8-K/A
Jazz Pharmaceuticals plc true 0001232524 0001232524 2021-05-05 2021-05-05

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K/A

(Amendment No. 1)

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): May 5, 2021

 

 

JAZZ PHARMACEUTICALS PUBLIC LIMITED COMPANY

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Ireland   001-33500   98-1032470

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

Fifth Floor, Waterloo Exchange,

Waterloo Road, Dublin 4, Ireland D04 E5W7

(Address of principal executive offices) (Zip Code)

011-353-1-634-7800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Ordinary shares, nominal value $0.0001 per share   Jazz   The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

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. ☐

 

 

 


EXPLANATORY NOTE

On February 3, 2021, Jazz Pharmaceuticals Public Limited Company, an Ireland public limited company (“Jazz”), entered into a Transaction Agreement (“Transaction Agreement”) with GW Pharmaceuticals plc, a public limited company incorporated under the laws of England and Wales (“GW”), and Jazz Pharmaceuticals UK Holdings Limited, a private limited company incorporated under the laws of England and Wales and an indirect wholly owned subsidiary of Jazz (“Bidco”), pursuant to which Bidco (and/or, at Bidco’s election, Bidco’s nominee(s)) acquired the entire issued share capital of GW (the “Transaction”) on May 5, 2021 pursuant to a scheme of arrangement under Part 26 of the United Kingdom Companies Act 2006 (the “Scheme”).

On May 5, 2021, Jazz filed a Current Report on Form 8-K (the “Original Form 8-K”) reporting the closing of the Transaction. The Transaction was conditioned on, among other things, the sanction of the Scheme by the High Court of Justice of England and Wales (the “Court”). On May 5, 2021, the Court issued an order sanctioning the Scheme. Upon the delivery of such order to the Registrar of Companies in England and Wales on May 5, 2021, the Scheme became effective (the “Effective Time”). As a result, GW became an indirect wholly owned subsidiary of Jazz. At the Effective Time, the Scheme Shareholders (as defined in the Scheme) became entitled to receive for each Scheme Share (as defined in the Scheme) held by them at such time an amount equal to $16.662/3 in cash plus 0.010030 ordinary shares (the “Share Deliverable”), nominal value $0.0001 per share, of Jazz (“Jazz Ordinary Shares”). In addition, because each American Depositary Share issued by Citibank, N.A., as depositary, in respect of GW (“GW ADS”) represented a beneficial interest in 12 Scheme Shares held by such depositary, holders of GW ADSs became entitled under such depositary arrangements to receive, for each GW ADS (1) an amount equal to $200 in cash (less (a) a $0.05 per GW ADS cancellation fee, (b) a $0.05 per GW ADS distribution fee, (c) any other fees and expenses payable by such holders pursuant to the terms of the deposit agreement, dated as of May 7, 2013 (as amended), by and among GW, Citibank, N.A., as depositary, and all holders and beneficial owners of GW ADSs issued thereunder and (d) any applicable withholding taxes) and (2) an amount of Jazz Ordinary Shares equal to 12 times the Share Deliverable. Scheme Shareholders and holders of GW ADSs became entitled to receive cash in lieu of any fractional Jazz Ordinary Shares to which they would have otherwise been entitled to in accordance with the Scheme. In connection with the Transaction, 3,798,105 Jazz Ordinary Shares were issued to such Scheme Shareholders.

This Current Report on Form 8-K/A amends the Original Form 8-K to provide the consolidated financial statements of GW as required under Item 9.01(a) and the pro forma financial information required under Item 9.01(b).

 

Item 9.01.

Financial Statements and Exhibits.

 

  (a)

Financial statements of business acquired.

The audited consolidated financial statements of GW as of December 31, 2020 and 2019 and for the years then ended, and the notes related thereto, are filed as Exhibit 99.2 to this Current Report on Form 8-K/A and are incorporated herein by reference. The consent of Deloitte & Touche LLP, the independent registered public accounting firm of GW, is attached hereto as Exhibit 23.1 to this Current Report on Form 8-K/A.

The unaudited consolidated financial statements of GW as of March 31, 2021 and December 31, 2020 and for the three months ended March 31, 2021 and 2020, and the notes related thereto, are filed as Exhibit 99.3 to this Current Report on Form 8-K/A and are incorporated herein by reference.

 

  (b)

Pro forma financial information.

The unaudited pro forma condensed combined financial statements of Jazz and GW as of and for the three months ended March 31, 2021 and for the year ended December 31, 2020, and the notes related thereto, each giving effect to the Transaction, are included as Exhibit 99.4 to this Current Report on Form 8-K/A and are incorporated herein by reference.


  (d)

Exhibits.

 

Exhibit No.

 

Description of Exhibit

2.1   Transaction Agreement, dated as of February 3, 2021, by and among Jazz Pharmaceuticals UK Holdings Limited, Jazz Pharmaceuticals Public Limited Company and GW Pharmaceuticals plc (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 001-33500), as filed by Jazz with the SEC on February 4, 2021).*
10.1   Credit Agreement, dated as of May 5, 2021, by and among Jazz Pharmaceuticals Public Limited Company, the other borrowers from time to time party thereto, the lenders and issuing banks from time to time party thereto, Bank of America, N.A., as administrative agent, and U.S. Bank National Association, as collateral trustee (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-33500), as filed by Jazz with the SEC on May 5, 2021). *
23.1   Consent of Deloitte & Touche LLP.
99.1   Jazz Press Release dated as of May 5, 2021 (incorporated herein by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 001-33500), as filed by Jazz with the SEC on May 5, 2021).
99.2   Audited consolidated financial statements of GW as of and for the years ended December 31, 2020 and 2019, and the notes related thereto.
99.3   Unaudited consolidated financial statements of GW as of March 31, 2021 and December 31, 2020 and for the three months ended March 31, 2021 and 2020, and the notes related thereto.
99.4   Unaudited pro forma condensed combined financial statements as of and for the three months ended March 31, 2021 and for the year ended December 31, 2020, and the notes related thereto.
104   Cover Page Interactive Data File (embedded within the Inline XBRL document).

 

*

Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Jazz agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon its request.


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Date: July 19, 2021     JAZZ PHARMACEUTICALS PUBLIC LIMITED COMPANY
    By:  

/s/ Neena M. Patil

      Name: Neena M. Patil
      Title: Chief Legal Officer and SVP, Legal and Corporate Affairs
EX-23.1

Exhibit 23.1

Consent of Deloitte & Touche LLP.


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in registration Statement No. 333-249807, No. 333-236636, No. 333-229889, No. 333-224757, No. 333-216338, No. 333-209767, No. 333-202269, No. 333-194131, No. 333-186886, No. 333-179075, No. 333-253417 and No. 333-255895 on Form S-8 of Jazz Pharmaceuticals Public Limited Company of our report dated February 26, 2021, relating to the financial statements of GW Pharmaceuticals plc and subsidiaries appearing in this Current Report on Form 8-K/A dated July 19, 2021.

 

/s/ DELOITTE & TOUCHE LLP
San Diego, California
July 19, 2021
EX-99.2

Exhibit 99.2

GW PHARMACEUTICALS PLC

Audited Consolidated Financial Statements

As of and for the years ended December 31, 2020 and 2019


GW PHARMACEUTICALS PLC

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     2  

Consolidated Balance Sheets as of December 31, 2020 and 2019

     4  
Consolidated Statements of Operations for the year ended December 31, 2020 and 2019, three months ended December 31, 2018 and years ended September 30, 2018      5  
Consolidated Statements of Comprehensive (Loss) Income for the year ended December 31, 2020 and 2019, three months ended December 31, 2018 and years ended September 30, 2018      6  
Consolidated Statements of Cash Flows for the year ended December 31, 2020 and 2019, three months ended December 31, 2018 and years ended September 30, 2018      7  
Consolidated Statements of Stockholders’ Equity for the year ended December 31, 2020 and 2019, three months ended December 31, 2018 and years ended September 30, 2018      8  

Notes to the Consolidated Financial Statements

     9  


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of GW Pharmaceuticals plc

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of GW Pharmaceuticals plc and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2020, three month period ended December 31, 2018, and year ended September 30, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, three month period ended December 31, 2018, and year ended September 30, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

2


Epidiolex Product Net Sales — Rebates — Refer to Note 2 to the financial statements

Critical Audit Matter Description

As more fully disclosed in Note 2 to the financial statements, the Company recognizes revenue from product sales, net of allowances for rebates, which are included in accrued liabilities on the consolidated balance sheet. Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program and the Medicare Part D prescription drug benefit as well as contractual rebates with commercial payers. The allowance for rebates is based on contracted or statutory discount rates and expected utilization by benefit plan participants.

Given the significant estimation and uncertainty involved in management’s assumptions to calculate the rebates, such as consideration of historical claims experience, expected utilization, unbilled claims, claims submission time lags, and the limited historical data currently available, auditing these estimates involved especially subjective judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our auditing procedures related to allowances for rebates for Epidiolex product sales included the following, among others:

 

   

We tested the effectiveness of eight internal controls over the development of the allowances for rebates, including the underlying assumptions and key inputs into the Company’s allowances for rebates as well as controls over management’s review of the application of the governmental pricing regulations.

 

   

We engaged internal Government Pricing specialists to assess the government pricing and accrual methodology for reasonableness.

 

   

We compared the significant assumptions used by management to currently available historical trends, evaluated the change in the accruals from prior periods, and assessed the historical accuracy of management’s estimates against actual results.

 

   

We estimated the rebates accrual for a sample of U.S. programs, using a combination of Company internal data, historical information, executed contracts, and third-party data and compared our estimate to the amount recorded by the Company.

 

   

We tested the completeness and accuracy of the underlying data used in the Company’s calculations through reconciliation to third-party invoices, executed contracts, claims data, and actual cash payments.

 

/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 26, 2021

We have served as the Company’s auditor since 2018.

 

3


GW PHARMACEUTICALS PLC

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

     December 31,  
     2020     2019  

Assets

    

Cash and cash equivalents

   $ 486,752     $ 536,933  

Accounts receivable, net

     71,168       48,883  

Inventory

     129,138       85,528  

Prepaid expenses and other current assets

     42,472       28,292  
  

 

 

   

 

 

 

Total current assets

     729,530       699,636  
  

 

 

   

 

 

 

Property, plant, and equipment, net

     143,767       127,765  

Operating lease assets

     25,118       24,916  

Intangible assets, net

     5,565       —    

Goodwill

     6,959       6,959  

Deferred tax assets

     20,777       18,123  

Other assets

     7,795       4,850  
  

 

 

   

 

 

 

Total assets

   $ 939,511     $ 882,249  
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Accounts payable

   $ 21,870     $ 9,990  

Accrued liabilities

     127,849       99,374  

Current tax liabilities

     877       437  

Other current liabilities

     9,210       7,760  
  

 

 

   

 

 

 

Total current liabilities

     159,806       117,561  
  

 

 

   

 

 

 

Long-term liabilities:

    

Finance lease liabilities

     5,454       5,573  

Operating lease liabilities

     22,127       21,650  

Other liabilities

     11,034       11,431  
  

 

 

   

 

 

 

Total long-term liabilities

     38,615       38,654  
  

 

 

   

 

 

 

Total liabilities

     198,421       156,215  
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

Stockholders’ equity:

    

Ordinary shares par value £0.001; 375,196,172 and 371,068,436 shares outstanding as of December 31, 2020 and 2019, respectively

     577       570  

Additional paid-in capital

     1,690,151       1,632,046  

Accumulated deficit

     (896,087     (837,959

Accumulated other comprehensive loss

     (53,551     (68,623
  

 

 

   

 

 

 

Total stockholders’ equity

     741,090       726,034  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 939,511     $ 882,249  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


GW PHARMACEUTICALS PLC

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

     Year Ended
December 31,
    Three Months
Ended
December 31,
    Years Ended
September 30,
 
     2020     2019     2018     2018  

Revenues

        

Product net sales

   $ 526,830     $ 310,331     $ 6,617     $ 10,469  

Other revenue

     375       1,001       37       2,268  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     527,205       311,332       6,654       12,737  

Operating expenses

        

Cost of product sales

     37,531       27,199       1,829       5,986  

Research and development

     205,396       142,678       29,086       153,736  

Selling, general and administrative

     336,043       259,880       49,083       141,818  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     578,970       429,757       79,998       301,540  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (51,765     (118,425     (73,344     (288,803

Interest income

     1,814       8,464       2,449       3,645  

Interest expense

     (1,121     (1,087     (295     (1,249

Other income

     —         104,117       —         —    

Foreign exchange loss

     (3,974     (2,272     (982     (4,963
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (55,046     (9,203     (72,172     (291,370

Income tax expense (benefit)

     3,082       (184     (266     3,797  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (58,128   $ (9,019   $ (71,906   $ (295,167
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share, basic and diluted

   $ (0.15   $ (0.02   $ (0.20   $ (0.88
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted

     375,586       371,580       366,458       333,936  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


GW PHARMACEUTICALS PLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

 

     Year Ended
December 31,
    Three Months
Ended
December 31,
    Year Ended
September 30,
 
     2020     2019     2018     2018  

Net loss

   $ (58,128   $ (9,019   $ (71,906   $ (295,167

Foreign currency translation adjustments

     15,072       10,065       (3,494     (676
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (43,056   $ 1,046     $ (75,400   $ (295,843
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


GW PHARMACEUTICALS PLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Year Ended
December 31,
    Three Months
Ended
December 31,
    Years Ended
September 30,
 
     2020     2019     2018     2018  

Cash flows from operating activities

        

Net loss

   $ (58,128   $ (9,019   $ (71,906   $ (295,167

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

        

Foreign exchange loss

     910       2,709       742       4,917  

Stock-based compensation

     58,359       48,030       9,683       31,627  

Depreciation and amortization

     12,757       9,240       2,534       9,290  

Deferred income taxes

     (2,654     (9,698     (1,265     (317

Gain from sale of priority review voucher

     —         (104,117     —         —    

Other

     528       39       —         241  

Changes in operating assets and liabilities:

        

Accounts receivable, net

     (22,104     (44,623     (2,125     (804

Inventory

     (39,873     (51,125     (14,460     (13,646

Prepaid expenses and other current assets

     (9,624     (9,831     (3,635     14,489  

Other assets

     3,290       3,888       (47     (564

Accounts payable

     9,862       805       (1,211     2,238  

Current tax liabilities

     (3,404     (963     878       54  

Accrued liabilities

     24,890       43,110       5,942       16,507  

Other liabilities

     (2,194     (1,914     410       (733
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (27,385     (123,469     (74,460     (231,868
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

        

Proceeds from sale of priority review voucher

     —         104,117       —         —    

Additions to property, plant and equipment

     (18,585     (40,386     (18,687     (31,362

Additions to capitalized software

     (3,018     (2,102     (63     (2,042

Additions to intangible assets - licenses

     (6,404     —         —         —    

Proceeds from disposal of property, plant and equipment

     —         —         —         517  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (28,007     61,629       (18,750     (32,887
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

        

Proceeds from issuance of ordinary shares, net of issuance costs

     —         —         324,638       297,931  

Proceeds from exercise of stock options

     1,579       2,878       —         621  

Payments in connection with common stock withheld for employee tax obligation

     (1,826     —         —         —    

Payments on finance leases

     (299     (389     (40     (276

Payments on landlord financing obligation

     (583     (543     (130     (522
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (1,129     1,946       324,468       297,754  
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     6,340       5,330       5,326       (240

Net (decrease) increase in cash and cash equivalents

     (50,181     (54,564     236,584       32,759  

Cash and cash equivalents at beginning of period

     536,933       591,497       354,913       322,154  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 486,752     $ 536,933     $ 591,497     $ 354,913  
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

        

Income taxes paid

   $ 9,139     $ 10,462     $ —       $ 3,726  

Interest paid

   $ 1,121     $ 1,087     $ 198     $ 1,249  

Supplemental disclosure of noncash information:

        

Property and equipment purchases in accounts payable and accrued liabilities

   $ 2,396     $ 923     $ 1,899     $ 322  

See accompanying notes to consolidated financial statements.

 

7


GW PHARMACEUTICALS PLC

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

     Common Stock      Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Total
Stockholders’
Equity
 
     Shares      Amount  

Balances at September 30, 2017

     304,440      $ 482      $ 916,726     $ (461,867   $ (74,518   $ 380,823  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock in public offering, net of issuance costs

     33,120        44        297,888       —         —         297,932  

Issuance of common stock from exercise of stock options

     2,687        4        616       —         —         620  

Net loss

     —          —          —         (295,167     —         (295,167

Stock-based compensation

     —          —          31,627       —         —         31,627  

Other comprehensive loss

     —          —          —         —         (676     (676
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at September 30, 2018

     340,247      $ 530      $ 1,246,857     $ (757,034   $ (75,194   $ 415,159  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock in public offering, net of issuance costs

     26,220        34        324,604       —         —         324,638  

Issuance of common stock from exercise of stock options

     150        —          —         —         —         —    

Net loss

     —          —          —         (71,906     —         (71,906

Stock-based compensation

     —          —          9,683       —         —         9,683  

Other comprehensive loss

     —          —          —         —         (3,494     (3,494
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2018

     366,617      $ 564      $ 1,581,144     $ (828,940   $ (78,688   $ 674,080  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock from exercise of stock options

     4,452        6        2,872       —         —         2,878  

Net loss

     —          —          —         (9,019     —         (9,019

Stock-based compensation

     —          —          48,030       —         —         48,030  

Other comprehensive income

     —          —          —         —         10,065       10,065  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2019

     371,069      $ 570      $ 1,632,046     $ (837,959   $ (68,623   $ 726,034  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock from exercise of stock options

     4,127        7        1,572       —         —         1,579  

Net loss

     —          —          —         (58,128     —         (58,128

Common stock withheld for employee tax obligations

     —          —          (1,826     —         —         (1,826

Stock-based compensation

     —          —          58,359       —         —         58,359  

Other comprehensive income

     —          —          —         —         15,072       15,072  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2020

     375,196      $ 577      $ 1,690,151     $ (896,087   $ (53,551   $ 741,090  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

8


GW PHARMACEUTICALS PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Business Overview

GW Pharmaceuticals plc and its subsidiaries (referred to herein as “we,” “us,” “our,” and the “Company”) is a biopharmaceutical company focused on discovering, developing and commercializing novel therapeutics from our proprietary cannabinoid product platform in a broad range of disease areas. The Company is developing a portfolio of cannabinoid medicines, of which the lead product is Epidiolex®, an oral medicine for the treatment of certain refractory childhood epilepsies.

The Company is a public limited company, which has American Depository Shares (ADSs) registered with the U.S. Securities and Exchange Commission (SEC) and has been listed on Nasdaq since May 1, 2013. The Company’s ADSs each represent twelve ordinary shares of GW Pharmaceuticals plc. The Company is incorporated and domiciled in the United Kingdom. The address of the Company’s registered office and principal place of business is Sovereign House, Vision Park, Histon, Cambridgeshire.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Change of Fiscal Year

We changed our fiscal year end to December 31 from September 30, effective December 31, 2018.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates.

Foreign Currency Translation

The financial position and results of operations of the Company’s non-U.S. subsidiaries are generally determined using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss in stockholders’ equity. Foreign currency transaction gains and losses are included in “foreign exchange loss” in the Company’s consolidated statements of operations.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents.

 

9


Fair Value of Financial Instruments

The carrying values of the Company’s financial instruments, consisting of cash and cash equivalents, trade receivables, interest and other receivables, and accounts payable and accrued liabilities, approximate fair value due to the relative short-term nature of these instruments.

Accounts Receivable

Accounts receivable are recorded net of customer allowances for prompt payment discounts, chargebacks, and doubtful accounts. Allowances for prompt payment discounts and chargebacks are based on contractual terms. The Company estimates the allowance for doubtful accounts based on existing contractual payment terms, actual payment patterns of its customers and individual customer circumstances. As of December 31, 2020, and 2019, the allowance for doubtful accounts was $0.3 million.

Inventory

Inventory is stated at the lower of cost or estimated net realizable value. The Company uses a combination of standard and actual costing methodologies to determine the cost basis for its inventories which approximates actual cost. Inventory is valued on a first-in, first-out basis. The Company reduces its inventory to net realizable value for potentially excess, dated or obsolete inventory based on an analysis of forecasted demand compared to quantities on hand, as well as product shelf life.

Our inventory production process includes the cultivation of botanical raw material. Because of the duration of the cultivation process, a portion of our inventory will not be sold within one year. Consistent with the practice in other industries that cultivate botanical raw materials, all inventory is classified as a current asset.

The Company capitalizes inventory costs associated with its products upon regulatory approval when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed. Prior to FDA approval of Epidiolex, all costs related to the manufacturing of Epidiolex were charged to research and development expense in the period incurred.

Property, Plant, and Equipment

Property, plant, and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the lease by use of the straight-line method. The estimated useful lives for buildings and leasehold improvements range from 4 to 20 years. The estimated useful lives of machinery and equipment range from 3 to 20 years. Construction-in-process reflects amounts incurred for property, equipment or improvements that have not been placed in service. Maintenance and repair costs are expensed as incurred. When assets are retired or sold, the assets and accumulated depreciation are removed from the respective accounts and any gain or loss is recognized.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to estimated future operating cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Goodwill

Goodwill represents the excess of purchase price over fair value of net assets acquired in a business combination and is not amortized. Goodwill is subject to impairment testing at least annually or when a triggering event occurs that could indicate a potential impairment. We performed the annual assessment for goodwill impairment in December of 2020, noting no impairment.

 

10


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 is entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Revenue for the Company’s product sales has not been adjusted for the effects of a financing component as the Company expects, at contract inception, that the period between when the Company transfers control of the product and when the Company receives payment will be one year or less. Product shipping and handling costs are included in cost of product sales.

Epidiolex Product Net Sales

In the United States, the Company sells Epidiolex to specialty pharmacies (SPs) and specialty distributors (SDs). The Company recognizes revenue from product sales upon receipt of product at the SPs and SDs, the date at which the control is transferred, net of the following allowances which are reflected either as a reduction to the related account receivable or as an accrued liability, depending on how the allowance is settled:

Distribution Fees: Distribution fees include distribution service fees paid to the SPs and SDs based on a contractually fixed percentage of the wholesale acquisition cost (WAC), and prompt payment discounts. Distribution fees are recorded as an offset to revenue based on contractual terms at the time revenue from the sale is recognized.

Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program and the Medicare Part D prescription drug benefit, and contractual rebates with commercial payers. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or statutory requirements. The allowance for rebates is based on contracted or statutory discount rates and expected utilization by benefit plan participants. The Company’s estimates for expected utilization of rebates is based on utilization data received from the SPs. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for prior quarters’ unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Chargebacks: Chargebacks are discounts and fees that relate to contracts with government and other entities purchasing from the SDs at a discounted price. The SDs charge back to the Company the difference between the price initially paid by the SDs and the discounted price paid to the SDs by these entities. The Company also incurs group purchasing organization fees for transactions through certain purchasing organizations. The Company estimates sales with these entities and accrues for anticipated chargebacks and organization fees, based on the applicable contractual terms. If actual future chargebacks vary from these estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Co-Payment Assistance: The Company offers co-payment assistance to commercially insured patients meeting certain eligibility requirements. Co-payment assistance is accrued for based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Product Returns: Consistent with industry practice, the Company offers the SPs and SDs limited product return rights for damages, shipment errors, and expiring product, provided that the return is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement.

 

11


The Company does not allow product returns for product that has been dispensed to a patient. As the Company receives inventory reports from the SPs and SDs and has the ability to control the amount of product that is sold to the SPs and SDs, it is able to make a reasonable estimate of future potential product returns based on this on-hand channel inventory data and sell-through data obtained from the SPs and SDs. In arriving at its estimate, the Company also considers historical product returns, the underlying product demand, and industry data specific to the specialty pharmaceutical distribution industry.

In September 2019, the Company announced that the European Commission (EC) approved the marketing authorization for Epidyolex (the trade name in Europe for Epidiolex) for use as adjunctive therapy of seizures associated with Lennox-Gastaut syndrome (LGS) or Dravet syndrome, in conjunction with clobazam, for patients two years of age and older. The Company has launched Epidyolex in a number of European markets and recognizes revenue from product sales in Europe upon delivery of the product, which is the point at which control of the goods is transferred to the customer. The Company recognizes revenue net of standard discounts and allowances, which are reflected as accrued liabilities.

The Company also sells Epidiolex in certain markets outside of the United States under early access programs that enable patients to receive the product prior to regulatory approval. Revenue under early access programs is generally recognized when the product is delivered.

The total amount deducted from gross sales for the allowances described above for the year ended December 31, 2020 and 2019 was $137.5 million and $63.3 million, respectively.

Sativex Product Net Sales

Sativex is sold outside of the United States for the treatment of spasticity due to multiple sclerosis, or MS, pursuant to license agreements with commercial partners and, beginning in the first quarter of 2020, directly to customers in the U.K.

Under the license agreements, the Company sells fully labeled Sativex vials to its commercial partners for a contractually agreed price, which is generally based on percentages of the commercial partners’ in-market net selling price charged to end customers. Product net sales revenue related to Sativex shipments to commercial license partners is recognized when shipped, at which point the customer obtains control of the product.

In the U.K., the Company recognizes revenue from product sales of Sativex upon delivery of the product, which is the point at which control of the goods is transferred to the customer. The Company recognizes revenue net of standard discounts and allowances, which are reflected as accrued liabilities.

The Company also commercializes Sativex in Australia and New Zealand through a consignment relationship with a local distributor. Product net sales revenues related to Sativex sales in Australia and New Zealand are recognized when the product is sold through to the end customer.

Other Revenue

The Company’s other revenue primarily consists of research and development fee revenue and variable consideration milestone payments related to the Sativex license agreements. The research and development fee revenue is recognized at the time the underlying services are performed. The Sativex license agreements contain provisions for the Company to earn variable consideration in the form of regulatory milestone payments, sales-based milestone payments, and royalty payments. The Company has no further performance obligations related to the regulatory milestone payments and these amounts are recognized in accordance with Topic 606 when receipt of these payments becomes probable and there is no significant risk of revenue reversal. Revenue related to the sales-based milestone payments and product royalty payments are subject to the sales-based royalty exception under Topic 606 and is recognized when the underlying sales are made.

 

12


Research and Development Expenses

Research and development expenses are charged to operations as incurred. Research and development expenses include, among other things, internal and external costs associated with preclinical development, pre-commercialization manufacturing expenses, and clinical trials. The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial or services provided and the invoices received from its external service providers. In the case of clinical trials, a portion of the estimated cost normally relates to the projected cost to treat a patient in the trials, and this cost is recognized based on the number of patients enrolled in the trial. As actual costs become known, the Company adjusts its accruals accordingly.

Research and development expense is presented net of reimbursements from reimbursable tax and expenditure credits from the U.K. government. The majority of the Company’s pipeline research, clinical trials management and the Epidiolex and Sativex chemistry and manufacturing controls development activities, which are generally carried out by a subsidiary in the U.K., are eligible for inclusion under the U.K tax and expenditure rebate schemes. For the years ended December 31, 2020 and 2019, three months ended December 31, 2018 and year ended September 30, 2018, the Company recorded $8.1 million, $4.0 million, $0.8 million, and $4.3 million, respectively, of U.K. tax and expenditure rebates as a component of research and development expense.

Concentration Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, principally consist of cash, cash equivalents, investment securities, and accounts receivable. The Company’s cash and cash equivalents balances are primarily in depository accounts at major financial institutions in accordance with the Company’s investment policy. The Company’s investment policy defines allowable investments and establishes guidelines relating to credit quality, diversification, and maturities of its investments to preserve principal and maintain liquidity. Further, the Company specifies credit quality standards for its customers that are designed to limit the Company’s credit exposure to any single party.

For the year ended December 31, 2020 the Company’s five largest customers represented approximately 79% of the Company’s product net sales and 75% of the Company’s accounts receivable balance as of December 31, 2020. For the year ended December 31, 2019, the Company’s five largest customers represented approximately 85% of the Company’s product net sales and 86% of the Company’s accounts receivable balance as of December 31, 2019. For the three months ended December 31, 2018, the Company’s five largest customers represented approximately 71% of the Company’s product net sales and 75% of the Company’s accounts receivable balance as of December 31, 2018. For the year ended September 30, 2018, product net sales consisted entirely of Sativex sales outside of the United States pursuant to license agreements with a small number of commercial partners.

Share-based Compensation

The Company recognizes share-based compensation expense for grants of stock options under the Company’s Long-Term Incentive Plans to employees and non-employee members of the Company’s board of directors based on the grant-date fair value of those awards. The grant-date fair value of an award is generally recognized as compensation expense over the award’s requisite service period. Expense related to awards with graded vesting is generally recognized over the vesting period using the accelerated attribution method.

The Company uses the Black-Scholes model to compute the estimated fair value of market-priced stock option awards. Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of the Company’s ADS price, (ii) the periods of time over which employees and members of the board of directors are expected to hold their options prior to exercise (expected lives), (iii) expected dividend yield on the ordinary shares, and (iv) risk-free interest rates. Share-based compensation expense also includes an estimate, which is made at the time of grant, of the number of awards that are expected to be forfeited. This estimate is revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

13


Income Taxes

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities along with net operating loss and tax credit carryovers. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.

Valuation allowances against the Company’s deferred tax assets were $133.7 million and $114.5 million at December 31, 2020 and 2019, respectively. Changes in the valuation allowances are generally recognized in the provision for income taxes as a component of the estimated annual effective tax rate.

Uncertain tax positions, for which management’s assessment is that there is more than a 50% probability of sustaining the position upon challenge by a taxing authority based upon its technical merits, are subjected to certain recognition and measurement criteria. The Company re-evaluates uncertain tax positions and considers various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, and changes in facts or circumstances related to a tax position. The Company adjusts the level of the liability to reflect any subsequent changes in the relevant facts and circumstances surrounding the uncertain positions. The Company recognizes interest and penalties related to income tax matters as a component of income tax expense.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, market-priced stock options are considered to be common stock equivalents but are not included in the calculations of diluted net loss per share for the periods presented as their effect would be anti-dilutive. Nominal strike-price options are considered common stock equivalents and are included in the calculation of basic weighted average shares outstanding once they have become vested. The Company incurred net losses for all periods presented and there were no reconciling items for potentially dilutive securities. More specifically, at December 31, 2020, December 31, 2019, December 31, 2018, and September 30, 2018, options totaling approximately 16.3 million, 11.8 million, 13.0 million, and 13.0 million ordinary shares, respectively, were excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive.

Segment and Geographic Reporting

Management has determined that the Company operates in one business segment which is the discovery, development and commercialization of novel therapeutics from its proprietary cannabinoid product platform in a broad range of disease areas.

Revenues recorded in the years ended December 31, 2020 and 2019, three months ended December 31, 2018, and year ended September 30, 2018, were generated in the following geographical areas:

 

     Year Ended
December 31,
     Three Months
Ended
December 31,
     Year Ended
September 30,
 
     2020      2019      2018      2018  
            (in thousands)         

United Kingdom

     10,804        2,550        220        1,761  

United States

     467,553        288,164        4,669        1,560  

Europe

     45,376        16,516        1,131        6,882  

Other

     3,472        4,102        634        2,534  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 527,205      $ 311,332      $ 6,654      $ 12,737  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Long-lived assets which include property, plant, and equipment were located as follows:

 

     December 31,  
     2020      2019  
     (in thousands)  

United Kingdom

   $ 139,084      $ 123,207  

United States

     4,683        4,558  
  

 

 

    

 

 

 

Total long-lived assets

   $ 143,767      $ 127,765  
  

 

 

    

 

 

 

Recently Issued Accounting Standards

Accounting Standards Update (ASU) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity:

In August 2020, FASB issued ASU No. 2020-06, simplifying the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments, and amends existing earnings-per-share, or EPS, guidance by requiring that an entity use the if-converted method when calculating diluted EPS for convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We plan to adopt ASU 2020-06 effective January 1, 2022 and are currently evaluating the effect ASU 2020-06 will have on our consolidated financial statements and related disclosures.

ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes:

In December 2019, the FASB issued ASU No. 2019-12, simplifying the accounting for Income Taxes. The objective of the standard is to improve areas of GAAP by removing certain exceptions permitted by ASC Topic 740 - Income Taxes and clarifying existing guidance to facilitate consistent application. The standard is effective for us beginning on January 1, 2021. We are currently evaluating the new standard to determine the potential impact on our financial condition, results of operations, cash flows, or financial statement disclosures. The ASU is currently not expected to have a material impact on our consolidated financial statements.

Recently Adopted Accounting Standards

Accounting Standards Update (ASU) 2016-13, Measurement of Credit Losses on Financial Instruments:

In June 2016, the FASB issued ASU 2016-13, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods. We adopted this guidance as of January 1, 2020. Under the current expected credit loss model, we have adopted a provision matrix approach, utilizing historical loss rates based on the number of days past due, adjusted to reflect current economic conditions and forecasts of future economic conditions. The adoption of ASU 2016-13 had an immaterial impact on the Company’s consolidated financial statements.

 

15


Note 3: Sativex License Agreements

The Company has entered into license agreements for Sativex with major pharmaceutical companies that provide the license partners with exclusive rights in a defined geographic territory to commercialize Sativex for all indications. The Company has retained the exclusive right to manufacture and supply Sativex to license partners on commercial supply terms for the duration of the commercial life of the product. In the first quarter of 2020, the Company reacquired the rights to commercialize Sativex in the U.K. from Bayer AG for approximately $6.4 million. The Company capitalized the cost to reacquire the license as an intangible asset and will amortize the asset over its five-year estimated useful life. As of December 31, 2020, $1.2 million of the intangible asset has been amortized.

In 2007, the Company entered into an exclusive license agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka) for the development and commercialization of Sativex in the United States. In December 2017, the Company entered into a mutual termination agreement with Otsuka to return the rights to develop and commercialize Sativex in the United States to the Company. As part of the termination agreement, the Company agreed to pay Otsuka a contingent future milestone payment of $10 million if Sativex achieves FDA approval in the U.S. and a total of $30 million of potential sales-based milestones if U.S. sales of Sativex reach certain thresholds. As of December 31, 2020, no amounts have been accrued related to the contingent payments because it is not probable that the milestones will be achieved.

Note 4: Fair Value Measurements

At December 31, 2020 and December 31, 2019, the Company’s cash equivalents consisted of money market funds, which are classified as Level 1 within the fair value hierarchy defined by authoritative guidance.

Securities classified as Level 1 are valued using quoted market prices. The Company does not hold any securities classified as Level 2, which are securities valued using inputs that are either directly or indirectly observable, or Level 3, which are securities valued using unobservable inputs. The Company has not transferred any securities between the classification levels.

Note 5: Composition of Certain Balance Sheet Captions:

Inventory consisted of the following:

 

     December 31,  
     2020      2019  
     (in thousands)  

Raw materials

   $ 2,691      $ 1,976  

Work in process

     112,662        78,547  

Finished goods

     13,785        5,005  
  

 

 

    

 

 

 
   $ 129,138      $ 85,528  
  

 

 

    

 

 

 

Property, plant and equipment, net, consisted of the following:

 

     December 31,  
     2020     2019  
     (in thousands)  

Buildings

   $ 15,957     $ 4,725  

Machinery and equipment

     51,021       36,323  

Leasehold improvements

     49,516       42,744  

Office and IT equipment

     5,890       3,837  

Construction-in-process

     71,441       78,485  
  

 

 

   

 

 

 
     193,825       166,114  

Accumulated depreciation

     (50,058     (38,349
  

 

 

   

 

 

 
   $ 143,767     $ 127,765  
  

 

 

   

 

 

 

 

16


Depreciation of property and equipment was $9.9 million, $8.0 million, $2.2 million, and $8.5 million for the years ended December 31, 2020 and 2019, three months ended December 31, 2018 and for the year ended September 30, 2018, respectively. The Company retired $0.5 million of property, plant, and equipment for the year ended December 31, 2020. The Company did not retire any property, plant, or equipment in the year ended December 31, 2019 and three months ended December 31, 2018. During the year ended September 30, 2018, the Company retired $0.5 million, of fully depreciated property, plant and equipment.

Accrued liabilities consisted of the following:

 

     December 31,  
     2020      2019  
     (in thousands)  

Accrued compensation and benefits

   $ 34,830      $ 25,469  

Accrued vendor fees

     31,445        29,731  

Clinical trial accruals

     14,845        10,382  

Accrued growing fees

     3,363        3,818  

Accrued sales rebates and discounts

     37,403        22,995  

Other

     5,963        6,979  
  

 

 

    

 

 

 
   $ 127,849      $ 99,374  
  

 

 

    

 

 

 

Other current liabilities consisted of the following:

 

     December 31,  
     2020      2019  
     (in thousands)  

Finance lease liabilities

   $ 338      $ 305  

Operating lease liabilities

     6,209        5,902  

Landlord financing

     665        595  

Other

     1,998        958  
  

 

 

    

 

 

 
   $ 9,210      $ 7,760  
  

 

 

    

 

 

 

Other liabilities consisted of the following:    

 

     December 31,  
     2020      2019  
     (in thousands)  

Landlord financing obligation

   $ 8,844      $ 9,152  

Other

     2,190        2,279  
  

 

 

    

 

 

 
   $ 11,034      $ 11,431  
  

 

 

    

 

 

 

Note 6: Stockholders’ Equity

In October 2018, the Company completed a public offering of 2,185,000 ADSs listed on the Nasdaq Global Market, representing 26,220,000 ordinary shares of the Company, at a price of $158.00 per ADS. The net proceeds from this transaction after underwriting discounts and commissions were approximately $324.6 million.

In December 2017, the Company completed a public offering of 2,760,000 ADSs listed on the Nasdaq Global Market, representing 33,120,000 ordinary shares of the Company, at a price of $115.00 per ADS. The net proceeds from this transaction after underwriting discounts and commissions were approximately $297.9 million.

 

17


Note 7: Share-Based Compensation

Stock Plans

The Company issues share-based awards under shareholder approved long-term incentive plans. In May 2020, the Company adopted the GW Pharmaceuticals plc 2020 Long-Term Incentive Plan (the 2020 LTIP Plan), which superseded the Company’s prior long-term incentive plans. The 2020 LTIP plan authorizes the Company to issue up to an aggregate of 22.2 million ordinary shares, or 1.85 million ADSs, related to share-based awards to employees, non-employee directors and consultants. As of December 31, 2020, the Company has granted stock options for 4.3 million ordinary shares under the 2020 LTIP Plan.

The Company issues new ordinary shares and the commensurate number of ADS when share-based awards are exercised.

Provisions of Share-Based Awards

The Company issues nominal strike price stock options, which have an exercise price equal to the £0.001 par value per ordinary share of the Company’s ordinary shares, to executive officers, employees and non-employee directors. The Company also issues market-priced options to executive officers and non-employee directors. Nominal strike price options granted to U.S. residents are awarded in the form of RSU-style options that automatically exercise on the vesting date.

Substantially all of the share-based awards issued by the Company have service-based vesting conditions. Many awards also have non-market-based performance conditions, which must be achieved within the service-based vesting period for the awards to vest. These performance conditions are generally linked to operational, regulatory or strategic milestones and are designed to incentivize individual employees and advance the Company’s progress towards its strategic objectives. Share-based awards that do not automatically exercise at vest date expire ten years from the date of grant.

Share-Based Award Activity

The following tables summarize the Company’s stock option activity. The number of options, the weighted average grant date fair value per stock option, and the weighted average exercise price are all on a per ordinary shares basis. The Company’s ADSs that are listed on the Nasdaq Global Market each represent twelve ordinary shares.

The following table summarizes the Company’s nominal strike price stock option activity:

 

     Year Ended
December 31,
     Year Ended
December 31,
     Three Months Ended
December 31,
     Year Ended
September 30,
 
     2020      2019      2018      2018  
     Nominal
Strike
Price
Options
    Weighted
Average
Grant Date
Fair Value
     Nominal
Strike
Price
Options
    Weighted
Average
Grant Date
Fair Value
     Nominal
Strike
Price
Options
    Weighted
Average
Grant Date
Fair Value
     Nominal
Strike
Price
Options
    Weighted
Average
Grant Date
Fair Value
 
     (in thousands, except weighted average grant date fair value)  

Outstanding, beginning of period

     10,459     $ 11.24        11,182     $ 8.44        11,240     $ 8.41        9,752     $ 7.90  

Granted

     8,982       9.54        3,493       13.93        184       9.58        4,247       9.34  

Exercised

     (4,156     9.46        (3,798     5.43        (150     7.36        (2,617     7.21  

Cancelled

     (566     9.92        (418     11.69        (92     8.61        (142     9.37  
  

 

 

      

 

 

      

 

 

      

 

 

   

Outstanding, end of period

     14,719     $ 10.76        10,459     $ 11.24        11,182     $ 8.44        11,240     $ 8.41  
  

 

 

      

 

 

      

 

 

      

 

 

   

Exercisable, end of period

     1,949     $ 8.91        1,434     $ 5.47        1,054     $ 3.65        1,136     $ 6.11  
  

 

 

      

 

 

      

 

 

      

 

 

   

 

18


The following table summarizes the Company’s market-priced stock option activity:

 

     Year Ended
December 31,
     Year Ended
December 31,
     Three Months Ended
December 31,
     Year Ended
September 30,
 
     2020      2019      2018      2018  
     Market
Strike
Price
Options
    Weighted
Average
Exercise
Price
     Market
Strike
Price
Options
    Weighted
Average
Exercise
Price
     Market
Strike
Price
Options
     Weighted
Average
Exercise
Price
     Market
Strike
Price
Options
    Weighted
Average
Exercise
Price
 
     (in thousands, except weighted average grant date fair value)  

Outstanding, beginning of period

     2,836     $ 9.60        2,889     $ 8.49        2,889      $ 8.49        2,174     $ 8.28  

Granted

     —         —          602       14.82        —          —          785       9.65  

Exercised

     (162     4.68        (654     2.32        —          —          (70     9.03  

Cancelled

     —         —          (1     3.89        —          —          —         —    
  

 

 

      

 

 

      

 

 

       

 

 

   

Outstanding, end of period

     2,674     $ 9.90        2,836     $ 9.60        2,889      $ 8.49        2,889     $ 8.49  
  

 

 

      

 

 

      

 

 

       

 

 

   

Exercisable, end of period

     1,489     $ 7.92        620     $ 4.99        461      $ 6.90        257     $ 8.74  
  

 

 

      

 

 

      

 

 

       

 

 

   

No market priced options were granted in the year ended December 31, 2020 or in the three months ended December 31, 2018. The weighted average per share fair value of market priced options granted during the year ended December 31, 2019 and year ended September 30, 2018 was $14.82 and $5.98, respectively.

The aggregate intrinsic value of the stock options exercised in the years ended December 31, 2020 and 2019 was $36.3 million and $52.9 million, respectively. The aggregate intrinsic value of the stock options exercised in the three months ended December 31, 2018 was $1.6 million. The aggregate intrinsic value of stock options exercised for the year ended September 30, 2018 was $30.7 million. As of December 31, 2020, the weighted average remaining contractual life of options outstanding and options exercisable are 4.3 years and 5.1 years, respectively. Based on the Company’s closing year-end stock price of $116.09 per ADS (or $9.67 per ordinary share) at December 31, 2020, the aggregate intrinsic value of options outstanding and options exercisable are $145.6 million and $21.6 million, respectively.

Valuation and Expense Recognition of Share-Based Awards

The fair value of market-priced stock option awards is estimated using the Black-Scholes option-pricing model. The estimated fair value of each stock option is then expensed over the requisite service period, which is generally the vesting period. The determination of fair value using the Black-Scholes model is affected by the Company’s ADS price as well as assumptions regarding a number of complex and subjective variables, including expected ADS price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behaviors. No market-priced stock options were granted in 2020. Market-priced stock options granted during the year ended December 31, 2019 and the year ended September 30, 2018 were valued using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

     Year Ended
December 31,
     Year Ended
September 30,
 
     2019      2018  

Expected volatility

     56%        63%  

Risk-free interest rate

     2.56%        2.30%  

Expected dividend yield

     0%        0%  

Expected life of options in years

     6.50        6.50  

The Company estimates its stock price volatility based using a combination of historical stock price volatility and the average implied volatility of options traded in the open market. The risk-free interest rate assumption is based on observed interest rates for the appropriate term of the Company’s stock options. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future. The expected option life assumption is estimated using the simplified method prescribed by ASC 718 and is based on the mid-point between vest date and expiration date since the Company does not have sufficient exercise history to estimate expected option life of historical grants.

 

19


Compensation expense for share-based awards based on a service condition is recognized only for those awards that are ultimately expected to vest. An estimated forfeiture rate has been applied to unvested awards for the purpose of calculating compensation cost. Forfeitures were estimated based on historical experience. These estimates are revised, if necessary, in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs. Compensation expense for share-based awards with graded, service-based vesting conditions is recognized over the requisite service period using the accelerated attribution method.

The table below summarizes the total share-based compensation expense included in the Company’s statements of operations for the periods presented:

 

     Year Ended
December 31,
     Three Months
Ended
December 31,
     Years Ended
September 30,
 
     2020      2019      2018      2018  
    

(in thousands)

 

Research and development

   $ 11,253      $ 9,757      $ 6,887      $ 9,385  

Sales, general and administrative

     43,730        35,468        2,382        22,242  
  

 

 

    

 

 

    

 

 

    

 

 

 
     54,983        45,225      $ 9,269      $ 31,627  
  

 

 

    

 

 

    

 

 

    

 

 

 

For the year ended December 31, 2020 and 2019, $3.4 million and $2.8 million of share-based compensation related to manufacturing operations was capitalized into inventory, respectively. For the three months ended December 31, 2018, $0.4 million of share-based compensation related to manufacturing operations was capitalized into inventory. Share-based compensation related to manufacturing operations capitalized into inventory for the year ended September 30, 2018 was negligible.

As of December 31, 2020, total compensation cost related to non-vested stock options not yet recognized was approximately $68.4 million, which is expected to be recognized over the next 42 months (22 months on a weighted average basis).

Note 8: Retirement Plans

The Company operates defined contribution retirement plans in the U.S. and U.K. for the benefit of all qualifying employees. The Company makes discretionary contributions to these plans and contributed $6.7 million, $4.6 million, $0.9 million, and $3.3 million, in the years ended December 31, 2020 and 2019, three months ended December 31, 2018 and year ended September 30, 2018, respectively.

Note 9: Income Taxes

Income (loss) before income taxes is as follows:

 

     Year Ended
December 31,
    Three Months
Ended

December 31,
    Year Ended
September 30,
 
     2020     2019     2018     2018  
     (in thousands)  

United States

   $ 32,183     $ 22,822     $ 1,487     $ 12,041  

United Kingdom

     (88,570     (32,025     (73,659     (303,411

Europe

     1,341       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (55,046   $ (9,203   $ (72,172   $ (291,370
  

 

 

   

 

 

   

 

 

   

 

 

 

 

20


The components of income tax (benefit) expense are as follows:

 

     Year Ended
December 31,
    Three Months Ended
December 31,
    Year Ended
September 30,
 
     2020     2019     2018     2018  
     (in thousands)  

Current

        

U.S. federal

   $ 2,829     $ 7,397     $ 945     $ 3,885  

U.S. state and local

     2,584       2,117       54       229  

United Kingdom

     —         —         —         —    

Europe

     338       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Current

   $ 5,751     $ 9,514     $ 999     $ 4,114  
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred

        

U.S. federal

   $ (1,501   $ (6,372   $ (1,166   $ (263

U.S. state and local

     (1,116     (3,326     (99     (54

United Kingdom

     —         —         —         —    

Europe

     (52     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Deferred

   $ (2,669   $ (9,698   $ (1,265   $ (317
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax (benefit) expense

   $ 3,082     $ (184   $ (266   $ 3,797  
  

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2020 and December 31, 2019, the tax effects of temporary differences and carryforwards that give rise to deferred tax assets and liabilities were as follows:

 

     Year Ended
December 31,
 
     2020     2019  
     (in thousands)  

Deferred tax assets:

    

Net operating losses

   $ 124,596     $ 106,421  

Research and development tax credits

     763       668  

Share-based compensation

     17,433       14,515  

Accrued expenses

     3,861       3,268  

Capitalized costs

     —         1,688  

Operating lease liabilities

     1,678       1,837  

Rebates and allowances

     6,881       5,172  

Depreciation

     —         279  

Other

     1,694       428  
  

 

 

   

 

 

 

Total gross deferred tax assets

     156,906       134,276  

Valuation allowance

     (133,720     (114,525
  

 

 

   

 

 

 

Total deferred tax assets, net of valuation allowance

     23,186       19,751  
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Depreciation

   $ (1,039     —    

Operating lease assets

     (1,370     (1,628
  

 

 

   

 

 

 

Total gross deferred tax liabilities

     (2,409     (1,628
  

 

 

   

 

 

 

Net deferred tax assets and liabilities

   $ 20,777     $ 18,123  
  

 

 

   

 

 

 

A valuation allowance of $133.7 million and $114.5 million at December 31, 2020 and 2019, respectively, has been recognized to offset net deferred tax assets where realization of such assets is uncertain. The valuation allowances are primarily related to deferred assets for operating loss carryforwards and temporary differences related to share-based compensation expense of the Company’s U.K. operations.

 

21


The following table reconciles the Company’s effective tax rate to the United Kingdom statutory rate:

 

     Years Ended
December 31,
     Three Months Ended
December 31,
     Year Ended
September 30,
 
     2020      2019      2018      2018  

Tax, computed at the U.K. statutory rate

     19.0%        19.0%        19.0%        19.0%  

Non-deductible expenses

     (1.0%)        (5.2%)        (0.2%)        (0.1%)  

U.S. research tax credits, net

     5.7%        39.3%        0.4%        0.9%  

Surrender of R&D expenditures for U.K. research tax credits, net

     (0.5%)        (1.9%)        —          (0.1%)  

Foreign Derived Intangible Income

     7.0%        6.8%        0.8%        —    

Share-based compensation

     (4.1%)        61.2%        0.2%        0.9%  

Changes in valuation allowances

     (55.1%)        (96.2%)        (19.6%)        (20.5%)  

Remeasurement of deferred taxes from legislative updates

     24.9%        —          —          (1.0%)  

Current/Deferred tax rate differential

     —          (21.4%)        —          —    

Overseas profits taxed at different rates

     (2.1%)        (13.9%)        (0.1%)        (0.3%)  

State tax rate change

     0.5%        13.5%        —          —    

Other

     0.1%        0.8%        (0.1%)        (0.1%)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Effective income tax rate

     (5.6%)        2.0%        0.4%        (1.3%)  
  

 

 

    

 

 

    

 

 

    

 

 

 

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in the U.S. in March 2020. The CARES Act adjusted a number of provisions of the tax code, including the eligibility of certain deductions and the treatment of net operating losses and tax credits. The enactment of the CARES Act did not result in any material adjustments to the Company’s income tax provision for the year ended December 31, 2020 or to its deferred tax assets as of December 31, 2020.

California Assembly Bill 85 (“AB 85”), which intends to close a gap in the budget created by the COVID-19 pandemic, was signed into law by Governor Gavin Newsom on June 29, 2020. It was passed by both houses of the California state legislature on June 15, 2020. AB 85 disallows California net operating losses for any taxable year beginning on or after January 1, 2020, and before January 1, 2023 for any corporation with a net business or modified adjusted gross income of more than $1 million for the taxable year. This bill also limits any business credit to offset a maximum of $5 million of California tax, including the California Research Credit. The Company does not expect any material impacts related to this tax law change.

The Company is headquartered in the United Kingdom and has subsidiaries in the United Kingdom, United States, Europe, and Australia.

The Company incurs tax losses in the United Kingdom. The U.K. corporate tax rate for the years ended December 31, 2020 and 2019, three months ended December 31, 2018, and year ended September 30, 2018 was 19.0%. On March 11, 2020, the UK Chancellor of the Exchequer delivered the 2020 Budget to the UK parliament. It was announced that the previously anticipated reduction in the UK corporate tax rate to 17% due to take effect on April 1, 2020 would not be implemented and the rate would remain at 19%. Royal Assent was given on July 22, 2020. The deferred tax assets at December 31, 2020 have now been represented at the current tax rate of 19% with a corresponding offset to the valuation allowance.

As of December 31, 2020, the Company had U.K. net operating loss carryforwards of approximately $655.8 million. Unsurrendered U.K. tax losses and tax credit carryforwards can be carried forward indefinitely to be offset against future taxable profits, however this is restricted to an annual £5 million allowance in each standalone company or group and above this allowance, there will be a 50% restriction in the profits that can be covered by losses brought forward.

The Company’s subsidiary in the United States has generated taxable profits due to the commercialization of Epidiolex in the United States and service agreements between the Company’s subsidiaries in the United States and the United Kingdom. The U.S. federal corporate tax rate for the years ended December 31, 2020 and 2019, three months ended December 31, 2018, and year ended September 30, 2018 was 21.0%, 21.0%, 21.0%, and 24.5%, respectively. The U.S. federal statutory tax rate has decreased due to U.S. tax reform which was enacted in December 2017.

 

22


The impact of income taxes outside of the United States and United Kingdom are not significant.

The Company’s tax returns are subject to examination in the U.K. and U.S. The Company is no longer subject to examinations by tax authorities for tax years ended September 30, 2017 and prior in the United Kingdom. The Company’s U.K. income tax returns have been submitted to Her Majesty’s Revenue and Customs through the period ended December 31, 2019 and may be subject to audit until December 31, 2021. The Company is subject to examinations by U.S. Federal tax authorities for tax years ended December 31, 2018 and September 30, 2018 and 2017, and by state authorities for the tax years ended December 31, 2018 and September 30, 2018, 2017, and 2016. The California Franchise Tax Board is conducting an income tax audit of the Company’s U.S. subsidiary for tax years ended September 30, 2017, 2016, and 2015.

Unrecognized tax benefits arise when the estimated benefit recorded in the financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. The Company’s total amount of unrecognized tax benefits was $2.3 million and $2.4 million as of December 31, 2020 and December 31, 2019, respectively. The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense and unrecognized tax benefits. The amounts accrued for interest and penalty charges as of December 31, 2020 and December 31, 2019 were not significant. If recognized, $2.3 million would affect the effective tax rate. The Company does not anticipate that the amount of unrecognized tax benefits as of December 31, 2020 will significantly change within the next twelve months.

The reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:

 

     Years Ended
December 31,
 
     2020     2019  
           (in thousands)  

Balance, beginning of period

   $ 2,391     $ 1,943  

Additions for tax positions related to current year

     590       416  

Additions for tax positions related to prior years

     8       32  

Reduction for tax positions related to prior years

     —         —    

Reduction for lapse of statute of limitations

     (648     —    
  

 

 

   

 

 

 

Balance, end of period

   $ 2,341     $ 2,391  
  

 

 

   

 

 

 

Note 10: Commitments and Contingencies

Landlord Financing

In 2013, the Company entered into an agreement with its landlord for the construction of a new production facility. In conjunction with agreement, the Company’s landlord provided $13.1 million of funding to the Company for the internal fit out of the production facility. The repayment of this landlord financing takes the form of quarterly rent payments over a 15-year period that commenced in May 2016. The landlord financing liability is accounted for at amortized cost using the effective interest method at a rate of 7.0%. As of December 31, 2020 and 2019, the total landlord financing liability balance was $9.5 million and $9.7 million, respectively and included in “other current liabilities” and “other liabilities” in the Company’s consolidated balance sheets.

Legal Proceedings

As of December 31, 2020, the Company was not a party to any material legal proceedings.

In 2007, the Company entered into a research collaboration agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka), which expired in June 2013. Otsuka has contacted the Company to assert that it is owed royalty payments under the agreement of up to two percent of Epidiolex net sales. While the Company believes Otsuka’s position is without merit, the Company cannot predict the outcome of this matter and cannot provide assurances that the Company will be successful, in whole or in part, in the Company’s efforts.

 

23


On December 23, 2020, Canopy Growth Corporation filed suit against the Company in the Western District of Texas, alleging infringement of U.S. Patent No. 10,870,632. Canopy alleges that the process the Company used to make the crude cannabinoid extract that is used to make Epidiolex is within the scope of its patent. The Company dispute Canopy’s claims and intend to defend the matter vigorously.

Note 11: Leases

The Company leases buildings, land, equipment, and automobiles. Additionally, the Company has growing and cultivation contracts that contain embedded facility leases. The Company determines if an arrangement is a lease or contains a lease at contract inception. For contracts that are or contain leases, the Company records right-of-use (ROU) lease assets and lease liabilities at lease commencement based on the present value of lease payments over the lease term. The lease term includes renewal option periods when those options are reasonably certain to be exercised. The present value of lease payments is calculated using the Company’s incremental collateralized borrowing rate unless an implicit rate is readily determinable. ROU lease assets include any upfront payments and exclude lease incentives. The Company accounts for lease and non-lease components as a single lease component for all of its leases except embedded leases, for which the lease and non-lease components are accounted for separately.

Leases are classified at lease commencement as either operating leases or finance leases. Operating lease assets are included in non-current assets and operating lease liabilities are included in other current liabilities and operating lease liabilities in our consolidated balance sheets. Operating lease cost is recognized on a straight-line basis over the lease term. Finance lease assets are included in property, plant and equipment, net, and finance lease liabilities are included in other current liabilities and finance lease liabilities in our consolidated balance sheets. Finance lease cost is recognized as depreciation expense of fixed assets and interest expense on finance lease liabilities. Leases with an initial term of 12 months or less are not recorded in the consolidated balance sheets and expense for these leases is recognized on a straight-line basis over the lease term.

The Company’s lease costs consist of the following:

 

     Year Ended
December 31,
 
     2020      2019  
     (in thousands)  

Lease cost

     

Operating lease cost (1)

   $ 8,891      $ 7,446  

Finance lease cost

     

Amortization of leased assets

     386        383  

Interest on lease liabilities

     414        403  
  

 

 

    

 

 

 

Total lease cost

   $ 9,691      $ 8,232  
  

 

 

    

 

 

 
  (1)

Includes short-term lease expense and variable cost, which are immaterial.

For the year ended December 31, 2020 and 2019, approximately $3.0 million and $2.7 million of operating and finance lease cost related to manufacturing operations was capitalized into inventory, respectively. Prior to January 1, 2019, the Company accounted for leases under the previous U.S. GAAP lease guidance, Accounting Standards Codification Topic 840, Leases. Rent expense for operating leases was $1.8 million and $5.7 million for the three months ended December 31, 2018 and year ended September 30, 2018, respectively.

 

24


The following table summarizes cash flow information related to the Company’s lease obligations:

 

     Year Ended
December 31,
 
     2020      2019  
     (in thousands)  

Operating cash used for operating leases

   $ 8,321      $ 7,081  

Operating cash used for finance leases

   $ 414      $ 403  

Financing cash used for finance leases

   $ 299      $ 389  

In the year ended December 31, 2020 and 2019, $3.2 million and $7.6 million of operating lease assets were exchanged for lease liabilities related to newly commenced leases, respectively.

The following table summarizes the Company’s lease assets and liabilities as of December 31, 2020 and 2019:

 

     As of December 31,  
     2020      2019  
     (in thousands)  

Lease assets

     

Operating lease assets

   $ 25,118      $ 24,916  

Finance lease assets

     4,934        5,571  
  

 

 

    

 

 

 

Total lease assets

   $ 30,052      $ 30,487  
  

 

 

    

 

 

 

Lease liabilities

     

Current

     

Operating lease liabilities

     6,209        5,902  

Finance lease liabilities

     338        305  

Non-current

     

Operating lease liabilities

     22,127        21,650  

Finance lease liabilities

     5,454        5,573  
  

 

 

    

 

 

 

Total lease liabilities

   $ 34,128      $ 33,430  
  

 

 

    

 

 

 

The following table summarizes other supplemental information related to the Company’s lease obligations:

 

     As of December 31,  
     2020     2019  

Weighted average remaining lease term (years)

    

Operating leases

     6.8       7.2  

Finance leases

     13.4       14.2  

Weighted average discount rate

    

Operating leases

     5.4     5.5

Finance leases

     7.7     7.6

 

25


The Company’s future minimum annual lease payments under operating and finance leases as of December 31, 2020 are as follows:

 

     Operating Leases      Finance Leases  
     (in thousands)  

2021

     6,209        787  

2022

     5,903        749  

2023

     4,415        749  

2024

     4,183        746  

2025

     4,102        746  

Thereafter

     10,560        5,665  
  

 

 

    

 

 

 

Total lease payments

   $ 35,372      $ 9,442  

Future cash lease incentives

     746        —    

Less amounts representing interest

     6,290        3,650  
  

 

 

    

 

 

 

Total lease obligations

   $ 28,336      $ 5,792  
  

 

 

    

 

 

 

Note 12: Sale of Priority Review Voucher

In April 2019, the Company sold the rare pediatric disease PRV it received from the FDA in connection with the United States approval of Epidiolex to Biohaven Pharmaceutical Holding Ltd. for consideration of $105.0 million. The net proceeds of $104.1 million from the sale of the PRV was recognized as a gain on the sale of an intangible asset within other income on the consolidated statements of operations, as the PRV did not have a carrying value on the Company’s consolidated balance sheet at the time of sale.

Note 13: Financial Statements and Supplementary Data (Unaudited)

The following interim financial information reflects all normal recurring adjustments necessary to fairly present the Company’s quarterly financial results.

The summarized quarterly data for the years ended December 31, 2020 and 2019, are as follows:

 

     March 31,     June 30,     September 30,     December 31,  
     2020     2020     2020     2020  
           (in thousands, except share and per share amounts)        

Revenue

   $ 120,633     $ 121,297     $ 137,053     $ 148,222  

Operating loss

     (7,193     (9,039     (12,721     (22,812

Net loss attributable to ordinary shareholders

   $ (7,965   $ (8,828   $ (12,188   $ (29,147

Net loss per ordinary share, basic and diluted

   $ (0.02   $ (0.02   $ (0.03   $ (0.08

Weighted average shares outstanding, diluted

     373,831       375,525       376,281       376,680  
  

 

 

   

 

 

   

 

 

   

 

 

 
     March 31,     June 30,     September 30,     December 31,  
     2019     2019     2019     2019  
           (in thousands, except share and per share amounts)        

Revenue

   $ 39,247     $ 72,038     $ 90,971     $ 109,076  

Operating loss

     (51,337     (29,322     (17,658     (20,108

Net (loss) income attributable to ordinary shareholders

     (50,064     79,748       (13,757     (24,946

Net (loss) income per ordinary share, basic

     (0.14     0.21       (0.04     (0.07

Net (loss) income per ordinary share, diluted

     (0.14     0.21       (0.04     (0.07

Weighted average shares outstanding, basic

     369,823       371,712       372,246       372,447  

Weighted average shares outstanding, diluted

     369,823       377,435       372,246       372,447  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Note 14: Transition Period

The Company is presenting audited financial statements for the three months ended December 31, 2018. The following tables provide certain unaudited comparative financial information for the same period of the prior year.

 

     Three Months Ended December 31,  
     2018     2017  
     (in thousands, except share and per share amounts)  

Revenues

    

Product net sales

   $ 6,617     $ 2,220  

Other revenue

     37       1,772  
  

 

 

   

 

 

 

Total revenues

     6,654       3,992  

Operating expenses

    

Cost of product sales

     1,829       1,171  

Research and development

     29,086       36,195  

Selling, general and administrative

     49,083       25,174  
  

 

 

   

 

 

 

Total operating expenses

     79,998       62,540  
  

 

 

   

 

 

 

Loss from operations

     (73,344     (58,548

Interest income

     2,449       604  

Interest expense

     (295     (314

Foreign exchange (loss) gain

     (982     160  
  

 

 

   

 

 

 

Loss before income taxes

     (72,172     (58,098

Income tax (benefit) expense

     (266     3,718  
  

 

 

   

 

 

 

Net loss

   $ (71,906   $ (61,816
  

 

 

   

 

 

 

Net loss per common share, basic and diluted

   $ (0.20   $ (0.20
  

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted

     366,458       313,730  
  

 

 

   

 

 

 

 

27


     Three Months Ended December 31,  
     2018     2017  
     (in thousands)  

Cash flows from operating activities

    

Net loss

   $ (71,906   $ (61,816

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

    

Foreign exchange loss (gain)

     742       (180

Stock-based compensation

     9,683       5,592  

Depreciation and amortization

     2,534       2,163  

Deferred income taxes

     (1,265     (1,152

Other

     —         8  

Changes in operating assets and liabilities:

    

Accounts receivable, net

     (2,125     (223

Inventory

     (14,460     378  

Prepaid expenses and other current assets

     (3,635     (516

Other assets

     (47     (166

Accounts payable

     (1,211     (1,802

Current tax liabilities

     878       4,898  

Accrued liabilities

     5,942       3,004  

Other current liabilities

     93       (2,071

Long-term liabilities

     317       325  
  

 

 

   

 

 

 

Net cash used in operating activities

     (74,460     (51,558
  

 

 

   

 

 

 

Cash flows from investing activities

    

Additions to property, plant and equipment

     (18,687     (7,748

Additions to capitalized software

     (63     (993

Proceeds from disposal of property, plant and equipment

     —         —    
  

 

 

   

 

 

 

Net cash used in investing activities

     (18,750     (8,741
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from issuance of ordinary shares, net of issuance costs

     324,638       297,932  

Proceeds from exercise of stock options

     —         1  

Payments on build-to-suit financing obligation

     —         (26

Payments on capital leases

     (40     (39

Payments on landlord financing obligation

     (130     (125
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     324,468       297,743  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     5,326       (371

Net increase (decrease) in cash and cash equivalents

     236,584       237,073  

Cash and cash equivalents at beginning of period

     354,913       322,154  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 591,497     $ 559,227  
  

 

 

   

 

 

 

Note 15: Subsequent Events

On February 3, 2021, the Company entered into a definitive agreement with Jazz Pharmaceuticals plc (Jazz), under which Jazz will acquire all the outstanding share capital of the GW Pharmaceuticals plc for $200 in cash and $20 in Jazz Ordinary Shares for each GW Pharmaceuticals plc ADS (or $16.67 in cash and $1.67 in Jazz Ordinary Shares for each GW Pharmaceuticals plc Ordinary Share).

 

28

EX-99.3

Exhibit 99.3

GW PHARMACEUTICALS PLC

Unaudited Consolidated Financial Statements

As of March 31, 2021 and December 31, 2020 and for the three months ended March 31, 2021 and 2020


GW PHARMACEUTICALS PLC

INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Financial Statements (Unaudited)

     1  

Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020

     1  

Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020

     2  

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2021 and 2020

     3  

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2021 and 2020

     4  

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020

     5  

Notes to Unaudited Condensed Consolidated Financial Statements

     6  


PART I — FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

GW PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

     March 31,     December 31,  
     2021     2020  

Assets

    

Cash and cash equivalents

   $ 458,101     $ 486,752  

Accounts receivable, net

     84,947       71,168  

Inventory

     137,627       129,138  

Prepaid expenses and other current assets

     38,058       42,472  
  

 

 

   

 

 

 

Total current assets

     718,733       729,530  
  

 

 

   

 

 

 

Property, plant, and equipment, net

     149,591       143,767  

Operating lease assets

     24,036       25,118  

Intangible assets, net

     5,271       5,565  

Goodwill

     6,959       6,959  

Deferred tax assets

     20,775       20,777  

Other assets

     8,978       7,795  
  

 

 

   

 

 

 

Total assets

   $ 934,343     $ 939,511  
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Accounts payable

   $ 16,672     $ 21,870  

Accrued liabilities

     136,101       127,849  

Current tax liabilities

     420       877  

Other current liabilities

     7,053       9,210  
  

 

 

   

 

 

 

Total current liabilities

     160,246       159,806  
  

 

 

   

 

 

 

Long-term liabilities:

    

Finance lease liabilities

     5,413       5,454  

Operating lease liabilities

     21,373       22,127  

Other liabilities

     10,938       11,034  
  

 

 

   

 

 

 

Total long-term liabilities

     37,724       38,615  
  

 

 

   

 

 

 

Total liabilities

     197,970       198,421  
  

 

 

   

 

 

 

Commitments and contingencies (Note 8)

    

Stockholders’ equity:

    

Ordinary shares par value £0.001; 378,505,496 shares outstanding as of March 31, 2021; 375,196,172 shares outstanding as of December 31, 2020

     583       577  

Additional paid-in capital

     1,702,578       1,690,151  

Accumulated deficit

     (915,764     (896,087

Accumulated other comprehensive loss

     (51,024     (53,551
  

 

 

   

 

 

 

Total stockholders’ equity

     736,373       741,090  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 934,343     $ 939,511  
  

 

 

   

 

 

 

See accompanying notes to these condensed consolidated financial statements.

 

1


GW PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

     Three Months Ended
March 31,
 
     2021     2020  

Revenues

    

Product net sales

   $ 152,443     $ 120,532  

Other revenue

     23       101  
  

 

 

   

 

 

 

Total revenues

     152,466       120,633  

Operating expenses

    

Cost of product sales

     11,807       10,769  

Research and development

     60,634       45,874  

Selling, general and administrative

     101,052       71,183  
  

 

 

   

 

 

 

Total operating expenses

     173,493       127,826  
  

 

 

   

 

 

 

Loss from operations

     (21,027     (7,193

Interest income

     146       1,269  

Interest expense

     (286     (284

Foreign exchange loss

     (573     (20
  

 

 

   

 

 

 

Loss before income taxes

     (21,740     (6,228

Income tax (benefit) expense

     (2,063     1,737  
  

 

 

   

 

 

 

Net loss

   $ (19,677   $ (7,965
  

 

 

   

 

 

 

Net loss per share:

    

Basic

   $ (0.05   $ (0.02
  

 

 

   

 

 

 

Diluted

   $ (0.05   $ (0.02
  

 

 

   

 

 

 

Weighted average shares outstanding:

    

Basic

     378,566       373,831  

Diluted

     378,566       373,831  

See accompanying notes to these condensed consolidated financial statements.

 

2


GW PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

     Three Months Ended
March 31,
 
     2021     2020  

Net loss

   $ (19,677   $ (7,965

Foreign currency translation adjustments

     2,527       (14,428
  

 

 

   

 

 

 

Comprehensive loss

   $ (17,150   $ (22,393
  

 

 

   

 

 

 

See accompanying notes to these condensed consolidated financial statements.

 

3


GW PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

                               Accumulated        
                   Additional           Other     Total  
     Common Stock      Paid-in     Accumulated     Comprehensive     Stockholders’  
     Shares      Amount      Capital     Deficit     Loss     Equity  

Balances at December 31, 2020

     375,196      $ 577      $ 1,690,151     $ (896,087   $ (53,551   $ 741,090  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock from exercise of stock options

     3,309        6        2,324       —          —          2,330  

Net loss

     —           —           —          (19,677     —          (19,677

Common stock withheld for employee tax obligations

           (7,685         (7,685

Share-based compensation

     —           —           17,788       —          —          17,788  

Other comprehensive loss

     —           —           —          —          2,527       2,527  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2021

     378,505      $ 583      $ 1,702,578     $ (915,764   $ (51,024   $ 736,373  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
                               Accumulated        
                   Additional           Other     Total  
     Common Stock      Paid-in     Accumulated     Comprehensive     Stockholders’  
     Shares      Amount      Capital     Deficit     Loss     Equity  

Balances at December 31, 2019

     371,069      $ 570      $ 1,632,046     $ (837,959   $ (68,623   $ 726,034  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock from exercise of stock options

     1,493        3        —          —          —          3  

Net loss

     —           —           —          (7,965     —          (7,965

Share-based compensation

     —           —           11,361       —          —          11,361  

Other comprehensive loss

     —           —           —          —          (14,428     (14,428
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2020

     372,562      $ 573      $ 1,643,407     $ (845,924   $ (83,051   $ 715,005  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to these condensed consolidated financial statements

 

4


GW PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Three Months Ended March 31,  
     2021     2020  

Cash flows from operating activities

    

Net loss

   $ (19,677   $ (7,965

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

    

Foreign exchange loss

     543       60  

Share-based compensation

     17,788       11,361  

Depreciation and amortization

     3,849       2,656  

Other

     1       27  

Changes in operating assets and liabilities:

    

Accounts receivable, net

     (13,803     (13,630

Inventory

     (7,912     (8,928

Prepaid expenses and other current assets

     6,367       5,377  

Other assets

     993       885  

Accounts payable

     (3,887     8,585  

Current tax liabilities

     (2,221     1,726  

Accrued liabilities

     9,147       (16,953

Other liabilities

     (2,910     (1,799
  

 

 

   

 

 

 

Net cash used in operating activities

     (11,722     (18,598
  

 

 

   

 

 

 

Cash flows from investing activities

    

Additions to property, plant and equipment

     (7,936     (6,361

Additions to capitalized software

     (2,889     (535

Additions to intangible assets - licenses

     —          (6,404
  

 

 

   

 

 

 

Net cash used in investing activities

     (10,825     (13,300
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from exercise of stock options

     2,330       3  

Payments in connection with common stock withheld for employee tax obligation

     (7,685     —     

Payments on finance leases

     (85     (73

Payments on landlord financing obligation

     (166     (143
  

 

 

   

 

 

 

Net cash used in financing activities

     (5,606     (213
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (498     (3,887

Net decrease in cash and cash equivalents

     (28,651     (35,998

Cash and cash equivalents at beginning of period

     486,752       536,933  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 458,101     $ 500,935  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Income taxes paid

     119       10  

Interest paid

     286       285  

Supplemental disclosure of noncash information:

    

Property and equipment purchases in accounts payable and accrued liabilities

     408       1,661  

Right-of-use asset obtained in exchange for operating liabilities

     123       275  

See accompanying notes to these condensed consolidated financial statements.

 

5


GW PHARMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Business Overview

GW Pharmaceuticals plc and its subsidiaries (referred to herein as “we,” “us,” “our,” and the “Company”) is a biopharmaceutical company focused on discovering, developing and commercializing novel therapeutics from our proprietary cannabinoid product platform in a broad range of disease areas. The Company is developing a portfolio of cannabinoid medicines, of which the lead product is Epidiolex®, an oral medicine for the treatment of certain refractory childhood epilepsies.

The Company is a public limited company, which has American Depository Shares (ADSs) registered with the U.S. Securities and Exchange Commission (SEC) and has been listed on Nasdaq since May 1, 2013. The Company’s ADSs each represent twelve ordinary shares of GW Pharmaceuticals plc. The Company is incorporated and domiciled in the United Kingdom. The address of the Company’s registered office and principal place of business is Sovereign House, Vision Park, Histon, Cambridgeshire.

On February 3, 2021, the Company entered into a transaction agreement (the Transaction Agreement) with Jazz Pharmaceuticals Public Limited Company, a public limited company incorporated in Ireland (Jazz), and Jazz Pharmaceuticals UK Holdings Limited, a private limited company incorporated in England and Wales and a wholly owned subsidiary of Jazz (Bidco), under which Bidco has agreed to acquire the entire issued and to be issued share capital of the Company by means of a court-sanctioned scheme of arrangement under Part 26 of the U.K. Companies Act 2006, subject to the conditions described therein (the Scheme of Arrangement and such acquisition, the Transaction). On April 23, 2021, the Company held a meeting of shareholders convened with the permission of the High Court of Justice of England and Wales (the Court Meeting) and a general meeting of shareholders (the General Meeting and, together with the Court Meeting, the Shareholder Meetings), in each case in connection with the Transaction. At the Shareholder Meetings, the proposals required to be approved by the Company’s shareholders in order to complete the Transaction were each approved. Completion of the Transaction remains subject to the sanction by the High Court of Justice of England and Wales (the Court) and other customary closing conditions. The Court hearing to sanction the Transaction is currently scheduled for May 5, 2021, and the completion of the Transaction is expected to occur shortly thereafter.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete annual financial statements. In the Company’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the Company’s financial statements for interim periods.

The condensed consolidated balance sheet as of December 31, 2020 was derived from audited annual financial statements but does not include all annual disclosures required by U.S. GAAP. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2020 included in the Company’s Form 10-K. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year or any other future periods.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

6


Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, trade receivables, interest and other receivables, and accounts payable and accrued liabilities, approximate fair value due to the relative short-term nature of these instruments. The Company’s foreign exchange derivatives are measured at fair value using observable market inputs such as forward exchange rates and are therefore classified within Level 2 of the fair value hierarchy.

Accounts Receivable

Accounts receivable are recorded net of customer allowances for prompt payment discounts, chargebacks, and doubtful accounts. Allowances for prompt payment discounts and chargebacks are based on contractual terms. The Company estimates the allowance for doubtful accounts based on existing contractual payment terms, actual payment patterns of its customers and individual customer circumstances. As of March 31, 2021, the allowance for doubtful accounts was $0.8 million. At December 31, 2020, the allowance for doubtful accounts was $0.3 million. No accounts were written off during the periods presented.

Inventory

Inventory is stated at the lower of cost or estimated net realizable value. The Company uses a combination of standard and actual costing methodologies to determine the cost basis for its inventories which approximates actual cost. Inventory is valued on a first-in, first-out basis. The Company reduces its inventory to net realizable value for potentially excess, dated or obsolete inventory based on an analysis of forecasted demand compared to quantities on hand, as well as product shelf life.

Our inventory production process includes the cultivation of botanical raw material. Because of the duration of the cultivation process, a portion of our inventory will not be sold within one year. Consistent with the practice in other industries that cultivate botanical raw materials, all inventory is classified as a current asset.

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 is entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

7


Revenue for the Company’s product sales has not been adjusted for the effects of a financing component as the Company expects, at contract inception, that the period between when the Company’s transfers control of the product and when the Company receives payment will be one year or less. Product shipping and handling costs are included in cost of product sales.

Epidiolex Product Net Sales

In the United States, the Company sells Epidiolex to specialty pharmacies (SPs) and specialty distributors (SDs). The Company recognizes revenue from product sales upon receipt of product at the SPs and SDs, the date at which the control is transferred, net of the following allowances which are reflected either as a reduction to the related account receivable or as an accrued liability, depending on how the allowance is settled:

Distribution Fees: Distribution fees include distribution service fees paid to the SPs and SDs based on a contractually fixed percentage of the wholesale acquisition cost (WAC), and prompt payment discounts. Distribution fees are recorded as an offset to revenue based on contractual terms at the time revenue from the sale is recognized.

Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program and the Medicare Part D prescription drug benefit, and contractual rebates with commercial payers. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or statutory requirements. The allowance for rebates is based on contracted or statutory discount rates and expected utilization by benefit plan participants. The Company’s estimates for expected utilization of rebates is based on utilization data received from the SPs since product launch. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for prior quarters’ unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Chargebacks: Chargebacks are discounts and fees that relate to contracts with government and other entities purchasing from the SDs at a discounted price. The SDs charge back to the Company the difference between the price initially paid by the SDs and the discounted price paid to the SDs by these entities. The Company also incurs group purchasing organization fees for transactions through certain purchasing organizations. The Company estimates sales with these entities and accrues for anticipated chargebacks and organization fees, based on the applicable contractual terms. If actual future chargebacks vary from these estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Co-Payment Assistance: The Company offers co-payment assistance to commercially insured patients meeting certain eligibility requirements. Co-payment assistance is accrued for based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Product Returns: Consistent with industry practice, the Company offers the SPs and SDs limited product return rights for damages, shipment errors, and expiring product, provided that the return is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement. The Company does not allow product returns for product that has been dispensed to a patient. As the Company receives inventory reports from the SPs and SDs and has the ability to control the amount of product that is sold to the SPs and SDs, it is able to make a reasonable estimate of future potential product returns based on this on-hand channel inventory data and sell-through data obtained from the SPs and SDs. In arriving at its estimate, the Company also considers historical product returns, the underlying product demand, and industry data specific to the specialty pharmaceutical distribution industry.

The Company has launched Epidyolex in Germany and the U.K. and recognizes revenue from product sales in Europe upon delivery of the product, which is the point at which control of the goods is transferred to the customer. The Company recognizes revenue net of standard discounts and allowances, which are reflected as accrued liabilities.

 

8


The Company also sells Epidiolex in certain markets outside of the United States under early access programs that enable patients to receive the product prior to regulatory approval. Revenue under early access programs is generally recognized when the product is delivered.

The total amount deducted from gross sales for the allowances described above for the three months ended March 31, 2021 and 2020 was $51.3 million and $31.1 million, respectively.

Sativex Product Net Sales

Sativex is sold outside of the United States for the treatment of spasticity due to multiple sclerosis, or MS, pursuant to license agreements with commercial partners and, beginning in the first quarter of 2020, directly to customers in the U.K.

Under the license agreements, the Company sells fully labeled Sativex vials to its commercial partners for a contractually agreed price, which is generally based on percentages of the commercial partners’ in-market net selling price charged to end customers. Product net sales revenue related to Sativex shipments to commercial license partners is recognized when shipped, at which point the customer obtains control of the product.

In the U.K., the Company recognizes revenue from product sales of Sativex upon delivery of the product, which is the point at which control of the goods is transferred to the customer. The Company recognizes revenue net of standard discounts and allowances, which are reflected as accrued liabilities.

The Company also commercializes Sativex in Australia and New Zealand through a consignment relationship with a local distributor. Product net sales revenues related to Sativex sales in Australia and New Zealand are recognized when the product is sold through to the end customer.

Research and Development Expenses

Research and development expenses are charged to operations as incurred. Research and development expenses include, among other things, internal and external costs associated with preclinical development, pre-commercialization manufacturing expenses, and clinical trials. The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial or services provided and the invoices received from its external service providers. In the case of clinical trials, a portion of the estimated cost normally relates to the projected cost to treat a patient in the trials, and this cost is recognized based on the number of patients enrolled in the trial. As actual costs become known, the Company adjusts its accruals accordingly.

Research and development expense is presented net of reimbursements from reimbursable tax and expenditure credits from the U.K.government. Reimbursable research and development tax and expenditure credits were $1.1 million and $0.8 million for the three months ended March 31, 2021 and 2020, respectively.

 

9


Concentration Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, principally consist of cash, cash equivalents, and accounts receivable. The Company’s cash and cash equivalents balances are primarily in depository accounts and money market funds at major financial institutions in accordance with the Company’s investment policy. The Company’s investment policy defines allowable investments and establishes guidelines relating to credit quality, diversification, and maturities of its investments to preserve principal and maintain liquidity. Further, the Company specifies credit quality standards for its customers that are designed to limit the Company’s credit exposure to any single party.

Share-based Compensation

The Company recognizes share-based compensation expense for grants of stock options under the Company’s Long-Term Incentive Plans to employees and non-employee members of the Company’s board of directors based on the grant-date fair value of those awards. The grant-date fair value of an award is generally recognized as compensation expense over the award’s requisite service period. Expense related to awards with graded vesting is generally recognized over the vesting period using the accelerated attribution method.

Income Taxes

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities along with net operating loss and tax credit carryovers. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.

Uncertain tax positions, for which management’s assessment is that there is more than a 50% probability of sustaining the position upon challenge by a taxing authority based upon its technical merits, are subjected to certain recognition and measurement criteria. The Company re-evaluates uncertain tax positions and considers various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, and changes in facts or circumstances related to a tax position. The Company adjusts the level of the liability to reflect any subsequent changes in the relevant facts and circumstances surrounding the uncertain positions. The Company recognizes interest and penalties related to income tax matters in income tax expense.

On March 11, 2021, the President of the United States signed the American Rescue Plan into law. The new law contains corporate tax revenue raising provisions including expanding the list of “covered employees” under IRC Section 162(m) for the limitation on the deduction for excessive employee remuneration. The Company is evaluating the legislation and does not expect any material impact to the financial statements.

Recently Issued Accounting Standards

ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes: In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. The adoption of the ASU had an immaterial impact on the Company’s interim unaudited condensed consolidated financial statements.

Note 3: Sativex License Agreements

The Company has entered into license agreements for Sativex with major pharmaceutical companies that provide the license partners with exclusive rights in a defined geographic territory to commercialize Sativex for all indications. The Company has retained the exclusive right to manufacture and supply Sativex to license partners on commercial supply terms for the duration of the commercial life of the product. In the first quarter of 2020, the Company reacquired the rights to commercialize Sativex in the U.K. from Bayer AG for approximately $6.4 million. The Company capitalized the cost to reacquire the license as an intangible asset and will amortize the asset over its five-year estimated useful life.

 

10


In 2007, the Company entered into an exclusive license agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka) for the development and commercialization of Sativex in the United States. In December 2017, the Company entered into a mutual termination agreement with Otsuka to return the rights to develop and commercialize Sativex in the United States to the Company. As part of the termination agreement, the Company agreed to pay Otsuka a contingent future milestone payment of $10 million if Sativex achieves FDA approval in the U.S. and a total of $30 million of potential sales-based milestones if U.S. sales of Sativex reach certain thresholds. As of March 31, 2021, no amounts have been accrued related to the contingent payments because it is not probable that the milestones will be achieved.

Note 4: Fair Value Measurements

At March 31, 2021 and December 31, 2020, the Company’s cash equivalents consisted of money market funds, which are classified as Level 1 within the fair value hierarchy defined by authoritative guidance.

The Company enters into foreign exchange forward contracts, with durations of up to 12 months, designed to limit the exposure to fluctuations in foreign exchange rates related to the translation of certain non-U.S. dollar cash flows. Hedge accounting is not applied to these derivative instruments. At March 31, 2021 the Company had foreign exchange derivative assets with an aggregate notional amount of $90.0 million and aggregate fair value of $0.5 million, which are classified as other current assets in our condensed consolidated balance sheets. For the three months ended March 31, 2021, $0.5 million fair value gain was recognized and is included within foreign exchange loss on the statement of operations. The foreign exchange derivative instruments are measured at fair value using observable market inputs such as forward exchange rates and are classified within Level 2 of the fair value hierarchy. The Company did not hold any foreign exchange derivatives as December 31, 2020.

The Company has not transferred any securities between the classification levels.

Note 5: Composition of Certain Balance Sheet Captions:

Inventory consisted of the following:

 

     March 31,      December 31,  
     2021      2020  
     (in thousands)  

Raw materials

   $ 3,168      $ 2,691  

Work in process

     124,702        112,662  

Finished goods

     9,757        13,785  
  

 

 

    

 

 

 
   $ 137,627      $ 129,138  
  

 

 

    

 

 

 

Property, plant and equipment, net, consisted of the following:

 

     March 31,     December 31,  
     2021     2020  
     (in thousands)  

Buildings

   $ 16,100     $ 15,957  

Machinery and equipment

     52,069       51,021  

Leasehold improvements

     50,688       49,516  

Office and IT equipment

     7,220       5,890  

Construction-in-process

     76,934       71,441  
  

 

 

   

 

 

 
     203,011       193,825  

Accumulated depreciation

     (53,420     (50,058
  

 

 

   

 

 

 
   $ 149,591     $ 143,767  
  

 

 

   

 

 

 
  

 

 

   

 

 

 

Depreciation of property, plant, and equipment was $2.9 million and $2.1 million for the three months ended March 31, 2021 and 2020, respectively. The Company did not have any significant property, plant, or equipment write-offs in the three months ended March 31, 2021 and 2020.

 

11


Accrued liabilities consisted of the following:

 

     March 31,      December 31,  
     2021      2020  
     (in thousands)  

Accrued compensation and benefits

   $ 25,763      $ 34,830  

Accrued vendor fees

     25,352        31,445  

Clinical trial accruals

     14,128        14,845  

Accrued growing fees

     3,139        3,363  

Accrued sales rebates and discounts

     51,458        37,403  

Other

     16,261        5,963  
  

 

 

    

 

 

 
   $ 136,101      $ 127,849  
  

 

 

    

 

 

 

Other current liabilities consisted of the following:

 

     March 31,      December 31,  
     2021      2020  
     (in thousands)  

Finance lease liabilities

   $ 346      $ 338  

Operating lease liabilities

     5,934        6,209  

Landlord financing

     683        665  

Other

     90        1,998  
  

 

 

    

 

 

 
   $ 7,053      $ 9,210  
  

 

 

    

 

 

 

Other liabilities consisted of the following:

 

     March 31,      December 31,  
     2021      2020  
     (in thousands)  

Landlord financing obligation

   $ 8,747      $ 8,844  

Other

     2,191        2,190  
  

 

 

    

 

 

 
   $ 10,938      $ 11,034  
  

 

 

    

 

 

 

Note 6: Earnings Per Share

The computation of basic earnings per share (EPS) is based on the weighted-average number of our ordinary shares outstanding. For the purpose of this calculation, vested nominal strike-price options are considered ordinary shares outstanding. The computation of diluted EPS is based on the weighted-average number of ordinary shares outstanding and potentially dilutive common stock equivalents outstanding for the period, primarily shares that may be issued under the Company’s stock option plans, determined using the treasury stock method.

The Company incurred net losses for the three months ended March 31, 2021 and therefore did not include potentially dilutive common stock equivalents in the computation of diluted net loss per share. For the three months ended March 31, 2021, options totaling approximately 16.1 million ordinary shares were excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive. For the three months ended March 31, 2020, options totaling approximately 13.7 million ordinary shares were excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive.

Note 7: Share-Based Compensation

Compensation expense for share-based awards is recognized over the requisite service period using the accelerated attribution method. An estimated forfeiture rate has been applied to unvested awards for the purpose of calculating compensation cost. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.

 

12


The fair value of stock option awards is estimated using the Black-Scholes option-pricing model. The determination of fair value using the Black-Scholes model is affected by the Company’s ADS price as well as assumptions regarding a number of complex and subjective variables, including expected ADS price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behaviors.

The Company estimates its stock price volatility using a combination of historical stock price volatility and the average implied volatility of options traded in the open market. The risk-free interest rate assumption is based on observed interest rates for the appropriate term of the Company’s stock options. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future. The expected option life assumption is estimated using the simplified method prescribed by ASC Topic 718, Compensation – Stock Compensation, and is based on the mid-point between vest date and expiration date since the Company does not have sufficient exercise history to estimate expected option life of historical grants.

The table below summarizes the total share-based compensation expense included in the Company’s statements of operations for the periods presented:

 

     Three Months Ended
March 31,
 
     2021      2020  
     (in thousands)  

Research and development

   $ 4,187      $ 2,299  

Sales, general and administrative

     12,644        8,260  
  

 

 

    

 

 

 
   $ 16,831      $ 10,559  
  

 

 

    

 

 

 

For the three months ended March 31, 2021 and 2020, $1.0 million and $0.8 million of share-based compensation related to manufacturing operations was capitalized into inventory, respectively.

Note 8: Commitments and Contingencies

As of March 31, 2021, the Company was not a party to any material legal proceedings except as follows: In 2007, the Company entered into a research collaboration agreement with Otsuka Pharmaceutical Co., Ltd., or Otsuka, which expired in June 2013. Otsuka has contacted the Company to assert that it is owed royalty payments under the agreement up to 2% of Epidiolex net sales. While the Company believes Otsuka’s position is without merit, the Company cannot predict the outcome of this matter and cannot provide assurances that the Company will be successful, in whole or in part, in its efforts.

On December 23, 2020, Canopy Growth Corporation filed suit against us in the Western District of Texas, alleging infringement of U.S. Patent No. 10,870,632. Canopy alleges that the process we used to make the crude cannabinoid extract that is used to make Epidiolex is within the scope of its patent. We dispute Canopy’s claims and intend to defend the matter vigorously.

Since the initial filing of the Company’s proxy statement related to the Jazz Transaction (the Proxy Statement), the following 11 complaints have been filed in federal courts in California, New York and Pennsylvania by purported shareholders of the Company against GW and the members of GW’s board of directors, and in one instance against Jazz and Bidco, in connection with the Jazz transaction: Farrell v. GW Pharmaceuticals plc, et al., Case No. 1:21-cv-02344 (filed March 17, 2021) (S.D.N.Y.), Hinton v. GW Pharmaceuticals plc, et al., Case No. 1:21-cv-02379 (filed March 18, 2021) (S.D.N.Y.), Brady v. GW Pharmaceuticals plc, et al., Case No. 1:21-cv-02382 (filed March 18, 2021) (S.D.N.Y.), Warren v. GW Pharmaceuticals plc, et al., Case No. 1:21-cv-02536 (filed March 24, 2021) (S.D.N.Y.), Goodman v. GW Pharmaceuticals plc, et al., Case No. 1:21-cv-01574 (filed March 25, 2021) (E.D.N.Y.), Kent v. GW Pharmaceuticals, plc, et al., Case No. 3:21-cv-00530 (filed March 26, 2021) (S.D. Cal.), Coffman v. GW Pharmaceuticals plc, et al., Case No. 3:21-cv-00537 (filed March 26, 2021) (S.D. Cal.), Shubitowski v. GW Pharmaceuticals plc, et al., Case No. 1:21-cv-02668 (filed March 29, 2021) (S.D.N.Y.), Hurlbut v. GW Pharmaceuticals plc, et al., Case No. 2:21-cv-01500 (filed March 30, 2021) (E.D. Pa.), Olesky v. GW Pharmaceuticals, plc, et al., Case No. 1:21-cv-02741 (filed March 31, 2021) (S.D.N.Y.), and Ochoa v. GW Pharmaceuticals plc, et al., Case No. 3:21-cv-00580 (filed April 2, 2021) (S.D. Cal.) (collectively, the Federal Shareholder Litigation). Each of the complaints in the Federal Shareholder Litigation includes allegations that, among other things, the Proxy Statement omitted certain material information in connection with the Jazz transaction in violation of Sections 14(a) and 20(a) of the Exchange Act, and Rule 14a-9 promulgated under the Exchange Act, and one of those complaints also purports to allege claims that the members of GW’s board of directors breached fiduciary duties in connection with the Jazz transaction, and that GW, Jazz and Bidco aided and abetted those alleged breaches. An additional lawsuit, filed in state court in New York, alleged misrepresentation and concealment claims under New York common law relating to the Proxy Statement: Levy v. Guy, et al., Case No. 603237/2021 (filed March 17, 2021) (N.Y. Sup. Nassau Cty.).

 

13


The plaintiffs seek various remedies, including injunctive relief to prevent the consummation of the Jazz transaction unless certain allegedly material information is disclosed, rescission and/or other damages and an award of attorneys’ fees and expenses. On April 14, 2021, GW filed supplemental disclosures to the Proxy Statement on a Current Report on Form 8-K, in response to which five of the 11 federal complaints were voluntarily dismissed without prejudice, and the New York state action was voluntarily discontinued with prejudice.

The Company is not aware of any other proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or results of operations.

 

14

EX-99.4

Exhibit 99.4

Jazz Pharmaceuticals Plc

Unaudited pro forma condensed combined financial statements as of and for the three months ended March 31, 2021 and for the year ended December 31, 2020


UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

On February 3, 2021, Jazz Pharmaceuticals Public Limited Company, or Jazz, entered into a Transaction Agreement, or the Transaction Agreement, with GW Pharmaceuticals plc, or GW, and Jazz Pharmaceuticals UK Holdings Limited, an indirect wholly owned subsidiary of Jazz, or Bidco, pursuant to which Bidco (and/or, at Bidco’s election, Bidco’s nominee(s)) acquired the entire issued share capital of GW, or the Acquisition, on May 5, 2021, or the Closing Date, pursuant to a scheme of arrangement, or the Scheme under Part 26 of the United Kingdom Companies Act 2006. The aggregate consideration for the Acquisition was $7.2 billion.

On April 29, 2021, Jazz Securities Designated Activity Company, a direct wholly owned subsidiary of Jazz, closed an offering of $1.5 billion in aggregate principal amount of 4.375% senior secured notes, due 2029, or the Notes. Jazz used the proceeds from the Notes to fund, in part, the cash consideration payable in connection with the Acquisition.

On the Closing Date, Jazz, Jazz Financing Lux S.à.r.l., or Jazz Lux, and certain other subsidiaries of Jazz, as borrowers, entered into a Credit Agreement, or the Credit Agreement, with the lenders and issuing banks from time to time party thereto, Bank of America, N.A., as Administrative Agent and U.S. Bank National Association, as Collateral Trustee.

The Credit Agreement provides for (i) a seven-year $3.1 billion term loan B facility, which was drawn by Jazz Lux on the Closing Date in U.S. dollars, or the Dollar Term Loan, (ii) a seven-year €625 million ($750 million equivalent) term loan B facility, which was drawn by Jazz Lux on the Closing Date in Euros, or the Euro Term Loan and, together with the Dollar Term Loan, collectively known as the Term Loan and (iii) a five-year $500 million revolving credit facility, or the Revolving Credit Facility, which is available to be drawn by any borrower in U.S. dollars. As of the Closing Date, the Revolving Credit Facility was undrawn.

Jazz used the proceeds from the Term Loan (i) to repay loans under that certain credit agreement, dated as of June 18, 2015 (as amended) among Jazz and certain other subsidiaries of Jazz as borrowers, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent, or the Existing Credit Agreement, (ii) to fund, in part, the cash consideration payable in connection with the Acquisition and (iii) to pay related fees and expenses. The Borrowers expect to use future loans under the Revolving Credit Facility, if any, for general corporate purposes, including potential business development activities. Upon the repayment in full of loans under the Existing Credit Agreement, the Existing Credit Agreement was terminated and all guarantees and liens thereunder were released.

The following unaudited pro forma condensed combined financial information and related notes, or the Pro Forma Financial Information, are based on the historical consolidated financial statements of Jazz and GW. The Pro Forma Financial Information has been prepared to illustrate the effects of the Acquisition, including the financing arrangements effected to partially fund the Acquisition, as if it had occurred on January 1, 2020 in respect of the pro forma condensed combined statement of operations, or Pro Forma Statement of Operations, and as if it had occurred on March 31, 2021 in respect of the unaudited pro forma condensed combined balance sheet, or Pro Forma Balance Sheet. The Pro Forma Financial Information has been developed from and should be read in conjunction with Jazz’s and GW’s audited consolidated financial statements and related notes as of and for the year ended December 31, 2020, and Jazz’s and GW’s unaudited condensed consolidated financial statements and related notes as of and for the three months ended March 31, 2021.

Jazz’s consolidated balance sheet and statement of income information as of and for the three months ended March 31, 2021 was derived from its unaudited condensed consolidated financial statements for the three-month period ended March 31, 2021 included in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021, filed with the Securities and Exchange Commission. Jazz’s consolidated statement of income information for the year ended December 31, 2020 was derived from its audited consolidated financial statements for the year ended December 31, 2020 included in the Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission.

GW’s consolidated balance sheet and statement of operations information as of and for the three months ended March 31, 2021 was derived from its unaudited condensed consolidated financial statements for the three-month period ended March 31, 2021 included in Exhibit 99.3 to the current report on Form 8-K/A, or the Jazz Form 8-K/A, to which these unaudited pro forma condensed combined financial statements are attached as Exhibit 99.4. GW’s consolidated statement of operations information for the year ended December 31, 2020 was derived from its audited consolidated financial statements for the year ended December 31, 2020 included in Exhibit 99.2 to the Jazz Form 8-K/A.

 

1


The pro forma adjustments related to the Acquisition and related financing arrangements include:

 

   

a cash payment of $6.3 billion to GW shareholders in respect of American Depositary Shares issued by the depositary in respect of GW, or GW ADSs, and a cash payment of $267.5 million (inclusive of payroll taxes) to settle GW share options that became exercisable on closing of the Acquisition;

 

   

the issuance of approximately 3.8 million Jazz ordinary shares, par value $0.0001 per share, or Jazz Ordinary Shares, valued at $608.5 million, to GW shareholders in respect of GW ADSs and the issuance of Jazz share options in exchange for GW share options attributable to pre-combination service valued at $3.6 million;

 

   

the borrowings comprised of the Term Loan and the Notes, each further described in Note 5;

 

   

the payment of $575.9 million to repay the term loan outstanding under the Existing Credit Agreement, or the Existing Term Loan; and

 

   

the impact of fair value adjustments to the underlying assets and liabilities of GW.

The Acquisition will be accounted for as a business combination using the acquisition method of accounting in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification Topic 805, Business Combinations, or ASC 805. Jazz will be treated as the acquiring entity for accounting purposes, and accordingly, the GW assets acquired and liabilities assumed have been adjusted based on preliminary estimates of fair value, which are subject to change. Any excess of the purchase price over the fair value of identified assets acquired and liabilities assumed will be recognized as goodwill.

The unaudited pro forma adjustments are based upon a preliminary valuation and available information and certain assumptions that Jazz believes to be reasonable, which are subject to change. The Pro Forma Financial Information is presented for informational purposes only, it does not purport to represent what the actual consolidated results of operations or the consolidated financial position of the combined entity would have been had the Acquisition occurred on the dates indicated, nor is it necessarily indicative of the combined financial position or results of operations that would have been realized had the Acquisition occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that the combined company will experience after the completion of the Acquisition. The Pro Forma Financial Information is based on Jazz’s accounting policies.

The Pro Forma Financial Information does not reflect any adjustment for liabilities or related costs of any integration and similar activities, or benefits, including potential synergies that may be derived in future periods, from the Acquisition.

 

2


Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 31, 2021

 

    Historical
Jazz
    Historical
GW
    Transaction accounting adjustments     Total
Unaudited
Pro Forma
Combined
 
(in thousands)   PPA(4)     Financing(5)     Other(6)  
          Notes         Notes         Notes    

ASSETS

 

Current assets:

                 

Cash and cash equivalents

  $ 2,097,533   $ 458,101   $ (6,243,690     4(i)     $ 4,611,730    

5(i),

5(ii),

5(iii)

 

 

 

  $ (184,065    

6(i),

6(ii)

 

 

  $ 739,609

Investments

    335,000     —         (335,000     4(i)       —           —           —    

Accounts receivable, net of allowances

    413,976     84,947     —           —           —           498,923

Inventories

    115,475     137,627     1,062,627     4(vi)       —           —           1,315,729

Prepaid expenses

    57,185     38,058     7,257     4(vii)       —           —           102,500

Other current assets

    147,727     —         —           —           —           147,727
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total current assets

    3,166,896     718,733     (5,508,806       4,611,730       (184,065       2,804,488
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Property, plant and equipment, net

    123,863     149,591     —           —           —           273,454

Operating lease assets

    125,738     24,036     —           —           —           149,774

Intangible assets, net

    2,108,046     5,271     5,634,729     4(v)       —           —           7,748,046

Goodwill

    938,398     6,959     842,087     4(iv)       —           79,957     6(ii)       1,867,401

Deferred tax assets, net

    258,454     20,775     14,958     4(vii)       —           —           294,187

Deferred financing costs

    4,724     —         —           9,389    

5(i),

5(ii)

 

 

    —           14,113

Other non-current assets

    30,351     8,978     —           —           —           39,329
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total assets

  $ 6,756,470   $ 934,343   $ 982,968     $ 4,621,119     $ (104,108     $ 13,190,792
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Current liabilities:

                 

Accounts payable

  $ 77,738   $ 16,672   $ —         $ —         $ —         $ 94,410

Accrued liabilities

    374,035     136,101     —           —           —           510,136

Current portion of long-term debt

    248,613     —         —           (10,137     5(iii)       —           238,476

Income taxes payable

    49,334     420     —           —           (3,278     6(ii)       46,476

Deferred revenue

    2,373     —         —           —           —           2,373

Other current liabilities

    —         7,053     —           —           —           7,053
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total current liabilities

    752,093     160,246     —           (10,137       (3,278       898,924
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Deferred revenue, non-current

    1,852     —         —           —           —           1,852

Long-term debt, less current portion

    1,853,033     —         —           4,634,969     5(iv)       —           6,488,002

Finance lease liabilities

    —         5,413     —           —           —           5,413
Operating lease liabilities, less current portion     136,020     21,373     —           —           —           157,393

Deferred tax liabilities, net

    109,915     —         1,104,692     4(vii)       —           —           1,214,607

Other non-current liabilities

    105,868     10,938     2,638     4(vii)       —           —           119,444
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total liabilities

    2,958,781     197,970     1,107,330       4,624,832       (3,278       8,885,635
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Shareholder’s equity

                 

Ordinary shares

    6     583     (583       —           —           6

Non-voting euro deferred shares

    55     —         —           —           —           55

Capital redemption reserve

    472     —         —           —           —           472

Additional paid-in capital

    2,694,858     1,702,578     (1,154,871    

4(ii),

4(iii)

 

 

    —           64,304     6(iv)       3,306,869

Accumulated other comprehensive loss

    (179,428     (51,024     51,024       —           —           (179,428

Retained earnings

    1,281,726     (915,764     980,068       (3,713     5(ii)       (165,134    

6(ii),

6(iv)

 

 

    1,177,183

Total shareholders’ equity

    3,797,689     736,373     (124,362       (3,713       (100,830       4,305,157
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total liabilities and shareholder’s equity

  $ 6,756,470   $ 934,343   $ 982,968     $ 4,621,119     $ (104,108     $ 13,190,792
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

The accompanying notes are an integral part of this unaudited pro forma condensed combined financial information.

 

3


Unaudited Pro Forma Condensed Combined Statement of Operations

For the year ended December 31, 2020

(in thousands, except per share amounts)

 

    Historical
Jazz
    Historical
GW
    Reclassifications(3)     Transaction accounting adjustments     Total
Unaudited
Pro Forma
Combined
 
    PPA(4)     Financing(5)     Other(6)  
            Notes         Notes         Notes    

Revenues:

                   

Product sales, net

  $ 2,346,660   $ 526,830   $ —       $ —         $ —         $ —         $ 2,873,490

Royalties and contract revenues

    16,907     —         —         —           —           —           16,907

Other revenue

    —         375     —         —           —           —           375
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total revenues

    2,363,567     527,205     —         —           —           —           2,890,772
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Operating expenses:

                   

Cost of product sales (excluding amortization of acquired developed technologies)

    148,917     37,531     —         306,023     4(vi)       —           5,878    

6(iii),

6(iv)

 

 

    498,349

Selling, general and administrative

    854,233     336,043     (1,177     —           —           313,203    

6(ii),

6(iii),

6(iv)

 

 

 

    1,502,302

Research and development

    335,375     205,396     —         —           —           34,405    

6(iii),

6(iv)

 

 

    575,176

Intangible asset amortization

    259,580     —         1,177     464,606     4(v)       —           —           725,363

Impairment charges

    136,139     —         —         —           —           —           136,139

Acquired in-process research and development

    251,250     —         —         —           —           —           251,250
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total operating expenses

    1,985,494     578,970     —         770,629       —           353,486       3,688,579
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 
Total income from operations     378,073     (51,765     —         (770,629       —           (353,486       (797,807

Interest income

    —         1,814     (1,814     —           —           —           —    

Interest expense, net

    (99,707     (1,121     1,814     —           (228,855     5(v)       —           (327,869

Foreign exchange loss

    (3,271     (3,974     —         —           —           —           (7,245
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 
Income (loss) before income tax provision     275,095     (55,046     —         (770,629       (228,855       (353,486       (1,132,921
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Income tax provision (benefit)

    33,517     3,082     —         (149,671    

4(v),

4(vi)

 

 

    (50,243     5(vi)       (28,122    

6(ii),

6(iii),

6(iv)

 

 

 

    (191,437

Equity in loss of investees

    2,962     —         —         —           —           —           2,962
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net income (loss)

  $ 238,616   $ (58,128   $ —       $ (620,958     $ (178,612     $ (325,364     $ (944,446
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net income (loss) per ordinary share:

                   

Basic EPS

  $ 4.28                   $ (15.87
 

 

 

                   

 

 

 

Diluted EPS

  $ 4.22                   $ (15.87
 

 

 

                   

 

 

 
Weighted-average ordinary shares used in per share calculation - basic (Note 7)     55,712                     59,510
 

 

 

                   

 

 

 
Weighted-average ordinary shares used in per share calculation - diluted (Note 7)     56,517                     59,510
 

 

 

                   

 

 

 

The accompanying notes are an integral part of this unaudited pro forma condensed combined financial information.

 

4


Unaudited Pro Forma Condensed Combined Statement of Operations

For the three months ended March 31, 2021

(in thousands, except per share amounts)

 

    Historical
Jazz
    Historical
GW
    Reclassifications(3)     Transaction accounting adjustments     Total
Unaudited
Pro Forma
Combined
 
    PPA(4)     Financing(5)     Other(6)  
            Notes         Notes         Notes    

Revenues:

                   

Product sales, net

  $ 603,531   $ 152,443   $ —       $ —         $ —         $ —         $ 755,974

Royalties and contract revenues

    4,050     —         —         —           —           —           4,050

Other revenue

    —         23     —         —           —           —           23
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total revenues

    607,581     152,466     —         —           —           —           760,047
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Operating expenses:

                   

Cost of product sales (excluding amortization of acquired developed technologies)

    40,189     11,807     —         79,418     4(vi)       —           392     6 (iv)      131,806

Selling, general and administrative

    260,508     101,052     (345     —           —           3,436     6 (iv)      364,651

Research and development

    76,573     60,634     —         —           —           1,637     6 (iv)      138,844

Intangible asset amortization

    68,192     —         345     116,101     4(v)       —           —           184,638
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total operating expenses

    445,462     173,493     —         195,519       —           5,465       819,939
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total income from operations

    162,119     (21,027     —         (195,519       —           (5,465       (59,892

Interest income

    —         146     (146     —           —           —           —    

Interest expense, net

    (27,376     (286     146     —           (57,922     5 (v)      —           (85,438

Foreign exchange gain (loss)

    943     (573     —         —           —           —           370
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 
Income (loss) before income tax provision     135,686     (21,740     —         (195,519       (57,922       (5,465       (144,960
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Income tax provision (benefit)

    18,019     (2,063     —         (37,148    

4(v),

4(vi)

 

 

    (9,197     5 (vi)      (1,200     6 (iv)      (31,589

Equity in gain of investees

    (4,165     —         —         —           —           —           (4,165
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net income (loss)

  $ 121,832   $ (19,677   $ —       $ (158,371     $ (48,725     $ (4,265     $ (109,206
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net income (loss) per ordinary share:

                   

Basic EPS

  $ 2.16                   $ (1.81
 

 

 

                   

 

 

 

Diluted EPS

  $ 2.09                   $ (1.81
 

 

 

                   

 

 

 
Weighted-average ordinary shares used in per share calculation - basic (Note 7)     56,468                     60,266
 

 

 

                   

 

 

 
Weighted-average ordinary shares used in per share calculation - diluted (Note 7)     58,393                     60,266
 

 

 

                   

 

 

 

The accompanying notes are an integral part of this unaudited pro forma condensed combined financial information.

 

5


NOTES TO UNAUDITED PRO FORMA

CONDENSED COMBINED FINANCIAL STATEMENTS

 

1.

Description of the Acquisition

On February 3, 2021, Jazz entered into the Transaction Agreement with GW and Bidco that provided for the acquisition of the entire issued and to be issued share capital of GW by Bidco (and/or, at Bidco’s election, Jazz and/or the DR Nominee (as defined in the Transaction Agreement)). On May 5, 2021, the transaction was consummated pursuant to the Transaction Agreement and, as a result, GW became an indirect wholly owned subsidiary of Jazz.

Under the Transaction Agreement, at the effective time of the Scheme, or the Effective Time, all Scheme Shares (as defined in the Scheme) were transferred to Bidco (and/or, at Bidco’s election, Jazz and/or the DR Nominee), and the Share Scheme h