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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 September 30, 2020
OR
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For transition period from               to            
Commission File Number: 000-19756
https://cdn.kscope.io/c09461861b8a7759042e8504c8c5b6f2-pdli-20200930_g1.jpg
PDL BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
Delaware94-3023969
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
932 Southwood Boulevard
Incline Village, Nevada 89451
(Address of principal executive offices and Zip Code)

(775832-8500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each classTrading symbolName of each exchange on which registered
Common Stock, par value $0.01 per sharePDLIThe Nasdaq Stock Market LLC
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 filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicated 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  ☒
As of October 30, 2020, there were 114,226,566 shares of the registrant’s Common Stock outstanding.



 PDL BIOPHARMA, INC.
2020 Form 10-Q
Table of Contents
 Page
PART I - FINANCIAL INFORMATION
   
ITEM 1.FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Statement of Net Assets (Liquidation Basis) as of September 30, 2020
 Condensed Consolidated Balance Sheet (Going Concern Basis) as of December 31, 2019
Condensed Consolidated Statement of Changes in Net Assets (Liquidation Basis) for the One Month Ended September 30, 2020
 Condensed Consolidated Statements of Operations (Going Concern Basis) for the Two and Eight Months Ended August 31, 2020 and the Three and Nine Months Ended September 30, 2019
   
 Condensed Consolidated Statements of Comprehensive Income (Loss) (Going Concern Basis) for the Two and Eight Months Ended August 31, 2020 and the Three and Nine Months Ended September 30, 2019
   
Condensed Consolidated Statements of Stockholders Equity (Going Concern Basis) for the Eight Months Ended August 31, 2020 and the Nine Months Ended September 30, 2019
 Condensed Consolidated Statements of Cash Flows (Going Concern Basis) for the Eight Months Ended August 31, 2020 and the Nine Months Ended September 30, 2019
   
 Notes to the Condensed Consolidated Financial Statements
   
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
ITEM 4.CONTROLS AND PROCEDURES
 
PART II - OTHER INFORMATION
   
ITEM 1.LEGAL PROCEEDINGS
   
ITEM 1A.RISK FACTORS
   
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
ITEM 4.MINE SAFETY DISCLOSURES
ITEM 5.OTHER INFORMATION
ITEM 6.EXHIBITS
  
SIGNATURES
2


We own or have rights to certain trademarks, trade names, copyrights and other intellectual property used in our business, including PDL BioPharma and the PDL logo, each of which is considered a trademark. All other company names, product names, trade names and trademarks included in this Quarterly Report on Form 10-Q are trademarks, registered trademarks or trade names of their respective owners.
3


PART I. FINANCIAL INFORMATION

ITEM  1.         FINANCIAL STATEMENTS

PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENT OF NET ASSETS
(Unaudited)
(In thousands)

(Proforma)
September 30,September 30,
 20202020
(Under Liquidation Basis of Accounting)
 (Note 1)(Excluding LENSAR - Note 21)
Assets 
Cash and cash equivalents$125,736 $83,035 
Accounts receivable8,323 5,894 
Receivables from asset sales39,389 39,389 
Notes receivable53,070 52,081 
Inventory13,685  
Royalty assets227,738 227,738 
Income tax receivable88,778 76,949 
Property and equipment783  
Equipment under lease3,033  
Intangible assets42,113  
Other assets12,462 7,599 
Total assets$615,110 $492,685 
Liabilities 
Accounts payable$3,639 $1,290 
Accrued liabilities, LENSAR7,678  
Uncertain tax positions34,942 34,942 
Compensation and benefit costs21,219 21,219 
Lease guarantee10,700 10,700 
Costs to sell assets5,007 5,007 
Other accrued liquidation costs14,770 14,770 
Convertible notes payable15,238 15,238 
Total liabilities$113,193 $103,166 
Net assets in liquidation$501,917 $389,519 
See accompanying notes.
4


PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts) 
December 31,
 2019
(Note 1)
 (Under Going Concern Basis of Accounting)
Assets 
Current assets: 
Cash and cash equivalents$168,982 
Accounts receivable, net6,559 
Notes receivable52,583 
Inventory8,061 
Assets held for sale (Note 3)70,366 
Prepaid and other current assets7,344 
Total current assets313,895 
Property and equipment, net2,560 
Notes receivable, long-term827 
Intangible assets, net13,186 
Long-term assets held for sale (Note 3)377,491 
Other assets9,247 
Total assets$717,206 
Liabilities and Stockholders’ Equity 
Current liabilities: 
Accounts payable$2,675 
Accrued liabilities11,923 
Liabilities held for sale (Note 3)31,095 
Total current liabilities45,693 
Convertible notes payable27,250 
Liabilities held for sale, long-term (Note 3)120 
Other long-term liabilities50,865 
Total liabilities123,928 
Commitments and contingencies (Note 14)
Stockholders’ equity: 
Preferred stock, par value $0.01 per share, 10,000 shares authorized; no shares issued and outstanding 
Common stock, par value $0.01 per share, 350,000 shares authorized;124,303 shares issued and outstanding at December 31, 20191,243 
Additional paid-in capital(78,875)
Retained earnings670,832 
Total PDL stockholders’ equity593,200 
Noncontrolling interests78 
Total stockholders’ equity593,278 
Total liabilities and stockholders’ equity$717,206 

See accompanying notes.
5



PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
(In thousands)

(Note 1)
(Under Liquidation Basis of Accounting)
Net assets in liquidation, at September 1, 2020$446,553 
Changes in assets and liabilities in liquidation:
Decrease in liquidation value of royalty assets(3,944)
Decrease in receivables from asset sales(9,078)
Increase in liquidation value of notes receivable7,460 
Increase in other assets1,768 
Increase in income tax receivable53,106 
Decrease in estimated costs to sell assets3,048 
Decrease in uncertain tax positions4,414 
Increase in estimated liquidation costs(413)
Increase in other liabilities(997)
Total changes in net assets in liquidation55,364 
Net assets in liquidation, at September 30, 2020$501,917 
See accompanying notes.
6



PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Two Months EndedThree Months EndedEight Months EndedNine Months Ended
 August 31,September 30,August 31,September 30,
 2020201920202019
(Under Going Concern Basis of Accounting - Note 1)
Revenues  
Product revenue, net$2,831 $5,856 $10,946 $15,860 
Lease revenue703 1,322 2,139 3,854 
Service revenue544 898 2,126 2,510 
Royalties from Queen et al. patents   9 
License and other37 (45)110 (48)
Total revenues4,115 8,031 15,321 22,185 
Operating expenses    
Cost of product revenue (excluding intangible asset amortization)1,127 4,765 6,626 13,494 
Amortization of intangible assets204 321 841 983 
Severance and retention2,400  24,713  
General and administrative7,224 10,062 29,695 27,067 
Sales and marketing835 1,545 3,322 4,980 
Research and development1,053 4,310 4,374 6,106 
Total operating expenses12,843 21,003 69,571 52,630 
Operating loss from continuing operations(8,728)(12,972)(54,250)(30,445)
Non-operating expense, net    
Interest and other income, net26 1,460 608 4,984 
Interest expense(210)(3,011)(996)(8,950)
Loss on investment (5,576) (5,576) 
Gain on sale of intangible assets 3,476  3,476 
Loss on extinguishment of convertible notes (3,900)(606)(3,900)
Total non-operating expense, net(5,760)(1,975)(6,570)(4,390)
Loss from continuing operations before income taxes(14,488)(14,947)(60,820)(34,835)
Income tax benefit from continuing operations(3,636)(3,136)(17,780)(6,558)
Net loss from continuing operations(10,852)(11,811)(43,040)(28,277)
Income (loss) from discontinued operations before income taxes (including loss on classification as held for sale of zero and $28,904 for the two and eight months ended August 31, 2020, respectively)191 (4,962)(57,921)18,555 
Income tax (benefit) expense of discontinued operations(15,045)1,193 (23,006)6,141 
Income (loss) from discontinued operations15,236 (6,155)(34,915)12,414 
Net income (loss) 4,384 (17,966)(77,955)(15,863)
Less: Net loss attributable to noncontrolling interests(14)(182)(659)(340)
Net income (loss) attributable to PDL’s shareholders$4,398 $(17,784)$(77,296)$(15,523)
Net income (loss) per share - basic    
Net loss from continuing operations$(0.10)$(0.10)$(0.36)$(0.23)
Net income (loss) from discontinued operations0.14 (0.06)(0.30)0.10 
Net income (loss) attributable to PDL’s shareholders$0.04 $(0.16)$(0.66)$(0.13)
Net income (loss) per share - diluted
Net loss from continuing operations$(0.10)$(0.10)$(0.36)$(0.23)
Net income (loss) from discontinued operations0.14 (0.06)(0.30)0.10 
Net income (loss) attributable to PDL’s shareholders$0.04 $(0.16)$(0.66)$(0.13)
Weighted-average shares outstanding    
Basic113,889 112,986 118,001 119,966 
Diluted113,889 112,986 118,001 119,966 
See accompanying notes.
7


PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
Two Months EndedThree Months EndedEight Months EndedNine Months Ended
 August 31,September 30,August 31,September 30,
 2020201920202019
(Under Going Concern Basis of Accounting - Note 1)
Net income (loss) $4,384 $(17,966)$(77,955)$(15,863)
Other comprehensive income (loss), net of tax    
Total other comprehensive income (loss), net of tax    
Comprehensive income (loss)4,384 (17,966)(77,955)(15,863)
Less: Comprehensive loss attributable to noncontrolling interests(14)(182)(659)(340)
Comprehensive income (loss) attributable to PDL’s shareholders$4,398 $(17,784)$(77,296)$(15,523)

See accompanying notes.
8


PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)
PDL Stockholders’ Equity
Common StockTreasury StockAdditional
Paid-In
Capital
Retained EarningsNon-controlling InterestTotal
Stockholders’ Equity
SharesAmount
(Under Going Concern Basis of Accounting - Note 1)
Balance at December 31, 2019124,302,616 $1,243 $ $(78,875)$670,832 $78 $593,278 
Issuance of common stock, net of forfeitures1,781,197 18 — (18)— —  
Stock-based compensation expense— — — 14,453 — — 14,453 
Repurchase and retirement of common stock(5,564,841)(56)(2,244)— (17,978)— (20,278)
Transfer of subsidiary shares to non-controlling interest— — — 683 — 100 783 
Extinguishment of convertible notes— — — (3,911)— — (3,911)
Capped call transactions— — — 801 — — 801 
Comprehensive loss:
Net loss— — — — (31,723)(288)(32,011)
Total comprehensive loss— — — — — — (32,011)
Balance at March 31, 2020120,518,972 1,205 (2,244)(66,867)621,131 (110)553,115 
Issuance of common stock, net of forfeitures183,903 2 — 458 — — 460 
Stock-based compensation expense— — — 245 — — 245 
Repurchase and retirement of common stock(6,758,147)(68)2,244 — (21,267)— (19,091)
Noncash liquidating distribution (0.11591985 shares of Evofem Biosciences, Inc. common stock distributed per share of the Company’s common stock )— — — — (64,400)— (64,400)
Comprehensive loss:
Net loss— — — — (49,971)(357)(50,328)
Total comprehensive loss— — — — — — (50,328)
Balance at June 30, 2020113,944,728 1,139  (66,164)485,493 (467)420,001 
Issuance of common stock, net of forfeitures166,630 2 — (2)— —  
Stock-based compensation expense— — — 829 — — 829 
Comprehensive loss:
Net income (loss)— — — — 4,398 (14)4,384 
Total comprehensive income— — — — — — 4,384 
Balance at August 31, 2020114,111,358 $1,141 $ $(65,337)$489,891 $(481)$425,214 

See accompanying notes.
9


PDL Stockholders’ Equity
Common StockTreasury StockAdditional
Paid-In
Capital
Retained EarningsNon-controlling InterestTotal
Stockholders’ Equity
SharesAmount
(Under Going Concern Basis of Accounting - Note 1)
Balance at December 31, 2018136,512,522 $1,365 $(2,103)$(98,030)$828,547 $ $729,779 
Issuance of common stock, net of forfeitures764,785 8 — (8)— —  
Stock-based compensation expense— — — 1,169 — — 1,169 
Repurchase and retirement of common stock(13,460,164)(135)613 — (44,831)— (44,353)
Transfer of subsidiary shares to non-controlling interest— — — — — 572 572 
Comprehensive income:
Net income— — — — 6,680 (63)6,617 
Total comprehensive income— — — — — — 6,617 
Balance at March 31, 2019123,817,143 1,238 (1,490)(96,869)790,396 509 693,784 
Issuance of common stock, net of forfeitures37,996 — — — — —  
Stock-based compensation expense— — — 2,175 — — 2,175 
Repurchase and retirement of common stock(8,185,970)(81)944 — (26,897)— (26,034)
Transfer of subsidiary shares to non-controlling interest— — — 229 — (216)13 
Comprehensive loss:
Net loss— — — — (4,419)(95)(4,514)
Total comprehensive loss— — — — — — (4,514)
Balance at June 30, 2019115,669,169 1,157 (546)(94,465)759,080 198 665,424 
Issuance of common stock, net of forfeitures(18,061)— — — 8 — 8 
Stock-based compensation expense— — — 2,059 — — 2,059 
Repurchase and retirement of common stock(1,466,498)(15)546 — (4,609)— (4,078)
Convertible Notes Exchange— — — (8,013)— — (8,013)
Comprehensive loss:
Net loss— — — — (17,784)(182)(17,966)
Total comprehensive loss— — — — — — (17,966)
Balance at September 30, 2019114,184,610 $1,142 $ $(100,419)$736,695 $16 $637,434 

See accompanying notes.
10


PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 Eight Months Ended August 31,Nine Months Ended September 30,
 20202019
(Under Going Concern Basis of Accounting - Note 1)
Cash flows from operating activities  
Net loss $(77,955)$(15,863)
Less: (Loss) income from discontinued operations(34,915)12,414 
Net loss from continuing operations(43,040)(28,277)
Adjustments to reconcile net loss to net cash used in operating activities:
  
Amortization of convertible notes conversion option and debt issuance costs622 5,776 
Accreted interest on convertible note principal44 79 
Amortization of intangible assets841 983 
Amortization of right-of-use assets497 544 
Loss on investment5,576  
Change in fair value of derivative assets110 (48)
Gain on sale of intangible assets (3,476)
Loss on extinguishment of convertible notes606 — 
Other amortization and depreciation1,017 2,124 
Loss on exchange of convertible notes— 3,900 
Loss on disposal of property and equipment331  
Stock-based compensation expense18,802 5,192 
Deferred income taxes(18,723)8,936 
Changes in assets and liabilities:  
Accounts receivable3,344 1,462 
Prepaid and other current assets(29,875)1,706 
Inventory(8,062)(3,079)
Other assets306 337 
Accounts payable371 6,502 
Accrued liabilities5,762 3,518 
Other long-term liabilities1,030 493 
Net cash (used in) provided by operating activities - continuing operations(60,441)6,672 
Net cash provided by (used in) operating activities - discontinued operations28,318 (19,971)
Cash flows from investing activities  
Settlement agreement cash received7,500  
Proceeds from the sale of intangible assets 5,000 
Purchase of intangible assets (1,700)
Property and equipment, net purchases(221)(504)
Net cash provided by investing activities - continuing operations7,279 2,796 
Net cash provided by (used in) investing activities - discontinued operations38,966 (1,710)
Cash flows from financing activities  
Proceeds from the exercise of stock options461  
Repurchase of convertible notes(18,845) 
Payment to exchange convertible notes (7,451)
Net receipts (payments) for capped call transactions801 (3,694)
Payment of contingent consideration (1,071)
Repurchase of Company common stock(39,373)(75,891)
Net settlement of stock-based compensation awards(3,462) 
Net cash used in financing activities - continuing operations(60,418)(88,107)
Net cash used in financing activities - discontinued operations(359) 
Net decrease in cash and cash equivalents(46,655)(100,320)
Cash and cash equivalents at beginning of the period193,451 394,590 
Cash and cash equivalents at end of the period146,796 294,270 
Less: Cash and cash equivalents of discontinued operations25,060 16,982 
Cash and cash equivalents of continuing operations at end of period$121,736 $277,288 
Supplemental cash flow information  
Cash refunded for income taxes$(4)$(2,685)
Cash paid for interest$298 $2,063 
Noncash liquidating distribution$64,400 $ 
See accompanying notes.
11

PDL BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. Summary of Significant Accounting Policies
 
Basis of Presentation
 
Throughout its history, the mission of PDL BioPharma, Inc. and its subsidiaries (collectively, the “Company” or “PDL”)
has been to improve the lives of patients by aiding in the successful development of innovative therapeutics and healthcare technologies. PDL was founded in 1986 as Protein Design Labs, Inc. when it pioneered the humanization of monoclonal antibodies, enabling the discovery of a new generation of targeted treatments that have had a profound impact on patients living with different cancers as well as a variety of other debilitating diseases. In 2006, the Company changed its name to PDL BioPharma, Inc.

Historically, the Company generated a substantial portion of its revenues through license agreements related to patents covering the humanization of antibodies, which it refers to as the Queen et al. patents. In 2012, the Company began providing alternative sources of capital through royalty monetizations and debt facilities, and, in 2016, the Company began acquiring commercial-stage products and launching specialized companies dedicated to the commercialization of these products first with its acquisition of branded prescription pharmaceutical drugs from Novartis AG, Novartis Pharma AG and Speedel Holding AG (collectively, “Novartis”) in 2016 and, in 2017, with the acquisition of LENSAR, Inc. (“LENSAR”), a medical device ophthalmology equipment manufacturing company. In 2019, it entered into a securities purchase agreement with Evofem Biosciences, Inc. (“Evofem”), pursuant to which it invested $60.0 million in a private placement of securities structured in two tranches. Evofem is a publicly-traded commercial-stage biopharmaceutical company committed to developing and commercializing innovative products to address unmet needs in women’s sexual and reproductive health. Evofem is leveraging its proprietary Multipurpose Vaginal pH Regulator (MVP-R™) platform for PhexxiTM (L-lactic acid, citric acid and potassium bitartrate) for hormone-free birth control.

Based on the composition of its investment portfolio, the Company historically structured its operations in four segments designated as Medical Devices, Strategic Positions, Pharmaceutical and Income Generating Assets. Following is a summary of the Company’s segments including those that have been classified as discontinued operations:

The Company’s Medical Devices segment consists of revenue derived from the LENSAR® Laser System sales made by the Company’s subsidiary, LENSAR which may include equipment, Patient Interface Devices (“PIDs” or “consumables”), procedure licenses, training, installation, warranty and maintenance agreements.
The Company’s Strategic Positions segment consisted of an investment in Evofem, which included shares of common stock and warrants to purchase shares of common stock.
The Company’s Pharmaceutical segment consisted of revenue derived from branded prescription medicine products sold under the name Tekturna® and Tekturna HCT® in the United States and Rasilez® and Rasilez HCT® in the rest of the world and an authorized generic form of Tekturna sold in the United States (collectively, the “Noden Products”). The branded prescription Noden Products were acquired from Novartis in July 2016 (the “Noden Transaction”) by the Company’s wholly-owned subsidiary, Noden Pharma DAC (“Noden DAC”).
The Company’s Income Generating Assets segment consists of revenue derived from (i) notes and other long-term receivables, (ii) equity investments and (iii) royalties from issued patents in the United States and elsewhere covering the humanization of antibodies (“Queen et al. patents”).

In September 2019, the Company engaged financial and legal advisors and initiated a review of its strategy. This review was completed in December 2019 at which time the Company announced that it decided to halt the execution of its growth strategy, cease additional strategic transactions and investments and instead pursue a formal process to unlock value by monetizing its assets and returning net proceeds to stockholders (the “monetization strategy”). Pursuant to the Company’s monetization strategy, the Company does not expect to enter into any additional strategic investments. The Company further announced in December 2019 that it would explore a variety of potential transactions in connection with the monetization strategy, including a whole Company sale, divestiture of assets, spin-offs of operating entities, merger opportunities or a combination thereof. Over the subsequent months, the Company’s Board of Directors (the “Board”) and management analyzed, together with outside financial and legal advisors, how to best capture value pursuant to the monetization strategy and best return the value of the assets in its portfolio to its stockholders.

12

PDL BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

During the first quarter of 2020, the Board approved a plan of complete liquidation (the “Plan of Liquidation”) and passed a resolution to seek stockholder approval to dissolve the Company as permitted by the General Corporation Law of the State of Delaware (the “DGCL”). The proposal was approved by stockholders on August 19, 2020 at the Company’s 2020 Annual Meeting of Stockholders. On November 5, 2020, our Board approved filing a Certificate of Dissolution with the Secretary of State of Delaware on January 4, 2021 (the “Final Record Date”) and proceeding to complete the dissolution process for the Company in accordance with the Delaware General Corporate Law. The liquidation and dissolution process will take a minimum of three years. However, the timing may be extended due to circumstances such as pending litigation or other factors that may affect the ability of the Company to wind down its business. Upon filing the Certificate of Dissolution on January 4, 2021 (the Final Record Date), we will close our stock transfer books. After such time, we will not record any further transfers of our common stock, except pursuant to the provisions of a deceased stockholder’s will, intestate succession, or by operation of law and we will not issue any new stock certificates, other than replacement certificates. In addition, after the Final Record Date, we will not issue any shares of our common stock upon exercise of outstanding stock options. As a result of the closing of our transfer books, it is anticipated that distributions, if any, made in connection with the dissolution will be made pro rata to the same stockholders of record as the stockholders of record as of the Final Record Date, and it is anticipated that no further trading of our common stock will occur after the Final Record Date. In accordance with our dissolution plan, we intend to begin the voluntary delisting process from the Nasdaq Stock Market exchange so that such delisting will occur at market close on December 31, 2020 and we do not anticipate transferring into OTC trading.

Pursuant to the Company’s monetization strategy, the Company explored a variety of potential transactions, including a whole Company sale, divestiture of assets, spin-offs of operating entities, merger opportunities or a combination. During the quarter ended March 31, 2020, the Company’s Pharmaceutical segment and the royalty right assets within the Income Generating Assets segment met the criteria to be classified as held for sale. Those investments are reported as discontinued operations on the Condensed Consolidated Statements of Operations for the two and eight months ended August 31, 2020 and for the three and nine months ended September 30, 2019, and as Assets and Liabilities held for sale on the Condensed Consolidated Balance Sheet as of December 31, 2019.

During the quarter ended June 30, 2020, the Evofem common stock held within the Strategic Positions segment was distributed to the Company’s stockholders and, as a result, the Strategic Positions segment and all investments included in the segment met the criteria to be classified as discontinued operations. Therefore, the Strategic Positions segment is also presented as discontinued operations on the Condensed Consolidated Statements of Operations. The Company continues to hold warrants to purchase shares of Evofem’s common stock.

In September 2020, the Company sold the Noden business, including its Noden Pharma USA, Inc. subsidiary (“Noden USA” and, together with Noden DAC, “Noden”) to a third party. Separately, the Company also sold three royalty right assets in August 2020 to a third party.

As a result of the approval of the Company’s stockholders to pursue dissolution of the Company pursuant to a plan of dissolution, the Company’s basis of accounting transitioned, effective September 1, 2020, from the going concern basis of accounting (“Going Concern Basis”) to the liquidation basis of accounting (“Liquidation Basis”) in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States. Under the Liquidation Basis, all assets are valued at the estimated amount of cash or other consideration that the Company expects to collect. Liabilities with specified, contractual amounts are measured in accordance with applicable GAAP and all other liabilities are stated at their estimated settlement amounts over the remaining estimated liquidation period. The assets and liabilities of LENSAR included in the Statement of Net Assets reflect the expected distribution value. LENSAR was spun-off on October 1, 2020. See Note 21, Subsequent Events, for additional information.

The accompanying unaudited Condensed Consolidated Financial Statements of PDL have been prepared in accordance with GAAP for interim financial information. The financial statements include all adjustments that management of the Company believes are necessary for a fair statement of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year.
 
The accompanying unaudited Condensed Consolidated Financial Statements and related financial information should be read in conjunction with the Company’s audited Consolidated Financial Statements and the related notes thereto for the fiscal year ended December 31, 2019, included in its Current Report on Form 8-K, filed with the Securities and Exchange Commission (“SEC”) on June 29, 2020, which re-casts certain historical financial information from our 2019 Annual Report on Form 10-K to present the Pharmaceutical segment and the royalty right assets within the Income Generating Assets segment as
13

PDL BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

discontinued operations for all periods presented. The Condensed Consolidated Balance Sheet at December 31, 2019, included herein, has been derived from the audited Consolidated Financial Statements at that date, as adjusted to conform with the financial statement presentation as of and for the two and eight months ended August 31, 2020 as discussed in Note 3, Discontinued Operations Classified as Assets Held for Sale under Going Concern Basis, but does not include all disclosures required by GAAP.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying Notes to the Condensed Consolidated Financial Statements. The accounting estimates that require management’s most significant, difficult and subjective judgments include the estimated sales proceeds of our assets in liquidation and estimated settlement amounts of our liabilities as well as the estimated revenue and operating expenses during dissolution that are projected under the Liquidation Basis. Significant estimates include, the valuation of royalty rights, product revenue recognition and allowances for customer rebates, the valuation of notes receivable and inventory, the assessment of recoverability of intangible assets and their estimated useful lives, the valuation and recognition of stock-based compensation, the recognition and measurement of current and deferred income tax assets and liabilities, including amounts recoverable under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, and the valuation of warrants to acquire shares of common stock. Furthermore, the impact on accounting estimates and judgments on the Company’s financial condition and results of operations due to COVID-19 has introduced additional uncertainties. Actual results may differ materially from those estimates.

The Condensed Consolidated Financial Statements included herein include the accounts of the Company and its wholly-owned subsidiaries (up to the date of sale) and majority-owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation.

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

The worldwide spread of coronavirus, or COVID-19, has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of COVID-19 and the extent to which COVID-19 impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict. If the financial markets or the overall economy are impacted for an extended period, the Company’s liquidity, revenues and assets may be adversely affected.

Significant Accounting Policies

Liquidation Basis of Accounting

Under the Liquidation Basis, the values of the Company's assets and liabilities include management's estimate of income to be generated from the remaining assets until the anticipated date of sale, estimated sales proceeds, estimates for operating expenses and expected amounts required to settle liabilities. The estimated liquidation values for assets derived from future revenue streams and asset sales and the settlement of estimated liabilities are reflected on the Condensed Consolidated Statement of Net Assets in Liquidation. The actual amounts realized could differ materially from the estimated amounts.

Assets Held for Sale

Assets and liabilities are classified as held for sale when all of the following criteria for a plan of sale have been met: (1) management, having the authority to approve the action, commits to a plan to sell the assets; (2) the assets are available for immediate sale, in their present condition, subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated; (4) the sale of the assets is probable and is expected to be completed within one year; (5) the assets are being actively marketed for a price that is reasonable in relation to their current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. When all of these criteria have been met, the assets and liabilities are classified as held for sale in the balance sheet. Assets classified as held for sale are reported at the lower of their carrying value or fair value less costs to sell. Depreciation and amortization of assets ceases upon designation as held for sale. The assets and liabilities held for sale as of December 31, 2019 are recorded on the Company’s Condensed Consolidated Balance Sheet as Assets held for sale and Liabilities held for sale, respectively.
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PDL BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


Discontinued Operations

Discontinued operations comprise those activities that were disposed of during the period or which were classified as held for sale at the end of the period, represent a separate major line of business or geographical area that can be clearly distinguished for operational and financial reporting purposes and represent a strategic shift that has or will have a major effect on the Company’s operations and financial results. The profits and losses are presented on the Condensed Consolidated Statements of Operations as discontinued operations. See Note 3, Discontinued Operations Classified as Assets Held for Sale under Going Concern Basis, for additional information.

Severance and retention

After the Company announced its monetization strategy, it recognized that its ability to execute on its plan and optimize returns to its stockholders depended to a large extent on its ability to retain the necessary expertise to effectively transact with respect to its assets. On December 21, 2019, the Compensation Committee of the Board adopted a Wind Down Retention Plan in which the Company’s executive officers and other employees who are participants in the Company’s Severance Plan are eligible to participate. Under the Wind Down Retention Plan, participants are eligible to earn a retention benefit in consideration for their continued employment with the Company. The Wind Down Retention benefits are equivalent to previously disclosed compensation payments contemplated in connection with a change in control under the Company’s existing Severance Plan. Under the Wind Down Retention Plan, the Company is currently obligated to pay a retention benefit to each participant upon termination of the participant’s employment with the Company either by the Company without cause or by the participant for good reason. The retention benefit, if paid, would be in lieu of (and not in addition to) any other severance compensation that could become payable to the participant under the Company’s Severance Plan. In connection with the adoption of the Wind Down Retention Plan, a severance liability was being recorded over the remaining service period for the participating employees under the Going Concern Basis. Upon the adoption of the Liquidation Basis on September 1, 2020, all remaining estimated severance and retention costs were accrued. As of September 30, 2020, the Company has recorded a severance liability of $10.9 million, which is reported as Compensation and benefit costs on the Company’s Condensed Consolidated Statement of Net Assets. Expenses associated with severance payments and accruals are reflected in Severance and retention on the Company’s Condensed Consolidated Statements of Operations for the two and eight months ended August 31, 2020.

The Wind Down Retention Plan also provides that, consistent with the existing terms of the Company’s Amended and Restated 2005 Equity Incentive Plan (the “Equity Plan”), the vesting of all outstanding equity awards held by participants as of the date the Wind Down Retention Plan was adopted will be accelerated upon the earlier of: (i) a termination of the participant’s employment with the Company either by the Company without cause or by the participant for good reason or (ii) the consummation of a change in control (as defined in the Equity Plan) of the Company. In addition, the post-termination exercise period for all outstanding stock options will be extended until their expiration date. In connection with the Board adopting the Plan of Liquidation in the first quarter of 2020, all of the outstanding and unvested stock options and restricted stock granted to the Company’s employees and executive officers, with the exception of certain outstanding awards under the 2016/20 Long-Term Incentive Plan, accelerated and vested under the change in control definition in the Equity Plan. The expense associated with the accelerated vesting, totaling $15.7 million is reported as Severance and retention on the Company’s Condensed Consolidated Statements of Operations for the two and eight months ended August 31, 2020.

For a discussion of other accounting policies, refer to the Company’s Current Report on Form 8-K for the fiscal year ended December 31, 2019. Summarized below are the accounting pronouncements and policies adopted subsequent to December 31, 2019 in addition to those described above.

Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The guidance amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses. The Company adopted ASU No. 2016-13 on January 1, 2020 using a modified retrospective approach. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. As a consequence of adopting ASU 2016-13, the Company’s accounts receivable accounting policy has been updated, as follows:

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PDL BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Accounts and Notes Receivable

The Company makes estimates of the collectability of accounts receivable. In doing so, the Company analyzes historical bad debt trends, customer credit worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for credit losses. Amounts are charged off against the allowance for credit losses when the Company determines that recovery is unlikely and the Company ceases collection efforts. The Company applies the practical expedient for its collateral-dependent notes receivable. Estimated credit losses are based on the fair value of the collateral (less costs to sell, as applicable). 

In April 2020, the FASB issued a staff question-and-answer document, “Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic” (the “COVID-19 Q&A”), to address certain frequently-asked questions pertaining to lease concessions arising from the effects of the COVID-19 pandemic. Existing lease guidance requires entities to determine if a lease concession was a result of a new arrangement reached with the lessee (which would be addressed under the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (which would not fall under the lease modification framework). The COVID-19 Q&A clarifies that entities may elect to not evaluate whether lease-related relief granted in light of the effects of COVID-19 is a lease or obligations of the lease. This election is available for concessions that result in the total payments required by the modified contract being substantially the same or less than the total payments required by the original contract.

As a result of the COVID-19 pandemic, LENSAR entered into agreements with 23 customers through which LENSAR agreed to waive monthly rental and minimum monthly license fees ranging from one to four months for an aggregate of $0.9 million of revenue for the eight months ended August 31, 2020, consisting of $0.5 million in Product revenue, $0.3 million in Lease revenue, and $0.1 million in Service revenue. In return for these concessions the related contracts were extended by the same number of months waived. No amounts of accounts receivable or notes receivable were deemed uncollectible due to COVID-19 during the 2020 periods presented herein; however, the Company considered the effects of COVID-19 in estimating its credit losses for the period.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement. The new guidance modifies disclosure requirements related to fair value measurement. The Company adopted ASU No. 2018-13 on January 1, 2020. The adoption did not have an effect on the Consolidated Financial Statements on the adoption date and no adjustment to prior year Consolidated Financial Statements was required.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software. The new guidance reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The Company adopted ASU No. 2018-15 on January 1, 2020 using the prospective transition option. The adoption did not have an effect on the Consolidated Financial Statements on the adoption date and no adjustment to prior year Consolidated Financial Statements was required.

Recently Issued Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. For public companies, the amendments in ASU No. 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early