance Sheet Arrangements
As of
68
--------------------------------------------------------------------------------Contractual Obligations
Convertible Senior Notes
As of
We have actively repurchased our convertible senior notes in privately negotiated transactions and in the open market using cash on hand. As ofSeptember 30, 2020 , our outstanding notes consisted of notes due inDecember 2021 and inDecember 2024 , which in the aggregate totaled$14.8 million in principal, or less than 10% of the aggregate principal balance of the original issuance. In lateSeptember 2020 , we received notices to convert$11.2 million par value of our 2021 convertible notes which we intend to settle in cash. After settling the debt submitted for conversion and pending any further transactions before the end of the year, we will finish 2020 with an aggregate of$3.6 million of convertible notes outstanding. We expect that our debt service obligations prior to our dissolution will consist of interest payments and the repurchase or repayment of ourDecember 2021 Notes andDecember 2024 Notes.
Guarantees
Redwood City Lease Guarantee
In connection with the spin-off ofFacet Biotech Corporation ("Facet"), we entered into amendments to the leases for our former facilities inRedwood City, California , under which Facet was added as a co-tenant, and a Co-Tenancy Agreement, under which Facet agreed to indemnify us for all matters related to the leases attributable to the period after the spin-off date. InApril 2010 , Abbott Laboratories acquired Facet and later renamed the entityAbbVie Biotherapeutics, Inc. ("AbbVie"). If AbbVie were to default under its lease obligations, we could be held liable by the landlord as a co-tenant and, thus, we have in substance guaranteed the payments under the lease agreements for theRedwood City facilities. As ofSeptember 30, 2020 , the total lease payments for the duration of the guarantee, which runs throughDecember 2021 , are approximately$14.1 million . For additional information regarding our lease guarantee, see Note 14, Commitments and Contingencies.
Purchase Obligation
Noden DAC and Novartis entered into a supply agreement pursuant to which Novartis will manufacture and supply to Noden DAC a bulk tableted form of the Noden Products and the active pharmaceutical ingredient. OnJuly 30, 2020 we announced the signing of a definitive agreement for the sale of 100% of the outstanding stock inNoden DAC and Noden USA . The sale closed inSeptember 2020 , at which time we were released of our guarantee to Novartis in connection withNoden's supply agreement. LENSAR entered into various supply agreements for the manufacture and supply of certain components. The supply agreement commits LENSAR to a minimum purchase obligation of approximately$2.5 million , which is due over the next twelve months. We had previously guaranteed a portion of this commitment and were released from our guarantee in August of 2020. 69
--------------------------------------------------------------------------------
© Edgar Online, source
