SEC Filing | Travere Therapeutics, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________

FORM 10-Q

_________________________________



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

For the quarterly period ended September 30, 2019



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

For the transition period from ___________ to ___________

Commission File Number: 001-36257

RETROPHIN, INC.

(Exact name of registrant as specified in its charter)



	Delaware		27-4842691
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3721 Valley Centre Drive, Suite 200

San Diego, CA 92130

(Address of Principal Executive Offices)

(888) 969-7879

(Registrant's Telephone number including area code)



	N/A
	Former name, former address and former fiscal year, if changed since last report

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	RTRX	The Nasdaq Global Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The number of shares of outstanding common stock, par value $0.0001 per share, of the Registrant as of October 29, 2019 was 42,958,401.

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RETROPHIN, INC.

Form 10-Q

For the Fiscal Quarter Ended September 30, 2019

TABLE OF CONTENTS



		Page No.
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018	3
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	5
	Unaudited Condensed Consolidated Statement of Stockholder's Equity for the three and nine months ended September 30, 2019 and 2018	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48

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FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the "2018 10-K"), and in this Quarterly Report on Form 10-Q. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned to not unduly rely upon these statements.

We file reports with the Securities and Exchange Commission ("SEC"). The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

RETROPHIN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share amounts)



	September 30, 2019			December 31, 2018
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	65,188		$	102,873
Marketable securities	341,835			368,668
Accounts receivable, net	16,781			12,662
Inventory, net	5,264			5,619
Prepaid expenses and other current assets	8,628			4,140
Prepaid taxes	2,022			1,716
Total current assets	439,718			495,678
Property and equipment, net	2,910			3,146
Other non-current assets	12,453			7,709
Investment-equity	—			15,000
Intangible assets, net	157,799			186,691
Goodwill	936			936
Total assets	$	613,816		$	709,160
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	13,832		$	6,954
Accrued expenses	47,874			49,695
Other current liabilities	8,411			6,165
Business combination-related contingent consideration	17,900			19,350
2019 Convertible debt	—			22,457
Total current liabilities	88,017			104,621
2025 Convertible debt	202,355			195,091
Other non-current liabilities	21,487			17,545
Business combination-related contingent consideration, less current portion	56,000			73,650
Total liabilities	367,859			390,907
Stockholders' Equity:
Preferred stock $0.0001 par value; 20,000,000 shares authorized; 0 issued and outstanding as of September 30, 2019 and December 31, 2018	—			—
Common stock $0.0001 par value; 100,000,000 shares authorized; 42,958,401 and 41,389,524 issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	4			4
Additional paid-in capital	630,966			589,795
Accumulated deficit	(386,185		)	(270,017		)
Accumulated other comprehensive income (loss)	1,172			(1,529		)
Total stockholders' equity	245,957			318,253
Total liabilities and stockholders' equity	$	613,816		$	709,160

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

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RETROPHIN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share amounts)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net product sales	$	44,373		$	40,706		$	128,651		$	120,475
Operating expenses:
Cost of goods sold	1,513			1,133			3,509			3,924
Research and development	33,220			32,448			104,597			91,544
Selling, general and administrative	29,779			26,107			101,418			77,675
Change in fair value of contingent consideration	(702		)	16,601			5,820			22,387
Impairment of L-UDCA IPR&D intangible asset	—			—			25,500			—
Write off of L-UDCA contingent consideration	—			—			(18,000		)	—
Impairment of long-term investment	15,000			—			15,000			—
Total operating expenses	78,810			76,289			237,844			195,530
Operating loss	(34,437		)	(35,583		)	(109,193		)	(75,055		)
Other income (expenses), net:
Other expense, net	(496		)	(90		)	(673		)	(372		)
Interest income	2,467			1,147			7,875			2,905
Interest expense	(4,547		)	(2,533		)	(14,230		)	(4,848		)
Loss on early extinguishment of debt	—			(17,042		)	—			(17,042		)
Total other expense, net	(2,576		)	(18,518		)	(7,028		)	(19,357		)
Loss before income taxes	(37,013		)	(54,101		)	(116,221		)	(94,412		)
Income tax benefit (expense)	523			(415		)	53			(811		)
Net loss	$	(36,490	)	$	(54,516	)	$	(116,168	)	$	(95,223	)

Basic and diluted net loss per common share:	$	(0.85	)	$	(1.34	)	$	(2.76	)	$	(2.37	)
Basic and diluted weighted average common shares outstanding:	42,943,828			40,717,440			42,109,618			40,149,184
Comprehensive loss:
Net loss	$	(36,490	)	$	(54,516	)	$	(116,168	)	$	(95,223	)
Foreign currency translation	315			5			342			29
Unrealized gain (loss) on marketable securities	75			64			2,359			(97		)
Comprehensive loss	$	(36,100	)	$	(54,447	)	$	(113,467	)	$	(95,291	)

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

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RETROPHIN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	For the Nine Months Ended September 30,
	2019			2018
Cash Flows From Operating Activities:
Net loss	$	(116,168	)	$	(95,223	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	15,118			13,789
Non-cash interest expense	1,134			1,115
(Accretion) amortization of discounts/premiums on investments, net	(779		)	749
Amortization of debt discount and issuance costs	7,397			980
Provision for Inventory	(646		)	1,625
Share based compensation	16,608			14,920
Change in fair value of contingent consideration	(12,180		)	22,387
Payments related to change in fair value of contingent consideration	(4,329		)	(6,852		)
Loss on the extinguishment of debt	—			17,042
Impairment of IPR&D intangible assets	25,500			—
Impairment of long-term investment	15,000			—
Unrealized foreign currency transaction gain (loss)	539			270
Other	15			(15		)
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable	(3,989		)	1,346
Inventory	947			(1,428		)
Other current and non-current operating assets	(9,629		)	(2,183		)
Accounts payable and accrued expenses	4,962			6,991
Other current and non-current operating liabilities	6,778			3,094
Net cash used in operating activities	(53,722		)	(21,393		)
Cash Flows From Investing Activities:
Purchase of fixed assets	(286		)	(727		)
Cash paid for intangible assets	(11,299		)	(15,108		)
Proceeds from the sale/maturity of marketable securities	180,818			96,166
Purchase of marketable securities	(150,950		)	(219,820		)
Cash paid for investments - equity	—			(15,000		)
Net cash provided by (used in) investing activities	18,283			(154,489		)
Cash Flows From Financing Activities:
Payment of acquisition-related contingent consideration	(2,562		)	(8,842		)
Payment of guaranteed minimum royalty	(1,559		)	(1,500		)
Payment of other liability	—			(750		)
Proceeds from exercise of warrants	—			4,274
Proceeds from exercise of stock options	944			10,379
Proceeds from 2025 convertible senior notes	—			276,000
Repayment of 2019 convertible senior notes	—			(40,203		)
Payment of debt issuance and financing costs	—			(8,820		)
Other financing activities	1,005			800
Net cash (used in) provided by financing activities	(2,172		)	231,338
Effect of exchange rate changes on cash	(74		)	(30		)
Net change in cash and cash equivalents	(37,685		)	55,426
Cash and cash equivalents, beginning of year	102,873			99,394
Cash and cash equivalents, end of period	$	65,188		$	154,820

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

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RETROPHIN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(unaudited, in thousands, except share amounts)



	Three Months Ended September 30, 2019														Three Months Ended September 30, 2018
	Common Stock			Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders' Equity			Common Stock			Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders' Equity
	Shares	Amount													Shares	Amount
Balance - June 30	42,899,318	$	4	$	625,999	$	781		$	(349,695	)	$	277,089		40,370,521	$	4	$	497,183	$	(1,152	)	$	(208,046	)	$	287,989
Share based compensation				4,178								4,178						4,801								4,801
Issuance of common shares under the equity incentive plan and proceeds from exercise	59,083			627								627			264,591			3,489								3,489
Exercise of warrants															532,830			2,134								2,134
Unrealized gain on marketable securities						76						76								64						64
Foreign currency translation adjustments						315						315								5						5
Issuance of common stock from maturity of the 2019 Convertible debt outstanding																		74,945								74,945
ESPP stock purchase and expense				162								162						154								154
Net loss									(36,490		)	(36,490		)									(54,516		)	(54,516		)
Balance - September 30	42,958,401	$	4	$	630,966	$	1,172		$	(386,185	)	$	245,957		41,167,942	$	4	$	582,706	$	(1,083	)	$	(262,562	)	$	319,065
	Nine Months Ended September 30, 2019														Nine Months Ended September 30, 2018
Balance - December 31	41,389,524	$	4	$	589,795	$	(1,529	)	$	(270,017	)	$	318,253		39,373,745	$	4	$	471,800	$	(1,015	)	$	(177,655	)	$	293,134
Adoption of ASU 2017-11 - reclassification of derivative liability of warrants with down round provisions																		5,394					10,316			15,710
Share based compensation				16,125								16,125						14,716								14,716
Issuance of common shares under the equity incentive plan and proceeds from exercise	207,730			944								944			794,149			10,379								10,379
Exercise of warrants															956,887			4,274								4,274
Unrealized gain (loss) on marketable securities						2,359						2,359								(97		)				(97		)
Foreign currency translation adjustments						342						342								29						29
Issuance of common stock from maturity of the 2019 Convertible debt outstanding	1,297,343			22,590								22,590						74,945								74,945
ESPP stock purchase and expense	63,804			1,512								1,512			43,161			1,198								1,198
Net loss									(116,168		)	(116,168		)									(95,223		)	(95,223		)
Balance - September 30	42,958,401	$	4	$	630,966	$	1,172		$	(386,185	)	$	245,957		41,167,942	$	4	$	582,706	$	(1,083	)	$	(262,562	)	$	319,065

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

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RETROPHIN, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS

Organization and Description of Business

Retrophin, Inc. (“we”, “our”, “us”, “Retrophin” and the “Company”) refers to Retrophin, Inc., a Delaware corporation, as well as our direct and indirect subsidiaries. Retrophin is a biopharmaceutical company headquartered in San Diego, California, focused on identifying, developing and delivering life-changing therapies to people living with rare diseases. We regularly evaluate and, where appropriate, act on opportunities to expand our product pipeline through licenses and acquisitions of products in areas that will serve patients with rare diseases and that we believe offer attractive growth characteristics.

Product Candidate Development Activities:

Sparsentan, also known as RE-021, is an investigational product candidate with a dual mechanism of action, a potent angiotensin receptor blocker (“ARB”) and selective endothelin receptor antagonist (“ERA”), with in vitro selectivity toward endothelin receptor type A. Sparsentan is currently being evaluated in two pivotal Phase 3 clinical studies in the following indications:


•	Focal segmental glomerulosclerosis ("FSGS") is a rare kidney disease characterized by proteinuria where the glomeruli become progressively scarred. FSGS is a leading cause of end-stage renal disease.


•	Immunoglobulin A nephropathy ("IgAN") is an immune-complex-mediated glomerulonephritis characterized by hematuria, proteinuria, and variable rates of progressive renal failure. IgAN is the most common primary glomerular disease.

The Company has three approved products:


•	Chenodal (chenodiol tablets) is approved in the United States for the treatment of patients suffering from gallstones in whom surgery poses an unacceptable health risk due to disease or advanced age. Chenodal has been the standard of care for cerebrotendinous xanthomatosis ("CTX") patients for more than three decades and the Company is currently pursuing adding this indication to the label.


•	Cholbam (cholic acid capsules) is approved in the United States for the treatment of bile acid synthesis disorders due to single enzyme defects and is further indicated for adjunctive treatment of patients with peroxisomal disorders.

•

Thiola (tiopronin tablets) is approved in the United States for the prevention of cystine (kidney) stone formation in patients with severe homozygous cystinuria. On June 28, 2019, the Company announced that the U.S. Food and Drug Administration ("FDA") approved 100 mg and 300 mg tablets of THIOLA EC™ (tiopronin), a new enteric-coated formulation of THIOLA® (tiopronin), to be used for the treatment of cystinuria.

Cooperative Research and Development Agreements ("CRADAs"):

The Company is a participant in two CRADAs, which form a multi-stakeholder approach to pool resources with leading experts, and incorporates the patient perspective early in the identification and development process. Retrophin has partnered with the National Institutes of Health’s National Center for Advancing Translational Sciences ("NCATS") and leading patients advocacy organization, NGLY1.org and Alagille Syndrome Alliance ("ALGSA"), aimed at the identification of potential small molecule therapeutics for NGLY1 deficiency, and Alagille syndrome respectively, diseases with no approved treatment options.

Changes in Development Activities:

In August 2019, the Company announced that the Phase 3 FORT Study evaluating the safety and efficacy of fosmetpantotenate compared to placebo in patients with pantothenate kinase-associated neurodegeneration ("PKAN") did not meet its primary endpoint and did not demonstrate a difference between treatment groups. The study also did not meet its secondary endpoint. The Company will not proceed with further development of fosmetpantotenate for PKAN.

In August 2019, following a strategic review of the CNSA-001 program in patients with phenylketonuria ("PKU"), the Company made the decision to decline to exercise its option to acquire Censa Pharmaceuticals and accordingly discontinue its joint development program for CNSA-001. The Company impaired the related $15 million long term investment during the third quarter of 2019.

During the first quarter of 2019, the Company elected to discontinue development of the L-UDCA program, resulting in impairment of the intangible asset of $25.5 million, originally recorded in 2016, and the related $18.0 million in contingent liability. This resulted in a net $7.5 million non-cash charge to first quarter operations. In June 2016, the Company acquired certain rights to its product candidate L-UDCA for $0.5 million cash. At the same time the Company established a related non-cash asset of $25.5 million and liability of $25.0 million for IPR&D and contingent consideration (deferred financing) related net sales royalties and milestones. As a result of our quarterly valuation update process during 2016 and 2017, the contingent liability was decreased by $2.3 million and $5.7 million, respectively, and increased by $1.0 million during 2018. The resulting balance of the L-UDCA contingent liability at December 31, 2018 was $18.0 million.

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NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2018 10-K filed with the SEC on February 26, 2019. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions for Form 10-Q and the rules and regulations of the SEC. Accordingly, since they are interim statements, the accompanying condensed consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements, but reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for any future periods. The December 31, 2018 balance sheet information was derived from the audited financial statements as of that date. Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.

A summary of the significant accounting policies applied in the preparation of the accompanying condensed consolidated financial statements follows:

Principles of Consolidation

The unaudited condensed consolidated financial statements represent the consolidation of the accounts of the Company and its subsidiaries in conformity with GAAP. All intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect substantially all the consideration it is entitled to in exchange for the goods or services it transfers to the customer. See Note 3 for further discussion.

Research and Development Expenses

Research and development expenses are comprised of salaries and bonuses, benefits, non-cash share-based compensation, license fees, costs paid to third-party contractors to perform research, conduct clinical trials and pre/non-clinical trials, develop drug materials, and associated overhead expenses and facilities. We also incur indirect costs that are not allocated to specific programs because such costs benefit multiple development programs and allow us to increase our pharmaceutical development capabilities. These consist of internal shared resources related to the development and maintenance of systems and processes applicable to all of our programs.

Clinical Trial Expenses

Our clinical trials are conducted pursuant to contracts with contract research organizations ("CROs") that support conducting and managing clinical trials. The financial terms and activities of these agreements vary from contract to contract and may result in uneven expense levels. Generally, these agreements set forth activities that drive the recording of expenses such as start-up, initiation activities, enrollment, treatment of patients, or the completion of other clinical trial activities.

Expenses related to clinical trials are accrued based on our estimates and/or representations from service providers regarding work performed, including actual level of patient enrollment, progress of the clinical trials, and completion of patient studies. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If the amounts we are obligated to pay under our clinical trial agreements are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), we adjust our accruals accordingly on a prospective basis. Revisions to our contractual payment obligations are charged to expense in the period in which the facts that give rise to the revision become reasonably certain.

We currently have two Phase 3 clinical trials in process that are in varying stages of activity, with ongoing non-clinical support trials. As such, clinical trial expenses will vary depending on all the factors set forth above and may fluctuate significantly from quarter to quarter.

Adoption of New Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. See Note 6 for further discussion.

Recently Issued Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies. Unless otherwise noted, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position or results of operations upon adoption.

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In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As of September 30, 2019, the Company held $341.8 million in available-for-sale debt securities. If adopted as of September 30, 2019, this ASU update would not have a material impact on the Company's financial statements.

NOTE 3. REVENUE RECOGNITION

Product Revenue, Net

The Company sells Chenodal and Cholbam (Kolbam), which are aggregated as bile acid products, and Thiola and Thiola EC, aggregated as tiopronin products, through direct-to-patient distributors. The Company sells its products worldwide, with more than 95% of the revenue generated in North America.

Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs upon delivery to the customer.

Deductions from Revenue

Revenues from product sales are recorded at the net sales price, which includes provisions resulting from discounts, rebates and co-pay assistance that are offered to customers, health care providers, payors and other indirect customers relating to the Company’s sales of its products. These provisions are based on the amounts earned or to be claimed on the related sales and are classified as a reduction of accounts receivable (if the amount is payable to a customer) or as a current liability (if the amount is payable to a party other than a customer). Where appropriate, these reserves take into consideration the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. If actual results in the future vary from the Company’s provisions, the Company will adjust the provision, which would affect net product revenue and earnings in the period such variances become known. Our historical experience is that such adjustments have been immaterial.

Government Rebates: We calculate the rebates that we will be obligated to provide to government programs and deduct these estimated amounts from our gross product sales at the time the revenues are recognized. Allowances for government rebates and discounts are established based on actual payer information, which is reasonably estimated at the time of delivery, and the government-mandated discounts applicable to government-funded programs. Rebate discounts are included in other current liabilities in the accompanying consolidated balance sheets.

Commercial Rebates: We calculate the rebates that we incur due to contracts with certain commercial payors and deduct these amounts from our gross product sales at the time the revenues are recognized. Allowances for commercial rebates are established based on actual payer information, which is reasonably estimated at the time of delivery. Rebate discounts are included in other current liabilities in the accompanying consolidated balance sheets.

Prompt Pay Discounts: We offer discounts to certain customers for prompt payments. We accrue for the calculated prompt pay discount based on the gross amount of each invoice for those customers at the time of sale.

Product Returns: Consistent with industry practice, we offer our customers a limited right to return product purchased directly from the Company, which is principally based upon the product’s expiration date. Generally, shipments are only made upon a patient prescription thus returns are minimal.

Co-pay Assistance: We offer a co-pay assistance program, which is intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an identification of claims and the cost per claim associated with product that has been recognized as revenue.

The following table summarizes net product revenues for the three and nine months ended September 30, 2019 and 2018 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Bile acid products	$	19,938	$	18,052	$	59,258	$	55,153
Tiopronin products	24,435		22,654		69,393		65,322
Total net product revenue	$	44,373	$	40,706	$	128,651	$	120,475

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NOTE 4. MARKETABLE SECURITIES

The Company's marketable securities as of September 30, 2019 and December 31, 2018 were comprised of available-for-sale marketable securities which are carried at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income (loss). Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income or expense. Interest and dividends on securities classified as available-for-sale are included in interest income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income. During the nine months ended September 30, 2019, investment activity for the Company included $180.8 million in maturities and $151.0 million in purchases, all relating to debt based marketable securities.

Marketable securities consisted of the following (in thousands):



	September 30, 2019		December 31, 2018
Commercial paper	$	43,504	$	59,255
Corporate debt securities	287,188		299,413
Securities of government sponsored entities	11,143		10,000
Total marketable securities:	$	341,835	$	368,668

The following is a summary of short-term marketable securities classified as available-for-sale as of September 30, 2019 (in thousands):



	Remaining Contractual Maturity (in years)	Amortized Cost		Unrealized Gains		Unrealized Losses			Aggregate Estimated Fair Value
Commercial paper	Less than 1	$	43,479	$	28	$	(3	)	$	43,504
Corporate debt securities	Less than 1	186,885		537		(15		)	187,407
Total maturity less than 1 year		230,364		565		(18		)	230,911
Corporate debt securities	1 to 2	99,216		598		(33		)	99,781
Securities of government-sponsored entities	1 to 2	11,177		—		(34		)	11,143
Total maturity 1 to 2 years		110,393		598		(67		)	110,924
Total available-for-sale securities		$	340,757	$	1,163	$	(85	)	$	341,835

The following is a summary of short-term marketable securities classified as available-for-sale as of December 31, 2018 (in thousands):



	Remaining Contractual Maturity (in years)	Amortized Cost		Unrealized Gains		Unrealized Losses			Aggregate Estimated Fair Value
Commercial paper	Less than 1	$	59,313	$	—	$	(58	)	$	59,255
Corporate debt securities	Less than 1	149,824		—		(604		)	149,220
Total maturity less than 1 year		209,137		—		(662		)	208,475
Corporate debt securities	1 to 2	150,813		18		(638		)	150,193
Securities of government-sponsored entities	1 to 2	9,997		4		(1		)	10,000
Total maturity 1 to 2 years		160,810		22		(639		)	160,193
Total available-for-sale securities		$	369,947	$	22	$	(1,301	)	$	368,668

The primary objective of the Company’s investment portfolio is to enhance overall returns while preserving capital and liquidity. The Company’s investment policy limits interest-bearing security investments to certain types of instruments issued by institutions with primarily investment grade credit ratings and places restrictions on maturities and concentration by asset class and issuer. All available-for-sale securities are held in current assets regardless of contractual maturities exceeding one year, as the Company has the ability to sell them within the next twelve months.

The Company reviews the available-for-sale investments for other-than-temporary declines in fair value below cost basis each quarter and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. This evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below the cost basis and adverse conditions related specifically to the security, including any changes to the credit rating of the security, and the intent to sell, or whether the Company will more likely than not be required to sell the security before recovery of its amortized cost basis. The assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security. As of September 30, 2019 and December 31, 2018, the Company believed the cost basis for available-for-sale investments was recoverable in all material respects.

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NOTE 5. FUTURE ACQUISITION RIGHT AND JOINT DEVELOPMENT AGREEMENT

Censa Pharmaceuticals Inc.

In December 2017, the Company entered into a Future Acquisition Right and Joint Development Agreement (the “Option Agreement”) with Censa, which became effective in January 2018. The Company made an upfront payment of $10.0 million, agreed to fund certain development activities of Censa’s CNSA-001 program which were approximately $19.9 million through proof of concept, and paid $5.0 million related to a development milestone for the right, but not the obligation, to acquire Censa (the “Option”) on the terms and subject to the conditions set forth in a separate Agreement and Plan of Merger. The Company capitalized the upfront and milestone payments and expensed the development funding as incurred. The Company treated the upfront payment and milestone payment, both of which were consideration for the Option, as a cost-method investment with a carrying value of $15.0 million.

If the Company had exercised the Option, the Company would have acquired Censa for an additional $65.0 million, which would have been reduced by up to $2.8 million of development funding ("creditable"), paid as a combination of 20% in cash and 80% in shares of the Company’s common stock, valued at a fixed price of $21.40 per share; provided, however, that Censa could have elected on behalf of its equity holders to receive the upfront consideration in 100% cash if the average price per share of the Company’s common stock for the ten trading days ending on the date the Company provided notice of interest to exercise the Option was less than $19.26. In addition, if the Company had exercised the Option and acquired Censa, the Company would have been required to make further cash payments to Censa’s equity holders of up to an aggregate of $25.0 million if the CNSA-001 program had achieved specified development and commercial milestones.

The Company determined that Censa was a variable interest entity ("VIE"), and concluded that the Company was not the primary beneficiary of the VIE. As such, the Company did not consolidate Censa’s results into its consolidated financial statements.

In August 2019, following a strategic review of the CNSA-001 program in patients with phenylketonuria (PKU), the Company made the decision to decline to exercise its option to acquire Censa Pharmaceuticals and accordingly discontinue its joint development program for CNSA-001. The Company impaired the $15 million long term investment during the current quarter.

NOTE 6. LEASES

As of January 1, 2019, the Company adopted ASU No. 2016-02, Leases, using a modified retrospective basis method under which prior comparative periods are not restated.

The new standard establishes an ROU model that requires a lessee to record an ROU asset and a lease liability on its balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. In addition, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, ASU No. 2018-11, Targeted Improvements, and ASU No. 2018-20, Narrow-Scope Improvements for Lessors, to clarify and amend the guidance in ASU No. 2016-02. The Company has elected the following as practical expedients from within these ASUs: 1) an entity need not reassess whether any expired or existing contracts are or contain leases; 2) an entity need not reassess the lease classification for any expired or existing leases; and 3) an entity need not reassess initial direct costs for any existing leases.

As of January 1, 2019, the Company had a single operating lease for its office located in San Diego, California. The lease was originally signed in July 2016, was amended in July 2017, and is for approximately 45,000 square feet of office space in adjacent buildings. The term of the original lease is 7 years, 7 months, and is coterminous for all space occurring in July 2024. Under the terms of the lease, the Company will pay base annual rent (subject to an annual fixed percentage increase), plus property taxes and other normal and necessary expenses, such as utilities, repairs, security and maintenance. Certain incentives were included in the lease, including approximately $2.3 million in tenant improvement allowances and seven months of rent abatement. The Company has the right to extend the lease for five years.

As of January 1, 2019, the Company's remaining minimum lease payments and unamortized lease incentives were approximately $14.0 million and $1.8 million, respectively. Using a discount rate equal to our borrowing rate of 7.7% and a remaining term of 5 years, 7 months, the Company determined the ROU asset and lease liability as of adoption were $7.9 million and $11.3 million, respectively. There was no cumulative adjustment to our beginning accumulated deficit balance.

In March 2019, the Company amended the existing office lease to add approximately 16,000 square feet of office space in adjacent buildings; 12,000 square feet has been occupied as of September 30, 2019. The total additional space is expected to be utilized through August 2020 and has future minimum lease payments of approximately $1.0 million. The Company determined the ROU asset and lease liability were each $0.4 million for the lease space that has commenced and is occupied as of September 30, 2019.

On April 23, 2019, the Company entered into an office lease with an effective date of April 12, 2019 with Kilroy Realty, L.P. (the "Landlord") for the lease of approximately 77,000 square feet of the building located at 3611 Valley Centre Drive, San Diego, California. The Company expects to use the premises as its new principal corporate offices and plans to consolidate its corporate headquarters into the premises from the current location of multiple suites in adjacent buildings at 3721 and 3661 Valley Centre Drive, San Diego, California. Under the terms of the lease, the Company will have the one-time right of first offer on the suites it currently occupies and a general right of first offer to lease additional space from the Landlord in the development. The commencement date of the lease is expected to be October 1, 2020. The initial term of the lease is 7 years, 7 months, and the Landlord has granted the Company an option to extend the term of the lease by a period of 5 years. The aggregate base rent due over the initial term of the lease is approximately $36.5 million.

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



	September 30, 2019
2019	$	787
2020	2,958
2021	2,486
2022	2,560
2023	2,637
Thereafter	1,585
Total undiscounted future minimum payments	13,013
Present value discount	(2,538		)
Total lease liability	10,475
Lease incentives	(1,543		)
Straight line lease expense in excess of cash payments	(1,585		)
Total ROU asset	$	7,347

As of September 30, 2019, the current and non-current portions of the ROU asset were recorded to the Condensed Consolidated Balance Sheets as follows (in thousands):



	September 30, 2019
Prepaid expenses and other current assets	$	2,147
Other non-current assets	5,200
Total ROU asset	$	7,347

As of September 30, 2019, the current and non-current portions of the lease liability were recorded to the Condensed Consolidated Balance Sheets as follows (in thousands):



	September 30, 2019
Other current liabilities	$	2,668
Other non-current liabilities	7,807
Total lease liabilities	$	10,475

For the three and nine months ended September 30, 2019, the Company recorded $0.7 million and $2.0 million in expense related to operating leases, respectively.

NOTE 7. FAIR VALUE MEASUREMENTS

Financial Instruments and Fair Value

The Company accounts for financial instruments in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The valuation techniques used to measure the fair value of the Company’s marketable securities and all other financial instruments, all of which have counter-parties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. Based on the fair value hierarchy, the Company classified marketable securities within Level 2.

In estimating the fair value of the Company’s contingent consideration, the Company used the Monte Carlo Simulation model as of September 30, 2019 and December 31, 2018. Based on the fair value hierarchy, the Company classified the fair value measurement of contingent consideration within Level 3.

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Financial instruments with carrying values approximating fair value include cash and cash equivalents, accounts receivable, and accounts payable, due to their short-term nature. As of September 30, 2019, the estimated fair value of the Company's 2.5% Convertible Senior Notes due 2025 was $206.7 million, considering factors such as market conditions, prepayment and make-whole provisions, variability in pricing from multiple lenders and the term of the debt.

The following table presents the Company’s assets and liabilities, measured and recognized at fair value on a recurring basis, classified under the appropriate level of the fair value hierarchy as of September 30, 2019 (in thousands):



	As of September 30, 2019
	Total carrying and estimated fair value		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets:
Cash and Cash Equivalents	$	65,188	$	65,188	$	—	$	—
Marketable securities, available-for-sale	341,835		—		341,835		—
Total	$	407,023	$	65,188	$	341,835	$	—
Liabilities:
Business combination-related contingent consideration	$	73,900	$	—	$	—	$	73,900
Total	$	73,900	$	—	$	—	$	73,900



	As of December 31, 2018
	Total carrying and estimated fair value		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets:
Cash and Cash Equivalents	$	102,873	$	62,978	$	39,895	$	—
Marketable securities, available-for-sale	368,668		—		368,668		—
Total	$	471,541	$	62,978	$	408,563	$	—
Liabilities:
Business combination-related contingent consideration	93,000		—		—		93,000
Total	$	93,000	$	—	$	—	$	93,000

The following table sets forth a summary of changes in the estimated fair value of the Company's business combination-related contingent consideration for the nine months ended September 30, 2019 (in thousands):



	Fair Value Measurements of Acquisition-Related Contingent Consideration (Level 3)
Balance at January 1, 2019	$	93,000
L-UDCA write-off	(18,000		)
Changes in the fair value of contingent consideration	5,820
Contractual payments included in accrued liabilities at September 30, 2019	(2,245		)
Contractual payments	(4,556		)
Foreign currency impact	(119		)
Balance at September 30, 2019	$	73,900

The key assumptions included in the calculations for contingent consideration were the future number of patients in treatment, projected revenues, discount rate, and the timing of payments. The present value of the expected payments considers the time at which the obligations are expected to be settled and a discount rate that reflects the risk associated with the performance payments.

During the three and nine months ended September 30, 2019, the Company recognized $(0.7) million and $5.8 million, respectively, in operating expense on the Condensed Consolidated Statement of Operations and Comprehensive Loss for the change in fair value of the contingent consideration liabilities. For the nine months ended September 30, 2019, $6.9 million and $(1.1) million of the charges were related to the change in contingent consideration liabilities for the products Chenodal and Cholbam, respectively. In each case, the value increased due to passage of time and projected revenues. During the first quarter of 2019, the Company made a portfolio decision not to pursue further development of its product candidate L-UDCA. The related contingent consideration of $18.0 million was accordingly fully written off. See Note 17 for further discussion.

During the three and nine months ended September 30, 2018, the Company incurred charges of $16.6 million and $22.4 million, respectively, in operating expenses on the Condensed Consolidated Statements of Operations and Comprehensive Loss for the change in fair value of the

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contingent consideration liabilities. For the nine months ended September 30, 2018, $10.0 million, $10.4 million, and $2.0 million of the charges were related to the increase in contingent consideration liabilities for the products Chenodal and Cholbam and product candidate L-UDCA, respectively. In each case, the value increased due to passage of time.

NOTE 8. INTANGIBLE ASSETS

As of September 30, 2019, the net book value of amortizable intangible assets was approximately $157.8 million.

The following table sets forth amortizable intangible assets as of September 30, 2019 and December 31, 2018 (in thousands):



	September 30, 2019			December 31, 2018
Finite-lived intangible assets	$	241,195		$	255,643
Less: accumulated amortization	(83,396		)	(68,952		)
Net carrying value	$	157,799		$	186,691

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

The following table summarizes amortization expense for the three and nine months ended September 30, 2019 and 2018 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Research and development	$	292	$	292	$	866	$	684
Selling, general and administrative	4,715		4,333		13,728		12,635
Total amortization expense	$	5,007	$	4,625	$	14,594	$	13,319

NOTE 9. CONVERTIBLE NOTES PAYABLE

Convertible Senior Notes Due 2025

On September 10, 2018, the Company completed its registered underwritten public offering of $276.0 million aggregate principal amount of 2.50% Convertible Senior Notes due 2025 ("2025 Notes"), and entered into a base indenture and supplemental indenture agreement ("2025 Indenture") with respect to the 2025 Notes. The 2025 Notes will mature on September 15, 2025 ("Maturity Date”), unless earlier repurchased, redeemed, or converted. The 2025 Notes are senior unsecured obligations of the Company and bear interest at an annual rate of 2.50%, payable semi-annually in arrears on March 15 and September 15 of each year, commencing March 15, 2019.

The composition of the Company’s 2025 Notes are as follows (in thousands):



	September 30, 2019			December 31, 2018
2.50% convertible senior notes due 2025	$	276,000		$	276,000
Unamortized debt discount	(68,245		)	(74,836		)
Unamortized debt issuance costs	(5,400		)	(6,073		)
Total 2025 Notes, net of unamortized debt discount and debt issuance costs	$	202,355		$	195,091

The net proceeds from the issuance of the 2025 Notes were approximately $267.2 million, after deducting commissions and the offering expenses payable by the Company. A portion of the net proceeds from the 2025 Notes was used by the Company to repurchase $23.4 million aggregate principal amount of its then-outstanding 4.5% senior convertible notes due 2019 in privately-negotiated transactions.

Holders may convert their 2025 Notes at their option only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2018 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock for each of at least 20 trading days, whether or not consecutive, during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price on the applicable trading day; (2) during the five consecutive business days immediately after any 10 consecutive trading day period (“measurement period”) if the trading price per $1,000 principal amount of 2025 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Company’s common stock; (4) if the Company calls the 2025 Notes for redemption; and (5) at any time from, and including, May 15, 2025 until the close of business on the scheduled trading day immediately before the Maturity Date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election, based on the applicable conversion rate.

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The initial conversion rate for the 2025 Notes is 25.7739 shares of the Company’s common stock per $1,000 principal amount of 2025 Notes, which represents an initial conversion price of approximately $38.80 per share. If a “make-whole fundamental change” (as defined in the 2025 Indenture) occurs, then the Company will, in certain circumstances, increase the conversion rate for a specified period of time.

The 2025 Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after September 15, 2022 and, in the case of any partial redemption, on or before the 40th scheduled trading day before the Maturity Date, at a cash redemption price equal to the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice. If a fundamental change (as defined in the 2025 Indenture) occurs, then, subject to certain exceptions, holders may require the Company to repurchase their 2025 Notes at a cash repurchase price equal to the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.

In the event of conversion, holders would forgo all future interest payments, any unpaid accrued interest and the possibility of further stock price appreciation. Upon the receipt of conversion requests, the settlement of the 2025 Notes will be paid pursuant to the terms of the 2025 Indenture. In the event that all of the 2025 Notes are converted, the Company would be required to repay the $276.0 million principal amount and any conversion premium in any combination of cash and shares of its common stock at the Company’s option. In addition, calling the 2025 Notes for redemption will constitute a “make whole fundamental change."

The 2025 Notes are the Company’s general unsecured obligations that rank senior in right of payment to all of its indebtedness that is expressly subordinated in right of payment to the 2025 Notes, and equal in right of payment to the Company’s unsecured indebtedness.

The 2025 Notes are classified on the Company’s Condensed Consolidated Balance Sheets at September 30, 2019 as long-term debt.

Under ASC 470-20, Debt with Conversion and Other Options, an entity must separately account for the liability and equity components of convertible debt instruments (such as the 2025 Notes) that may be settled entirely or partially in cash upon conversion, in a manner that reflects the issuer’s economic interest cost. The liability component of the instrument is valued in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance. The initial carrying value of the liability component was $198.6 million. The equity component of $77.4 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the 2025 Notes and is recorded in additional paid-in capital on the consolidated balance sheet at the issuance date. That equity component is treated as a discount on the liability component of the 2025 Notes, which is amortized over the seven-year term of the 2025 Notes using the effective interest rate method. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The Company allocated the total transaction costs of approximately $8.8 million related to the issuance of the 2025 Notes to the liability and equity components of the 2025 Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the seven-year term of the 2025 Notes, and transaction costs attributable to the equity component are netted with the equity component in stockholders’ equity.

The effective interest rate on the liability components of the 2025 Notes for the period from the date of issuance through September 30, 2019 was 7.7%. The following table sets forth total interest expense recognized related to the 2025 Notes (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Contractual interest expense	$	1,725	$	383	$	5,175	$	383
Amortization of debt discount	2,239		468		6,591		468
Amortization of debt issuance costs	224		50		672		50
Total interest expense for the 2025 Notes	$	4,188	$	901	$	12,438	$	901

The 2025 Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by the Company. The 2025 Indenture contains customary events of default with respect to the 2025 Notes, including failure to pay (for more than 30 days) interest when due and certain types of bankruptcy or insolvency involving the Company. Upon an event of default involving certain types of bankruptcy insolvency, 100% of the outstanding principal and accrued and unpaid interest on the 2025 Notes will automatically become due and payable, and upon other events of default, the trustee under the 2025 Indenture or the holders of at least 25% of the outstanding principal amount of the 2025 Notes may declare 100% of the principal and accrued and unpaid interest on the 2025 Notes to be immediately due and payable.

Senior Convertible Notes Due 2019

On May 29, 2014, the Company entered into a Note Purchase Agreement relating to a private placement by the Company of $46.0 million aggregate principal amount of 4.50% senior convertible notes due 2019 (the “2019 Notes”) which were convertible into shares of the Company’s common stock at an initial conversion price of $17.41 per share. The conversion price was subject to customary anti-dilution protection. The 2019 Notes bore interest at a rate of 4.5% per annum, payable semiannually in arrears on May 15 and November 15 of each year. The 2019 Notes had a maturity date of May 30, 2019 and there were no contractual payments due prior to that date.

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In September 2018, the Company used part of the net proceeds from the issuance of the 2025 Notes to repurchase $23.4 million aggregate principal amount of the 2019 Notes in privately-negotiated transactions for approximately $40.2 million in cash. The partial repurchase of the 2019 Notes resulted in a $17.0 million loss on early extinguishment of debt in September 2018.

In May 2019, the remaining $22.6 million outstanding principal amount of 2019 Notes was converted by the holders thereof into approximately 1.3 million shares of common stock.

The composition of the Company’s 2019 Notes at December 31, 2018 was as follows (in thousands):



	December 31, 2018
4.50% senior convertible notes due 2019	$	22,590
Unamortized debt discount	(125		)
Unamortized debt issuance costs	(