UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2018

or

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

For the transition period from             to

Commission File Number: 001-32966

OSIRIS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

443-545-1800

(Registrant’s telephone number, including area code)

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, 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.

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

OSIRIS THERAPEUTICS, INC.

INDEX

PART I -- FINANCIAL INFORMATION

Item 1.Financial Statements 

OSIRIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share data)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

OSIRIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

OSIRIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017

1.  Description of Business

Osiris Therapeutics, Inc. (“we”, “us”, “our”, “Osiris”, or the “Company”) researches, develops, manufactures and commercializes regenerative medicine products intended to improve the health and lives of patients and lower overall healthcare costs. We are headquartered in Columbia, Maryland and operate in one segment. We continue to advance our research and development (“R&D”) by focusing on innovation in regenerative medicine, including the development of bioengineered stem cell and tissue-based products.  We have achieved commercial success with products in orthopedics, sports medicine and wound care, including the Grafix product line, Stravix, BIO4 and Cartiform.

We are a fully integrated company, having developed capabilities in R&D, manufacturing, marketing and sales of our products. We are focused on the long-term commercial growth of the Company through the delivery of differentiated products for use across multiple fields of medicine with clear value propositions for patients, providers and third-party payors.

2.  Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Osiris Therapeutics International GmbH. All intercompany transactions have been eliminated in consolidation. Osiris Therapeutics International GmbH does not have any operations.

The condensed financial statements included in this quarterly report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“GAAP”).  

The condensed consolidated balance sheet as of December 31, 2017 is derived from the Company’s audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the SEC’s rules and regulations for interim financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with our financial statements and footnotes included in our Annual Report on Form 10-K for the years ended December 31, 2017, 2016, and 2015 (the “Annual Report”).  In the opinion of management, these condensed consolidated financial statements include all adjustments (consisting solely of normal recurring adjustments) considered necessary to fairly present the results of operations, financial position and cash flows for the periods indicated.

Operating results for any interim period are not necessarily indicative of the results that may be achieved for the full year.

Use of Estimates

We make certain estimates and assumptions in preparing our condensed consolidated financial statements in accordance with GAAP. These estimates and assumptions affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses for the period presented. Actual results may differ from these estimates.

Income per Common Share

Basic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per common share adjusts basic income per share for the potentially dilutive effects of common share equivalents, using the treasury stock method, and includes the incremental effect of shares that would be issued upon the assumed exercise of stock options.

Diluted earnings per share for the three-months ended September 30, 2018 and 2017 exclude 378,438 and 697,501 of our outstanding options as of that date, respectively, as their impact on our net income per share is anti-dilutive. Diluted earnings per share for the nine-months ended September 30, 2018 and 2017 excludes 379,813 and 697,501 of our outstanding options as of that date, respectively, as their impact on our net income per share is anti-dilutive. 

Stockholders’ Equity

On June 26, 2018, the Company amended its charter, which was approved by the Company’s stockholders, which decreased the total number of authorized shares of common stock from ninety million (90,000,000) shares to seventy-two million (72,000,000) shares. 

Concentration of Risk

We maintain cash and cash equivalents as well as short-term investment balances in accounts that exceed federally insured limits. Our investments consist primarily of marketable securities with a total portfolio duration of approximately two years.  We have historically provided credit in the normal course of business to contract counterparties and to the end user customers and distributors of our products. Trade accounts receivable in the accompanying condensed consolidated balance sheets consist primarily of amounts due from end user customers and distributors of our products within the United States.

The Company's revenue concentrations through distributors of 10% or greater are as follows:

The Company's accounts receivable concentrations of 10% or greater are as follows:

Recently Adopted Accounting Pronouncements 

In May 2014, the Financial Accounting Standards Board (“FASB) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (“Topic 606”).” This ASU outlines a single set of comprehensive principles for recognizing revenue under GAAP and supersedes existing revenue recognition guidance. The main principle of this ASU is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted the new standard on a modified retrospective basis as of January 1, 2018. The Company completed a comprehensive assessment of customer contracts and concluded that the adoption of this ASU did not have a material impact on our condensed consolidated financial statements; therefore, no adjustment was recorded upon adoption.  See Note 8, “Revenue,” for additional information.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 203).” This ASU addresses eight specific cash flow issues and clarifies their presentation and classification in the statement of cash flows. The Company adopted this ASU on January 1, 2018 and concluded that the adoption of this ASU did not have a material impact on our condensed consolidated financial statements.  As such, no retrospective adjustment was recorded. 

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the newly-enacted U.S. Tax Cuts and Jobs Act (the “Act”). SAB 118 allows registrants to include a provisional amount to account for the implications of the Act where a reasonable estimate can be made and requires the completion of the accounting no later than one year from the date of enactment of the Act or December 22, 2018.

Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This ASU requires, among other things, a lessee to recognize assets and liabilities associated with the rights and obligations attributable to most leases but also recognize expenses similar to current lease accounting. This ASU also requires certain qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases, along with additional key information about leasing arrangements.  Originally, entities were required to adopt Leases (Topic 842) using a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. However, in July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which now allows entities the option of recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. In July 2018, the FASB also issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which clarifies how to apply certain aspects of ASU 2016-02. ASU 2016-02, ASU 2018-10 and ASU 2018-11 (now commonly referred to as ASC Topic 842 (ASC 842)) is effective for the Company’s fiscal year beginning January 1, 2019.  The Company plans to elect the transition option provided under the ASU, which will not require adjustments to comparative periods nor require modified disclosures in those comparative periods. Upon adoption, the Company expects to elect the transition package of practical expedients permitted within the new standard, which among other things, allows the carryforward of the historical lease classification. Based on its anticipated election of practical expedients, the Company anticipates the recognition of right of use assets and related lease liabilities on its consolidated balance sheets related to its leases.  The Company is finalizing its analysis of data gathered to evaluate the impact of adopting this ASU on its consolidated financial statements. The Company will apply this ASU and its related updates on a modified retrospective basis as of January 1, 2019.  The adoption of the guidance will likely have a material effect on the consolidated balance sheets, resulting in the recording of an operating lease asset and liability.  The impact

on the consolidated statement of comprehensive income and the consolidated statement of cash flows are expected to be immaterial.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326).” The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. We have not yet begun to evaluate the specific impacts of this guidance nor have we determined the manner in which we will adopt this guidance.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  This ASU gives entities the option to reclassify the disproportionate income tax effects caused by the Act from accumulated other comprehensive income to retained earnings. The update also requires new disclosures, some of which are applicable for all entities. The guidance in ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and the timing of adoption although we do not believe the impact of adoption will be material.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.”  This ASU eliminates, adds, and modifies certain disclosure requirements for fair value measurements.  Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance in ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and the timing of adoption although we do not believe the impact of adoption will be material.

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This ASU requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the non-cancellable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. The guidance in ASU 2018-15 is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and the timing of adoption.

3. Investments

Our investments consisted of the following as of September 30, 2018 and December 31, 2017:

(1) Includes investments in notes issued by the Federal Home Loan Bank and the Federal Farm Credit Bank.

Unrealized losses on all fixed maturity investments in a continuous loss position for more than twelve consecutive months were $0.3 million and $0.2 million as of September 30, 2018 and December 31, 2017, respectively.  Unrealized losses on all fixed maturity investments in a continuous loss position for less than twelve consecutive months were not material as of September 30, 2018 and December 31, 2017.  As of September 30, 2018 and December 31, 2017, there were no material unrealized losses that the Company believed to be other-than-temporary.

The following table summarizes maturities of our investments available-for-sale as of September 30, 2018:

Realized losses net of investment income were not material for three-month period ended September 30, 2018 and 2017, respectively.  Realized losses net of investment income were $0.2 million for both the nine-month periods ended September 30, 2018 and 2017.  The realized losses net of investment income have been included as a component of “Other income, net” in the accompanying unaudited condensed consolidated statements of comprehensive income. 

4. Inventory, net

Inventory, net consisted of the following:

Work-in-process inventory is largely product that is in quarantine pending completion of our quality assurance procedures. Finished goods inventory included gross consigned inventory of $1.9 million and $1.5 million as of September 30, 2018 and December 31, 2017, respectively. This consigned finished goods inventory was reduced by reserves of $0.8 million and $0.6 million as of September 30, 2018 and December 31, 2017, respectively.

5. Property and Equipment, net

Property and equipment, net, consisted of the following:

(A) Shorter of economic life or lease term.

Depreciation expense was $0.2 million and $0.7 million for the three and nine-month periods ended September 30, 2018, respectively, and $0.2 million and $0.5 million for the three and nine-month periods ended September 30, 2017, respectively.

6. Accrued Liabilities

Accrued liabilities consisted of the following:

7. Financial Instruments and Fair Value

Fair value is defined as the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied.

Financial assets recorded at fair value in the accompanying financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities and are as follows:

When quoted prices in active markets for identical assets are available, we use these quoted market prices to determine the fair value of financial assets and classify these assets as Level 1. In other cases where a quoted market price for identical assets in an active market is either not available or not observable, we obtain the fair value from a third party vendor that uses pricing models, such as matrix pricing, to determine fair value. These financial assets would then be classified as Level 2. In the event quoted market prices were not available, we would determine fair value using broker quotes or an internal analysis of each investment’s financial statements and cash flow projections. In these instances, financial assets would be classified based upon the lowest level of input that is significant to the valuation. Thus, financial assets might be classified in Level 3 even though there could be some significant inputs that may be readily available.

Assets and liabilities measured at fair value on a recurring basis are summarized below as of September 30, 2018 and December 31, 2017:

There were no transfers in or out of Level 1, 2, or 3 during the nine-months ended September 30, 2018.

8. Revenue

The Company began accounting for revenue in accordance with Topic 606 on January 1, 2018, using the modified retrospective method. Under the new revenue standard for arrangements that are determined to be within the scope of Topic 606, the Company recognizes revenue following the five-step model: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines the performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Accordingly, the Company recognizes revenue when title to the product, ownership and risk of loss transfer to the customer, which is either the date of receipt by the customer or when we receive appropriate notification that the product has been used or implanted in a patient. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to in exchange for transferring the goods. The nature of the Company’s contracts gives rise to certain types of variable consideration, including rebates and other discounts. The Company includes estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue. Estimates are based on historical or anticipated performance and represent our best judgment at the time. Any estimates are evaluated on a quarterly basis until the uncertainty is resolved.

The Company provides a variety of products and services to its customers. Most of the Company’s contracts consist of a single, distinct performance obligation or promise to transfer goods to a customer. For contracts that include multiple performance obligations, the Company allocates the total transaction price to each performance obligation using our best estimate of the standalone selling price of each identified performance obligation.

The Company’s incremental costs of obtaining a contract would generally have less than a one-year duration; therefore, the Company applies the practical expedient available and expenses costs to obtain a contract when incurred.

The following table presents our revenues disaggregated by product line: 

9. Income Taxes

    We calculate our interim tax provision in accordance with the guidance for accounting for income taxes in interim periods.  At the end of each interim period, we estimate the annual effective tax rate and apply that tax rate to our ordinary quarterly pre-tax income from continuing operations. The tax expense or benefit related to significant, unusual or extraordinary discrete events during the interim period is recognized in the interim period in which those events occurred. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.  On December 22, 2017, the U.S. enacted the Act, which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018.  The Company’s effective income tax rate for the three and nine-month periods ended September 30, 2018 is lower than the federal statutory income tax rate primarily due to the estimated reduction of the valuation allowance resulting from the projected reversal of deferred tax assets during 2018.    For the three and nine-month periods ended September 30, 2018, our tax expense was ($100) thousand and ($170) thousand, respectively, primarily due to minimum state taxes, and interest and penalties related to uncertain tax positions.  Our tax benefit for the three and nine-month periods ended September 30, 2017 was $198 thousand and $134 thousand, respectively, due to the intraperiod tax allocation. A full valuation allowance has been recorded on the net deferred tax assets as of September 30, 2018 and December 31, 2017.  

    During the third quarter of 2018, we filed amended U.S. Federal and state income tax returns for 2015 and 2016 as well as the original 2017 U.S. Federal and state income tax returns which resulted in the reexamination of the provisional amount recorded in the 2017 financial statements.  This reexamination updated the gross tax basis of the deferred tax assets and liabilities, however, due to the full valuation allowance, there is no income tax effect or impact on our condensed consolidated financial statements. 

10. Commitments and Contingencies

Operating Leases

    We lease facilities and equipment under various non-cancellable operating lease agreements expiring through 2023. As of September 30, 2018, the Company’s total future minimum lease payments under non-cancelable operating leases were $6.6 million.

Legal

The Company is party to outstanding legal proceedings and claims as described below. The Company cannot predict with any certainty the final outcome of any legal proceedings or claims made against it as described in the paragraphs below, and there can be no assurance that the ultimate resolution of any such matter will not have a material adverse impact on the Company’s consolidated financial position, results of operations, or cash flows.

The Company records accruals for certain outstanding legal proceedings, investigations or claims when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings, investigations and claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable. When a loss contingency is not both probable and reasonably estimable, the Company does not accrue the loss. However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then the Company discloses a reasonable estimate of the possible loss or range of loss, if such reasonable estimate can be made. If the Company cannot make a reasonable estimate of the possible loss, or range of loss, then that is disclosed.

The assessments of whether a loss is probable or a reasonable possibility, and whether the loss or range of loss is reasonably estimable, often involve a series of complex judgments about future events. Among the factors that the Company considers in this assessment are the nature of existing legal proceedings, investigations and claims, the asserted or possible damages or loss contingency (if reasonably estimable), the progress of the matter, existing law and precedent, the opinions or views of legal counsel and other advisers, the involvement of the U.S. Government and its agencies in such proceedings, the Company’s experience in similar matters and the experience of other companies, the facts available to the Company at the time of assessment, and how the Company intends to respond, or has responded, to the proceeding, investigation or claim. The Company’s assessment of these factors may change over time as individual proceedings, investigations or claims progress. For matters where the Company is not currently able to reasonably estimate the range of reasonably possible loss, the factors that have contributed to this determination include the following: (i) the damages sought are indeterminate or uncertain, or an investigation has not manifested itself in a filed civil or criminal complaint, (ii) the matters are in the early stages, (iii) the matters involve novel or unsettled legal theories or a large or uncertain number of actual or potential cases or parties, and/or (iv) discussions with the government or other parties in matters that may be expected ultimately to be resolved through negotiation and settlement have not reached the point where the Company believes a reasonable estimate of loss, or range of loss, can be made. In such instances, the Company believes that there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss, fine, penalty or business impact, if any.

The Company does not accrue for estimated legal fees and other directly related costs as they are expensed as incurred.

In addition to the matters described in the paragraphs below, in the normal course of its business, the Company is involved in various lawsuits from time to time and may be subject to certain other contingencies, none of which we believe to be material.

Based on our analysis and assessment as described above, including consultation with our legal counsel, management believes there are no matters that are probable or reasonably possible that require accrual or disclosure, except for the matters described below.

Securities Class Action

On November 23, 2015, a putative class action lawsuit was filed in the United States District Court for the District of Maryland by a single plaintiff, individually and on behalf of other persons similarly situated, against the Company and three current or former executive officers of the Company. An amended complaint clarifying plaintiff's claims was filed on April 6, 2018. The action, captioned Kiran Kumar Nallagonda v. Osiris Therapeutics, Inc. et al., Case 1:15-cv-03562 (the “Nallagonda Action”), alleges, among other things, that the defendants made materially false or misleading statements and material omissions in the Company’s filings with the SEC in violation of the federal securities laws. The complaint seeks certification as a class action, unspecified damages and reimbursement of attorneys’ fees. On March 21, 2016, the court entered an order appointing Dr. Raffy Mirzayan as lead plaintiff and the firm of Hagens Berman Sobol Shapiro LLP as lead counsel. On March 11, 2018, we entered into a memorandum of understanding to settle the Nallagonda Action. Subsequently, on June 5, 2018, the parties executed a Stipulation and Settlement Agreement in which the Company agreed in principle to pay $18.5 million in cash to create a settlement fund for the benefit of class members. On June 12, 2018, the lead plaintiff filed an Unopposed Motion for Preliminary Approval of the parties’ settlement. On September 4, 2018, the Court entered an order preliminarily approving the settlement and scheduling a hearing for February 4, 2019 to determine whether the proposed settlement is fair, reasonable and adequate and whether the case should therefore be dismissed with prejudice. The Company also expects that lead plaintiff will seek an award of attorneys’ fees and expenses from the settlement fund. Both the settlement itself and any award to lead plaintiff of attorneys’ fees and expenses remain subject to Court approval. The Company can provide no assurance that the Court will approve the settlement.  On October 3, 2018, the Company deposited the $18.5 million settlement payment into an escrow account, pending final Court approval of the settlement.

The Company had a $5.0 million executive and corporate securities liability insurance policy in place at the time of the allegations. The Company received the remaining $4.8 million of unused policy coverage for the shareholder settlement of the Nallagonda Action on October 9, 2018 which is recorded as Insurance receivable in the condensed consolidated balance sheets at both September 30, 2018 and December 31, 2017. 

Shareholder Derivative Actions

On March 2, 2016, a shareholder derivative complaint was filed in the Circuit Court for Howard County in the State of Maryland (Case No. 13C16106811) by a single plaintiff, derivatively and on behalf of the Company, against certain current and former directors and certain former executive officers (the “Connelley Action”). This action, captioned Kevin Connelley v. Lode Debrabandere et al., alleges that each of the individual directors and officers named as defendants (i) violated their fiduciary duties to the Company’s shareholders; (ii) abused their ability to control and influence the Company; (iii) engaged in gross mismanagement of the assets and business of the Company; and (iv) was unjustly enriched at the expense of, and to the detriment of, the Company. The alleged claims generally relate to the matters that are the subject of the Nallagonda Action. The plaintiff seeks, among other things, unspecified monetary damages, reimbursement of attorneys’ fees and shareholder votes on amendments to the Company’s Articles of Incorporation and Bylaws with respect to various corporate governance policies. On June 2, 2016, the Court entered an order that, subject to certain qualifications, stayed the action until 30 days after the entry of an order either: (1) denying all motions to dismiss in the Nallagonda Action, or (2) finally dismissing the Nallagonda Action with prejudice. On March 12, 2018, the plaintiff filed an amended complaint clarifying his claims. On or about July 31, 2018, the parties advised the Court that the Company and the plaintiffs in various derivative actions, including the plaintiff in the Connelley Action, had entered into a Memorandum of Understanding to resolve those derivative actions (see below).

On February 9, 2017, a shareholder derivative complaint was filed in the United States District Court for the District of Maryland (Case No. 1:17-cv-00381-JKB) by a single plaintiff, derivatively and on behalf of the Company, against certain current and former directors (the “Recupero Action”). This action, captioned Recupero v. Friedli et al., alleges, among other things, that each of the individual directors named as defendants (i) violated their fiduciary duties to the Company’s shareholders, including that such violations constituted constructive fraud; (ii) engaged in gross mismanagement of the assets and business of the Company; and (iii) was unjustly enriched at the expense of, and to the detriment of, the Company. The plaintiff seeks, among other things, unspecified monetary damages, reimbursement of attorneys’, accountants’ and experts’ fees, and that the Company take all necessary actions to improve and comply with corporate governance, internal procedures and existing laws. On March 28, 2017, the Court entered an order that stays