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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 September 30, 2020
OR
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-38080
Biohaven Pharmaceutical Holding Company Ltd.
(Exact Name of Registrant as Specified in its Charter)
British Virgin Islands Not applicable
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
c/o Biohaven Pharmaceuticals, Inc.
215 Church Street, New Haven, CT
 06510
(Address of principal executive offices) (Zip Code)
(203) 404-0410
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Shares, no par valueBHVNNew York Stock Exchange

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 filer
Non-accelerated filerSmall 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 7(a)(2)(B) of the Securities 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 November 5, 2020, the registrant had 59,939,166 common shares, without par value per share, outstanding.
1



 
 Table of Contents
Page
Part IFinancial Information 
Item 1.
Item 2.
Item 3.
Item 4.
Part II
Other Information
 
Item 1.
Item 1A.
Item 2.
Item 6.








Form 10-Q Table of Contents
Part 1.     Financial Information

Item 1.    Condensed Consolidated Financial Statements


Index to Condensed Consolidated Financial Statements
Page
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019
Condensed Consolidated Statements of Operations for three and nine months ended September 30, 2020 and 2019
Condensed Consolidated Statements of Comprehensive Loss for three and nine months ended September 30, 2020 and 2019
Condensed Consolidated Statements of Cash Flows for nine months ended September 30, 2020 and 2019
Notes to Condensed Consolidated Financial Statements

1

Index to Condensed Consolidated Financial Statements

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
September 30, 2020December 31, 2019
(Unaudited)
Assets
Current assets:
Cash and cash equivalents$316,231 $316,727 
Marketable securities229,983  
Trade receivables, net79,522  
Inventories20,131  
Prepaid expenses and other current assets62,418 11,554 
Total current assets708,285 328,281 
Property and equipment, net8,802 8,152 
Equity method investment1,866 5,338 
Intangible assets, net39,811  
Other assets23,251 2,493 
Total assets$782,015 $344,264 
Liabilities and Shareholders’ Equity (Deficit)
Current liabilities:
Accounts payable$43,976 $14,071 
Accrued expenses and other current liabilities126,267 52,102 
Current portion of mandatorily redeemable preferred shares46,875  
Total current liabilities217,118 66,173 
Long-term debt264,135  
Liability related to sale of future royalties, net318,594 144,111 
Mandatorily redeemable preferred shares, net119,456 103,646 
Derivative liabilities1,940 37,690 
Other long-term liabilities14,590 68 
Total liabilities935,833 351,688 
Commitments and contingencies (Note 19)
Contingently redeemable non-controlling interests60,000  
Shareholders’ Equity (Deficit):
Common shares, no par value; 200,000,000 shares authorized as of September 30, 2020 and December 31, 2019; 59,707,780 and 52,385,283 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
1,205,384 881,426 
Additional paid-in capital103,419 83,523 
Accumulated other comprehensive income251  
Accumulated deficit(1,521,433)(972,373)
Total shareholders’ equity (deficit) attributable to Biohaven Pharmaceutical Holding Company Ltd.(212,379)(7,424)
Non-controlling interests(1,439) 
Total shareholders' equity (deficit)(213,818)(7,424)
Total liabilities and shareholders' equity (deficit)$782,015 $344,264 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
2

Index to Condensed Consolidated Financial Statements
BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Product revenue, net$17,664 $ $28,513 $ 
Cost of goods sold4,244  7,726  
Gross profit13,420  20,787  
Operating expenses:
Research and development57,044 61,674 155,539 278,654 
Selling, general and administrative119,533 28,778 339,936 65,467 
Total operating expenses176,577 90,452 495,475 344,121 
Loss from operations(163,157)(90,452)(474,688)(344,121)
Other income (expense):
Interest expense(4,608) (4,835) 
Non-cash interest expense on mandatorily redeemable preferred shares(7,310)(4,378)(19,864)(8,333)
Non-cash interest expense on liability related to sale of future royalties(11,955)(7,312)(31,950)(19,284)
Change in fair value of derivatives(1,940)(1,717)(7,071)(2,980)
Loss from equity method investment(607)(1,993)(3,472)(4,308)
Other(3,062)8 (3,278)(25)
Total other expense, net(29,482)(15,392)(70,470)(34,930)
Loss before provision for income taxes(192,639)(105,844)(545,158)(379,051)
Provision for income taxes3,989 323 5,341 490 
Net loss(196,628)(106,167)(550,499)(379,541)
Less: Net loss attributable to non-controlling interests(1,439) (1,439) 
Net loss attributable to Biohaven Pharmaceutical Holding Company Ltd.$(195,189)$(106,167)$(549,060)$(379,541)
Net loss per share attributable to Biohaven Pharmaceutical Holding Company Ltd. — basic and diluted$(3.27)$(2.04)$(9.42)$(8.04)
Weighted average common shares outstanding—basic and diluted59,677,989 52,077,240 58,282,697 47,210,615 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

Index to Condensed Consolidated Financial Statements
BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Amounts in thousands, except share and per share amounts)
(Unaudited)


Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net loss$(196,628)$(106,167)$(550,499)$(379,541)
Other comprehensive income, net of tax:
Foreign currency translation adjustments324  324  
Net unrealized losses related to available-for-sale debt securities(73) (73) 
Other comprehensive income251  251  
Comprehensive loss(196,377)(106,167)(550,248)(379,541)
Less: comprehensive loss attributable to non-controlling interests(1,439) (1,439) 
Comprehensive loss attributable to Biohaven Pharmaceutical Holding Company Ltd.$(194,938)$(106,167)$(548,809)$(379,541)

The accompanying notes are an integral part of these condensed consolidated financial statements.
4

Index to Condensed Consolidated Financial Statements
BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 Nine Months Ended September 30,
 20202019
Cash flows from operating activities:
Net loss$(550,499)$(379,541)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash share-based compensation expense43,206 34,855 
Non-cash interest expense on mandatorily redeemable preferred shares19,864 8,333 
Non-cash interest expense on liability related to sale of future royalties31,950 19,284 
Non-cash expense related to license agreement 5,646 
Change in fair value of derivatives7,071 2,980 
Loss from equity method investment3,472 4,308 
Depreciation and amortization4,625 437 
Other non-cash items80  
Changes in operating assets and liabilities:
Trade receivables, net(79,522) 
Inventories(18,124) 
Prepaid expenses and other current assets(46,088)1,494 
Other assets(45)(352)
Accounts payable27,898 810 
Accrued expenses and other current liabilities65,410 26,862 
Other long-term liabilities62 (2,000)
Net cash used in operating activities(490,641)(276,884)
Cash flows from investing activities:
Purchases of marketable securities(230,233) 
Purchases of property and equipment(1,501)(1,637)
Payments for leasehold improvements(1,600) 
Payments for intangible assets(41,500) 
Net cash used in investing activities(274,834)(1,637)
Cash flows from financing activities:
Proceeds from issuance of long-term debt264,000  
Proceeds from issuance of common shares283,333 303,221 
Proceeds from sale of future royalties147,476  
Proceeds from sale of contingently redeemable non-controlling interests60,000  
Proceeds from obligation to perform R&D services2,124  
Proceeds from issuance of mandatorily redeemable preferred shares 125,000 
Proceeds from exercise of warrants 1,998 
Payments of issuance costs(2,300)(1,150)
Payment of term loan commitment fee(2,000) 
Proceeds from exercise of stock options17,815 2,777 
Repayment of principal for finance leases(991) 
Net cash provided by financing activities769,457 431,846 
Effect of exchange rate changes on cash, cash equivalents and restricted cash324  
Net increase in cash, cash equivalents and restricted cash4,306 153,325 
Cash, cash equivalents and restricted cash at beginning of period317,727 264,249 
Cash, cash equivalents and restricted cash at end of period$322,033 $417,574 
Supplemental disclosure of cash flow information:
Cash paid for interest$2,564 $ 
Cash paid for income taxes$1,406 $835 

The accompanying notes are an integral part of these condensed consolidated financial statements.
5

Index to Condensed Consolidated Financial Statements

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)

1.   Nature of the Business and Basis of Presentation
Biohaven Pharmaceutical Holding Company Ltd. (“we,” “us”, "our," "Biohaven" or the “Company”) was incorporated in Tortola, British Virgin Islands in September 2013. We are a biopharmaceutical company with a portfolio of innovative product candidates targeting neurological diseases, including rare disorders. The Company's lead product, NURTEC™ ODT (rimegepant), was approved by the U.S. Food and Drug Administration ("FDA") on February 27, 2020, and available by prescription in U.S. pharmacies on March 12, 2020. NURTEC ODT is the first and only calcitonin gene-related peptide ("CGRP") receptor antagonist available in a quick-dissolve orally dissolving tablet ("ODT") formulation that is approved by the FDA for the acute treatment of migraine in adults. Our other product candidates are based on multiple mechanisms — CGRP receptor antagonists, glutamate modulators and myeloperoxidase inhibition—which we believe have the potential to significantly alter existing treatment approaches across a diverse set of neurological indications with high unmet need in both large and orphan indications.
The Company is subject to risks and uncertainties common to companies in the biopharmaceutical industry, including, but not limited to, the risks associated with developing product candidates at each stage of non-clinical and clinical development; the challenges associated with gaining regulatory approval of such product candidates; the risks associated with commercializing pharmaceutical products for marketing and sale; the potential for development by third parties of new technological innovations that may compete with the Company’s products; the dependence on key personnel; the challenges of protecting proprietary technology; the need to comply with government regulations; the high costs of drug development; and the uncertainty of being able to secure additional capital when needed to fund operations.
Subsequent to its May 2017 initial public offering, the Company has primarily raised funds through sales of equity in private placements and public offerings, sale of a revenue participation rights related to future royalties and debt financing. The Company has incurred recurring losses since its inception, had an accumulated deficit as of September 30, 2020, and expects to continue to generate operating losses during the commercial launch of NURTEC ODT. To execute its business plans, the Company will continue to require additional funding to support its continuing operations and pursue its growth strategy.
In January 2020, the Company issued and sold 4,830,917 common shares at a public offering price of $51.75 per share for net proceeds of approximately $245,877 after deducting underwriting discounts and commissions of approximately $3,623 and other offering expenses of approximately $500. In addition, in February 2020, the underwriter of the January follow-on offering exercised its option to purchase additional shares, and the Company issued and sold 724,637 common shares for net proceeds of approximately $36,956 after deducting underwriting discounts and commissions of approximately $543. Thus, the aggregate net proceeds to the Company from the follow-on offering, after deducting underwriting discounts and commissions and other offering costs, were approximately $282,833.
In August 2020, the Company and Biohaven Pharmaceuticals, Inc., the Company’s wholly-owned subsidiary (together with the Company, the "Borrowers"), entered into a five-year financing agreement (the "Sixth Street Financing Agreement") with Sixth Street Specialty Lending, Inc. as administrative agent, various lenders (the "Lenders") and certain of the Company's subsidiaries, as guarantors. Pursuant to the Sixth Street Financing Agreement, the Lenders agreed to extend a senior secured credit facility to the Borrowers providing for term loans in an aggregate principal amount up to $500,000. Also in August 2020, the Company entered into a funding agreement (the "2020 RPI Funding Agreement") with RPI 2019 Intermediate Finance Trust ("RPI 2019 IFT") providing for up to $250,000 of funding in exchange for rights to participation payments based on global net sales of products containing zavegepant and rimegepant and certain payments based on success-based milestones relating to zavegepant and entered into a share purchase agreement providing for the issuance and sale to RPI 2019 IFT of series B preferred shares for an aggregate purchase price of $200,000, payable in installments between 2021 and 2024 (the "Series B Preferred Shares"). For further detail on these August 2020 transactions see Note 4, “Fair Value of Financial Assets and Liabilities,” Note 9, “Liability Related to Sale of Future Royalties, net” and Note 18, "Debt."
In September 2020, the Company's Asia-Pacific subsidiary, BioShin Limited, issued and sold $60,000 Series A preferred shares (the "BioShin Series A Preferred Shares") to a group of investors led by OrbiMed, with participation from Cormorant Asset Management LLC, HBM Healthcare Investments Ltd, Surveyor Capital (a Citadel Company), and Suvretta Capital Management, LLC.
6


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
1.   Nature of the Business and Basis of Presentation (Continued)
As of November 9, 2020, the issuance date of our condensed consolidated financial statements, the Company expects that its cash, cash equivalents and marketable securities as of September 30, 2020, and the funds available from the Sixth Street Financing Agreement, and Series B Preferred Shares will be sufficient to fund its current forecast for operating expenses, including commercialization of NURTEC ODT, financial commitments and other cash requirements for more than one year. The Company may need to raise additional capital until it is profitable. If no additional capital is raised through either public or private equity financings, debt financings, strategic relationships, alliances and licensing agreements, or a combination thereof, the Company may delay, limit or reduce discretionary spending in areas related to research and development activities and other general and administrative expenses in order to fund its operating costs and working capital needs.
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its controlled subsidiaries after elimination of all significant intercompany accounts and transactions. Investments in companies in which the Company owns less than a 50% equity interest and where it exercises significant influence over the operating and financial policies of the investee are accounted for using the equity method of accounting.

2.   Summary of Significant Accounting Policies
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. In addition, management’s assessment of the Company’s ability to continue as a going concern involves the estimation of the amount and timing of future cash inflows and outflows. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. As of September 30, 2020 cash equivalents was primarily comprised of money market funds. The Company had no cash equivalents as of December 31, 2019.
Restricted Cash
Restricted cash included in other current assets in the condensed consolidated balance sheet represents employee contributions to the Company's employee share purchase plan held for future purchases of the Company's outstanding shares. See Note 14 "Share-Based Compensation" for additional information on the Company's employee share purchase plan.
Restricted cash included in other assets in the condensed consolidated balance sheets represents collateral held by a bank for a letter of credit ("LOC") issued in connection with the leased office space in Yardley, Pennsylvania. See Note 19 ‘‘Commitments and Contingencies’’ for additional information on the real estate lease. The following represents a reconciliation of cash and cash equivalents in the condensed consolidated balance sheets to total cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flow:
September 30, 2020December 31, 2019
Cash and cash equivalents$316,231 $316,727 
Restricted cash (included in other current assets)4,802  
Restricted cash (included in other assets)1,000 1,000 
Total cash, cash equivalents and restricted cash in the statement of cash flows$322,033 $317,727 
7


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
2.   Summary of Significant Accounting Policies (Continued)


Marketable Securities
We invest our excess cash balances in marketable securities of highly rated financial institutions and investment-grade debt instruments. We seek to diversify our investments and limit the amount of investment concentrations for individual institutions, maturities and investment types. We classify marketable debt securities as available-for-sale and, accordingly, record such securities at fair value. We classify these securities as current assets as these investments are intended to be available to the Company for use in funding current operations.
Unrealized gains and losses on our marketable debt securities that are deemed temporary are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. If any adjustment to fair value reflects a significant decline in the value of the security, we evaluate the extent to which the decline is determined to be other-than-temporary and would mark the security to market through a charge to our consolidated statement of operations. Credit losses are identified when we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security. In the event of a credit loss, only the amount associated with the credit loss is recognized in operating results, with the amount of loss relating to other factors recorded in accumulated other comprehensive income (loss).
We utilize the specific identification method in computing realized gains and losses. Realized gains and losses on our marketable securities were not material for the three and nine months ended September 30, 2020.
Trade Receivables, Net
The Company’s trade accounts receivable consists of amounts due from pharmacy wholesalers in the U.S. (collectively, its "Customers") related to sales of NURTEC ODT and have standard payment terms. For certain Customers, the trade accounts receivable for the Customer is net of distribution service fees, prompt pay discounts and other adjustments. The Company monitors the financial performance and creditworthiness of its Customers so that it can properly assess and respond to changes in their credit profile. The Company reserves against trade accounts receivable for estimated losses that may arise from a Customer’s inability to pay and any amounts determined to be uncollectible are written off against the reserve when it is probable that the receivable will not be collected. The reserve amount for estimated losses was not significant as of September 30, 2020.
Inventory
The Company values its inventories at the lower-of-cost or net realizable value. The Company determines the cost of its inventories, which includes costs related to products held for sale in the ordinary course of business, products in process of production for such sale and items to be currently consumed in the production of goods to be available for sale, on a first-in, first-out (FIFO) basis. Due to the nature of the Company’s supply chain process, inventory that is owned by the Company, is physically stored at third-party warehouses, logistics providers and contract manufacturers. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and writes down any excess and obsolete inventories to their net realizable value in the period in which the impairment is first identified. If they occur, such impairment charges are recorded as a component of cost of goods sold in the condensed consolidated statements of operations.
The Company capitalizes inventory costs associated with products following regulatory approval when future commercialization is considered probable and the future economic benefit is expected to be realized. Products which may be used in clinical development programs are excluded from inventory and charged to research and development expense as incurred. Prior to the initial date regulatory approval is received, costs related to the production of inventory are recorded as research and development expense on the Company’s condensed consolidated statements of operations in the period incurred. Following FDA approval of NURTEC ODT on February 27, 2020, the Company subsequently began capitalizing costs related to inventory manufacturing.
Intangible Assets
The Company had no intangible assets as of December 31, 2019. The Company is required to pay milestone payments of $41,500 related to the FDA approval and launch of NURTEC ODT. These milestone payments were capitalized as an intangible asset, and will be amortized to cost of goods sold over the remaining expected life of the patents. For the three and nine months ended September 30, 2020, the Company recognized $724 and $1,689, respectively, of amortization on the asset and recorded the expense to cost of goods sold.
8


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
2.   Summary of Significant Accounting Policies (Continued)


Estimated future amortization expense for the intangible assets subsequent to September 30, 2020 is a follows:
2020 (remaining three months)724
20212,895
20222,895
20232,895
20242,895
Thereafter27,506
39,811

Impairment of Long-lived Assets
The Company monitors its long-lived assets and finite-lived intangibles for indicators of impairment. If such indicators are present, the Company assesses the recoverability of affected assets by determining whether the carrying value of such assets is less than the sum of the undiscounted future cash flows of the assets. If such assets are found not to be recoverable, the Company measures the amount of such impairment by comparing the carrying value of the assets to the fair value of the assets, with the fair value generally determined based on the present value of the expected future cash flows associated with the assets. The Company believes no impairment of long-lived assets existed as of September 30, 2020 or December 31, 2019.
Fair Value Measurements
Certain assets of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
Level 1— Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
 The Company’s Series A preferred shares derivative liability and Series B preferred shares forward contracts are carried at fair value, determined according to the fair value hierarchy described above (see Note 4).
Derivative Instruments
The Company recognizes all derivatives at fair value either as assets or liabilities in the condensed consolidated balance sheets and changes in fair value of such instruments are recognized in current period earnings, unless specific hedge accounting criteria are met on its derivative instruments. As of September 30, 2020, the Company accounted for its Series B preferred forward contract as a derivative instrument (see Note 4, and 10) . As of December 31, 2019, the Company accounted for certain scenarios as described in the Series A preferred shares agreement with RPI as a derivative liability (see Note 4).
Leases
The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and operating lease liabilities are recognized at the
9


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
2.   Summary of Significant Accounting Policies (Continued)


commencement date based on the present value of the remaining future minimum lease payments. If the interest rate implicit in the Company’s leases is not readily determinable, the Company utilizes an estimate of its incremental borrowing rate based on market sources including interest rates for companies with similar credit quality for agreements of similar duration, determined by class of underlying asset, to discount the lease payments. The operating lease right-of-use assets also include lease payments made before commencement and exclude lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the term of the short-term lease and variable lease costs are expensed as incurred.
For our real estate lease, the Company elected the practical expedient to include both the lease and non-lease components as a single component and account for it as an operating lease. In addition, payments made by the Company for improvements to the underlying asset, if the payment relates to an asset of the lessor, are recorded as prepaid rent within other assets in the condensed consolidated balance sheets and expensed as part of the amortization of the right-of-use asset. The commencement date for the Company's leased office space in Yardley, Pennsylvania occurred during the second quarter of 2020. In connection with the commencement of the office lease, the Company reclassified $2,850 for leasehold improvements related to assets of the lessor from prepaid rent to operating right-of-use asset. As of September 30, 2020, the Company had restricted cash of $1,000 included in other assets in the condensed consolidated financial statements, which represents collateral held by a bank for an LOC issued in connection with the leased office space in Yardley, Pennsylvania. The restricted cash is deposited in a non-interest bearing account. See Note 19 ‘‘Commitments and Contingencies’’ for additional information on the real estate lease.
For our vehicle leases, the Company elected the practical expedient to include both the lease and non-lease components as a single component and account for it as a finance lease. Each of the Company's vehicle leases are considered a single lease under a master service agreement, and each vehicle lease has a residual value guarantee equivalent to the wholesale value of the vehicle at termination of the lease. During the third quarter of 2020, the Company took delivery of the majority of its commercial car fleet. In connection with the vehicle leases, the Company recorded finance lease right-of-use assets in other assets and finance lease liabilities in other long-term liabilities on its condensed consolidated balance sheet. See Note 19 "Commitments and Contingencies" for additional information on the vehicle leases.
Foreign Currency Translation
The financial statements of our subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using period-end exchange rates for assets and liabilities, historical exchange rates for stockholders’ equity and weighted average exchange rates for operating results. Translation gains and losses are included in accumulated other comprehensive income (loss), net of tax, in stockholders’ equity. Foreign currency transaction gains and losses are included in other income (expense) in the condensed consolidated statement of operations.
Revenue Recognition
Pursuant to Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when a customer obtains control of promised goods or services. The Company records the amount of revenue that reflects the consideration that it expects to receive in exchange for those goods or services. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The Company only applies the five-step model to contracts when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services that it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations it must deliver and which of these performance obligations are distinct. The Company recognizes as revenue the amount of the transaction price that is allocated to each performance obligation when that performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations are transferred to customers at a point in time, typically upon delivery.
10


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
2.   Summary of Significant Accounting Policies (Continued)


Product Revenue, Net
The Company sells its product principally to its Customers in the United States. The Company’s Customers subsequently resell the products to pharmacies and health care providers. In accordance with ASC 606, the Company recognizes net product revenues from sales when the Customers obtain control of the Company’s products, which typically occurs upon delivery to the Customer. The Company’s payment terms are generally between 30 - 65 days.
Revenues from product sales are recorded at the net sales price, or “transaction price,” which includes estimates of variable consideration that result from (a) invoice discounts for prompt payment and distribution service fees, (b) government and private payor rebates, chargebacks, discounts and fees, (c) product returns and (d) costs of co-pay assistance programs for patients, as well as other incentives for certain indirect customers. Reserves are established for the estimates of variable consideration based on the amounts earned or to be claimed on the related sales. The reserves are classified as reductions to trade receivable, net if payable to a Customer or accrued expenses if payable to a third-party. Where appropriate, the Company utilizes the expected value method to determine the appropriate amount for estimates of variable consideration based on factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. The amount of variable consideration that is included in the transaction price may be constrained and is included in net product revenues only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.
Distribution Service Fees: The Company engages with wholesalers to distribute its products to end customers. The Company pays the wholesalers a fee for services such as: Data Reporting, Inventory Management, Chargeback Administration and Service Level Commitment. The Company estimates the amount of distribution services fees to be paid to the Customers and adjusts the transaction price with the amount of such estimate at the time of sale to the Customer.
Shelf Stock Adjustments: The Company provides its Customers with a shelf stock adjustment for all product inventories held by the customer upon any decrease in price. The Company estimates the Customer’s inventory levels and the probability of pricing adjustments using management forecasts, and adjusts the transaction price with the amount of such estimate at the time of sale to the Customer.
Prompt Pay Discounts: The Company provides its Customers with a percentage discount on their invoice if the Customers pay within the agreed upon timeframe. The Company estimates the probability of Customers paying promptly and the percentage of discount outlined in the agreement, and deducts the full amount of these discounts from its gross product revenues and accounts receivable at the time such revenues are recognized.

Product Returns: The Company provides Customers a return credit in the amount of the purchase price paid by Customers for all products returned in accordance with the Company’s returned goods policy. In the initial sales period, the Company estimates its provision for sales returns based on industry data and adjusts the transaction price with such estimate at the time of sale to the Customer. Once sufficient history has been collected for product returns, the Company utilizes that history to inform its estimate assumption. Once the product is returned, it is destroyed. The Company does not record a right-of-return asset.
Chargeback: A chargeback is the difference between the manufacturer's invoice price to the wholesaler and the wholesaler’s customers contract price. The wholesaler tracks these sales and "charges back" the manufacturer for the difference between the negotiated prices paid between the wholesaler's customers and wholesaler's acquisition cost. Biohaven estimates the percentage of goods sold that are eligible for chargeback and adjusts the transaction price for such discount at the time of sale to the Customer.
Administration Fees: Biohaven engages with Pharmacy Benefit Managers ("PBMs") to administer prescription-drug plans for people with third-party insurance through a self-insured employer, health insurance plan, labor union or government plan. The Company pays PBMs “administrative fees” for their role in providing utilization data, administering rebates, and administering claims payments. Biohaven estimates the amount of administration fees to be paid to PBMs and adjusts the transaction price with the amount of such estimate at the time of sale to the Customer.
11


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
2.   Summary of Significant Accounting Policies (Continued)


Rebates: Rebates apply to:
Medicaid, managed care, expansion programs, the AIDS Drug Assistance Program, the State Pharmaceutical Assistance Program, and supplemental rebates to all applicable states as defined by the statutory government pricing calculation requirements under the Medicaid Drug Rebate Program;
Tricare rebate to the TRICARE third party administrator based on the statutory calculation defined in the Agreement with Defense Health Agency; and
Part D and Commercial Managed Care rebates are paid based on the contracts with PBMs and Managed Care Organizations. Rebates are paid to these entities upon receipt of an invoice from the contracted entity which is based on the utilization of the product by the members of the contracted entity.
The Company estimates the percentage of goods sold that are eligible for rebates and adjusts the transaction price for such discounts at the time of sale to the Customers.
Coverage Gap: The Medicare Part D coverage gap (also called the "donut hole") is a period of consumer payment for prescription medication costs which lies between the initial coverage limit and the catastrophic-coverage threshold, when the patient is a member of a Medicare Part D prescription-drug program administered by the Centers for Medicare & Medicaid Services. The Company estimates the percentage of goods sold under Coverage Gap and adjusts the transaction price for such discount at the time of sale to the Customer.
Bridge Program: A Bridge Program helps start a patient on a new therapy, especially in cases where payers may have barriers (e.g. prior authorizations and appeals) in place before agreeing to pay for a new drug. Under a Bridge Program the Customer distributes the product free of cost to eligible individuals for a period of time. The Company estimates the percentage of Bridge Program product to be provided at each sale to the customer and adjusts the transaction price with the amount of such estimate. The Company does not recognize revenue on Bridge program provided products. The volume of drug to be supplied under the Bridge Program is estimated by the Company at the time of sale to the Customer.
Stocking Allowance: The Company offers a stocking allowance for new product launches. Stocking allowances are one-time payments that a manufacturer makes to a wholesaler as a condition of the initial placement of the manufacturer’s products in the wholesaler’s warehouse. The Company uses the agreed upon fees and its forecasts for initial product sales to calculate the stocking allowance and adjusts the transaction price with the amount of such estimate at the time of sale to the Customer.
The Company makes significant estimates and judgments that materially affect its recognition of net product revenue. Claims by third-party payors for rebates, chargebacks and discounts frequently are submitted to the Company significantly after the related sales, potentially resulting in adjustments in the period in which the new information becomes known. The Company will adjust its estimates based on new information, including information regarding actual rebates, chargebacks and discounts for its products, as it becomes available.
Cost of Goods Sold
Cost of goods sold includes direct and indirect costs related to the manufacturing and distribution of NURTEC ODT, including third-party manufacturing costs, packaging services, freight-in, third-party royalties payable on the Company’s net product revenues and amortization of intangible assets associated with NURTEC ODT. Cost of goods sold may also include period costs related to certain inventory manufacturing services and inventory adjustment charges. In connection with the FDA approval of NURTEC on February 27, 2020, the Company subsequently began capitalizing inventory manufactured or purchased after this date. As a result, certain manufacturing costs associated with product shipments of NURTEC ODT were expensed prior to FDA approval and, therefore, are not included in cost of goods sold during the current period. These previously expensed costs were not material for the three and nine months ended September 30, 2020.
Advertising Costs
We expense the costs of advertising as incurred. We incurred and expensed advertising costs in the amount of $33,086 and $72,601 for the three and nine months ended September 30, 2020, respectively, and none for the three and nine months ended September 30, 2019. These costs were included in selling, general and administrative expenses in the condensed consolidated statements of operations.
12


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
2.   Summary of Significant Accounting Policies (Continued)


Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, and marketable securities. Our cash management policy permits investments in U.S. federal government and federal agency securities, corporate bonds or commercial paper, supranational and sovereign obligations, certain qualifying money market mutual funds, certain repurchase agreements, and places restrictions on credit ratings, maturities, and concentration by type and issuer. We are exposed to credit risk in the event of a default by the financial institutions holding our cash, cash equivalents and marketable securities to the extent recorded on the balance sheet.
We are also subject to credit risk from our accounts receivable related to our product sales. We monitor our exposure within accounts receivable and record a reserve against uncollectible accounts receivable as necessary. We extend credit primarily to pharmaceutical wholesale distributors. Customer creditworthiness is monitored and collateral is not required. Historically, we have not experienced credit losses on our accounts receivable and as of September 30, 2020, allowances on receivables was not material.
Unaudited Interim Condensed Consolidated Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The accompanying year-end condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2020 and the results of its operations for the three and nine months ended September 30, 2020 and 2019 and its cash flows for the nine months ended September 30, 2020 and 2019. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods or any future year or period.  The financial information included herein should be read in conjunction with the financial statements and notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
Recently Adopted Accounting Pronouncements
Effective January 1, 2020 the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This ASU provides guidance for recognizing credit losses on financial instruments based on an estimate of current expected credit losses model. This new standard amends the current guidance on the impairment of financial instruments and adds an impairment model known as current expected credit loss ("CECL") model that is based on expected losses rather than incurred losses. Under the new guidance, an entity will recognize as an allowance its estimate of expected credit losses. The FASB subsequently issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, derivatives and Hedging, and Topic 825, Financial Instruments and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses to clarify and address certain items related to the amendments in ASU 2016-13. ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition relief, was issued to provide entities that have certain instruments within the scope of ASC 326 with an option to irrevocably elect the fair value option under ASC 825-10, Financial Instruments - Overall, applied on an instrument-by-instrument basis for eligible instruments. The adoption of ASU 2016-13 did not have an effect on the Company's condensed consolidated financial statements as the Company's first trade accounts receivables were recorded following the adoption.
Effective January 1, 2020 the Company adopted ASU No. 2018-15, - Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"), a new standard on a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement ("CCA") that aligns the requirements for capitalizing implementation costs in a CCA service contract with existing internal-use software guidance. The standard also provides classification guidance
13


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
2.   Summary of Significant Accounting Policies (Continued)


on these implementation costs as well as additional quantitative and qualitative disclosures. The adoption of ASU 2018-15 did not have an effect on the Company’s condensed consolidated financial statements.
Effective January 1, 2020 the Company adopted ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which modifies the disclosure requirements on fair value measurements. The adoption of ASU 2018-13 had no effect on the Company’s condensed consolidated financial statements and no significant effect on the related fair value disclosures.
In March 2020, the FASB issued ASU 2020-03. This ASU improves and clarifies various financial instruments topics, including the CECL standard issued in 2016. The ASU includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The Company adopted ASU 2020-03 on issuance. The adoption of ASU 2020-03 did not have a significant effect on the Company's condensed consolidated financial statements.
Future Adoption of New Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted. The Company is currently evaluating the impact that the adoption of ASU 2019-12 will have on its condensed consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The new standard addresses accounting for the transition into and out of the equity method and measurement of certain purchased options and forward contracts to acquire investments. The standard is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. Adoption of the standard requires changes to be made prospectively. The Company is currently evaluating the impact that the adoption of ASU 2019-12 will have on its condensed consolidated financial statements.
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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The update addresses issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. The amendments in ASU 2020-06 are effective for fiscal years beginning after December 15, 2021, with early adoption permitted but no earlier that fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Adoption of the standard requires changes to be made through either a modified retrospective method of transition or a fully retrospective method. In applying the modified retrospective method, the updated guidance is applied to transactions outstanding as of the beginning of the fiscal year in which the amendments are adopted. The Company is currently evaluating the impact that the adoption of ASU 2020-06 will have on its condensed consolidated financial statements.

14


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)


3. Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of available-for-sale debt securities by type of security at September 30, 2020 was as follows:
Amortized CostAllowance for Credit LossesNet Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Corporate bonds
U.S.$136,664 $ $136,664 $3 $(69)$136,598 
Foreign16,084  16,084  (14)16,070 
Government related obligations
U.S.79,947  79,947 7  79,954 
Total $232,695 $ $232,695 $10 $(83)$232,622 

The Company had no available-for-sale debt securities at December 31, 2019.
The Company had 39 available-for-sale debt securities in an unrealized loss position, with an aggregate fair value of $141,493, as of September 30, 2020. As of September 30, 2020, the Company did not intend to sell these securities, and did not believe it was more likely than not that it would be required to sell these securities prior to the anticipated recovery of their amortized cost basis. We did not have any investments in a continuous unrealized loss position for more than twelve months as of September 30, 2020.
The fair values of debt securities available-for-sale by classification in the condensed consolidated balance sheets were as follows:
September 30, 2020
Cash and cash equivalents$2,639 
Marketable securities229,983 
Total$232,622 

The net amortized cost and fair value of debt securities available-for-sale at September 30, 2020 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called or prepaid, or the Company intends to sell a security prior to maturity.
Net Amortized CostFair Value
Due to mature:
Less than one year$224,672 $224,615 
One year through five years8,023 8,007 
Total$232,695 $232,622 

15



BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
3. Marketable Securities (continued)
Net Investment Income
Sources of net investment income included in other under other income (expense) in the condensed consolidated statements of operations for the three and nine months ended September 30, 2020 were as follows:
Three Months Ended September 30,Nine Months Ended September 30,
20202020
Gross investment income from debt securities available-for-sale$36 $36 
Investment expenses  
Net investment income (excluding net realized capital gains or losses)36 36 
Net realized capital gains (losses)  
Net investment income$36 $36 

The Company had no net investment income during the three and nine months ended September 30, 2019.
The Company had no maturities or sales of available-for-sale debt securities or resulting realized gains and losses for the three and nine months ended September 30, 2020.

4.   Fair Value of Financial Assets and Liabilities
The Company held financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2020, and held no financial assets measured at fair value on a recurring basis as of December 31, 2019.
The following tables present information about the Company's financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, and indicate the level of the fair value hierarchy utilized to determine such fair value:
Fair Value Measurement as of September 30, 2020 Using:
Balance Sheet ClassificationType of InstrumentLevel 1Level 2Level 3Total
Assets:
Cash equivalentsMoney market funds$167,343 $ $ $167,343 
Cash equivalentsU.S. corporate bonds 2,639  2,639 
Marketable securitiesU.S. treasury bills 79,954  79,954 
Marketable securitiesU.S. corporate bonds 133,959  133,959 
Marketable securitiesForeign corporate bonds 16,070  16,070 
Total assets$167,343 $232,622 $ $399,965 
Liabilities:
Series B preferred shares forward contracts  1,940 1,940 
Total liabilities$ $ $1,940 $1,940 

16



BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
4.   Fair Value of Financial Assets and Liabilities (Continued)
Fair Value Measurement as of December 31, 2019 Using:
Level 1Level 2Level 3Total
Liabilities:
Series A preferred shares derivative liability$ $ $37,690 $37,690 
Total liabilities$ $ $37,690 $37,690 

There were no securities transferred between Level 1, 2 and 3 during the nine months ended September 30, 2020.
The fair value of the Company's long-term debt, classified as a Level 2 liability, approximates its carrying value of $264,135 at September 30, 2020.
The Company had no financial assets carried on the condensed consolidated balance sheets at adjusted cost that required an estimated fair value at September 30, 2020 and no financial assets and liabilities carried on the condensed consolidated balance sheets carried at adjusted cost that required an estimated fair value at December 31, 2019.
Valuation of Series A Preferred Shares Derivative Liability
The following table provides a roll forward of the aggregate fair value of the Company’s Series A preferred shares derivative liability (see Note 10) for which fair value is determined by Level 3 inputs for the nine months ended September 30, 2020 and 2019:
Series A Derivative
Liability
Balance at December 31, 2019$37,690 
Change in fair value5,131 
Settlement of Series A preferred shares derivative liability(42,821)
Balance at September 30, 2020$ 
Transaction date balance$33,815 
Change in fair value2,980 
Balance at September 30, 2019$36,795 

The fair value of the derivative liability recognized in connection with the Series A preferred shares agreement with RPI, as described in Note 10, was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative liability relates to certain scenarios outlined in the agreement that would result in accelerated payments as compared to the agreement's host instrument. The with-and-without valuation method was used to determine the fair value of the embedded derivatives within the agreement.
As inputs into the valuation, the Company considered the type and probability of occurrence of certain events, the amount of the payments, the expected timing of certain events, and a risk-adjusted discount rate using credit spreads of biopharmaceutical companies in similar stages of development to the Company. In accordance with ASC 815, Derivatives and Hedging, the fair value of the derivative was recorded on the balance sheet as a Series A preferred shares derivative liability with changes in fair value recorded in other income (expense) in the condensed consolidated statements of operations.
Upon the FDA's approval of NURTEC ODT the Company remeasured the derivative using the inputs noted above. In the first quarter of 2020, the Company partially settled the derivative liability associated with this approval of $42,821, which modified the timing of the payment obligation related to the redeemable preferred share liability. During the second quarter of 2020, the Company recorded a $650 gain in other income in its condensed consolidated statement of operations.
17


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
4.   Fair Value of Financial Assets and Liabilities (Continued)
Valuation of Liability Related to Sale of Future Royalties
In June 2018, and as described in Note 9, the Company entered into a funding agreement with RPI, accounted for as a liability financing. As of September 30, 2020, the fair value of the liability related to sale of future royalties, used in determining the effective interest rate of the liability, is based on the Company's current estimates of future royalties expected to be paid to RPI over the life of the arrangement, which is considered Level 3.
Series B Preferred Shares Forward Contracts
The following table provides a roll forward of the aggregate fair value of the Company's Series B Preferred Shares Forward Contracts for which fair value is determined by Level 3 inputs for the nine months ended September 30, 2020:
Forward Contracts
Transaction date balance$ 
Change in fair value1,940 
Balance at September 30, 2020$1,940 

In August 2020, the Company entered into Series B preferred share agreement, whereby RPI will invest in the Company through the purchase of up to 3,992 Series B preferred shares at a price of $50,100 per share (the "RPI Series B Preferred Share Agreement"). The gross proceeds from the transaction with RPI will be used for the clinical development of zavegepant and other general corporate purposes. The shares will be issued in quarterly increments from March 31, 2021 to December 31, 2024.
The holders of the Company's outstanding Series B Preferred Shares will have the right to require redemption of the shares in certain circumstances. If a Change of Control occurs, as defined in the Company's memorandum and article of association, and the Series B Preferred Shares have not previously been redeemed, the holders of a majority of outstanding Series B Preferred Shares will have an option to redeem outstanding shares in a single payment at a price equal to 1.77 times the original issuance price of the Series B Preferred Shares.
The Company may redeem the Series B Preferred Shares at its option at any time in a single payment at a price equal to 1.77 times the original issuance price of the Series B Preferred Shares.
The Company is required to redeem the Series B Preferred Shares for 1.77 times the original purchase price, payable beginning March 31, 2025 in equal quarterly installments through December 31, 2030. Accordingly, the Company has concluded that the agreement to issue Series B Preferred Shares at a future date represents a forward contract, and classified as a derivative. The Company initially measured the forward contract at a fair value of zero. For detail of the transaction, see Note 9, "Liability Related to Sale of Future Royalties, net."
The Company will subsequently remeasure the fair value and recognize any gains or losses through other income (expense) in its condensed consolidated statement of operations. From the transaction date in August 2020 through September 30, 2020 the Company recognized $1,940 expense in other expense.
The fair value of the derivative recognized in connection with the RPI Series B Preferred Share Agreement was determined based on significant inputs not observable in the market, and therefore represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative primarily relates to the difference between the fair value of the Series B Preferred Shares and the contractual future purchase price. The fair value of the Series B Preferred Shares is calculated based on the cash flows to RPI (1.77 times the original purchase price as scheduled or accelerated upon certain events, as described previously) and the Company's estimated cost of capital for those cash flows. The cash flows to RPI are based on probability adjusted cash flows from certain scenarios outlined in the agreement that would result in accelerated payments modeled using a Monte Carlo simulation. As inputs into the valuation, the Company considered the type and probability of occurrence of certain change of control events, the amount of the payments, the expected timing of certain acceleration of payments, and a risk-adjusted discount rate. Assessing the probability of certain change of control events over a 10-year time period requires significant judgement and the successful completion of a change of control is largely dependent on the outcome of potential negotiations
18


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
4.   Fair Value of Financial Assets and Liabilities (Continued)
with a third party. Due to this uncertainty, our expectation of the probability of the timing of a change of control event at the reporting date could reasonably be different than the timing of an actual change of control event, and if so, would mean the estimated fair value could be significantly higher or lower than the fair value determined.
Upon issuance of the Series B Preferred Shares, they will qualify as mandatorily redeemable instruments and will be classified as a preferred shares liabilities. The Company will then measure the liability at fair value, and subsequently accrete the carrying value to the redemption value through interest expense using the effective interest rate method. The Company had no Series B Preferred Shares issued and outstanding as of September 30, 2020 and December 31, 2019.
Any Series B Preferred Shares that are not redeemed on an applicable redemption date described above will accrue interest at 18% per annum, until the shares are redeemed. If Series B Preferred Shares remain unredeemed for a period of one year after the applicable redemption date, the holders of the unredeemed shares will have the right to convert such preferred shares into a number of common shares equal to (a) the redemption price plus any accrued interest, divided by (b) the five day volume-weighted average trading price of the Company's common shares for the five days immediately preceding the conversion date for such unredeemed shares.

5.   Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
As of September 30, 2020As of December 31, 2019
Prepaid clinical trial costs$11,745 $6,101 
Prepaid manufacturing21,570  
Prepaid commercial costs16,772  
Other prepaid and current assets12,331 5,453 
 $62,418 $11,554 

6.   Equity Method Investment
The Company has a variable interest in Kleo Pharmaceuticals, Inc., a privately held Delaware corporation (“Kleo”), through its equity investment. Kleo is a variable interest entity due to the equity investment at risk being insufficient to finance its activities. An assessment of whether or not the Company has the power to direct activities that most significantly impact Kleo’s economic performance and to identify the party that obtains the majority of the benefits of the investment was performed as of September 30, 2020 and December 31, 2019, and will be performed as of each subsequent reporting date. After each of these assessments, the Company concluded that the activities that most significantly impact Kleo’s economic performance are the ability to direct the research activities, the ability to select vendors to perform the research, the ability to maintain research staff and the ability to raise additional funds, each of which are directed by Kleo. Based on the outcome of these assessments, the Company concluded that the investment should be accounted for under the equity method.
The Company has recorded its investments in Kleo to date based on the costs of those investments, as adjusted for the Company’s proportional share of Kleo’s net income or loss in each period. The Company's ownership interest in outstanding stock of Kleo for the nine months ended September 30, 2020 and 2019 was 41.9%. The Company records future adjustments to the carrying value of its investment at each reporting date equal to its proportionate share of Kleo’s net loss for the corresponding period. The Company recorded other expense and a corresponding reduction in the carrying value of its investment in Kleo as follows:
 Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Proportionate share of Kleo's net loss$607 $1,993 $3,472 $4,308 

19


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
6.   Equity Method Investment (Continued)


The carrying value of the Company’s investment in Kleo was $1,866 and $5,338 as of September 30, 2020 and December 31, 2019, respectively, and is reported as equity method investment on the condensed consolidated balance sheet. The carrying value of the investment represents the Company’s maximum loss exposure as of the balance sheet date. The following table provides a roll-forward of the carrying value of the Company’s equity method investment:
Carrying Value
Balance at December 31, 2019$5,338 
Loss recognized in connection with equity method investment(3,472)
Balance at September 30, 2020$1,866 
 
Balance at December 31, 2018$11,414 
Loss recognized in connection with equity method investment(4,308)
Balance at September 30, 2019$7,106 

7.   Accrued Expenses and Other Current Liabilities
Accrued expenses consisted of the following:
As of September 30, 2020As of December 31, 2019
Accrued development milestones$7,167 $12,000 
Accrued employee compensation and benefits19,835 3,521 
Accrued clinical trial costs15,097 16,476 
Accrued commercialization and other professional fees12,244 15,408 
Other accrued expenses and current liabilities71,924 4,697 
 $126,267 $52,102 

8. Inventories
Inventories consisted of the following:
As of September 30, 2020
Raw materials976 
Work-in-process16,898 
Finished goods2,257 
$20,131 
The Company had no inventories as of December 31, 2019.

9.   Liability Related to Sale of Future Royalties, net
2018 RPI Funding Agreement
In June 2018, the Company entered into a funding agreement (the "2018 RPI Funding Agreement") to sell tiered, sales-based royalty rights on global net sales of pharmaceutical products containing the compounds rimegepant or zavegepant (previously known as BHV-3500 and vazegepant) and certain derivative compounds thereof ("Products") to RPI, a Delaware statutory trust. The Company issued to RPI the right to receive certain revenue participation payments, subject to certain reductions, based on the future global net sales of the Products for each calendar quarter during the royalty term contemplated by the 2018 RPI Funding Agreement, in exchange for $100,000 in cash.
20


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
9.   Liability Related to Sale of Future Royalties, net (Continued)
Concurrent with the 2018 RPI Funding Agreement, the Company entered into a common stock purchase agreement (the "Purchase Agreement") with RPI. Pursuant to the Purchase Agreement, the Company sold 1,111,111 common shares of the Company to RPI at a price of $45.00 per share, for gross proceeds of $50,000.
The Company concluded that there were two units of account for the consideration received comprised of the liability related to sale of future royalties and the common shares. The Company allocated the $100,000 from the 2018 RPI Funding Agreement and $50,000 from the Purchase Agreement among the two units of account on a relative fair value basis at the time of the transaction. The Company allocated $106,047 in transaction consideration to the liability, and $43,953 to the common shares. The Company determined the fair value of the common shares based on the closing share price on the transaction date, adjusted for the trading restrictions. The transaction costs of $377 were allocated in proportion to the allocation of total consideration to the two units of account. The effective interest rate under the 2018 RPI Funding Agreement, including transaction costs, is approximately 27% as of September 30, 2020.
2020 RPI Funding Agreement
In August 2020, the Company entered into a funding agreement with RPI 2019 Intermediate Finance Trust (“RPI 2019 IFT”) providing for up to $250,000 of funding in exchange for rights to participation payments based on global net sales of products containing zavegepant and rimegepant and certain payments based on success-based milestones relating to zavegepant (the "2020 RPI Funding Agreement"). Under the 2020 RPI Funding Agreement, RPI 2019 IFT will be entitled to receive tiered, sales based participation rights up to 3.0% of future global net sales of products containing zavegepant, 0.4% of future global net sales of products containing rimegepant, and payments tied to success-based milestones as described below. The Company received $150,000 in cash and up to $100,000 upon achievement of certain development milestones for zavegepant (including the commencement of the oral zavegepant Phase 3 program).
If at any time during the 180 days following the closing of the 2020 RPI Funding Agreement, the Company enters into a definitive agreement to consummate a Change of Control (as defined in the Company's articles and memorandum of association), the Company will have the option to repurchase the participation rights and milestone payment rights for a purchase price of 2.0x of the amount received under the agreement at that date, contingent upon the closing of a Change of Control (the "Buy-Back Option").
The success-based milestone payments range from 0.6x to 2.95x of the funded amount depending on the number of regulatory approvals achieved for zavegepant (including 1.9x for the first zavegepant migraine regulatory approval) and would be paid over a ten-year period. If the Company consummates a Change of Control, and the Buy-Back Option has not previously been exercised, RPI 2019 IFT has the option to accelerate each unpaid milestone payment which has or thereafter occurs.
The Company concluded that there were two units of account for the $150,000 in initial consideration received, which comprised of a liability related to sale of future royalties for products containing rimegepant, and a research and development arrangement with RPI 2019 IFT for zavegepant. The Company allocated the $150,000 from the 2020 RPI Funding Agreement among the two units of account based on the present value of probability adjusted net sales at the time of the transaction. The Company allocated $147,876 in transaction consideration to the liability related to sale of future royalties and $2,124 to the obligation to perform contractual services in other long-term liabilities in the condensed consolidated balance sheets. The transaction costs of $400 were allocated only to the liability related to sale of future royalties. The effective interest rate under the 2020 RPI Funding Agreement, including transaction costs, is approximately 6% as of September 30, 2020. Since there is a substantive and genuine transfer of risk to RPI 2019 IFT for the development of zavegepant, the $2,124 of consideration allocated to the development of zavegepant is being recognized by the Company as an obligation to perform contractual services and therefore is a reduction of research and development expenses as incurred. The reduction to research and development expenses for the three and nine months ended September 30, 2020 was $110.
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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
9.   Liability Related to Sale of Future Royalties, net (Continued)
The following table shows the activity within the liability related to sales of future royalties account for the nine months ended September 30, 2020 and 2019, respectively, related to the 2018 and 2020 RPI Funding Agreements.
Nine Months Ended September 30,
20202019
Liability related to sale of future royalties - beginning balance
$144,111 $117,515 
Additional liability related to the 2020 RPI Funding Agreement, net of issuance costs147,476  
Royalty revenues payable to RPI(667) 
Non-cash interest expense on liability related to sale of future royalties31,950 19,284 
Liability related to sale of future royalties - ending balance
$322,870 $136,799 

10.   Mandatorily Redeemable Preferred Shares, net
In April 2019, the Company sold 2,495 Series A preferred shares (the "Series A Preferred Shares") to RPI at a price of $50,100 per preferred share pursuant to a Series A preferred share purchase agreement (the "Preferred Share Agreement"). The gross proceeds from the transaction with RPI were $125,000, with $105,000 of the proceeds used to purchase a priority review voucher ("PRV") issued by the United States Secretary of Health and Human Services to potentially expedite the regulatory review of the new drug application ("NDA") for the ODT formulation of rimegepant and the remainder of the proceeds to be used for other general corporate purposes. Pursuant to the Preferred Share Agreement, the Company had the option to issue additional Series A Preferred Shares to RPI in up to three additional closings for an aggregate amount of $75,000. The Company was not obligated to issue any additional Series A Preferred Shares, subject to a fee up to $3,000 if not all of the Series A Preferred Shares were issued. In the third quarter of 2020, the Company determined it will not exercise the option to issue additional Series A Preferred Shares and accordingly recognized the full $3,000 fee in other expense in the condensed consolidated statements of operations.
The holders of the Company's outstanding Series A Preferred Shares will have the right to require redemption of the shares in certain circumstances. If a Change of Control, as defined in the Company's memorandum and article of association, occurs and the Series A Preferred Shares have not previously been redeemed, the Company must redeem the Series A Preferred Shares for two times (2x) the original purchase price of the Series A Preferred Shares payable in a lump sum at the closing of the Change of Control or in equal quarterly installments following the closing of the Change of Control through December 31, 2024.
The Company may redeem the Series A Preferred Shares at its option at any time for two times (2x) the original purchase price, which redemption price may be paid in a lump sum or in equal quarterly installments through December 31, 2024.
In the event that the Company defaults on any obligation to redeem Series A Preferred Shares when required, the redemption amount shall accrue interest at the rate of eighteen percent (18%) per annum. If any such default continues for at least one year, the holders of such shares shall be entitled to convert, subject to certain limitations, such Series A Preferred Shares into common shares, with no waiver of their redemption rights.
The Company is required to redeem the Series A Preferred Shares for two times (2x) the original purchase price, payable beginning March 31, 2021 in equal quarterly installments through December 31, 2024. Accordingly, the Company has concluded the Series A Preferred Shares are mandatorily redeemable instruments and classified as a liability. The Company initially measured the liability at fair value, and will subsequently accrete the carrying value to the redemption value through interest expense using the effective interest rate method. The effective interest rate under the Preferred Share Agreement, including transaction costs, was determined to be approximately 18%, and the Company recognized $7,310 and $19,864 in interest expense for the three and nine months ended September 30, 2020, respectively. The Company had 2,495 Series A preferred shares issued and outstanding as of September 30, 2020 and December 31, 2019.
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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
10.   Mandatorily Redeemable Preferred Shares, net (Continued)
The following table shows the activity within the preferred share liability for the nine months ended September 30, 2020:
Carrying Value
Net balance at December 31, 2019$103,646 
Partial settlement of Series A preferred shares derivative liability42,821 
Non-cash interest expense recognized, including transaction cost amortization19,864 
Net balance at September 30, 2020$166,331 

Certain scenarios as described in the Preferred Share Agreement were determined by the Company to result in a derivative liability. The with-and-without valuation method was used to determine the fair value of the embedded derivatives within the agreement. As inputs into the valuation, the Company considered the type and probability of occurrence of certain events, the amount of the payments, the expected timing of certain events, and a risk-adjusted discount rate. In accordance with ASC 815, Derivatives and Hedging, the fair value of the derivative was recorded on the balance sheet as a Series A preferred shares derivative liability with changes in fair value recorded in other income (expense) in the condensed consolidated statements of operations (see Note 4 for details on the fair value measurement).
Upon the FDA's approval of NURTEC ODT the Company remeasured the derivative using the inputs noted above. In the first quarter of 2020, the Company partially settled the Series A preferred shares derivative liability associated with this approval of $42,821, which modified the timing of the payment obligation related to the redeemable preferred share liability. During the second quarter of 2020, the Company recorded a $650 gain in other income in its condensed consolidated statement of operations.
On August 7, 2020, the Company entered into the RPI Series B Preferred Share Agreement, pursuant to which RPI agreed to invest in the Company through the purchase of up to 3,992 Series B Preferred Shares at a price of $50,100 per share. The shares will be issued in quarterly increments from March 31, 2021 to December 31, 2024. Upon issuance of the Series B Preferred Shares, they will qualify as mandatorily redeemable instruments and be classified as a Series B preferred shares liability. The Company will then measure the liability at fair value, and subsequently accrete the carrying value to the redemption value through interest expense using the effective interest rate method. The Company had no Series B preferred shares issued and outstanding, as of September 30, 2020 and December 31, 2019.

11.   Warrants
Guarantor and Co-Guarantor Warrants
On August 30, 2016, the Company entered into a one-year credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”) providing for a term loan in the principal amount of $5,000 (the “Loan”) and borrowed the full $5,000 available under the Credit Agreement. The Credit Agreement was fully satisfied with a principal repayment to Wells Fargo of $5,000 on August 31, 2017.
In connection with entering into the Credit Agreement, the Company issued warrants to purchase common shares to two of the Company’s directors in connection with a guarantee of its obligations under the agreement. Both warrants, each to purchase 107,500 common shares at an exercise price of $9.2911 per share, were exercised in March 2019, resulting in proceeds to the Company of $1,998. The common shares settled in the second quarter of 2019.
Fox Chase Chemical Diversity Center Inc.
In May 2019, the Company entered into an agreement with Fox Chase Chemical Diversity Center Inc. ("FCCDC") for FCCDC's TDP-43 assets (the "FCCDC Agreement"). The FCCDC Agreement provides the Company with a plan and goal to identify one or more new chemical entity candidates for preclinical development for eventual clinical evaluation for the treatment of one or more TDP-43 proteinopathies. As consideration, Biohaven issued 100,000 of its common shares to FCCDC valued at $5,646. As of the end of the second quarter of 2019, the payment was recorded in accounts payable and research and development expense as the shares had not settled during the quarter. Upon settlement of the shares in July 2019, the Company transferred the value of the common shares issued to FCCDC from accounts payable to common shares.
23


BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
11.   Warrants (Continued)

In addition to the common shares issued to FCCDC, Biohaven is obligated to pay FCCDC milestone payments totaling up to $4,500 with $1,000 for each additional NDA filing (See Note 16). The Company also issued a warrant to FCCDC, granting FCCDC the option to purchase up to 100,000 Biohaven common shares, at a strike price of $56.46 per share, subject to vesting upon achievement of certain milestones in development of TD-43. The warrant has accelerated vesting in the event of a change of control of Biohaven.

12.   Shareholders' Equity
Changes in shareholders’ equity for the three and nine months ended September 30, 2020 were as follows:
Common Shares
SharesAmountAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive LossBiohaven Shareholders' Equity (Deficit)Non-controlling InterestsTotal Shareholders' Equity (Deficit)
Balance as of December 31, 201952,385,283 $881,426 $83,523 $(972,373)$ $(7,424)$ $(7,424)
Issuance of common shares, net of offering costs5,555,554 282,833 — — — 282,833 — 282,833 
Issuance of common shares under equity incentive plan447,111 10,880 (8,273)— — 2,607 — 2,607 
Non-cash share-based compensation expense— — 16,879 — — 16,879 — 16,879 
Net loss— — — (172,937)— (172,937)— (172,937)
Balance as of March 31, 202058,387,948 $1,175,139 $92,129 $(1,145,310)$ $121,958 $ $121,958 
Issuance of common shares under equity incentive plan1,137,617 23,866 (12,118)— — 11,748 — 11,748 
Non-cash share-based compensation expense