Quarterly report pursuant to Section 13 or 15(d)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
9 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (the “FASB”).

 

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 13, 2019. The accompanying consolidated balance sheet as of December 31, 2018 was derived from the audited financial statements for the year ended December 31, 2018. These condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X, and therefore omit or condense certain footnotes and other information normally included in complete consolidated financial statements prepared in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s financial position as of September 30, 2019, its results of operations and changes in equity for the three and nine months ended September 30, 2019 and 2018 and its cash flows for the nine months ended September 30, 2019 and 2018.

 

During the three and nine months ended September 30, 2019 and 2018, comprehensive loss was equal to the net loss amounts presented for the respective periods in the accompanying condensed consolidated statements of operations. In addition, certain prior year balances have been reclassified to conform to the current presentation. Specifically, for the three and nine months ended September 30, 2018, approximately $0.3 million and $1.0 million was reclassified from research and development expenses to selling, general and administrative expenses in the accompanying consolidated statements of operations. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full fiscal year.

 

Use of estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the realizable value of accounts receivable, valuation of inventory, assumptions used in the fair value of awards granted under the Company’s equity incentive plans and warrants issued in connection with the issuance of notes payable and the valuation allowance for the Company’s deferred tax assets.

Fair value of financial instruments

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents and accounts payable, are shown at cost which approximates fair value due to the short-term nature of these instruments. The debt outstanding under the Company’s senior secured term loan (see Note 6) approximates fair value due to the variable interest rate on this debt. With respect to the subordinated note payable in the amount of $15.0 million as of September 30, 2019 and December 31, 2018, which is held by Biotest AG (“Biotest”), a principal stockholder of the Company at the time the note was issued, and was issued concurrent with an acquisition transaction with an affiliate of such stockholder (see Note 6), the Company has concluded that an estimation of fair value for this note is not practicable.

 

Accounts receivable

Accounts receivable is reported at realizable value, net of allowances for contractual credits and doubtful accounts, which are recognized in the period the related revenue is recorded. At September 30, 2019, three customers accounted for an aggregate of 88% of the Company’s total accounts receivable, and at December 31, 2018, three customers accounted for approximately 95% of the Company’s total accounts receivable.

 

Inventories

Inventories, including plasma intended for resale and plasma intended for internal use in the Company’s manufacturing, future anticipated commercialization activities and research and development are carried at the lower of cost or net realizable value determined by the first-in, first-out method.  Although the Company expects that BIVIGAM and ASCENIV inventory manufactured prior to their respective BLA approvals on May 9, 2019 and April 1, 2019, respectively, will ultimately be available for commercial sale, due to prior uncertainties surrounding the timing of these FDA approvals, all costs related to the production of BIVIGAM and ASCENIV that were incurred prior to their respective approval dates have been charged to cost of product revenue in the accompanying consolidated statements of operations. These costs amounted to $0.6 million and $4.0 million for the nine months ended September 30, 2019 and 2018, respectively.

 

Goodwill

Goodwill represents the excess of purchase price over the fair value of net assets acquired by the Company. Goodwill at September 30, 2019 and December 31, 2018 was $3.5 million. All of the Company’s goodwill is attributable to the acquisition of its ADMA BioManufacturing business segment.

 

Goodwill is not amortized, but is assessed for impairment on an annual basis or more frequently if impairment indicators exist. The Company has the option to perform a qualitative assessment of goodwill to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill and other intangible assets. If the Company concludes that this is the case, then it must perform a goodwill impairment test by comparing the fair value of the reporting unit to its carrying value. An impairment charge is recorded to the extent the reporting unit’s carrying value exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The Company performs its annual goodwill impairment test as of October 1 of each year. The Company’s annual goodwill impairment test as of October 1, 2019 did not result in a goodwill impairment charge, and the Company did not record any impairment charges related to goodwill for the nine months ended September 30, 2019 and 2018.

 

Impairment of long-lived assets

The Company assesses the recoverability of its long-lived assets, which include property and equipment and definite-lived intangible assets, whenever significant events or changes in circumstances indicate impairment may have occurred. If indicators of impairment exist, projected future undiscounted cash flows associated with the asset are compared to its carrying amount to determine whether the asset’s carrying value is recoverable. Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and a charge to operating results. For the nine months ended September 30, 2019 and 2018, the Company determined that there was no impairment of its long-lived assets.

 

Revenue recognition

Revenues are comprised of (i) revenues from the sale of the Company’s FDA-approved immunoglobulin products, (ii) product revenues from the sale of human plasma collected from the Company’s Plasma Collection Centers business segment, (iii) revenues from contract manufacturing; and (iv) license and other revenues primarily attributable to the out-licensing of ASCENIV to Biotest to market and sell this product in Europe and selected countries in North Africa and the Middle East. Biotest has provided the Company with certain services and financial payments in accordance with the related Biotest license agreement and is obligated to pay the Company certain amounts in the future if certain milestones are achieved. Deferred revenue is recognized over the term of the Biotest license. Deferred revenue is amortized into income for a period of approximately 22 years, the term of the Biotest license agreement. Deferred revenue of approximately $2.4 million as of September 30, 2019 and December 31, 2018 is related to this agreement.

 

Product revenue is recognized when the customer is deemed to have control over the product. Control is determined based on when the product is shipped or delivered and title passes to the customer. Revenue is recorded in an amount that reflects the consideration the Company expects to receive in exchange. Revenue from the sale of immunoglobulin products is generally recognized when the product reaches the customer’s destination, and is recorded net of estimated rebates, price protection arrangements and customer incentives, including prompt pay discounts, wholesaler chargebacks and other wholesaler fees. These estimates are based on historical experience, and the Company believes that such estimates are reasonable. For revenues associated with contract manufacturing, control transfers to the customer and the performance obligation is satisfied when the customer takes possession of the product from the Boca Facility or a third party warehouse that is utilized by the Company.

 

Product revenues from the sale of human plasma collected at the Company’s plasma collection centers are recognized at the time control of the product has been transferred to the customer, which generally occurs at the time of shipment. Product revenues are recognized at the time of delivery to the customer if the Company retains control of the product during shipment. Payments received from customers where the foregoing revenue recognition criteria have not been satisfied are recorded as deferred revenue, and the Company has recognized $1.1 million of such deferred revenue as of September 30, 2019.

 

For the nine months ended September 30, 2019, four customers represented an aggregate of 86% of the Company’s consolidated revenues. For the nine months ended September 30, 2018, three customers represented an aggregate of 90% of the Company’s consolidated revenues.

Cost of product revenue

Cost of product revenue includes expenses related to process development as well as scientific and technical operations when these operations are attributable to marketed products. When the activities of these operations are attributable to new products in development, the expenses are classified as research and development expenses.

 

Expenses associated with remediating certain compliance issues at the Boca Facility for the nine months ended September 30, 2019 and 2018 were approximately $0.2 million and $1.3 million, respectively, and are reflected in cost of product revenue in the accompanying consolidated statements of operations.

Loss per common share

Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share is calculated by dividing net loss attributable to common stockholders, as adjusted for the effect of dilutive securities, if any, by the weighted average number of shares of common stock and dilutive common stock outstanding during the period. Potentially dilutive common stock includes the shares of common stock issuable upon the exercise of outstanding stock options and warrants, using the treasury stock method. Potentially dilutive common stock is excluded from the diluted loss per common share computation to the extent that it would be anti-dilutive. As a result, no potentially dilutive securities are included in the computation of any of the accompanying diluted loss per share amounts as the Company reported a net loss for all periods presented. For the nine months ended September 30, 2019 and 2018, the following securities were excluded from the calculation of diluted loss per common share because of their anti-dilutive effects:

 

    For the Nine Months Ended September 30,
    2019   2018
Stock options     5,639,539       4,278,324  
Warrants     2,138,160       528,160  
      7,777,699       4,806,484  

 

Stock-based compensation

The Company follows recognized accounting guidance which requires all equity-based payments, including grants of stock options, to be recognized in the statements of operations as compensation expense based on their fair values at the date of grant. The Company uses the Black-Scholes option pricing model to determine the fair value of options granted. Compensation expense related to awards to employees and directors with service-based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the associated vesting period of the award, which is generally four years (see Note 7). Stock options granted under the Company’s equity incentive plans generally have a term of 10 years.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or its tax returns. Under this method, deferred tax assets and liabilities are recognized for the temporary differences between the tax bases of assets and liabilities and their respective financial reporting amounts at enacted tax rates in effect for the years in which the temporary differences are expected to reverse. The Company records a valuation allowance on its deferred tax assets if it is more likely than not that the Company will not generate sufficient taxable income to utilize its deferred tax assets. The Company is subject to income tax examinations by major taxing authorities for all tax years since 2015 and for previous periods as it relates to the Company’s net operating loss carryforwards.  

 

In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2019 and December 31, 2018, and during the nine months ended September 30, 2019 and 2018, the Company recognized no adjustments for uncertain tax positions.

 

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize assets and liabilities for the rights and obligations created by most leases on their balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company adopted ASU 2016-02 on January 1, 2019 using the option to recognize the cumulative-effect adjustment, if any, as of the date of application, which was also January 1, 2019. The Company recognized right-to-use assets of $1.4 million and corresponding lease liabilities of approximately $1.6 million at the date of adoption (see Note 12). The Company also elected the “package of practical expedients,” which permits the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. In addition, the Company elected the short-term lease recognition exemption for all leases that qualify, including the agreement under which the Company occupies certain office space as discussed in Note 8.

 

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815)” (“ASU 2017-11”). ASU 2017-11 changed the classification analysis of certain equity-linked financial instruments (or embedded features within such instruments) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) will no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with ASC 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. In addition, convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features in ASC 470-20, “Debt—Debt with Conversion and Other Options.” ASU 2017-11 became effective for the Company on January 1, 2019, and this update did not have a significant impact on the Company’s consolidated financial statements.