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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-36257
 RETROPHIN, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
27-4842691
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
3721 Valley Centre Drive, Suite 200
San Diego, CA 92130
(Address of Principal Executive Offices)
(888) 969-7879
(Registrant's Telephone number including area code)
 
N/A
 
 
Former name, former address and former fiscal year, if changed since last report
 

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
 
 
Common Stock, par value $0.0001 per share
RTRX
The Nasdaq Global Market
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   No
 The number of shares of outstanding common stock, par value $0.0001 per share, of the Registrant as of August 5, 2019 was 42,954,151.
 


Table of Contents

RETROPHIN, INC.
Form 10-Q
For the Fiscal Quarter Ended June 30, 2019

TABLE OF CONTENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 

1

Table of Contents

FORWARD-LOOKING STATEMENTS 
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the fiscal year ended December 31, 2018 (the "2018 10-K"), and in this quarterly report on Form 10-Q and information contained in other reports that we file with the Securities and Exchange Commission (the “SEC”). You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. 
In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this quarterly report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned to not unduly rely upon these statements.
We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

2

Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RETROPHIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts)
 
June 30, 2019
 
December 31, 2018
Assets
(unaudited)
 
 

Current assets:
 

 
 

Cash and cash equivalents
$
75,657

 
$
102,873

Marketable securities
350,243

 
368,668

Accounts receivable, net
15,451

 
12,662

Inventory, net
5,050

 
5,619

Prepaid expenses and other current assets
9,164

 
4,140

Prepaid taxes
1,450

 
1,716

Total current assets
457,015

 
495,678

Property and equipment, net
3,015

 
3,146

Other non-current assets
12,702

 
7,709

Investment-equity
15,000

 
15,000

Intangible assets, net
158,906

 
186,691

Goodwill
936

 
936

Total assets
$
647,574

 
$
709,160

Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
12,519

 
$
6,954

Accrued expenses
50,557

 
49,695

Other current liabilities
8,417

 
6,165

Business combination-related contingent consideration
19,094

 
19,350

2019 Convertible debt

 
22,457

Total current liabilities
90,587

 
104,621

2025 Convertible debt
199,891

 
195,091

Other non-current liabilities
22,102

 
17,545

Business combination-related contingent consideration, less current portion
57,905

 
73,650

Total liabilities
370,485

 
390,907

Stockholders' Equity:
 

 
 

Preferred stock $0.0001 par value; 20,000,000 shares authorized; 0 issued and outstanding as of June 30, 2019 and December 31, 2018

 

Common stock $0.0001 par value; 100,000,000 shares authorized; 42,899,318 and 41,389,524 issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
4

 
4

Additional paid-in capital
625,999

 
589,795

Accumulated deficit
(349,695
)
 
(270,017
)
Accumulated other comprehensive income (loss)
781

 
(1,529
)
Total stockholders' equity
277,089

 
318,253

Total liabilities and stockholders' equity
$
647,574

 
$
709,160

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

3

Table of Contents

RETROPHIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net product sales
$
44,707

 
$
41,337

 
$
84,277

 
$
79,769

Operating expenses:
 

 
 

 
 
 
 
Cost of goods sold
979

 
1,178

 
1,996

 
2,791

Research and development
37,934


34,460


71,377


59,096

Selling, general and administrative
38,970


25,100


71,639


51,568

Change in fair value of contingent consideration
3,353

 
2,159

 
6,522

 
5,786

Impairment of L-UDCA IPR&D intangible asset

 

 
25,500

 

Write off of L-UDCA contingent consideration

 

 
(18,000
)
 

Total operating expenses
81,236

 
62,897

 
159,034

 
119,241

Operating loss
(36,529
)

(21,560
)

(74,757
)

(39,472
)
Other income (expenses), net:
 

 
 

 
 
 
 
Other income (expense), net
125


(403
)

(177
)

(282
)
Interest income
2,589


858


5,408


1,655

Interest expense
(4,817
)

(1,057
)

(9,682
)

(2,212
)
Total other expense, net
(2,103
)
 
(602
)
 
(4,451
)
 
(839
)
Loss before income taxes
(38,632
)
 
(22,162
)
 
(79,208
)
 
(40,311
)
Income tax expense
(69
)

(167
)

(470
)

(396
)
Net loss
$
(38,701
)
 
$
(22,329
)
 
$
(79,678
)
 
$
(40,707
)

 
 
 






Basic and diluted net loss per common share:
$
(0.92
)

$
(0.56
)

$
(1.91
)

$
(1.03
)
Basic and diluted weighted average common shares outstanding:
41,957,860


40,061,045


41,685,599


39,641,334

Comprehensive loss:
 

 
 

 
 
 
 
Net loss
$
(38,701
)
 
$
(22,329
)
 
$
(79,678
)
 
$
(40,707
)
Foreign currency translation
(91
)
 
2

 
27

 
24

Unrealized gain (loss) on marketable securities
815

 
375

 
2,284

 
(161
)
Comprehensive loss
$
(37,977
)
 
$
(21,952
)
 
$
(77,367
)
 
$
(40,844
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents

RETROPHIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
For the Six Months Ended June 30,
 
2019
 
2018
Cash Flows From Operating Activities:
 
 
 
Net loss
$
(79,678
)
 
$
(40,707
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
9,742

 
8,991

Non-cash interest expense
798

 
767

(Accretion) amortization of discounts/premiums on investments, net
(580
)
 
647

Amortization of debt discount and issuance costs
4,933

 
325

Provision for Inventory
(358
)
 
378

Share based compensation
11,947

 
10,160

ESPP Expense
345

 

Change in fair value of contingent consideration
(11,478
)
 
5,786

Payments related to change in fair value of contingent consideration
(2,767
)
 
(5,563
)
Impairment of IPR&D intangible assets
25,500

 

Unrealized foreign currency transaction gain (loss)
14

 
214

Other
60

 
199

Changes in operating assets and liabilities, net of business acquisitions:
 

 
 

Accounts receivable
(2,396
)
 
1,431

Inventory
918

 
(433
)
Other current and non-current operating assets
(10,101
)
 
637

Accounts payable and accrued expenses
6,305

 
(2,811
)
Other current and non-current operating liabilities
7,195

 
2,485

Net cash used in operating activities
(39,601
)
 
(17,494
)
Cash Flows From Investing Activities:
 

 
 

Purchase of fixed assets
(21
)
 
(601
)
Cash paid for intangible assets
(7,347
)
 
(11,389
)
Proceeds from the sale/maturity of marketable securities
115,998

 
63,565

Purchase of marketable securities
(94,812
)
 
(29,519
)
Cash paid for investments - equity

 
(15,000
)
Net cash provided by investing activities
13,818

 
7,056

Cash Flows From Financing Activities:
 

 
 

Payment of acquisition-related contingent consideration
(1,722
)
 
(7,947
)
Payment of guaranteed minimum royalty
(1,034
)
 
(1,000
)
Payment of other liability

 
(500
)
Proceeds from exercise of warrants

 
2,140

Proceeds from exercise of stock options
317

 
6,890

Other financing activities
1,005

 
800

Net cash (used in) provided by financing activities
(1,434
)
 
383

Effect of exchange rate changes on cash
1

 
(34
)
Net change in cash and cash equivalents
(27,216
)
 
(10,089
)
Cash and cash equivalents, beginning of year
102,873

 
99,394

Cash and cash equivalents, end of period
$
75,657

 
$
89,305

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

5

Table of Contents

RETROPHIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited, in thousands, except share amounts)
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
Common Stock
 
Additional Paid in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders'
Equity
 
Common Stock
 
Additional Paid in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders'
Equity
 
Shares
Amount
 
 
 
 
 
Shares
Amount
 
 
 
 
Balance - March 31
41,438,020

$
4

 
$
596,644

 
$
57

 
$
(310,994
)
 
$
285,712

 
39,873,285

$
4

 
$486,717
 
$
(1,529
)
 
$
(185,717
)
 
$
299,475

Share based compensation
 
 
 
5,577

 
 
 
 
 
5,577

 
 
 
 
5,372

 
 
 
 
 
5,372

Issuance of common shares under the equity incentive plan and proceeds from exercise
100,151

 
 
12

 
 
 
 
 
12

 
198,630


 
2,633

 
 
 
 
 
2,633

Exercise of warrants
 
 
 
 
 
 
 
 
 

 
255,445


 
1,533

 
 
 
 
 
1,533

Unrealized gain on marketable securities
 
 
 
 
 
815

 
 
 
815

 
 
 
 
 
 
375

 
 
 
375

Foreign currency translation adjustments
 
 
 
 
 
(91
)
 
 
 
(91
)
 
 
 
 
 
 
2

 
 
 
2

Issuance of common stock from maturity of the 2019 Convertible debt outstanding
1,297,343

 
 
22,590

 
 
 
 
 
22,590

 
 
 
 
 
 
 
 
 
 

ESPP stock purchase and expense
63,804


 
1,176

 
 
 
 
 
1,176

 
43,161


 
928

 
 
 
 
 
928

Net loss
 
 
 
 
 
 
 
(38,701
)
 
(38,701
)
 
 
 
 
 
 
 
 
(22,329
)
 
(22,329
)
Balance - June 30
42,899,318

$
4

 
$
625,999

 
$
781

 
$
(349,695
)
 
$
277,089

 
40,370,521

$
4

 
$
497,183

 
$
(1,152
)
 
$
(208,046
)
 
$
287,989

 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
Balance - December 31
41,389,524

$
4

 
$
589,795

 
$
(1,529
)
 
$
(270,017
)
 
$
318,253

 
39,373,745

$
4

 
$
471,800

 
$
(1,015
)
 
$
(177,655
)
 
$
293,134

Adoption of ASU 2017-11 - reclassification of derivative liability of warrants with down round provisions
 
 
 
 
 
 
 
 
 

 
 
 
 
5,394

 
 
 
10,316

 
15,710

Share based compensation
 
 
 
11,947

 
 
 
 
 
11,947

 
 
 
 
9,915

 
 
 
 
 
9,915

Issuance of common shares under the equity incentive plan and proceeds from exercise
148,647

 
 
317

 
 
 
 
 
317

 
529,558


 
6,890

 
 
 
 
 
6,890

Exercise of warrants
 
 
 
 
 
 
 
 
 

 
424,057


 
2,140

 
 
 
 
 
2,140

Unrealized gain (loss) on marketable securities
 
 
 
 
 
2,284

 
 
 
2,284

 
 
 
 
 
 
(161
)
 
 
 
(161
)
Foreign currency translation adjustments
 
 
 
 
 
26

 
 
 
26

 
 
 
 
 
 
24

 
 
 
24

Issuance of common stock from maturity of the 2019 Convertible debt outstanding
1,297,343


 
22,590

 
 
 
 
 
22,590

 
 
 
 
 
 
 
 
 
 

ESPP stock purchase and expense
63,804


 
1,350

 
 
 
 
 
1,350

 
43,161

 
 
1,044

 
 
 
 
 
1,044

Net loss
 
 
 
 
 
 
 
(79,678
)
 
(79,678
)
 
 
 
 
 
 
 
 
(40,707
)
 
(40,707
)
Balance - June 30
42,899,318

$
4

 
$
625,999

 
$
781

 
$
(349,695
)
 
$
277,089

 
40,370,521

$
4

 
$
497,183

 
$
(1,152
)
 
$
(208,046
)
 
$
287,989

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

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RETROPHIN, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.  DESCRIPTION OF BUSINESS
Organization and Description of Business
Retrophin, Inc. (“we”, “our”, “us”, “Retrophin” and the “Company”) refers to Retrophin, Inc., a Delaware corporation, as well as our direct and indirect subsidiaries. Retrophin is a biopharmaceutical company headquartered in San Diego, California, focused on identifying, developing and delivering life-changing therapies to people living with rare diseases. We regularly evaluate and, where appropriate, act on opportunities to expand our product pipeline through licenses and acquisitions of products in areas that will serve patients with rare diseases and that we believe offer attractive growth characteristics.
The Company is developing the following pipeline products:
The Company is developing fosmetpantotenate (RE-024), a novel small molecule, as a potential treatment for pantothenate kinase-associated neurodegeneration (“PKAN”). PKAN is a genetic neurodegenerative disorder that is typically diagnosed in the first decade of life.
Sparsentan, also known as RE-021, is an investigational product candidate with a dual mechanism of action, a potent angiotensin receptor blocker (“ARB”) and selective endothelin receptor antagonist (“ERA”), with in vitro selectivity toward endothelin receptor type A. Sparsentan is currently being evaluated in two pivotal Phase 3 clinical studies in the following indications:
Focal segmental glomerulosclerosis ("FSGS") is a rare kidney disease characterized by proteinuria where the glomeruli become progressively scarred. FSGS is a leading cause of end-stage renal disease.
Immunoglobulin A nephropathy ("IgAN") is an immune-complex-mediated glomerulonephritis characterized by hematuria, proteinuria, and variable rates of progressive renal failure. IgAN is the most common primary glomerular disease.

In September 2017, the Company entered into a three-way Cooperative Research and Development Agreement ("CRADA") with the National Institutes of Health’s National Center for Advancing Translational Sciences ("NCATS") and patient advocacy foundation NGLY1.org to collaborate on research efforts aimed at the identification of potential small molecule therapeutics for NGLY1 deficiency.
In June 2019, the Company announced that it has entered into a three-way CRADA with NCATS and patient advocacy foundation Alagille Syndrome Alliance ("ALGSA") to collaborate on research efforts aimed at the identification and development of potentially novel therapeutics for Alagille syndrome ("ALGS").
The Company sells the following three products:
Chenodal (chenodiol tablets) is approved in the United States for the treatment of patients suffering from gallstones in whom surgery poses an unacceptable health risk due to disease or advanced age. Chenodal has been the standard of care for cerebrotendinous xanthomatosis ("CTX") patients for more than three decades and the Company is currently pursuing adding this indication to the label.
Cholbam (cholic acid capsules) is approved in the United States for the treatment of bile acid synthesis disorders due to single enzyme defects and is further indicated for adjunctive treatment of patients with peroxisomal disorders.
Thiola (tiopronin tablets) is approved in the United States for the prevention of cystine (kidney) stone formation in patients with severe homozygous cystinuria. On June 28, 2019, the Company announced that the U.S. Food and Drug Administration ("FDA") approved 100 mg and 300 mg tablets of THIOLA® EC (tiopronin), a new enteric-coated formulation of THIOLA® (tiopronin), to be used for the treatment of cystinuria.
NOTE 2.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2018 10-K filed with the SEC on February 26, 2019. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions for Form 10-Q and the rules and regulations of the SEC. Accordingly, since they are interim statements, the accompanying condensed consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements, but reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for any future periods. The December 31, 2018 balance sheet information was derived from the audited financial statements as of that date. Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.

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A summary of the significant accounting policies applied in the preparation of the accompanying condensed consolidated financial statements follows:
Principles of Consolidation
The unaudited condensed consolidated financial statements represent the consolidation of the accounts of the Company and its subsidiaries in conformity with GAAP. All intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect substantially all the consideration it is entitled to in exchange for the goods or services it transfers to the customer. See Note 3 for further discussion.
Research and Development Expenses
Research and development expenses are comprised of salaries and bonuses, benefits, non-cash share-based compensation, license fees, costs paid to third-party contractors to perform research, conduct clinical trials and pre/non-clinical trials, develop drug materials, and associated overhead expenses and facilities. We also incur indirect costs that are not allocated to specific programs because such costs benefit multiple development programs and allow us to increase our pharmaceutical development capabilities. These consist of internal shared resources related to the development and maintenance of systems and processes applicable to all of our programs.
Clinical Trial Expenses
Our clinical trials are conducted pursuant to contracts with contract research organizations ("CROs") that support conducting and managing clinical trials. The financial terms and activities of these agreements vary from contract to contract and may result in uneven expense levels. Generally, these agreements set forth activities that drive the recording of expenses such as start-up, initiation activities, enrollment, treatment of patients, or the completion of other clinical trial activities.
Expenses related to clinical trials are accrued based on our estimates and/or representations from service providers regarding work performed, including actual level of patient enrollment, progress of the clinical trials, and completion of patient studies. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If the amounts we are obligated to pay under our clinical trial agreements are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), we adjust our accruals accordingly on a prospective basis. Revisions to our contractual payment obligations are charged to expense in the period in which the facts that give rise to the revision become reasonably certain.
We currently have three Phase 3 clinical trials in process that are in varying stages of activity, with ongoing non-clinical support trials. As such, clinical trial expenses will vary depending on all the factors set forth above and may fluctuate significantly from quarter to quarter.
Adoption of New Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. See Note 6 for further discussion.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies. Unless otherwise noted, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position or results of operations upon adoption.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As of June 30, 2019, the Company held $350.2 million in available-for-sale debt securities. If adopted as of June 30, 2019, this ASU update would not have a material impact on the Company's financial statements.

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NOTE 3. REVENUE RECOGNITION
Product Revenue, Net
The Company sells Chenodal and Cholbam (Kolbam), which are aggregated as bile acid products, and Thiola through direct-to-patient distributors. The Company sells its products worldwide, with more than 95% of the revenue generated in North America.
Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs upon delivery to the customer.
Deductions from Revenue
Revenues from product sales are recorded at the net sales price, which includes provisions resulting from discounts, rebates and co-pay assistance that are offered to customers, health care providers, payors and other indirect customers relating to the Company’s sales of its products. These provisions are based on the amounts earned or to be claimed on the related sales and are classified as a reduction of accounts receivable (if the amount is payable to a customer) or as a current liability (if the amount is payable to a party other than a customer). Where appropriate, these reserves take into consideration the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. If actual results in the future vary from the Company’s provisions, the Company will adjust the provision, which would affect net product revenue and earnings in the period such variances become known. Our historical experience is that such adjustments have been immaterial.
Government Rebates: We calculate the rebates that we will be obligated to provide to government programs and deduct these estimated amounts from our gross product sales at the time the revenues are recognized. Allowances for government rebates and discounts are established based on actual payer information, which is reasonably estimated at the time of delivery, and the government-mandated discounts applicable to government-funded programs. Rebate discounts are included in other current liabilities in the accompanying consolidated balance sheets.
Commercial Rebates: We calculate the rebates that we incur due to contracts with certain commercial payors and deduct these amounts from our gross product sales at the time the revenues are recognized. Allowances for commercial rebates are established based on actual payer information, which is reasonably estimated at the time of delivery. Rebate discounts are included in other current liabilities in the accompanying consolidated balance sheets.
Prompt Pay Discounts: We offer discounts to certain customers for prompt payments. We accrue for the calculated prompt pay discount based on the gross amount of each invoice for those customers at the time of sale.
Product Returns: Consistent with industry practice, we offer our customers a limited right to return product purchased directly from the Company, which is principally based upon the product’s expiration date. Generally, shipments are only made upon a patient prescription thus returns are minimal.
Co-pay Assistance: We offer a co-pay assistance program, which is intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an identification of claims and the cost per claim associated with product that has been recognized as revenue.
The following table summarizes net product revenues for the three and six months ended June 30, 2019 and 2018 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Bile acid products
$
20,929

 
$
18,594

 
$
39,319


$
37,102

Thiola
23,778

 
22,743

 
44,958


42,667

Total net product revenue
$
44,707

 
$
41,337

 
$
84,277

 
$
79,769


NOTE 4. MARKETABLE SECURITIES
The Company's marketable securities as of June 30, 2019 and December 31, 2018 were comprised of available-for-sale marketable securities which are carried at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income (loss). Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income or expense. Interest and dividends on securities classified as available-for-sale are included in interest income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income. During the six months ended June 30, 2019, investment activity for the Company included $116.0 million in maturities and $94.8 million in purchases, all relating to debt based marketable securities.

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Marketable securities consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Commercial paper
$
43,675

 
$
59,255

Corporate debt securities
306,568

 
299,413

Securities of government sponsored entities

 
10,000

Total marketable securities:
$
350,243

 
$
368,668


The following is a summary of short-term marketable securities classified as available-for-sale as of June 30, 2019 (in thousands):
 
Remaining Contractual Maturity
(in years)
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Estimated Fair Value
Commercial paper
Less than 1
 
$
43,632

 
$
43

 
$

 
$
43,675

Corporate debt securities
Less than 1
 
178,776

 
315

 
(49
)
 
179,042

Total maturity less than 1 year
 
 
222,408

 
358

 
(49
)
 
222,717

Corporate debt securities
1 to 2
 
126,833

 
700

 
(7
)
 
127,526

Total maturity 1 to 2 years
 
 
126,833

 
700

 
(7
)
 
127,526

Total available-for-sale securities
 
 
$
349,241

 
$
1,058

 
$
(56
)
 
$
350,243

The following is a summary of short-term marketable securities classified as available-for-sale as of December 31, 2018 (in thousands):
 
Remaining Contractual Maturity
(in years)
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Estimated Fair Value
Commercial paper
Less than 1
 
$
59,313

 
$

 
$
(58
)
 
$
59,255

Corporate debt securities
Less than 1
 
149,824

 

 
(604
)
 
149,220

Total maturity less than 1 year
 
 
209,137

 

 
(662
)
 
208,475

Corporate debt securities
1 to 2
 
150,813

 
18

 
(638
)
 
150,193

Securities of government-sponsored entities
1 to 2
 
9,997

 
4

 
(1
)
 
10,000

Total maturity 1 to 2 years
 
 
160,810

 
22

 
(639
)
 
160,193

Total available-for-sale securities
 
 
$
369,947

 
$
22

 
$
(1,301
)
 
$
368,668


The primary objective of the Company’s investment portfolio is to enhance overall returns while preserving capital and liquidity. The Company’s investment policy limits interest-bearing security investments to certain types of instruments issued by institutions with primarily investment grade credit ratings and places restrictions on maturities and concentration by asset class and issuer. All available-for-sale securities are held in current assets regardless of contractual maturities exceeding one year, as the Company has the ability to sell them within the next twelve months.
The Company reviews the available-for-sale investments for other-than-temporary declines in fair value below cost basis each quarter and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. This evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below the cost basis and adverse conditions related specifically to the security, including any changes to the credit rating of the security, and the intent to sell, or whether the Company will more likely than not be required to sell the security before recovery of its amortized cost basis. The assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security. As of June 30, 2019 and December 31, 2018, the Company believed the cost basis for available-for-sale investments was recoverable in all material respects.
NOTE 5. FUTURE ACQUISITION RIGHT AND JOINT DEVELOPMENT AGREEMENT
Censa Pharmaceuticals Inc.
In December 2017, the Company entered into a Future Acquisition Right and Joint Development Agreement (the “Option Agreement”) with Censa, which became effective in January 2018. The Company made an upfront payment of $10.0 million, agreed to fund certain development activities of Censa’s CNSA-001 program which were expected to be approximately $19.9 million through proof of concept, and paid $5.0 million related to a development milestone for the right, but not the obligation, to acquire Censa (the “Option”) on the terms and subject to the conditions set forth in a separate Agreement and Plan of Merger. The Company capitalized the upfront and milestone payments and expensed the development funding as incurred. The Company treated the upfront payment and milestone payment, both of which were consideration for the Option, as a cost-method investment with a carrying value of $15.0 million as of June 30, 2019.
If the Company had exercised the Option, the Company would have acquired Censa for an additional $65.0 million, which would have been reduced by up to $2.8 million of development funding ("creditable"), paid as a combination of 20% in cash and 80% in shares of the Company’s common stock, valued at a fixed price of $21.40 per share; provided, however, that Censa could have elected on behalf of its equity holders to receive the

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upfront consideration in 100% cash if the average price per share of the Company’s common stock for the ten trading days ending on the date the Company provided notice of interest to exercise the Option was less than $19.26. In addition, if the Company had exercised the Option and acquired Censa, the Company would have been required to make further cash payments to Censa’s equity holders of up to an aggregate of $25.0 million if the CNSA-001 program had achieved specified development and commercial milestones.
The Company determined that Censa was a variable interest entity ("VIE"), and concluded that the Company was not the primary beneficiary of the VIE. As such, the Company did not consolidate Censa’s results into its consolidated financial statements.
The following table presents the Company’s development funding roll-forward through June 30, 2019 and its effect on the upfront consideration if the Company exercised the Option (in thousands):
 
June 30, 2019
Non-creditable development funding commitment
$
17,091

Development funding creditable against purchase option
2,831

Total development funding
19,922

Development funding paid through June 30, 2019
19,308

Development funding payable
$
614


In August 2019, following a strategic review of the CNSA-001 program in patients with phenylketonuria (PKU), the Company made the decision to decline to exercise its option to acquire Censa Pharmaceuticals and accordingly discontinue its joint development program for CNSA-001. The Company expects to impair the $15 million long term investment on the balance sheet during the third quarter of 2019.
NOTE 6.  LEASES
As of January 1, 2019 the Company adopted ASU No. 2016-02, Leases, using a modified retrospective basis method under which prior comparative periods are not restated.
The new standard establishes an ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. In addition, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, ASU No. 2018-11, Targeted Improvements, and ASU No. 2018-20, Narrow-Scope Improvements for Lessors, to clarify and amend the guidance in ASU No. 2016-02. The Company has elected the following as practical expedients from within these ASUs: 1) an entity need not reassess whether any expired or existing contracts are or contain leases, 2) an entity need not reassess the lease classification for any expired or existing leases, and 3) an entity need not reassess initial direct costs for any existing leases.
As of January 1, 2019 the Company had a single operating lease for its office located in San Diego, California. The lease was originally signed in July 2016, was amended in July 2017, and is for approximately 45,000 square feet of office space in adjacent buildings. The term of the original lease is 7 years, 7 months, and is coterminous for all space occurring in July 2024. Under the terms of the lease, the Company will pay base annual rent (subject to an annual fixed percentage increase), plus property taxes and other normal and necessary expenses, such as utilities, repairs, security and maintenance. Certain incentives were included in the lease, including approximately $2.3 million in tenant improvement allowances and seven months of rent abatement. The Company has the right to extend the lease for five years.
As of January 1, 2019 the Company's remaining minimum lease payments and unamortized lease incentives were approximately $14.0 million and $1.8 million, respectively. Using a discount rate equal to our borrowing rate of 7.7% and a remaining term of 5 years, 7 months, the Company determined the ROU asset and lease liability as of adoption were $7.9 million and $11.3 million, respectively. There was no cumulative adjustment to our beginning accumulated deficit balance.
In March 2019, the company amended the existing office lease to add approximately 16,000 square feet of office space in adjacent buildings; 5,700 square feet has been occupied as of June 30, 2019. The total additional space is expected to be utilized through August 2020 and has future minimum lease payments of approximately $1.0 million. The Company determined the ROU asset and lease liability were each $0.4 million for the lease space that has commenced and is occupied as of June 30, 2019.
On April 23, 2019, the Company entered into an office lease with an effective date of April 12, 2019 with Kilroy Realty, L.P. (the "Landlord") for the lease of 77,242 square feet of the building located at 3611 Valley Centre Drive, San Diego, California. The Company expects to use the premises as its new principal corporate offices and plans to consolidate its corporate headquarters into the premises from the current location of multiple suites in adjacent buildings at 3721 and 3661 Valley Centre Drive, San Diego, California. Under the terms of the lease, the Company will have the one time right of first offer on the suites it currently occupies and a general right of first offer to lease additional space from the Landlord in the development. The commencement date of the lease is expected to be October 1, 2020. The initial term of the lease is 7 years, 7 months, and the Landlord has granted the Company an option to extend the term of the lease by a period of 5 years. The aggregate base rent due over the initial term under the terms of the lease is approximately $36.5 million.

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Following is a schedule of the future minimum rental commitments for our operating lease reconciled to the lease liability and ROU assets as of June 30, 2019 (in thousands):
 
June 30, 2019

2019
$
1,318

2020
2,613

2021
2,486

2022
2,560

2023
2,637

Thereafter
1,585

Total undiscounted future minimum payments
13,199

Present value discount
(2,278
)
Total lease liability
10,921

Lease incentives
(1,703
)
Straight line lease expense in excess of cash payments
(1,622
)
Total ROU asset
$
7,596



As of June 30, 2019, the current and non-current portions of the ROU asset were recorded to the Condensed Consolidated Balance Sheets as follows (in thousands):
 
June 30, 2019
Prepaid expenses and other current assets
$
2,170

Other non-current assets
5,426

Total ROU asset
$
7,596


As of June 30, 2019, the current and non-current portions of the lease liability were recorded to the Condensed Consolidated Balance Sheets as follows (in thousands):
 
June 30, 2019
Other current liabilities
$
2,674

Other non-current liabilities
8,247

Total lease liabilities
$
10,921



For the three and six months ended June 30, 2019, the Company recorded $0.6 million and $1.3 million in expense related to operating leases, respectively.
NOTE 7.  FAIR VALUE MEASUREMENTS
Financial Instruments and Fair Value
The Company accounts for financial instruments in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under ASC 820 are described below:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The valuation techniques used to measure the fair value of the Company’s marketable securities and all other financial instruments, all of which have counter-parties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. Based on the fair value hierarchy, the Company classified marketable securities within Level 2.
In estimating the fair value of the Company’s contingent consideration, the Company used the Monte Carlo Simulation model as of June 30, 2019 and December 31, 2018. Based on the fair value hierarchy, the Company classified the fair value measurement of contingent consideration within Level 3.
Financial instruments with carrying values approximating fair value include cash and cash equivalents, accounts receivable, and accounts payable, due to their short-term nature. As of June 30, 2019, the estimated fair value of the Company's 2.5% Convertible Senior Notes due 2025 was $249.0

12

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million, considering factors such as market conditions, prepayment and make-whole provisions, variability in pricing from multiple lenders and the term of the debt.
The following table presents the Company’s assets and liabilities, measured and recognized at fair value on a recurring basis, classified under the appropriate level of the fair value hierarchy as of June 30, 2019 (in thousands):

As of June 30, 2019

Total carrying and estimated fair value
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs (Level 2)
 
Significant unobservable inputs (Level 3)
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
75,657

 
$
43,836

 
$
31,821

 
$

Marketable securities, available-for-sale
350,243

 

 
350,243

 

Total
$
425,900

 
$
43,836

 
$
382,064

 
$

Liabilities:
 
 
 
 
 
 
 
Business combination-related contingent consideration
$
76,999

 
$

 
$

 
$
76,999

Total
$
76,999

 
$

 
$

 
$
76,999

The following table presents the Company’s assets and liabilities, measured and recognized at fair value on a recurring basis, classified under the appropriate level of the fair value hierarchy as of December 31, 2018 (in thousands):
 
As of December 31, 2018
 
Total carrying and estimated fair value
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs (Level 2)
 
Significant unobservable inputs (Level 3)
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
102,873

 
$
62,978

 
$
39,895

 
$

Marketable securities, available-for-sale
368,668

 

 
368,668

 

Total
$
471,541

 
$
62,978

 
$
408,563

 
$

Liabilities:
 
 
 
 
 
 
 
Business combination-related contingent consideration
93,000

 

 

 
93,000

Total
$
93,000

 
$

 
$

 
$
93,000


The following table sets forth a summary of changes in the estimated fair value of the Company's business combination-related contingent consideration for the six months ended June 30, 2019 (in thousands):
 
Fair Value Measurements of Acquisition-Related Contingent Consideration
(Level 3)
Balance at January 1, 2019
$
93,000

L-UDCA write-off
(18,000
)
Changes in the fair value of contingent consideration
6,522

Contractual payments included in accrued liabilities at June 30, 2019
(2,269
)
Contractual payments
(2,253
)
Foreign currency impact
(1
)
Balance at June 30, 2019
$
76,999


The key assumptions included in the calculations for contingent consideration were the future number of patients in treatment, projected revenues, discount rate, and the timing of payments. The present value of the expected payments considers the time at which the obligations are expected to be settled and a discount rate that reflects the risk associated with the performance payments.
During the three and six months ended June 30, 2019, the Company recognized $3.4 million and $6.5 million, respectively, in operating expense on the Condensed Consolidated Statement of Operations and Comprehensive Loss for the change in fair value of the contingent consideration liabilities. For the six months ended June 30, 2019, $4.3 million and $2.2 million of the charges were related to the increase in contingent consideration liabilities for the products Chenodal and Cholbam, respectively. In each case, the value increased due to passage of time. In addition, the Company made a portfolio decision not to pursue further development of its product candidate L-UDCA. The related contingent consideration of $18.0 million was accordingly considered fully written off. See Note 17 for further discussion.
During the three and six months ended June 30, 2018, the Company incurred charges of $2.2 million and $5.8 million, respectively, in operating expenses on the Condensed Consolidated Statements of Operations and Comprehensive Loss for the change in fair value of the contingent consideration liabilities. For the six months ended June 30, 2018, $1.9 million, $1.4 million, and $2.5 million of the charges were related to the

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increase in contingent consideration liabilities for the products Chenodal and Cholbam and product candidate L-UDCA, respectively. In each case, the value increased due to passage of time.
NOTE 8. INTANGIBLE ASSETS
As of June 30, 2019, the net book value of amortizable intangible assets was approximately $158.9 million.
The following table sets forth amortizable intangible assets as of June 30, 2019 and December 31, 2018 (in thousands):

June 30, 2019
 
December 31, 2018
Finite-lived intangible assets
$
237,427

 
$
255,643

Less: accumulated amortization
(78,521
)
 
(68,952
)
Net carrying value
$
158,906

 
$
186,691


During the first quarter of 2019, the Company made a portfolio decision not to pursue further development of L-UDCA, acquired in 2016. The related in-progress research and development intangible asset ("IPR&D") of $25.5 million was accordingly considered fully impaired and written off. As of December 31, 2018, the value of the IPR&D was $25.5 million. See Note 17 for further discussion.
The following table summarizes amortization expense for the three and six months ended June 30, 2019 and 2018 (in thousands):

Three Months Ended June 30,
 
Six Months Ended June 30,

2019
 
2018
 
2019
 
2018
Research and development
$
289

 
$
289

 
$
574

 
$
392

Selling, general and administrative
4,567

 
4,206

 
9,013

 
8,302

Total amortization expense
$
4,856

 
$
4,495

 
$
9,587

 
$
8,694


NOTE 9.  CONVERTIBLE NOTES PAYABLE
Convertible Senior Notes Due 2025
On September 10, 2018, the Company completed its registered underwritten public offering of $276.0 million aggregate principal amount of 2.50% Convertible Senior Notes due 2025 ("2025 Notes"), and entered into a base indenture and supplemental indenture agreement ("2025 Indenture") with respect to the 2025 Notes. The 2025 Notes will mature on September 15, 2025 ("Maturity Date”), unless earlier repurchased, redeemed, or converted. The 2025 Notes are senior unsecured obligations of the Company and bear interest at an annual rate of 2.50%, payable semi-annually in arrears on March 15 and September 15 of each year. The first payment was made on March 15, 2019.
The composition of the Company’s 2025 Notes are as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
2.50% convertible senior notes due 2025
$
276,000

 
$
276,000

Unamortized debt discount
(70,484
)
 
(74,836
)
Unamortized debt issuance costs
(5,625
)
 
(6,073
)
Total 2025 Notes, net of unamortized debt discount and debt issuance costs
$
199,891

 
$
195,091


The net proceeds from the issuance of the 2025 Notes were approximately $267.2 million, after deducting commissions and the offering expenses payable by the Company. A portion of the net proceeds from the 2025 Notes was used by the Company to repurchase $23.4 million aggregate principal amount of its then-outstanding 4.5% senior convertible notes due in 2019 in privately-negotiated transactions.
Holders may convert their 2025 Notes at their option only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2018 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock for each of at least 20 trading days, whether or not consecutive, during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price on the applicable trading day; (2) during the five consecutive business days immediately after any 10 consecutive trading day period (“measurement period”) if the trading price per $1,000 principal amount of 2025 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Company’s common stock; (4) if the Company calls the 2025 Notes for redemption; and (5) at any time from, and including, May 15, 2025 until the close of business on the scheduled trading day immediately before the Maturity Date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election, based on the applicable conversion rate.

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The initial conversion rate for the 2025 Notes is 25.7739 shares of the Company’s common stock per $1,000 principal amount of 2025 Notes, which represents an initial conversion price of approximately $38.80 per share. If a “make-whole fundamental change” (as defined in the 2025 Indenture) occurs, then the Company will, in certain circumstances, increase the conversion rate for a specified period of time.
The 2025 Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after September 15, 2022 and, in the case of any partial redemption, on or before the 40th scheduled trading day before the Maturity Date, at a cash redemption price equal to the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice. If a fundamental change (as defined in the 2025 Indenture) occurs, then, subject to certain exceptions, holders may require the Company to repurchase their 2025 Notes at a cash repurchase price equal to the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.
In the event of conversion, holders would forgo all future interest payments, any unpaid accrued interest and the possibility of further stock price appreciation. Upon the receipt of conversion requests, the settlement of the 2025 Notes will be paid pursuant to the terms of the 2025 Indenture. In the event that all of the 2025 Notes are converted, the Company would be required to repay the $276.0 million principal amount and any conversion premium in any combination of cash and shares of its common stock at the Company’s option. In addition, calling the 2025 Notes for redemption will constitute a “make whole fundamental change."
The 2025 Notes are the Company’s general unsecured obligations that rank senior in right of payment to all of its indebtedness that is expressly subordinated in right of payment to the 2025 Notes, and equal in right of payment to the Company’s unsecured indebtedness.
The 2025 Notes are currently classified on the Company’s Condensed Consolidated Balance Sheets at June 30, 2019 as long-term debt.
Under ASC 470-20, Debt with Conversion and Other Options, an entity must separately account for the liability and equity components of convertible debt instruments (such as the 2025 Notes) that may be settled entirely or partially in cash upon conversion, in a manner that reflects the issuer’s economic interest cost. The liability component of the instrument is valued in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance. The initial carrying value of the liability component was $198.6 million. The equity component of $77.4 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the 2025 Notes and is recorded in additional paid-in capital on the consolidated balance sheet at the issuance date. That equity component is treated as a discount on the liability component of the 2025 Notes, which is amortized over the seven year term of the 2025 Notes using the effective interest rate method. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The Company allocated the total transaction costs of approximately $8.8 million related to the issuance of the 2025 Notes to the liability and equity components of the 2025 Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the seven-year term of the 2025 Notes, and transaction costs attributable to the equity component are netted with the equity component in stockholders’ equity.
The effective interest rate on the liability components of the 2025 Notes for the period from the date of issuance through June 30, 2019 was 7.7%. The following table sets forth total interest expense recognized related to the 2025 Notes (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Contractual interest expense
$
1,725

 
$

 
$
3,450

 
$

Amortization of debt discount
2,197

 

 
4,352

 

Amortization of debt issuance costs
224

 

 
448

 

Total interest expense for the 2025 Notes
$
4,146

 
$

 
$
8,250

 
$


The 2025 Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by the Company. The 2025 Indenture contains customary events of default with respect to the 2025 Notes, including that upon certain events of default, 100% of the principal and accrued and unpaid interest on the 2025 Notes will automatically become due and payable.
Senior Convertible Notes Due 2019
On May 29, 2014, the Company entered into a Note Purchase Agreement relating to a private placement by the Company of $46.0 million aggregate principal amount of 4.50% senior convertible notes due in 2019 (the “2019 Notes”) which were convertible into shares of the Company’s common stock at an initial conversion price of $17.41 per share. The conversion price was subject to customary anti-dilution protection. The 2019 Notes bore interest at a rate of 4.5% per annum, payable semiannually in arrears on May 15 and November 15 of each year. The 2019 Notes had a maturity date of May 30, 2019 and there were no contractual payments due prior to that date.
In September 2018, the Company used part of the net proceeds from the issuance of the 2025 Notes to repurchase $23.4 million aggregate principal amount of the 2019 Notes in privately-negotiated transactions for approximately $40.2 million in cash. The partial repurchase of the 2019 Notes resulted in a $17.0 million loss on early extinguishment of debt in September 2018.

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In May 2019, the remaining $22.6 million outstanding principal amount of 2019 Notes was converted by the holders thereof into approximately 1.3 million shares of common stock.
The composition of the Company’s 2019 Notes at December 31, 2018 was as follows (in thousands):
 
 
December 31, 2018
4.50% senior convertible notes due 2019
 
$
22,590

Unamortized debt discount
 
(125
)
Unamortized debt issuance costs
 
(8
)
Total 2019 Notes, net of unamortized debt discount and debt issuance costs
 
$
22,457



NOTE 10. ACCRUED EXPENSES
Accrued expenses at June 30, 2019 and December 31, 2018 consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Government rebates payable
$
6,024

 
$
8,464

Compensation related costs
10,122

 
10,446

Accrued royalties and contingent consideration
6,912

 
6,805

Research and development
21,011

 
16,515

Selling, general and administrative
3,422

 
2,990

Miscellaneous accrued
3,066

 
4,475

Total accrued expenses
$
50,557

 
$
49,695


NOTE 11.  LOSS PER COMMON SHARE
Basic and diluted net loss per common share is calculated by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. The Company’s potentially dilutive shares, which include outstanding stock options, restricted stock units, warrants, and shares issuable upon conversion of the 2019 Notes and 2025 Notes, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.
Basic and diluted net loss per share is calculated as follows (net loss amounts are stated in thousands):
 
Three Months Ended June 30,
 
2019
 
2018
 
Shares
 
Net Loss
 
EPS
 
Shares
 
Net Loss
 
EPS
Basic and diluted loss per share
41,957,860

 
$
(38,701
)
 
$
(0.92
)
 
40,061,045

 
$
(22,329
)
 
$
(0.56
)
 
Six Months Ended June 30,
 
2019
 
2018
 
Shares
 
Net Loss
 
EPS
 
Shares
 
Net Loss
 
EPS
Basic and diluted loss per share
41,685,599

 
$
(79,678
)
 
$