10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on April 28, 2021
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2021 .
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 001-33528
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) (Zip Code) | ||||||||
(Registrant’s Telephone Number, Including Area Code) | ||||||||
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
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. ý 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes ¨ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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:
x | 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 ý NO
As of April 20, 2021, the registrant had 670,153,274 shares of Common Stock outstanding.
TABLE OF CONTENTS
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects, including the potential impact of the COVID-19 pandemic on our businesses, operating results, cash flows and/or financial condition. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described below and in “Item 1A-Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020, and described from time to time in our other filings with the Securities and Exchange Commission (the “SEC”). We do not undertake any obligation to update forward-looking statements, except to the extent required by applicable law. We intend that all forward-looking statements be subject to the safe-harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Risks and uncertainties, the occurrence of which could adversely affect our business, include the following:
•our business may be materially adversely affected by the coronavirus (COVID-19) pandemic, including the impact on our sales and operations from continued or increasing infection rates and potential declines in testing needs should infection rates decline;
•we have had a history of losses and may not generate sustained positive cash flow sufficient to fund our operations and research and development programs;
•our need for, and ability to obtain, additional financing when needed on favorable terms, or at all;
•adverse results in material litigation matters or governmental inquiries;
•the risks inherent in developing, obtaining regulatory approvals for and commercializing new, commercially viable and competitive products and treatments;
•our research and development activities may not result in commercially viable products;
•that earlier clinical results of effectiveness and safety may not be reproducible or indicative of future results;
•that we may fail to obtain regulatory approval for hGH-CTP (Somatrogon) or successfully commercialize hGH-CTP (Somatrogon);
•that we may not generate or sustain profits or cash flow from our laboratory operations or substantial revenue from Rayaldee and our other pharmaceutical and diagnostic products;
•that currently available over-the-counter and prescription products, as well as products under development by others, may prove to be as or more effective than our products for the indications being studied;
•our ability and our distribution and marketing partners’ ability to comply with regulatory requirements regarding the sales, marketing and manufacturing of our products and product candidates and the operation of our laboratories;
•the performance of our third-party distribution partners, licensees and manufacturers over which we have limited control;
•changes in regulation and policies in the United States (“U.S.”) and other countries, including increasing downward pressure on healthcare reimbursement;
•our ability to manage our growth and our expanded operations;
•increased competition, including price competition;
•changing relationships with payors, including the various state and multi-state programs, suppliers and strategic partners;
•efforts by third-party payors to reduce utilization and reimbursement for clinical testing services;
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•our ability to maintain reimbursement coverage for our products and services, including Rayaldee and the 4Kscore test;
•failure to timely or accurately bill and collect for our services;
•the information technology systems that we rely on may be subject to unauthorized tampering, cyberattack or other data security or privacy incidents that could impact our billing processes or disrupt our operations;
•failure to obtain and retain new clients and business partners, or a reduction in tests ordered or specimens submitted by existing clients;
•failure to establish, and perform to, appropriate quality standards to assure that the highest level of quality is observed in the performance of our testing services;
•failure to maintain the security of patient-related information;
•our ability to obtain and maintain intellectual property protection for our products;
•our ability to defend our intellectual property rights with respect to our products;
•our ability to operate our business without infringing the intellectual property rights of others;
•our ability to attract and retain key scientific and management personnel;
•the risk that the carrying value of certain assets may exceed the fair value of the assets causing us to impair goodwill or other intangible assets;
•failure to obtain and maintain regulatory approval outside the U.S.; and
•legal, economic, political, regulatory, currency exchange, and other risks associated with international operations.
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PART I. FINANCIAL INFORMATION
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the “Company”, “OPKO”, “we”, “our”, “ours”, and “us” refer to OPKO Health, Inc., a Delaware corporation, including our consolidated subsidiaries.
Item 1. Financial Statements
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
March 31, 2021 | December 31, 2020 | ||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net | |||||||||||
Inventory, net | |||||||||||
Other current assets and prepaid expenses | |||||||||||
Total current assets | |||||||||||
Property, plant and equipment, net | |||||||||||
Intangible assets, net | |||||||||||
In-process research and development | |||||||||||
Goodwill | |||||||||||
Investments | |||||||||||
Operating lease right-of-use assets | |||||||||||
Other assets | |||||||||||
Total assets | $ | $ | |||||||||
LIABILITIES AND EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | $ | |||||||||
Accrued expenses | |||||||||||
Current maturities of operating leases | |||||||||||
Current portion of lines of credit and notes payable | |||||||||||
Total current liabilities | |||||||||||
Operating lease liabilities | |||||||||||
Convertible notes | |||||||||||
Deferred tax liabilities | |||||||||||
Other long-term liabilities, principally contract liabilities, contingent consideration and lines of credit | |||||||||||
Total long-term liabilities | |||||||||||
Total liabilities | |||||||||||
Equity: | |||||||||||
Common Stock - $ |
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Treasury Stock - |
( |
( |
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Additional paid-in capital | |||||||||||
Accumulated other comprehensive loss | ( |
( |
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Accumulated deficit | ( |
( |
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Total shareholders’ equity | |||||||||||
Total liabilities and equity | $ | $ |
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
For the three months ended March 31, | |||||||||||
2021 | 2020 | ||||||||||
Revenues: | |||||||||||
Revenue from services | $ | $ | |||||||||
Revenue from products | |||||||||||
Revenue from transfer of intellectual property and other | |||||||||||
Total revenues | |||||||||||
Costs and expenses: | |||||||||||
Cost of service revenue | |||||||||||
Cost of product revenue | |||||||||||
Selling, general and administrative | |||||||||||
Research and development | |||||||||||
Contingent consideration | ( |
( |
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Amortization of intangible assets | |||||||||||
Total costs and expenses | |||||||||||
Operating income (loss) | ( |
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Other income and (expense), net: | |||||||||||
Interest income | |||||||||||
Interest expense | ( |
( |
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Fair value changes of derivative instruments, net | ( |
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Other income (expense), net | ( |
( |
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Other income and (expense), net | ( |
( |
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Income (loss) before income taxes and investment losses | ( |
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Income tax provision | ( |
( |
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Net income (loss) before investment losses | ( |
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Loss from investments in investees | ( |
( |
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Net income (loss) | $ | $ | ( |
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Income (loss) per share, basic and diluted: | |||||||||||
Income (loss) per share | $ | $ | ( |
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Weighted average common shares outstanding, basic and diluted | |||||||||||
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
For the three months ended March 31, | |||||||||||
2021 | 2020 | ||||||||||
Net income (loss) | $ | $ | ( |
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Other comprehensive income (loss), net of tax: | |||||||||||
Change in foreign currency translation and other comprehensive income (loss) | ( |
( |
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Comprehensive income (loss) | $ | $ | ( |
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The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except share data)
For the three months ended March 31, 2021
Common Stock | Treasury | Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total | ||||||||||||||||||||||||||||||||||||||||||
Shares | Dollars | Shares | Dollars | ||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | ( |
$ | ( |
$ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||||||||||||||
Equity-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Exercise of Common Stock options and warrants | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | ( |
— | ( |
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Balance at March 31, 2021 | $ | ( |
$ | ( |
$ | $ | ( |
$ | ( |
$ |
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except share data)
For the three months ended March 31, 2020
Common Stock | Treasury | Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total | ||||||||||||||||||||||||||||||||||||||||||
Shares | Dollars | Shares | Dollars | ||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | ( |
$ | ( |
$ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||||||||||||||
Equity-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
— | — | — | — | — | — | ( |
( |
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Net loss | — | — | — | — | — | — | ( |
( |
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Other comprehensive loss | — | — | — | — | — | ( |
— | ( |
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Balance at March 31, 2020 | $ | ( |
$ | ( |
$ | $ | ( |
$ | ( |
$ |
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the three months ended March 31, | |||||||||||
2021 | 2020 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | $ | ( |
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
Depreciation and amortization | |||||||||||
Non-cash interest | |||||||||||
Amortization of deferred financing costs | |||||||||||
Losses from investments in investees | |||||||||||
Equity-based compensation – employees and non-employees | |||||||||||
Realized loss (gain) on disposal of fixed assets and sales of equity securities | ( |
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Change in fair value of equity securities and derivative instruments | ( |
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Change in fair value of contingent consideration | ( |
( |
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Deferred income tax provision | ( |
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Changes in assets and liabilities: | |||||||||||
Accounts receivable, net | ( |
( |
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Inventory, net | ( |
( |
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Other current assets and prepaid expenses | ( |
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Other assets | |||||||||||
Accounts payable | ( |
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Foreign currency measurement | |||||||||||
Contract liabilities | ( |
( |
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Accrued expenses and other liabilities | ( |
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Net cash provided by (used in) operating activities | ( |
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Cash flows from investing activities: | |||||||||||
Proceeds from sale of investments | |||||||||||
Proceeds from the sale of property, plant and equipment | |||||||||||
Capital expenditures | ( |
( |
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Net cash used in investing activities | ( |
( |
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Cash flows from financing activities: | |||||||||||
Proceeds from the exercise of common stock options and warrants | |||||||||||
Borrowings on lines of credit | |||||||||||
Repayments of lines of credit | ( |
( |
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Net cash used in financing activities | ( |
( |
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Effect of exchange rate changes on cash and cash equivalents | ( |
( |
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Net increase (decrease) in cash and cash equivalents | ( |
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Cash and cash equivalents at beginning of period | |||||||||||
Cash and cash equivalents at end of period | $ | $ | |||||||||
SUPPLEMENTAL INFORMATION: | |||||||||||
Interest paid | $ | $ | |||||||||
Income taxes paid, net of refunds | $ | $ | |||||||||
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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OPKO Health, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 BUSINESS AND ORGANIZATION
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly growing medical markets. Our diagnostics business includes BioReference Laboratories, Inc. (“BioReference”), one of the nation’s largest full service laboratories with a core genetic testing business and an almost 300 -person sales and marketing team to drive growth and leverage new products, including the 4Kscore test. Our pharmaceutical business features Rayaldee, a U.S. Food and Drug Administration (“FDA”) approved treatment for secondary hyperparathyroidism (“SHPT”) in adults with stage 3 or 4 chronic kidney disease (“CKD”) and vitamin D insufficiency (launched in November 2016) and a pipeline of products in various stages of development. Our leading product in development is Somatrogon (hGH-CTP), a once-weekly human growth hormone for which we have partnered with Pfizer, Inc. (“Pfizer”) and successfully completed a phase 3 study in August 2019, and for which the FDA has accepted the initial Biologics License Application (“BLA”) for filing and we have submitted a New Drug Application (an “NDA”) with the Ministry of Health, Labour and Welfare in Japan. We are incorporated in Delaware, and our principal executive offices are located in leased offices in Miami, Florida.
Through BioReference, we provide laboratory testing services, primarily to customers in the larger metropolitan areas in New York, New Jersey, Florida, Texas, Maryland, California, Pennsylvania, Delaware, Washington, DC, Illinois and Massachusetts, as well as to customers in a number of other states. We offer a comprehensive test menu of clinical diagnostics for blood, urine and tissue analysis. This includes hematology, clinical chemistry, immunoassay, infectious diseases, serology, hormones, and toxicology assays, as well as Pap smear, anatomic pathology (biopsies) and other types of tissue analysis. We market our laboratory testing services directly to physicians, geneticists, hospitals, clinics, correctional and other health facilities.
We operate established pharmaceutical platforms in Ireland, Chile, Spain, and Mexico, which are generating revenue and from which we expect to generate positive cash flow and facilitate future market entry for our products currently in development. In addition, we have a development and commercial supply pharmaceutical company and a global supply chain operation and holding company in Ireland. We own a specialty active pharmaceutical ingredients (“APIs”) manufacturer in Israel, which we expect will facilitate the development of our pipeline of molecules and compounds for our proprietary molecular diagnostic and therapeutic products.
Our research and development activities are primarily performed at facilities in Woburn, MA, Waterford, Ireland, Kiryat Gat, Israel, and Barcelona, Spain.
NOTE 2 IMPACT OF COVID-19
As the disease caused by SARS-CoV-2, a novel strain of coronavirus, COVID-19 continues to spread and severely impact the U.S. economy and economies of other countries around the world, we are committed to being a part of the coordinated public and private sector response to this unprecedented challenge. In response to the COVID-19 pandemic, BioReference is providing COVID-19 solutions, including diagnostic molecular testing and serology antibody testing, to meet the testing needs of its numerous customer verticals, including physicians, health systems, long-term care facilities, governments, schools, employers, professional sports teams and entertainment venues, as wells as the general public through relationships with retail pharmacy chains.
Revenue from services for the three months ended March 31, 2021 increased by $336.1 million as compared to 2020 due to COVID-19 testing volumes; however we are unable to predict how long the demand will continue for our COVID-19 related testing, or whether pricing and reimbursement policies for testing will sustain, and accordingly, the sustainability of our COVID-19 testing volumes is uncertain. Additionally, beginning in March 2020, BioReference experienced a decline in testing volumes due to the COVID-19 pandemic; however as stay at home orders and other restrictions have been lifted, we have seen our routine clinical and genomic testing volumes trending towards normalization with prior periods. Should stay at home orders or other restrictions be reenacted, we could see our routine testing levels decline. Excluding COVID-19 test volumes, for the three months ended March 31, 2021, genomic test volume increased 10.3 % and routine clinical test volume declined 6.8 % as compared to volumes for the three months ended March 31, 2020. Additionally, sales of Rayaldee have not increased in accordance with its expected growth trajectory as a result of challenges in onboarding new patients due to the COVID-19 pandemic. Federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 have resulted in, among other things, a significant reduction in physician office visits, the cancellation of elective medical procedures, customers closing or severely curtailing their operations (voluntarily or in response to government orders), and the
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adoption of work-from-home or shelter-in-place policies. We also continue to see a substantial need for COVID-19 testing by our existing clients and expect new clients as infections for the virus continue.
In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain payroll tax credits associated with the retention of employees.
We have received, or expect to receive a number of benefits under the CARES Act including, but not limited to:
•During the second quarter of 2020, we received approximately $14 million under The Centers for Medicare & Medicaid Services (CMS) Accelerated and Advance Payment Program, which provides accelerated payments to Medicare providers/suppliers working to provide treatment to patients and combat the COVID-19 pandemic, and the amounts advanced are loans which will be offset against future claims and must be repaid in 2021. These loans are initially recorded as contract liabilities included in Accrued expenses and are recognized in Revenue from services when earned. As of March 31, 2021, no amount of the accelerated payments were recognized in revenue;
•We were eligible to defer depositing the employer’s share of Social Security taxes for payments due from March 27, 2020 through December 31, 2020, interest-free and penalty-free;
•We received approximately $16.2 million during 2020 from the funds that were distributed to healthcare providers for related expenses or lost revenues that are attributable to the COVID-19 pandemic. We recognized the $16.2 million grant in other revenues for the year ended December 31, 2020;
•U.S. Department of Health and Human Services (HHS), will provide claims reimbursement to healthcare providers generally at Medicare rates for testing uninsured patients; and
•Clinical laboratories are provided a one-year reprieve from the reporting requirements under the Protecting Access to Medicare Act (“PAMA”) as well as a one-year delay of reimbursement rate reductions for clinical laboratory services provided under Medicare that were scheduled to take place in 2021.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Goodwill and intangible assets. Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired accounted for by the acquisition method of accounting. Refer to Note 5. Goodwill, in-process research and development (“IPR&D”) and other intangible assets acquired in business combinations, licensing and other transactions was $1.7 billion at both at March 31, 2021 and December 31, 2020.
Assets acquired and liabilities assumed in business combinations, licensing and other transactions are generally recognized at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recognized as goodwill. At acquisition, we generally determine the fair value of intangible assets, including IPR&D, using the “income method.”
Subsequent to their acquisition, goodwill and indefinite lived intangible assets are tested at least annually as of October 1 for impairment, or when events or changes in circumstances indicate it is more likely than not that the carrying amount of such assets may not be recoverable.
Goodwill was $676.2 million and $680.6 million respectively, at March 31, 2021 and December 31, 2020. Estimating the fair value of a reporting unit for goodwill impairment is highly sensitive to changes in projections and assumptions and changes in assumptions could potentially lead to impairment. We perform sensitivity analyses around our assumptions in order to assess the reasonableness of the assumptions and the results of our testing. Ultimately, potential changes in these assumptions may impact the estimated fair value of a reporting unit and result in an impairment if the fair value of such reporting unit is less than its carrying value.
Net intangible assets other than goodwill was $1.0 billion, including IPR&D of $590.2 million, at both March 31, 2021 and December 31, 2020. Intangible assets are highly vulnerable to impairment charges, particularly newly acquired assets for recently launched products and IPR&D. Considering the high risk nature of research and development and the industry’s success rate of bringing developmental compounds to market, IPR&D impairment charges may occur in future periods. Estimating the fair value of IPR&D for potential impairment is highly sensitive to changes in projections and assumptions and changes in assumptions could potentially lead to impairment.
Upon obtaining regulatory approval, IPR&D assets are then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the IPR&D asset is charged to expense. Finite lived intangible assets are tested for impairment when events or changes in circumstances indicate it is more likely than not that the carrying amount of such assets may not be recoverable. The testing includes a comparison of the carrying amount of the asset to its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, then an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
We believe that our estimates and assumptions are reasonable and otherwise consistent with assumptions that marketplace participants would use in their estimates of fair value. However, if future results are not consistent with our estimates and assumptions, including as a result of the COVID-19 global pandemic, then we may be exposed to an impairment charge, which could be material.
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Income taxes. Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. We periodically evaluate the realizability of our
net deferred tax assets. Our tax accruals are analyzed periodically and adjustments are made as events occur to warrant such
adjustment. Valuation allowances on certain U.S. deferred tax assets and non-U.S. deferred tax assets are established, because realization of these tax benefits through future taxable income does not meet the more-likely-than-not threshold.
We operate in various countries and tax jurisdictions globally. For interim reporting purposes, we record income taxes based on the expected effective income tax rate, taking into consideration year to date and global forecasted tax results. For the three months ended March 31, 2021, the tax rate differed from the U.S. federal statutory rate of 21% primarily due to the
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The portion of our accounts receivable due from individual patients comprises the largest portion of credit risk. At March 31, 2021 and December 31, 2020, receivables due from patients represented approximately 0.7 % and 0.7 %, respectively, of our consolidated Accounts receivable, net.
Research and development expenses. Research and development expenses include external and internal expenses. External expenses include clinical and non-clinical activities performed by contract research organizations, lab services, purchases of drug and diagnostic product materials and manufacturing development costs. Research and development employee-related expenses include salaries, benefits and equity-based compensation expense. Other internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities. We expense these costs in the period in which they are incurred. We estimate our liabilities for research and development expenses in order to match the recognition of expenses to the period in which the actual services are received. As such, accrued liabilities related to third party research and development activities are recognized based upon our estimate of services received and degree of completion of the services in accordance with the specific third party contract.
Research and development expense includes costs for in-process research and development projects acquired in asset acquisitions which have not reached technological feasibility and which have no alternative future use. For in-process research
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Pending accounting pronouncements.
In August 2020, the FASB issued ASU No. 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).” ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. The ASU is effective for public entities for fiscal years beginning after December 15, 2021, with early adoption permitted. We are currently evaluating the impact of this new guidance on our Condensed Consolidated Financial Statements.
NOTE 4 EARNINGS (LOSS) PER SHARE
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A total of 74,623,270 and 69,339,603 potential shares of Common Stock were excluded from the calculation of diluted net loss per share for the three months ended March 31, 2021, and 2020, respectively, because their inclusion would be antidilutive. A full presentation of diluted earnings per share has not been provided because the required adjustments to the numerator and denominator resulted in diluted earnings per share equivalent to basic earnings per share.
During the three months ended March 31, 2021, 117,500 Common Stock options and Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 117,500 shares of Common Stock. Of the 117,500 Common Stock options and Common Stock warrants exercised, no shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the agreements.
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NOTE 5 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
(In thousands) | March 31, 2021 |
December 31, 2020 |
|||||||||
Accounts receivable, net: | |||||||||||
Accounts receivable | $ | $ | |||||||||
Less: allowance for credit losses | ( |
( |
|||||||||
$ | $ | ||||||||||
Inventories, net: | |||||||||||
Consumable supplies | $ | $ | |||||||||
Finished products | |||||||||||
Work in-process | |||||||||||
Raw materials | |||||||||||
Less: inventory reserve | ( |
( |
|||||||||
$ | $ | ||||||||||
Other current assets and prepaid expenses: | |||||||||||
Taxes recoverable | $ | $ | |||||||||
Prepaid expenses | |||||||||||
Prepaid insurance | |||||||||||
Other receivables | |||||||||||
Other | |||||||||||
$ | $ | ||||||||||
Intangible assets, net: | |||||||||||
Customer relationships | $ | $ | |||||||||
Technologies | |||||||||||
Trade names | |||||||||||
Covenants not to compete | |||||||||||
Licenses | |||||||||||
Product registrations | |||||||||||
Other | |||||||||||
Less: accumulated amortization | ( |
( |
|||||||||
$ | $ | ||||||||||
Accrued expenses: | |||||||||||
Inventory received but not invoiced | $ | $ | |||||||||
Commitments and contingencies | |||||||||||
Employee benefits | |||||||||||
Contract liabilities | |||||||||||
Clinical trials | |||||||||||
Contingent consideration | |||||||||||
Finance leases short-term | |||||||||||
Professional fees | |||||||||||
Other | |||||||||||
$ | $ |
20
(In thousands) | March 31, 2021 |
December 31, 2020 |
|||||||||
Other long-term liabilities: | |||||||||||
Contingent consideration | $ | $ | |||||||||
Mortgages and other debts payable | |||||||||||
Finance leases long-term | |||||||||||
Contract liabilities | |||||||||||
Other | |||||||||||
$ | $ |
Our intangible assets and goodwill relate principally to our completed acquisitions of OPKO Renal, OPKO Biologics, EirGen Pharma Limited (“EirGen”) and BioReference. We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives. The estimated useful lives by asset class are as follows: technologies - 7 -17 years, customer relationships - 7 -20 years, product registrations - 7 -10 years, covenants not to compete - 5 years, trade names - 5 -10 years, other 9 -13 years. We do not anticipate capitalizing the cost of product registration renewals, rather we expect to expense these costs, as incurred. Our goodwill is not tax deductible for income tax purposes in any jurisdiction in which we operate.
The changes in value of the intangible assets and goodwill during the three months ended March 31, 2021 were primarily due to foreign currency fluctuations between the Chilean Peso, and the Euro against the U.S. dollar.
The following table summarizes the changes in Goodwill by reporting unit during the three months ended March 31, 2021.
2021 | |||||||||||||||||
(In thousands) | Gross goodwill at January 1 | Cumulative impairment at January 1 | Goodwill impairment | Foreign exchange and other | Balance at March 31 | ||||||||||||
Pharmaceuticals | |||||||||||||||||
CURNA | $ | $ | ( |
$ | $ | $ | |||||||||||
Rayaldee | ( |
||||||||||||||||
FineTech | ( |
||||||||||||||||
OPKO Biologics | |||||||||||||||||
OPKO Chile | ( |
||||||||||||||||
OPKO Health Europe | ( |
||||||||||||||||
OPKO Mexico | ( |
||||||||||||||||
Transition Therapeutics | ( |
||||||||||||||||
Diagnostics | |||||||||||||||||
BioReference | |||||||||||||||||
OPKO Diagnostics | ( |
||||||||||||||||
$ | $ | ( |
$ | $ | ( |
$ | |||||||||||
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NOTE 6 INVESTMENTS
Investments
The following table reflects the accounting method, carrying value and underlying equity in net assets of our unconsolidated investments as of March 31, 2021 and December 31, 2020:
(in thousands) | As of March 31, 2021 | As of December 31, 2020 | ||||||||||||||||||||||||
Investment type | Investment Carrying Value | Underlying Equity in Net Assets | Investment Carrying Value | Underlying Equity in Net Assets | ||||||||||||||||||||||
Equity method investments | $ | $ | $ | $ | ||||||||||||||||||||||
Variable interest entity, equity method | ||||||||||||||||||||||||||
Equity securities | ||||||||||||||||||||||||||
Equity securities with no readily determinable fair value | ||||||||||||||||||||||||||
Warrants and options | ||||||||||||||||||||||||||
Total carrying value of investments | $ | $ |
Equity method investments
Our equity method investments consist of investments in Pharmsynthez (ownership 9 %), Cocrystal Pharma, Inc. (“COCP”) (4 %), Non-Invasive Monitoring Systems, Inc. (“NIMS”) (1 %), Neovasc, Inc. (“Neovasc”) (1 %), InCellDx, Inc. (“InCellDx”) (29 %), BioCardia, Inc. (“BioCardia”) (1 %), and Xenetic Biosciences, Inc. (“Xenetic”) (2 %). The aggregate total assets, liabilities, and net losses of our equity method investees as of and for the three months ended March 31, 2021 were $109.5 million, $23.9 million, and $10.1 million, respectively. The aggregate total assets, liabilities, and net losses of our equity method investees as of and for the year ended December 31, 2020 were $90.9 million, $28.4 million, and $75.4 million, respectively. We have determined that we and/or our related parties can significantly influence control of our equity method investments through our board representation and/or voting power. Accordingly, we account for our investment in these entities under the equity method and record our proportionate share of their losses in Loss from investments in investees in our Condensed Consolidated Statement of Operations. The aggregate value of our equity method investments based on the quoted market prices of their respective shares of common stock and the number of shares held by us as of March 31, 2021 was $7.6 million.
Investments in Equity Securities
Our equity securities consist of investments in Phio Pharmaceuticals (“Phio”) (ownership 0.01 %), VBI Vaccines Inc. (“VBI”) (1 %), ChromaDex Corporation (“ChromaDex”) (0.1 %), MabVax Therapeutics Holdings, Inc. (“MabVax”) (1 %), and Eloxx Pharmaceuticals, Inc. (“Eloxx”) (3 %). We have determined that our ownership, along with that of our related parties, does not provide us with significant influence over the operations of these investments. Accordingly, we account for our investment in these entities as equity securities, and we record changes in the fair value of these investments in Other income (expense) each reporting period when they have readily determinable fair value. Equity securities without a readily determinable fair value are adjusted to fair value when there is an observable price change. Net gains and losses on our equity securities for the three months ended March 31, 2021, and 2020 were as follows:
For the three months ended March 31 | |||||||||||
(in thousands) | 2021 | 2020 | |||||||||
Equity Securities: | |||||||||||
Net gains and losses recognized during the period on equity securities | $ | $ | ( |
||||||||
Less: Net gains and losses realized during the period on equity securities | ( |
||||||||||
Unrealized net gains and losses recognized during the period on equity securities still held at the reporting date | $ | ( |
$ | ( |
|||||||
Sales of investments
Gains (losses) included in earnings from sales of our investments are recorded in Other income (expense), net in our Condensed Consolidated Statement of Operations. The cost of securities sold is based on the specific identification method.
22
Warrants and options
In addition to our equity method investments and equity securities, we hold options to purchase 47 thousand additional shares of BioCardia, all of which were vested as of March 31, 2021 and December 31, 2020, and 33 thousand, 0.7 million, 40 thousand and 404 warrants to purchase shares of COCP, InCellDx, Inc., Xenetic, and Phio, respectively. We recorded the changes in the fair value of the options and warrants in Fair value changes of derivative instruments, net in our Condensed Consolidated Statement of Operations. We also recorded the fair value of the options and warrants in Investments, net in our Condensed Consolidated Balance Sheet. See further discussion of the Company’s options and warrants in Note 9 and Note 10.
Investments in variable interest entities
We have determined that we hold variable interests in Detect Genomix, LLC (“Detect Genomix”) and Zebra Biologics, Inc. (“Zebra”). We made this determination as a result of our assessment that they do not have sufficient resources to carry out their principal activities without additional financial support.
In August 2020, GeneDx, Inc., a subsidiary of BioReference, announced that it had entered into an agreement with Pediatrix Medical Group (“Pediatrix”), a provider of maternal-fetal, and pediatric medical and surgical subspecialty physician services, to offer genomic sequencing to support clinical diagnosis in neonatal intensive care units staffed by Pediatrix’s affiliated neonatologists. The offering is planned to include whole exome and whole genome sequencing and genomic support services under the brand Detect Genomix.
Our initial capital investment in Detect Genomix was $245,000 for which we received a 49 % ownership interest in Detect Genomix. We are required to make additional capital contributions to Detect Genomix in accordance with our percentage interests if Detect Genomix is unable to generate positive cash flow from operations or is unable to obtain alternative financing. We have not made any other investments in or loans to Detect Genomix through March 31, 2021.
In order to determine the primary beneficiary of Detect Genomix, we evaluated our investment to identify if we had the power to direct the activities that most significantly impact the economic performance of Detect Genomix. Based on the capital structure, governing documents and overall business operations of Detect Genomix, we determined that, while a VIE, we do not have the power to direct the activities that most significantly impact Detect Genomix’s economic performance. We determined, however, that we can significantly influence control of Detect Genomix through our board representation and voting power. Therefore, we have the ability to exercise significant influence over Detect Genomix’s operations and account for our investment in Detect Genomix under the equity method.
We own 1,260,000 shares of Zebra Series A-2 Preferred Stock and 900,000 shares of Zebra restricted common stock (ownership 29 % at March 31, 2021). Zebra is a privately held biotechnology company focused on the discovery and development of biosuperior antibody therapeutics and complex drugs. Dr. Richard Lerner, M.D., a member of our Board of Directors, is a founder of Zebra and, along with Dr. Frost, serves as a member of Zebra’s Board of Directors.
In order to determine the primary beneficiary of Zebra, we evaluated our investment and our related parties’ investment, as well as our investment combined with the related parties’ investment to identify if we had the power to direct the activities that most significantly impact the economic performance of Zebra. Based on the capital structure, governing documents and overall business operations of Zebra, we determined that, while a VIE, we do not have the power to direct the activities that most significantly impact Zebra’s economic performance and have no obligation to fund expected losses. We determined, however, that we can significantly influence control of Zebra through our board representation and voting power. Therefore, we have the ability to exercise significant influence over Zebra’s operations and account for our investment in Zebra under the equity method.
23
NOTE 7 DEBT
As of March 31, 2021 and December 31, 2020, our debt consists of the following:
(In thousands) | March 31, 2021 |
December 31, 2020 |
|||||||||
2025 Notes | $ | $ | |||||||||
2023 Convertible Notes | |||||||||||
2033 Senior Notes | |||||||||||
JP Morgan Chase | |||||||||||
Chilean and Spanish lines of credit | |||||||||||
Current portion of notes payable | |||||||||||
Long term portion of notes payable | |||||||||||
Total | $ | $ | |||||||||
Balance sheet captions | |||||||||||
Convertible Notes | $ | $ | |||||||||
Current portion of lines of credit and notes payable | |||||||||||
LT notes payable included in long-term liabilities | |||||||||||
Total | $ | $ |
On February 25, 2020, we entered into a credit agreement with an affiliate of Dr. Frost, pursuant to which the lender committed to provide us with an unsecured line of credit in the amount of $100 million. Borrowings under the line of credit will bear interest at a rate of 11 % per annum and may be repaid and reborrowed at any time. The credit agreement includes various customary remedies for the lender following an event of default, including the acceleration of repayment of outstanding amounts under line of credit. The line of credit matures on February 25, 2025. The line of credit also calls for a commitment fee equal to 0.25 % per annum of the unused portion of the line. As of March 31, 2021, no funds were borrowed under the line of credit.
In February 2019, we issued $200.0 million aggregate principal amount of Convertible Senior Notes due 2025 (the “2025 Notes”) in an underwritten public offering. The 2025 Notes bear interest at a rate of 4.50 % per year, payable semiannually in arrears on February 15 and August 15 of each year. The notes mature on February 15, 2025, unless earlier repurchased, redeemed or converted.
Holders may convert their 2025 Notes into shares of Common Stock at their option at any time prior to the close of business on the business day immediately preceding November 15, 2024 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ended March 31, 2019 (and only during such calendar quarter), if the last reported sale price of our Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which 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 of our Common Stock and the conversion rate on each such trading day; (3) if we call any or all of the 2025 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events set forth in the indenture governing the 2025 Notes. On or after November 15, 2024, until the close of business on the business day immediately preceding the maturity date, holders of the 2025 Notes may convert their notes at any time, regardless of the foregoing conditions. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our Common Stock, or a combination of cash and shares of our Common Stock, at our election.
The initial and current conversion rate for the 2025 Notes is 236.7424 shares of Common Stock per $1,000 principal amount of 2025 Notes (equivalent to a conversion price of approximately $4.22 per share of Common Stock). The conversion rate for the 2025 Notes is subject to adjustment in certain events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date of the 2025 Notes or if we deliver a notice of redemption, in certain circumstances the indenture governing the 2025 Notes requires an increase in the conversion rate of the 2025 Notes for a holder who elects to convert its notes in connection with such a corporate event or notice of redemption, as the case may be.
24
We may not redeem the 2025 Notes prior to February 15, 2022. We may redeem for cash any or all of the 2025 Notes, at our option, on or after February 15, 2022, if the last reported sale price of our Common Stock has been at least 130 % of the then current conversion price for the notes for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide a notice of redemption at a redemption price equal to 100 % of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2025 Notes.
If we undergo a fundamental change, as defined in the indenture governing the 2025 Notes, prior to the maturity date of the 2025 Notes, holders may require us to repurchase for cash all or any portion of their notes at a repurchase price equal to 100 % of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The 2025 Notes are our senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2025 Notes; equal in right of payment to any of our existing and future liabilities that are not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our current or future subsidiaries.
In conjunction with the issuance of the 2025 Notes, we agreed to loan up to 30,000,000 shares of our Common Stock to affiliates of the underwriter in order to assist investors in the 2025 Notes to hedge their position. As of March 31, 2021 and December 31, 2020, a total of 29,250,000 shares were issued under the share lending arrangement. We will not receive any of the proceeds from the sale of the borrowed shares, but we received a one-time nominal fee of $0.3 million for the newly issued shares. Shares of our Common Stock outstanding under the share lending arrangement are excluded from the calculation of basic and diluted earnings per share. See Note 4.
As required by ASC 470-20, “Debt with Conversion and Other Options,” we calculated the equity component of the 2025 Notes, taking into account both the fair value of the conversion option and the fair value of the share lending arrangement. The equity component was valued at $52.6 million at issue date and this amount was recorded as Additional paid-in capital, which resulted in a discount on the 2025 Notes. The discount is being amortized to Interest expense over the term of the 2025 Notes, which results in an effective interest rate on the 2025 Notes of 11.2 %.
The following table sets forth information related to the 2025 Notes which is included in our Condensed Consolidated Balance Sheet as of March 31, 2021:
(In thousands) | 2025 Senior Notes | Discount | Debt Issuance Cost | Total | |||||||||||||||||||
Balance at December 31, 2020 | $ | $ | ( |
$ | ( |