ZYLA LIFE SCIENCES The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and the related notes thereto included in this Annual Report. In addition to historical information, some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forwardlooking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Annual Report, our actual results could differ materially from the results described in or implied by the forwardlooking statements contained in the following discussion and analysis.
Overview
We are a commercial-stage life science company focused on developing and marketing important treatments for patients and healthcare providers. We currently have a portfolio of innovative treatments for pain and inflammation. We have six commercially available products: SPRIX® (ketorolac tromethamine) Nasal Spray, ZORVOLEX® (diclofenac), INDOCIN® (indomethacin) suppositories, VIVLODEX® (meloxicam), INDOCIN® oral suspension and OXAYDO® (oxycodone HCI, USP) tablets for oral use only -CII. VIVLODEX and ZORVOLEX are SOLUMATRIX® Technology non-steroidal anti-inflammatory products. To augment our current product portfolio, we continually seek to acquire additional product candidates or approved products to develop and/or market. We plan to grow our business through our commercial revenue and potential business development opportunities. We discontinued the sale and distribution of ARYMO® ER, an extended release morphine product formulated with abuse-deterrent properties, onSeptember 28, 2018 .
Merger Transaction with Assertio Therapeutics, Inc.
OnMarch 16, 2020 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among us, Assertio Therapeutics, Inc. ("Assertio"),Alligator Zebra Holdings, Inc. ("Parent"),Zebra Merger Sub, Inc. , a wholly-owned subsidiary of Parent ("Merger Sub") andAlligator Merger Sub, Inc. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into us, with us continuing as the surviving corporation and a wholly-owned subsidiary of Parent. Pursuant to the terms of the Merger Agreement, at the time the merger is effective, each outstanding share of common stock, par value$0.001 per share, of the Company (the "Common Stock") (other than Excluded Shares (as defined below) and Dissenting Shares (as defined below)) will be converted into the right to receive 2.5 shares (the "Exchange Ratio") of common stock, par value$0.0001 per share, of Parent ("Parent Common Stock"). Each share of Common Stock that is held by the Company as treasury stock or that is owned, directly or indirectly, by Parent, the Company, Merger Sub, or any subsidiary of the Company (collectively, "Excluded Shares"), immediately prior to the effective time of the Merger (the "Effective Time") will cease to be outstanding and will be cancelled and retired and will cease to exist, and no consideration will be delivered in exchange therefor. "Dissenting Shares" are shares of the Common Stock (other than Excluded Shares) outstanding immediately prior to the Effective Time and held by a holder who is entitled to demand and has properly demanded appraisal for such shares of the Common Stock in accordance with Section 262 of the Delaware General Corporation Law. Consummation of the Merger is subject to certain conditions to closing, including, among others, including (1) requisite approvals of our and Assertio's stockholders; (2) the absence of certain legal impediments to the consummation of the Merger; (3) the approval of shares of Parent Common Stock to be issued as consideration in the Merger for listing on theNasdaq Stock Market , (4) effectiveness of the registration statement on Form S-4 registering the shares of Parent Common Stock and other equity instruments to be issued in the Merger, (5) subject to certain exceptions, the accuracy of the representations, warranties and compliance with the covenants of each party to the Merger Agreement, and (6) Assertio, Parent and their respective Subsidiaries having minimum cash and cash equivalents equal to$25 million in the aggregate (as calculated pursuant to the Merger Agreement). We are working toward completing the Merger as quickly as possible and currently expect to consummate the merger in the second calendar quarter of 2020. 69 Table of Contents The pendency of this transactions may impact our operations and continuation of historical trends in future periods, including for those matters referred to in Part I, Item 1A, "Risk Factors." Therefore, the discussion and analysis of our financial condition and results of operations below may not be indicative of future operating results or financial condition for these reasons as well as for other reasons, including the potential realization of the risks identified elsewhere in this Annual Report, including in Part I, Item 1A "Risk Factors", or other risks and uncertainties we may face. The remainder of this Management's Discussion and Analysis of Financial Condition and Results of Operations does not take into account or give any effect to the pendency or other potential impact of the Merger.
Iroko Acquisition and Restructuring
OnOctober 30, 2018 , we entered into an asset purchase agreement withIroko Pharmaceuticals, Inc. ("Iroko") (the "Iroko Acquisition") pursuant to which, upon the terms and subject to the conditions set forth therein, we agreed to acquire certain assets and rights ofIroko , including assets related toIroko's marketed products VIVLODEX, TIVORBEX, ZORVOLEX and INDOCIN (indomethacin) oral suspension and suppositories ("INDOCIN"). The Iroko Acquisition closed onJanuary 31, 2019 . The Iroko Acquisition was to be effectuated pursuant to, and was conditioned upon, the occurrence of the effective date of the joint plan of reorganization related to the voluntary petitions for reorganization underthe United States Bankruptcy Code filed in theUnited States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court ") onOctober 30, 2018 . OnOctober 30, 2018 , we entered into a restructuring support agreement with creditors holding approximately 94% in aggregate principal amount outstanding and in excess of a majority in number of our 13% Notes and approximately 67% in aggregate principal amount outstanding of our then existing 5.50% convertible notes ("5.50% Notes") and 6.50% convertible notes ("6.50% Notes") in connection with our filing of the Chapter 11 cases onOctober 30, 2018 . OnJanuary 14, 2019 , theBankruptcy Court entered an order confirming the joint plan of reorganization. OnJanuary 31, 2019 (the "Effective Date"), and substantially concurrent with the consummation of the Iroko Acquisition, the plan became effective.
Pursuant to the plan, on the Effective Date, among other things, the following transactions occurred:
· payment in full, in cash, of all administrative claims, statutory fees,
professional fee claims and certain priority other secured claims, and general
unsecured claims (or, to the extent not so paid, such amounts shall be paid as
soon as practicable after the Effective Date or in the ordinary course of
business, subject to the reorganized company's claims and defenses);
· the cancellation of all of the Company's common stock and all other equity
interests in the Company outstanding on the Effective Date prior to
consummation of the transactions; the conversion of approximately
of claims (the "First Lien Secured Notes Claims") related to the Company's 13%
Notes into (1)
(2) the number of shares of the Company's common stock (or warrants)
representing, in the aggregate, 19.38% of the shares outstanding as of the
Effective Date (subject to dilution only on account of the Management Incentive
Plan (the "MIP") (as defined in the Plan)) (the "First Lien Equity
Distribution), (3)
adequate protection payments, and (4) cash in an amount equal to certain unpaid
fees and expenses of the trustee under the indenture governing the 13% Notes;
· the conversion of
related to the Company's 5.50% Notes and its 6.50% Notes into the number of
shares of common stock of the Company (or warrants) representing, in the
aggregate, 31.62% of the shares outstanding as of the Effective Date (subject
to dilution only on account of the MIP);
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· the consummation of the Iroko Acquisition and other transactions contemplated
by the asset purchase agreement; and
· the effectiveness of the discharge, release, exculpation and injunction
provisions for the benefit of the Debtors', certain of the Debtors'
claimholders and certain other parties in interest, each in their capacities as
such, from various claims and causes of action.
Each of the foregoing percentages of equity in the Company is subject to
dilution solely from the shares issued or reserved for issuance under the MIP.
On the Effective Date, following the consummation of the Iroko Acquisition and
the other transactions contemplated by the plan, there were 9,360,968 shares of
our common stock issued and outstanding and warrants for an aggregate of
4,972,364 shares of our common stock.
On the Effective Date, the Company issued (i) an aggregate of 4,774,093 shares
of common stock to the former holders of First Lien Secured Notes Claims and
Convertible Notes Claims and (ii) warrants for an aggregate of 2,535,905 shares
of common stock to certain holders of First Lien Secured Notes Claims and
Convertible Notes Claims.
Upon emergence from bankruptcy, we adopted the provisions of Financial
Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")
852, Reorganizations, ("fresh start accounting") which resulted in our becoming
a new entity for financial reporting purposes on February 1, 2019 . As a result
of the adoption of fresh start accounting, our consolidated financial statements
subsequent to January 31, 2019 are not necessarily indicative of the results to
be expected for any future year or period.
References to "Successor" or "Successor Company " relate to the financial
position and results of operations of the reorganized Company subsequent to
January 31, 2019 . References to "Predecessor" or "Predecessor Company " relate to
the financial position and results of operations of the Company prior to, and
including, January 31, 2019 .
We incurred a net loss of$46.6 million , net income of$107.2 million and a net loss of$95.5 million for the periodFebruary 1, 2019 throughDecember 31, 2019 (Successor), the periodJanuary 1, 2019 throughJanuary 31, 2019 (Predecessor), and the year endedDecember 31, 2018 (Predecessor), respectively. We recognized total revenues of$79.5 million ,$1.8 million and$30.4 million for the periodFebruary 1, 2019 throughDecember 31, 2019 (Successor), the periodJanuary 1, 2019 throughJanuary 31, 2019 (Predecessor), and the year endedDecember 31, 2018 (Predecessor), respectively which were all product sales. As ofDecember 31, 2019 , we had an accumulated deficit of$46.6 million . We expect to incur significant expenses and operating losses for the foreseeable future as we incur significant commercialization expenses as we continue to grow our sales, marketing and distribution infrastructure to sell our commercial products inthe United States . Additionally, we expect to continue to protect and expand our intellectual property portfolio. Until we become profitable, if ever, we will seek to fund our operations primarily through public or private equity or debt financings or other sources. Other additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed could have a material adverse effect on our financial condition and our ability to pursue our business strategy. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts Please see Part 1, Item 1A "Risk Factors" for a description of risks and uncertainties related to COVID-19 and other uncertainties and risks to our business.
Critical Accounting Policies and Significant Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements which we have prepared in accordance withU.S. Generally Accepted Accounting Principles ("GAAP"). The preparation of financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. 71
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Actual results may differ from those estimates under different assumptions or
conditions. We believe the following critical accounting policies reflect the
more significant judgements and estimates used in the preparation of our
consolidated financial statements. See Note 2 of Notes to the Consolidated
Financial Statements for a complete list of our significant accounting policies.
Revenue Recognition
We adopted ASC 606 and accordingly revenue is recognized when, or as,
performance obligations under the terms of a contract are satisfied, which
occurs when control of the promised products or services is transferred to
customers. To recognize revenue pursuant to the provisions of ASC 606, we
perform the following five steps: (i) identify the contract(s) with a customer;
(ii) identify the performance obligations in the contract; (iii) determine the
transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) we satisfy a
performance obligation. We only apply the five-step model to contracts when it
is probable that we will collect substantially all the consideration that we are
entitled to in exchange for the goods or services transferred to our customer.
At contract inception, once the contract is determined to be within the scope of
ASC 606, we assess whether the goods or services promised within each contract
are distinct to determine those that are performance obligations.
Revenue is measured as the amount of consideration we expect to receive in
exchange for transferring products or services to a customer ("transaction
price"). We then recognize as revenue the amount of the transaction price that
is allocated to the respective performance obligation when (or as) the
performance obligation is satisfied. To the extent that the transaction price
includes variable consideration, we estimate the amount of variable
consideration that should be included in the transaction price to which we
expect to be entitled after giving effect to returns, rebates, sales allowances
and other variable elements with contracts between us and our
customers. Variable consideration is included in the transaction price if, in
our judgment, it is probable that a significant future reversal of cumulative
revenue under the contract will not occur. Estimates of variable consideration
and determination of whether to include estimated amounts in the transaction
price are based largely on an assessment of our anticipated performance under
the contract and all information (historical, current and forecasted) that is
reasonably available. Sales taxes and other taxes collected on behalf of third
parties are excluded from revenue.
When determining the transaction price of a contract, an adjustment is made if
payment from a customer occurs either significantly before or significantly
after performance, resulting in a significant financing component. Applying the
significant financing practical expedient, we do not assess whether a
significant financing component exists if the period between when we perform our
obligations under the contract and when the customer pays is one year or
less. None of our contracts contained a significant financing component during
the year ended December 31, 2019 .
Our existing contracts with customers contain only a single performance
obligation and, as such, the entire transaction price is allocated to the single
performance obligation. Should future contracts contain multiple performance
obligations, those would require an allocation of the transaction price based on
the estimated relative standalone selling prices of the promised products or
services underlying each performance obligation. We determine standalone selling
prices based on observable prices or a cost-plus margin approach when one is not
available.
Our performance obligations are to provide pharmaceutical products to several
wholesalers or a single specialty pharmaceutical distributor. All of our
performance obligations, and associated revenue, are generally transferred to
customers at a point in time. Revenue is recognized at the time the related
performance obligation is satisfied by transferring control of a promised good
to a customer, which is typically upon delivery. Payments for invoices are
generally due within 30 to 65 days of invoice date.
Product Sales Allowances
We recognize product sales allowances as a reduction of product sales in the
same period the related revenue is recognized. Product sales allowances are
based on amounts owed or to be claimed on the related sales. These estimates
take into consideration the terms of our agreements with customers and
third-party payors that may result in future rebates or discounts taken. In
certain cases, such as patient discount programs, we recognize the cost of
patient discounts as a reduction of revenue based on estimated utilization. If
actual future results vary, we may need to adjust these
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estimates, which could have an effect on product revenue in the period of adjustment. Our product sales allowances include:
Product Returns. Consistent with industry practice, we generally offer customers a limited right of return for our products. We estimate the amount of our product sales that may be returned by our customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. We estimate product return liabilities using the expected value method based on our historical sales information and other factors that we believe could significantly impact our expected returns, including product discontinuations, product recalls and expirations, of which we become aware. These factors include our estimate of actual and historical return rates for non-conforming product and open return requests. Specialty Pharmacy Fees. We offer a discount to a certain specialty pharmaceutical distributor based on a contractually determined rate. We record the fees on shipment to the distributor and recognize the fees as a reduction of revenue in the same period the related revenue is recognized. Wholesaler and Title Fees. We pay certain pharmaceutical wholesalers and its third-party logistics provider fees based on a contractually determined rate. We accrue these fees on shipments to the respective wholesalers and recognize the fees as a reduction of revenue in the same period the related revenue is recognized. Prompt Pay Discounts. We offer cash discounts to our customers, generally 2% of the sales price, as an incentive for prompt payment. We account for cash discounts by reducing accounts receivable by the prompt pay discount amount and recognize the discount as a reduction of revenue in the same period the related revenue is recognized. Patient Discount Programs. We offer co-pay discount programs for each of our products to patients, in which patients receive a co-pay discount on their prescriptions. We utilize data provided by independent third parties to determine the total amount that was redeemed and recognize the discount as a reduction of revenue in the same period the related revenue is recognized. Rebates and Chargebacks. Managed care rebates are payments to governmental agencies and third parties, primarily pharmacy benefit managers and other health insurance providers. The reserve for these rebates is based on a combination of actual utilization provided by the third party and an estimate of customer buying patterns and applicable contractual rebate rates to be earned over each period. We recognize the discount as a reduction of revenue in the same period the related revenue is recognized.Goodwill Goodwill is calculated as the excess of the reorganization equity value over the fair value of tangible and identifiable intangible assets pursuant to ASC 852, Reorganizations.Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually or when a triggering event occurs that could indicate a potential impairment by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that the fair value of net assets are below their carrying amounts. A reporting unit is the same as, or one level below, an operating segment. Our operations are currently comprised of a single, entity wide reporting unit.
Intangible and Long-Lived Assets
Long-lived intangible assets acquired as part of the SPRIX Nasal Spray
acquisition, OXAYDO license and INDOCIN product rights are being amortized on a
straight-line basis over their estimated useful lives of 9 years, 3 years and 9
years, respectively. We estimated the useful life of the assets by considering
competition by products prescribed for the same indication, the likelihood and
estimated future entry of non-generic and generic competition for the same or
similar indication and other related factors. The factors that drive the
estimate of the life are often uncertain and are reviewed on a periodic basis or
when events occur that warrant review.
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We assess the recoverability of our longlived assets, which include property
and equipment and product rights whenever significant events or changes in
circumstances indicate impairment may have occurred. If indicators of impairment
exist, projected future undiscounted cash flows associated with the asset are
compared to the carrying amount to determine whether the asset's value is
recoverable. Any resulting impairment is recorded as a reduction in the carrying
value of the related asset and a charge to operating results. During the year
ended December 31, 2018 , we recorded a charge of $0.1 million to restructuring
and other charges to write off the remaining IP R&D intangible asset related to
our Guardian Technology due to our decision to discontinue the manufacturing and
promotion of ARYMO ER.
StockBased Compensation Expense
We apply the fair value recognition provisions of ASC Topic 718, Compensation-Stock Compensation. Determining the amount of share-based compensation expense to be recorded requires us to develop estimates of the fair value of stock options as of their grant date. We recognize share-based compensation expense ratably over the requisite service period, which in most cases is the vesting period of the award. Calculating the fair value of share-based awards requires that we make highly subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Use of this valuation methodology requires that we make assumptions as to the volatility of our common stock, the expected term of our stock options, and the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. We use the simplified method as prescribed by theSEC Staff Accounting Bulletin ("SAB") No. 107, Share-Based Payment, to calculate the expected term of stock option grants to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. Expected volatility is based on the actual historical volatility of our stock price. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention to pay cash dividends. The risk-free interest rate used for each grant is based on theU.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life. The weighted-average assumptions used to estimate the fair value of stock options using the Black-Scholes option pricing model were as follows for the year endedDecember 31, 2019 : Successor Period fromFebruary 1, 2019 throughDecember 31, 2019 Risk-free interest rate 1.37 - 2.27 % Expected term of options (in years) 6.00 Expected volatility 80.00 % Dividend yield -
Acquisition-related contingent consideration
Pursuant to the Iroko Products Acquisition, we have obligations relating to contingent payment consideration for future royalty obligations toIroko based upon annual INDOCIN product net sales over$20.0 million . We recorded the acquisition-date fair value of these contingent liabilities, based on the likelihood of contingent earn-out payments. The earn-out payments are subsequently remeasured to fair value each reporting date. The fair value of the acquisition-related contingent consideration is remeasured each reporting period, with changes in fair value recorded in our Consolidated Statements of Operations. The royalty term commenced on the Effective Date and ends on the tenth anniversary of the Effective Date,January 31, 2029 . 74 Table of Contents Income Taxes Our income tax expense, deferred tax assets and reserves for unrecognized tax benefits reflect management's best assessment of estimated future taxes to be paid. We are subject to income taxes inthe United States ,Denmark , and theUnited Kingdom ("U.K."). Significant judgments and estimates are required in determining the consolidated income tax expense, including a determination of whether and how much of a tax benefit taken by us in our tax filings or positions is more likely to be realized than not. We believe that it is more likely than not that the benefit from some of ourU.S. federal,U.S. state,Denmark , andU.K. net operating loss carryforwards will not be realized. AtDecember 31, 2019 , in recognition of this risk, we have provided a valuation allowance of approximately$96.9 million on the deferred tax assets relating to these net operating loss carryforwards and other deferred tax assets. If our assumptions change and we determine we will be able to realize these net operating losses, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets atDecember 31, 2018 will be accounted for as a reduction of income tax expense. We recognize tax liabilities in accordance with ASC Topic 740 ,- Tax Provisions and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.
Results of Operations
Comparison of the period from
Successor Predecessor
Period from Period from
February 1,
2019 January 1, 2019
through through Year ended
December 31, December 31,
(in thousands) 2019 January 31, 2019 2018 Change
Revenue
Net product sales $ 79,527 $ 1,775 $ 30,353 $ 50,949
Total revenue 79,527 1,775 30,353 50,949
Costs and Expenses
Cost of sales (excluding amortization of
product rights) 40,553 554 7,447 33,660
Amortization of product rights 12,823
171 2,107 10,887
General and administrative 22,321 5,413 24,079 3,655
Sales and marketing 32,536 2,773 33,730 1,579
Research and development 22 186 3,536 (3,328)Restructuring & other charges 1,920 799 17,043 (14,324) Change in fair value of contingent consideration payable 4,983 - - 4,983 Total costs and expenses 115,158 9,896 87,942 37,112 Loss from operations (35,631) (8,121) (57,589) 13,837 Other (income) expense: Change in fair value of warrant and derivative liability - - (12,292) 12,292 Interest expense, net 13,353 (52) 41,280 (27,979) Other gain (3,337) (140) (144) (3,333)
Loss (gain) on foreign currency exchange -
- (1) 1
Total other (income) expense 10,016 (192) 28,843 (19,019)
Reorganization items 993 (115,169) 9,022 (123,198)
Net (loss) income $ (46,640) $ 107,240 $ (95,454) $ 156,054
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Net product sales
Net product sales increased $50.9 million to $81.3 million for the year ended
December 31, 2019 compared to net product sales of $30.4 million for the year
ended December 31, 2018 . Net product sales for the year ended December 31, 2019
consisted of $25.3 million for SPRIX Nasal Spray, $7.1 million for OXAYDO, $41.5
million for INDOCIN products, and $7.4 million for the SOLUMATRIX products. Net
product sales for the year ended December 31, 2018 consisted of $23.4 million
for SPRIX Nasal Spray, $5.8 million for OXAYDO and $1.2 million for ARYMO ER.
Our ability to generate additional revenue and become profitable depends upon
our ability to expand the marketing and sales of our approved products or grow
our business through potential business development opportunities.
Cost of sales (excluding amortization of product rights)
Cost of sales (excluding amortization of product rights) increased$33.7 million to$41.1 million for the year endedDecember 31, 2019 compared cost of sales (excluding amortization of product rights) of$7.4 million to the year endedDecember 31, 2018 .
Cost of sales for SPRIX Nasal Spray and OXAYDO reflect the average cost of inventory shipped to wholesalers and specialty pharmaceutical companies fromJanuary 1, 2019 toJanuary 31, 2019 . Cost of sales for SPRIX Nasal Spray, OXAYDO, SOLUMATRIX products and INDOCIN products reflects the fair value of finished goods inventory for the period fromFebruary 1, 2019 toDecember 31, 2019 .
Cost of sales for SPRIX Nasal Spray, OXAYDO and ARYMO ER for the year ended
Amortization of product rights
Amortization of product rights increased$10.9 million to$13.0 million for the year endedDecember 31, 2019 compared amortization of product rights of$2.1 million for the year endedDecember 31, 2018 . Amortization of product rights relates to the INDOCIN, OXAYDO and SPRIX Nasal Spray intangible assets. The increase was due to the acquisition onJanuary 31, 2019 of the INDOCIN product rights that were valued at$90.1 million and the increase in the value of the SPRIX Nasal Spray intangible asset to$31.9 million , offset in part by a decrease in value of the OXAYDO intangible asset as a result of a fresh start accounting.
General and administrative expenses
Successor Predecessor
Period from Period from
January 1,
February 1, 2019 2019
through through Year ended
January 31, December 31,
(in thousands) December 31, 2019 2019 2018 Change
Salary and related benefits and employee
costs $ 7,008 $ 839 $ 8,975 $ (1,128)
Legal, accounting, tax and insurance 4,473 204 3,179 1,498 Regulatory and related 2,574 503 3,288 (211) Stock compensation 2,126 3,466 3,538 2,054 Other professional fees including public company costs 1,962 95 3,862 (1,805) Intellectual property 1,287 3 139 1,151 Other general and administrative costs 2,891 303 1,098 2,096 Total general and administrative expenses $ 22,321 $
5,413$ 24,079 $ 3,655 76 Table of Contents
General and administrative ("G&A") expenses increased $3.7 million to $27.7
million for the year ended December 31, 2019 compared to G&A expenses of $24.1
million to the year ended December 31, 2018 . This increase was primarily
attributable to $2.1 million of higher stock compensation partially offset by
lower salary and related costs, $1.2 million of higher intellectual property and
related costs, and $1.5 million of higher legal, accounting, tax and insurance
costs. We anticipate our G&A expenses will increase in the future due to growth
of our commercialization efforts for our approved products and costs related to
any business development activities. These increases will likely include
increased costs for insurance, hiring of additional personnel and payments to
outside consultants, regulatory fees, and legal and accounting fees, among
other
expenses.
Sales and marketing expenses
Successor Predecessor
Period from Period from
January 1,
February 1, 2019 2019
through through Year ended
January 31, December 31,
(in thousands) December 31, 2019 2019 2018 Change
Salary and related benefits and employee costs $ 18,510 $ 1,410 $ 20,453 $ (533)
Promotional and marketing programs 9,570 657 9,407 820
Other professional fees including consultants 2,705 65 1,808 962
Stock compensation 111 444 314 241
Other sales and marketing expenses 1,640 197 1,748 89
Total sales and marketing expenses $ 32,536 $
2,773
Sales and marketing ("S&M") expenses increased $1.6 million to $35.3 million for
the year ended December 31, 2019 compared to S&M expenses of $33.7 million for
the year ended December 31, 2018 . The increase was primarily due to higher
spending for consultants and marketing programs to support our Iroko acquired
products of $1.0 million and $0.8 million , respectively, partially offset by
lower employee compensation and related costs, including travel and fleet
expenses, of $0.5 million . We anticipate that our S&M expenses will continue to
increase as we grow our commercial operations. These increases will likely
include increased costs for hiring of additional personnel, outside consultants
and marketing programs, among other expenses.
Research and development expenses
Research and development ("R&D") expenses decreased $3.3 million to $0.2 million
for the year ended December 31, 2019 compared to R&D expense of $3.5 million for
the year ended December 31, 2018 . This decrease was driven by a discontinuation
of costs that did not directly support the growth of our commercial business. We
anticipate that our future research and development expense will continue to
decline as we are seeking partners for each of our product candidates.
Restructuring and other charges
Restructuring and other charges of$2.7 million for the year endedDecember 31, 2019 reflect costs of severance payments related to the reduction of executive officers and a reduction in force in ourDenmark facility inJanuary 2019 . Restructuring and other charges of$17.0 million for the year endedDecember 31, 2018 reflected costs related to the discontinuation of ARYMO ER of$8.2 million and a termination payment toHalo Pharmaceuticals of$3.1 million , and legal and other professional fees of$5.8 million .
Change in fair value of acquisition-related contingent consideration
Acquisition-related contingent consideration, which consists of our future royalty obligations toIroko based upon annual INDOCIN product net sales over$20.0 million , was recorded on the acquisition date,January 31, 2019 , at the estimated fair value of the obligation, in accordance with the acquisition method of accounting. The fair value of the 77
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acquisition-related contingent consideration is remeasured quarterly. The change in fair value of the acquisition-related contingent consideration for the periodFebruary 1, 2019 throughDecember 31, 2019 was$5.0 million which was primarily attributable to higher revenue projections and a decrease in the applicable discount rate.
Change in fair value of warrant and derivative liability
The interest make-whole provisions of the 6.50% Notes, as well as the warrant liability associated with the warrants issued in ourJuly 2017 Equity offering are subject to re-measurement at each balance sheet date. Refer to Note 6 - Fair Value Measurements to our Consolidated Financial Statements included in Item 15 of this Annual Report for additional details. We recognize any change in fair value in our Consolidated Statements of Operations and Comprehensive Loss as a change in fair value of the derivative liabilities. During the year endedDecember 31, 2018 we recognized a change in the fair value of our derivative liabilities of$12.3 million . The 6.50% Notes and warrants were cancelled as part of the reorganization. Interest expense, net
Interest expense, net decreased by
Interest expense of$13.3 million for the year endedDecember 31, 2019 includes non-cash interest and amortization of debt discount totaling$6.1 million . Interest expense of$41.3 million for the year endedDecember 31, 2018 includes non-cash interest and amortization of debt discount totaling$38.3 million . Refer to Note 11 to our Consolidated Financial Statements included in Item 15 of this Annual Report for additional details about our long-term debt atDecember 31, 2018 . Other gain
Other gain of
Reorganization items
Reorganization items of
Reorganization charges of
Provision (benefit) for income taxes
We had no provision nor benefit for the years ended
Liquidity and Capital Resources
Due to historical net losses, we have an accumulated deficit of$46.6 million and a working capital deficit of$24.1 million atDecember 31, 2019 . Cash, cash equivalents and restricted cash totaled$12.4 million as ofDecember 31, 2019 . We incurred a net loss of$46.6 million for the periodFebruary 1, 2019 throughDecember 31, 2019 , net income of$107.2 million for the periodJanuary 1, 2019 throughJanuary 31, 2019 , and a net loss of$95.5 million for the year endedDecember 31, 2018 . Our operating activities used net cash of$11.0 million
during the periodFebruary 1, 2019 78 Table of Contents
through
The Merger Agreement generally requires us to operate our business in the ordinary course pending consummation of the Merger, and subject to certain limited exceptions, including, without limitation, Assertio's prior written consent, it restricts us from taking certain specified actions until the Merger is complete or the agreement is terminated, including, without limitation, not exceeding a certain amount in capital expenditures, not entering into certain types of contracts and other matters.
Cash Flows
Comparison of the period from
The following table summarizes our cash flows for the period fromFebruary 1, 2019 throughDecember 31, 2019 , the period fromJanuary 1, 2019 throughJanuary 31, 2019 and the year endedDecember 31, 2018 : (in thousands) Successor Predecessor Period from Period from February 1, 2019 January 1, 2019 through through Year ended December 31, 2019 January 31, 2019 December 31, 2018 Net cash provided by (used in): Operating activities $ (10,964) $ 822 $ (54,814) Investing activities 4,970 - 55,209 Financing activities 914 (19,104) 3,912 Effect of foreign currency translation on cash (2) 6 (74) Net increase (decrease) in cash, cash equivalents and restricted cash $ (5,082)$ (18,276) $ 4,233
Cash Flows from Operating Activities
Net cash used in operating activities for the period fromFebruary 1, 2019 throughDecember 31, 2019 was$11.0 million and consisted primarily of a net loss of$46.6 million . The net loss was partially offset by non-cash adjustments of$13.6 million for depreciation and amortization expense,$6.1 million of non-cash interest and amortization of debt discount, and$5.0 million due to the change in fair value of contingent consideration. Net cash outflows from changes in operating assets and liabilities of$9.6 million consisted of an increase in accounts receivable of$21.6 million , offset by a decrease in inventory of$24.8 million and an increase in accounts payable and accrued expenses of$8.0 million . Net cash provided by operating activities for the period fromJanuary 1, 2019 throughJanuary 31, 2019 was$0.8 million and consisted primarily of net income of$107.2 million . In addition to net income, there were reorganization items of$121.1 million . Net cash inflows from changes in operating assets and liabilities of$10.4 million primarily consisted of a decrease in accounts receivable of$3.9 million , a decrease in other receivables of$0.7 million and a decrease in accrued expenses of$5.2 million . Net cash used in operating activities was$54.8 million for the year endedDecember 31, 2018 and included a net loss of$95.5 million . Net non-cash adjustments to reconcile net loss to net cash provided by operations were$40.9 million and included non-cash interest and 13% Notes redemption premium of$38.3 million , the write-down of ARYMO assets for$6.9 million , and depreciation and amortization expenses of$4.2 million , partially offset by a$12.3 million change in fair value of our derivative liability. Net cash inflows from changes in operating assets and liabilities consisted of an increase in accounts receivable of$4.3 million , and a decrease in accounts payable of$1.6 million , offset by an increase an increase in accrued expenses of$6.1 million . 79
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Cash Flows from Investing Activities
Net cash provided by investing activities for the period fromFebruary 1, 2019 throughDecember 31, 2019 was$5.0 million and consisted of cash inflows of$5.0 million for the maturity and sale of investments.
Net cash provided by investing activities for the year ended
Cash Flows from Financing Activities
Net cash provided by financing activities was$0.9 million for the period fromFebruary 1, 2019 throughDecember 31, 2019 and consisted of net proceeds from the Highbridge Credit Agreement, net of principal repayments, and payments of contingent consideration.
Net cash used in financing activities was
Net cash provided by financing activities was$3.9 million for the year endedDecember 31, 2018 and included$5.2 million in net proceeds from the issuance of our common stock under our "at-the-market" offering.
Operating and Capital Expenditure Requirements
We have not achieved profitability since our inception, and we expect to continue to incur net losses for the foreseeable future. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, sales and marketing expenses, commercial infrastructure, legal and other regulatory expense, business development opportunities and general overhead costs, including interest and principal repayments on indebtedness.
To date, we have been unable to achieve profitability, and with just our existing products and product candidates, we believe we may never achieve profitability in the future.
All of our employees are located in theU.S. , with the exception of one employee located inDenmark . In addition to our employees, we rely on (i) our partners, wholesalers, distributors and third party logistics provider in connection with our commercial efforts, and (ii) contract manufacturers and suppliers primarily in the U.S.in connection with the manufacture of our products. If we, or any of these third party partners encounter any disruptions to our or their respective operations or facilities, or if we or any of these third party partners were to shut down for any reason, including by fire, natural disaster, such as a hurricane, tornado or severe storm, power outage, systems failure, labor dispute, pandemic or other unforeseen disruption, then we or they may be prevented or delayed from effectively operating our or their business, respectively. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements. In order to meet these additional cash requirements, we may seek to sell additional equity or convertible debt securities that may result in dilution to holders of our common stock. The indenture that governs the 13% Senior Secured Notes due 2024 contains covenants that, among other things, restricts our ability to issue additional indebtedness other than pursuant to the Revolving Credit Facility. Although our ability to issue additional indebtedness is expected to be significantly limited by such covenants, if we raise additional funds through the issuance of convertible debt securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. We may also seek to raise additional financing through the issuance of debt which, if available and permitted pursuant to the documents governing the 13% Senior Secured Notes due 2024 and any other indebtedness we may incur in the future, may involve agreements that include restrictive covenants limiting our ability to take important actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. There can be no assurance that we will be able to obtain 80
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additional equity or debt financing on terms acceptable to us, if at all. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. In addition, certain agreements we entered into in connection with the consummation of the Iroko Acquisition and the Chapter 11 Cases will further restrict and limit our ability to raise additional capital, including agreements with respect to pre-emptive rights. Accordingly, our ability to raise additional capital may be restricted by these agreements as well. Refer to Note 21 to our Consolidated Financial Statements included in Item 15 of this Annual Report
for additional details. As ofDecember 31, 2019 , we had cash and cash equivalents, and restricted cash of$12.4 million . Given the uncertainty with respect to the various factors and assumptions underlying the previously disclosed date through which we estimated that our cash and cash equivalents would be sufficient to fund our future cash requirements, we are no longer in a position to provide such forward-looking information.
Please see "Risk Factors" for additional risks associated with our substantial capital requirements.
We have employment agreements with our executive officers that require the funding of a specific level of payments if specified events occur, such as a change in control or termination without cause.
In addition, in the course of normal business operations, we have agreements with contract service providers to assist in the performance of our commercial and manufacturing activities. We can elect to discontinue the work under these agreements at any time. We could also enter into additional collaborative research, contract research, manufacturing and supplier agreements in the future, which may require upfront payments or longterm commitments of cash.
Contractual Obligations and Purchase Commitments
(in thousands) Payments Due By Period
Less than More than
Total 1 year 1 to 3 years 3 to 5 years 5 years
Operating lease obligations (1) $ 3,367 $ 1,273 $ 1,861 $ 233 $ - 13% Series A-1 Notes (2) 74,281 7,794 19,029 47,458 - 13% Series A-2 Notes (3) 66,852 7,014 17,126 42,712 - Promissory Note (4) 5,019 5,019 - - - Credit agreement (5) 6,137 514 5,623 - -
Supply Agreement - Cosette Pharmaceuticals (6) 6,480 6,480 - - - Supply Agreement - Catalent (7) 1,000 500 500 - - Supply Agreement - JHS (8) 3,600 1,440
2,160 - -
Total $ 166,736 $ 30,034 $ 46,299 $ 90,403 $ -
(1) Operating lease obligations reflect our obligation to make payments in
connection with the leases for our vehicles and office space. The vehicle
lease expires in
(2) On
our 13% senior secured notes, designated as Series A-1 Notes, to former
holders of First Lien Secured Notes Claims. The Series A-1 Notes are subject
to an interest holiday from
Interest on the Series A-1 notes accrues at a rate of 13% per annum, and is
payable semi-annually in arrears on
commencing on
above. The stated maturity date of the Series A-1 Notes is
(3) On
our 13% senior secured notes, designated as Series A-2 Notes, to
certain of its affiliates. Interest on the Series A-2 notes accrues at a rate
of 13% per annum, and is payable semi-annually in arrears on
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November of each year, commencing on
(4) On
issued a
certain inventory purchases by
Acquisition (the "Interim Promissory Note"). The Interim Promissory Note
bears interest at a rate of 8% per annum (payable by way of increasing the
principal amount of the Interim Promissory Note on each interest payment
date), is subordinate to the Notes, and matures on July 31, 2020 .
(5) On
with
agent certain funds managed by
lenders, which Credit Agreement consists of a
credit. We drew
25% of the commitment amount outstanding at all times. Advances under the
Credit Agreement bear interest at the Company's option at either the LIBOR
Rate (as defined in the Credit Agreement) plus 5.00% or the Base Rate (as
defined in the Credit Agreement) plus 4.00%. The Credit Agreement matures on
March 20, 2022 .
(6) On
from Iroko , we assumed a Collaborative License, Exclusive Manufacture and
Global Supply Agreement with Cosette Pharmaceuticals, Inc. (formerly G&Wof INDOCIN Suppositories to Zyla for commercial distribution in the United
States. We are obligated to purchase all of our requirements for INDOCIN
Suppositories from
minimum purchase requirements for the calendar years 2019 and 2020. The term
of the Supply Agreement extends through July 31, 2023 , and there are no
minimum requirements in any of the other subsequent years.
(7) On
assumed a Commercial Supply Agreement ("CSA") with Catalent Pharma Solutions
("Catalent") for the manufacture of certain SOLUMATRIX products. Based on the
CSA, we are obligated to purchase certain minimum amounts of manufacturing
and product maintenance services on an annual basis for the term of the
contract ("Minimum Requirement") through September 2021 .
(8) On
"Agreement") with
supply of SPRIX® Nasal Spray. Based on the Agreement, we are obligated to
purchase certain minimum amounts of manufacturing and supply services on an
annual basis for the term of the agreement through July 30, 2022 .
OffBalance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any
offbalance sheet arrangements, as defined under
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