AKORN, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , that was filed with theSEC onFebruary 26, 2020 . [51] --------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE RESULTS
Certain statements in this Form 10-Q are forward-looking in nature and are intended to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements relate to future events or future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "will," "would," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of such terms or other comparable terminology. Any forward-looking statements, including statements regarding our intent, beliefs or expectations are not guarantees of future performance.
These statements are subject to risks and uncertainties and actual results, levels of activity, performance or achievements and may differ materially from those in the forward-looking statements as a result of various factors, including:
•our ability to continue as a going concern; •our ability to successfully consummate the contemplated sale of our business and emerge from the Chapter 11 Cases, including by satisfying the conditions and milestones in the Restructuring Support Agreement; •our ability to improve our liquidity and long-term capital structure and to address our debt service obligations through the restructuring and the potential adverse effects of our voluntary cases under chapter 11 (the "Chapter 11 Cases") of title 11 of the United States Code (the "Bankruptcy Code") on our liquidity and results of operations; •our substantial level of indebtedness and related debt service obligations and restrictions, including those imposed by covenants in our existing financing, including our debtor-in-possession financing, and our exit financing, that may limit our operational and financial flexibility, including our ability to make payments on our debt; •the effects of the Chapter 11 Cases on us and on the interests of various constituents, including holders of our common stock; •risks arising from the declines in the price of our common stock and the delisting of our common stock from the NASDAQ Global Select Market; •the impact of the coronavirus (COVID-19) pandemic on our business, financial condition, results of operations and the Chapter 11 Cases; •legal proceedings and governmental investigations, any of which may result in substantial losses, government enforcement actions, damage to our business and reputation and place a strain on our internal resources; •our ability to timely and efficiently develop, launch and market our products; •our reliance on, and our ability to maintain relationships with third parties, including suppliers, manufacturers and wholesalers, and regulatory authorities as a result of the Chapter 11 Cases; •our ability to attract and retain key personnel, especially due to the distractions and uncertainties related to Chapter 11 Cases; •significant disruptions or failures in our information technology systems and network infrastructures that could have a material adverse effect on our business; •ongoing oversight and review of our products and facilities by regulatory and governmental agencies, including periodic audits by theU.S. Food and Drug Administration and the results thereof; •increased competition; •our failure to comply with the complex reporting and payment obligations under Medicare, Medicaid and other government programs may result in litigation or sanctions; and •our ability to protect our patents and proprietary rights and to defend against claims of third parties that we infringe their proprietary rights. For more detailed information on the risks and uncertainties associated with our business activities, see "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , as filed with theSEC onFebruary 26, 2020 , Part II Item 1A on Form 10-Q for the three months endedMarch 31, 2019 , as filed with theSEC onMay 11, 2020 , and in Part II Item 1A herein. You should not place undue reliance on any forward-looking statements. You should read this report completely with the understanding that our actual results may differ materially from what we expect. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
OVERVIEW
We, together with our wholly owned subsidiaries, are a specialty pharmaceutical
company that develops, manufactures and markets generic and branded prescription
pharmaceuticals, branded and private-label OTC consumer health products and
animal health pharmaceuticals. We are an industry leader in the development,
manufacturing and marketing of specialized
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generic pharmaceutical products. As such, we specialize in
difficult-to-manufacture sterile and non-sterile dosage forms including, but not
limited to, ophthalmics, injectables, oral liquids, otics, topicals, inhalants
and nasal sprays.
We have identified two reportable segments:
•Prescription Pharmaceuticals, we manufacture and market generic and branded prescription pharmaceuticals including ophthalmics, injectables, oral liquids, otics, topical, inhalants, and nasal sprays. •Consumer Health, we manufacture and market branded and private-label animal health and OTC products. During the second quarter of 2020 and through the filing date of this Form 10-Q, we made a number of announcements regarding the Chapter 11 Cases, DIP Facility (as defined below) and our obligation to conduct the Sale (as defined below). Additionally, as discussed in our Condensed Consolidated Financial Statements and Notes thereto and elsewhere in this Quarterly Report on Form 10-Q, the Company conducted an evaluation as to its ability to continue as a going concern. These are addressed in the "Recent Developments" section below.
Net Revenue & Gross Profit:
Net revenue was$120.3 million for the three month period endedJune 30, 2020 , representing a decrease of$57.8 million , or 32.4%, as compared to net revenue of$178.1 million for the three month period endedJune 30, 2019 .
Consolidated gross profit for the quarter ended
Impact of COVID-19 Pandemic:
The emergence of COVID-19 around the world, and particularly inthe United States , presents significant risks to the Company, not all of which the Company is able to fully evaluate or foresee at the current time. We have adopted a number of precautionary measures, including social distancing, mandatory facial coverings, and increased facility cleaning and sanitization, in an effort to protect our employees and mitigate the potential spread of COVID-19. The majority of our office and management personnel have been and continue to work remotely, and some of our employees engaged in manufacturing, production and distribution facilities have been restricted by the Company and/or by governmental order from coming to work. At the same time, we have continued our critical business functions to support uninterrupted access to our medicines. The COVID-19 pandemic adversely impacted our financial results during the three and six months endedJune 30, 2020 , as demand for our products was reduced by significant disruption to healthcare practices limiting patient access to treatments, particularly in the areas of ophthalmology and acute care. Demand for the Company's products is likely to continue to be affected depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date, and numerous other uncertainties. Due to the evolving and uncertain global impacts of the COVID-19 pandemic, we cannot precisely determine or quantify the impact this pandemic will have on the Sale (as defined below), the Chapter 11 Cases or our business operations for the remainder of our fiscal year endingDecember 31, 2020 and beyond. This may continue to have far reaching impacts on the Company's business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the Company's management and employees, manufacturing, distribution, marketing and sales operations, customer and consumer behaviors, and on the overall economy. Due to the above circumstances and as described generally in this Form 10-Q, the Company's results of operations for the three month period endedJune 30, 2020 , are not necessarily indicative of the results to be expected for the full fiscal year. Management cannot predict the full impact of the COVID-19 pandemic on the Company's sales channels, supply chain, manufacturing and distribution nor to economic conditions generally, including the effects on consumer spending. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic ends. For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, our financial condition or our results of operations, see Part II, Item 1A "Risk Factors" in this Form 10-Q.
Recent Developments:
Chapter 11 Cases
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On May 20, 2020 (the "Petition Date"), the Company and its U.S. direct and
indirect subsidiaries (together with the Company, the "Company Parties") filed
the Chapter 11 Cases in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court "). The Chapter 11 Cases are being jointly
administered under the caption In re Akorn, Inc. , et al. Each of the Company
Parties continues to operate its business as a "debtor-in-possession" under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and the orders of the Bankruptcy Court . On
June 3, 2020 , the United States Trustee for the District of Delaware appointed
an official committee of unsecured creditors.
On the Petition Date, the Company Parties filed a series of "first-day" motions
with the Bankruptcy Court to facilitate the Company Parties' transition into
Chapter 11, including by allowing the Company Parties to make payments upon, or
otherwise honor, certain obligations that arose prior to the Petition Date,
including obligations related to employee wages, salaries and benefits, taxes,
and certain vendors and other providers of goods and services essential to the
Company Parties' businesses. On May 22, 2020 , the Bankruptcy Court approved the
relief sought in these motions on an interim basis. On June 15, 2020 , the
Bankruptcy Court entered the final order approving the relief sought. Refer to
Note 18 - Voluntary Reorganization Under Chapter 11 for more information.
Restructuring Support Agreement
In contemplation of the Chapter 11 Cases, on the Petition Date, the Company Parties entered into a Restructuring Support Agreement (together with all exhibits and schedules thereto, the "Restructuring Support Agreement") with certain lenders (the "Consenting Term Lenders") holding more than 75% in principal amount of the outstanding term loans under the Term Loan Agreement, dated as ofApril 17, 2014 (as amended, restated, supplemented or otherwise modified, the "Term Loan Agreement"), by and among the Company and certain of its subsidiaries, the lenders thereunder (the "Lenders") andWilmington Savings Fund Society , FSB, in its capacity as successor administrative agent. Refer to Note 18 - Voluntary Reorganization Under Chapter 11 for more information. Stalking Horse APA The Company Parties entered into an asset purchase agreement (the "Stalking Horse APA"), dated as ofMay 20, 2020 , with certain of the Company's existing lenders (collectively, the "Buyer"), pursuant to which the Buyer has agreed to purchase, subject to the terms and conditions contained therein, substantially all of the assets of the Company Parties (the "Sale"). Each of the Company Parties is a debtor in the Chapter 11 Cases. The Stalking Horse APA, subject to an auction to solicit higher or otherwise better bids, was approved by theBankruptcy Court onJune 15, 2020 .The Bankruptcy Court also approved the Buyer as the "stalking horse" bidder. Refer to Note 18 - Voluntary Reorganization Under Chapter 11 for more information. Debtor-In-Possession Financing OnMay 22, 2020 , the Company Parties entered into the Senior Secured Super-Priority Term Loan Debtor-in-Possession Loan Agreement (the "DIP Credit Agreement") with the lenders party thereto (the "DIP Lenders"), andWilmington Savings Fund Society , FSB, as the administrative agent, setting forth the terms and conditions of a$30.0 million debtor-in-possession financing facility (the "DIP Facility"). OnMay 22, 2020 , theBankruptcy Court granted the motion to approve the use of cash collateral and the DIP Facility on an interim basis (the "Interim DIP Order"). Within seven days of such approval,$10.0 million became available to the Company Parties. OnJune 15, 2020 , theBankruptcy Court entered a final order approving the DIP Facility (the "Final DIP Order"), pursuant to which the full$30.0 million became available to the Company Parties, subject to certain conditions. Refer to Note 8 - Financing Arrangements for more information.
Nasdaq Delisting
OnMay 21, 2020 , the Company received a notification letter from the listing qualifications department staff of theNasdaq Stock Market ("Nasdaq") indicating that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, Nasdaq determined that the Company's common stock would be delisted from Nasdaq. The Company did not appeal Nasdaq's delisting determination. Accordingly, Nasdaq suspended trading of the Company's common stock onJune 1, 2020 . OnJune 1, 2020 , after Company's common stock was suspended by Nasdaq, it began being quoted on the Pink Open Market operated by OTC Markets Group Inc. under the symbol "AKRXQ." OnJune 9, 2020 , Nasdaq filed a Form 25-NSE with theSEC to notify the Company that its common stock was going to be delisted, and delisting became effective 10 days after the Form 25 was filed. Going Concern [54]
-------------------------------------------------------------------------------- The Company's financial condition and the Chapter 11 Cases raise substantial doubt about our ability to continue as a going concern within one year after the date of the issuance of these financial statements.
Refer to Note 18 - Voluntary Reorganization Under Chapter 11 and Note 2 - Summary of Significant Accounting Policies for more information.
[55]
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
The following table sets forth the amounts and percentages of total revenue for certain items from our condensed consolidated statements of comprehensive (loss) and our segment reporting information for the three and six month periods endedJune 30, 2020 and 2019 (dollar amounts in thousands): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 % of % of % of % of Amount Revenue Amount Revenue Amount Revenue Amount Revenue Revenues, net: Prescription Pharmaceuticals$ 104,424 86.8 %$ 158,379 88.9 %$ 283,668 87.3 %$ 306,394 89.1 % Consumer Health 15,886 13.2 % 19,678 11.1 % 41,335 12.7 % 37,534 10.9 % Total revenues, net 120,310 100.0 % 178,057 100.0 % 325,003 100.0 % 343,928 100.0 % Gross profit: Prescription Pharmaceuticals 21,247 20.3 % 59,785 37.7 % 98,407 34.7 % 105,228 34.3 % Consumer Health 9,805 61.7 % 8,199 41.7 % 27,189 65.8 % 16,269 43.3 % Total gross profit 31,052 25.8 % 67,984 38.2 % 125,596 38.6 % 121,497 35.3 % Operating expenses: Selling, general and administrative expenses 70,921 58.9 % 61,042 34.3 % 135,977 41.8 % 133,540 38.8 % Research and development expenses 9,457 7.9 % 9,495 5.3 % 19,268 5.9 % 18,209 5.3 % Amortization of intangibles 6,152 5.1 % 9,950 5.6 % 12,294 3.8 % 21,015 6.1 % Impairment of intangibles 400 0.3 % 394 0.2 % 400 0.1 % 10,748 3.1 % Goodwill impairment - - % - - % 267,923 82.4 % 15,955 4.6 % Litigation rulings, settlements and contingencies - - % 74,469 41.8 % (7,470) (2.3) % 74,879 21.8 % Operating (loss)$ (55,878) (46.4) %$ (87,366) (49.1) %$ (302,796) (93.2) %$ (152,849) (44.4) %
Non-operating expenses:
Amortization of deferred financing costs - - % (5,655) (3.2) % (8,629) (2.7) % (6,959) (2.0) % Interest expense, net (32,674) (27.2) % (17,341) (9.7) % (57,038) (17.5) % (31,668) (9.2) % Reorganization items, net (5,809) (4.8) % - - % (5,809) (1.8) % - - % Other non-operating (expense)/income, net (65) (0.1) % 245 0.1 % (326) (0.1) % 598 0.2 % Total non-operating expenses (38,548) (32.0) % (22,751) (12.8) % (71,802) (22.1) % (38,029) (11.1) % Net (loss) before income taxes (94,426) (78.5) % (110,117) (61.8) % (374,598) (115.3) % (190,878) (55.5) % Income tax (benefit)/provision (25,764) (21.4) % 1,482 0.8 % (49,209) (15.1) % 2,902 0.8 % Net (loss)$ (68,662) (57.1) %$ (111,599) (62.7) %$ (325,389) (100.1) %$ (193,780) (56.3) %
THREE MONTHS ENDED
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Net revenue was $120.3 million for the three month period ended June 30, 2020 ,
representing a decrease of $57.8 million , or 32.4%, as compared to net revenue
of $178.1 million for the three month period ended June 30, 2019 . The decrease
in net revenue resulted from a $54.9 million decline in organic revenue, and a
$5.6 million , decline in revenue from discontinued products, partially offset by
a $2.8 million increase in net revenue from new products. The $54.9 million
decline in organic revenue was due an unfavorable volume impact of approximately
$52.3 million , or 30.7% and an unfavorable price variance of approximately $2.6
million , or 1.5%. The $52.3 million volume decline was principally a result of
lower demand due to the COVID-19 pandemic, which caused significant disruption
to healthcare practices limiting patient access to treatments, particularly in
the areas of ophthalmology and acute care.
The Prescription Pharmaceuticals segment revenue of $104.4 million for the three
month period ended June 30, 2020 , represented a decrease of $54.0 million , or
34.1%, compared to revenue of $158.4 million for the three month period ended
June 30, 2019 . The decline was principally a result of lower demand due to the
COVID-19 pandemic, which caused significant disruption to healthcare practices
limiting patient access to treatments, particularly in the areas of
ophthalmology and acute care.
The Consumer Health segment revenue of $15.9 million for the three month period
ended June 30, 2020 , represented a decrease of $3.8 million , or 19.3%, compared
to revenue of $19.7 million for three month period ended June 30, 2019 .
The net revenue for the three month period ended June 30, 2020 , of $120.3
million was net of adjustments totaling $180.6 million for chargebacks, rebates,
administrative fees and others, product returns, discounts and allowances and
advertising, promotions and other. Chargeback expenses for the three month
period ended June 30, 2020 , were $121.5 million , or 40.4% of gross sales,
compared to $192.7 million , or 41.4% of gross sales for the three month period
ended June 30, 2019 . The $71.2 million decrease in chargeback expense was due to
volume declines and product mix as well as decreases in wholesale acquisition
cost of certain products in current period as compared to prior year. Rebates,
administrative fees and other expenses for the three month period ended June 30,
2020 , were $42.4 million , or 14.1% of gross sales, compared to $78.0 million , or
16.7% of gross sales for three month period ended June 30, 2019 . The $35.6
million decrease in rebates, administrative fees and other expenses was
primarily due to volume declines, lower failure to supply claims, decreases in
contract prices and product mix. Our product returns provision for the three
month period ended June 30, 2020 , was $8.0 million , or 2.7% of gross sales,
compared to $5.5 million , or 1.2% of gross sales for the three month period
ended June 30, 2019 . Discounts and allowances were $6.1 million , or 2.0% of
gross sales for the three month period ended June 30, 2020 , compared to $9.0
million , or 1.9% of gross sales for the three month period ended June 30, 2019 .
Advertisement and promotion expenses were $2.6 million , or 0.9% of gross sales
for the three month period ended June 30, 2020 , compared to $2.8 million , or
0.6% of gross sales for the three month period ended June 30, 2019 .
Gross profit for the quarter ended June 30, 2020 , was $31.1 million , or 25.8% of
net revenue, compared to $68.0 million , or 38.2% of net revenue, in the
corresponding prior year quarter. The decrease in the gross profit percentage
was principally due to the impacts of the COVID-19 pandemic, which included
unfavorable volume and product mix, unfavorable manufacturing variances, along
with increased employee retention costs.
Total operating expenses were $86.9 million in the three month period ended
June 30, 2020 , a decrease of $68.5 million , or 44.1%, from the prior year
quarter amount of $155.4 million . The $68.5 million decrease was primarily
driven by decreases of $74.5 million and $3.8 million in litigation rulings,
settlements and contingencies and amortization of intangibles, respectively,
partially offset by an increase of $9.9 million in selling, general and
administrative ("SG&A"). The following is a discussion of the main drivers:
There were no Litigation rulings, settlements and contingencies expenses in the
three month period ended June 30, 2020 , compared to $74.5 million the
comparative prior year period. The primary driver of the $74.5 million decrease
was the charge and corresponding liability of $74.0 million taken in connection
with the Securities Class Action Litigation in the prior year period.
Amortization of intangible assets were $6.2 million in the three month period
ended June 30, 2020 , a decrease of $3.8 million , or 38.0% over the prior year
amount of $10.0 million . The primary driver of the $3.8 million decrease was a
lower intangible asset base during the three month period ended June 30, 2020
compared to prior year quarter as a result of impairments.
SG&A expenses were $70.9 million in the three month period ended June 30, 2020 ,
an increase of $9.9 million , or 16.2%, from the prior year quarter amount of
$61.0 million . The major drivers of the $9.9 million increase were increases of
$13.6 million related to the AIPL impairments, $4.6 million related to legal and
financial advisory fees and $2.9 million
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in employee retention expenses which were partially offset by decreases of $3.4
million , $2.3 million and $2.2 million in expenses related to the data integrity
assessment projects, consulting and legal expenses, respectively.
There were $0.4 million of impairments for one IPR&D project during the three
month period ended June 30, 2020 , while there were no IPR&D projects impaired in
the corresponding prior period. During the three month period ended June 30,
2020 , no product licensing right was impaired, compared to impairment of $0.4
million related to one product licensing right during the comparative prior
period.
Non-operating expenses were
During the three month periods endedJune 30, 2020 and 2019, the Company recorded income tax (benefit)/provision of$(25.8) million and$1.5 million , respectively, on (loss) before income taxes. The reason for the overall tax benefit during the three month period endedJune 30, 2020 , was principally due to the reversal of the$(13.9) million of current year tax expense booked in the first quarter (see Note 13 - Income Taxes) and additional$(12.1) million tax benefit recognized in 2020 as a result of the loss carryback provision of the CARES Act.
The Company reported a net loss of
SIX MONTHS ENDED
Net revenue was$325.0 million for the six month period endedJune 30, 2020 , representing a decrease of$18.9 million , or 5.5%, as compared to net revenue of$343.9 million for the six month period endedJune 30, 2019 . The decrease in net revenue in the period was primarily due to a$44.9 million decline in organic revenue, partially offset by an increase of$16.3 million from discontinued products, and an increase of$9.7 million from new product revenue. The$44.9 million decrease in organic revenue was due to approximately$65.2 million , or 20.2%, of volume declines partially offset by$20.3 million , or 6.3%, of favorable price variance. The$65.2 million volume decline was principally a result of lower demand due to the COVID-19 pandemic, which caused significant disruption to healthcare practices limiting patient access to treatments, particularly in the areas of ophthalmology and acute care. The$16.3 million increase in discontinued products revenue was driven by approximately$35.9 million of net revenue generated during the three month period endedMarch 31, 2020 , from a sale of remaining inventory of an unapproved product that has since been discontinued.The Prescription Pharmaceuticals segment revenue of$283.7 million for the six month period endedJune 30, 2020 , represented a decrease of$22.7 million , or 7.4%, compared to revenue of$306.4 million for the six month period endedJune 30, 2019 . The decline was principally a result of lower demand due to the COVID-19 pandemic, which caused significant disruption to healthcare practices limiting patient access to treatments, particularly in the areas of ophthalmology and acute care.The Consumer Health segment revenue of$41.3 million for the six month period endedJune 30, 2020 , represented an increase of$3.8 million , or 10.1%, compared to revenue of$37.5 million for six month period endedJune 30, 2019 . The net revenue for the six month period endedJune 30, 2020 , of$325.0 million was net of adjustments totaling$405.3 million for chargebacks, rebates, administrative fees and others, product returns, discounts and allowances and advertising, promotions and other. Chargeback expenses for the six month period endedJune 30, 2020 , were$277.7 million , or 38.0% of gross sales, compared to$398.1 million , or 43.1% of gross sales for the six month period endedJune 30, 2019 . The$120.4 million decrease in chargeback expense was due to volume declines and product mix as well as decreases in wholesale acquisition cost of certain products in the current period as compared to prior year. Rebates, administrative fees and other expenses for the six month period endedJune 30, 2020 , were$95.2 million , or 13.0% of gross sales, compared to$142.2 million , or 15.4% of gross sales for six month period endedJune 30, 2019 . The$47.0 million decrease in rebates, administrative fees and other expenses was primarily due to volume declines, lower failure to supply claims, decreases in contract prices and product mix. Our product returns provision for the six month period endedJune 30, 2020 , was$12.3 million , or 1.7% of gross sales, compared to$17.4 million , or 1.9% of gross sales for the six month period endedJune 30, 2019 . Discounts and allowances were$15.4 million , or 2.1% of gross sales for the six month period endedJune 30, 2020 , compared to$18.1 million , or 2.0% of gross sales for the six month period endedJune 30, 2019 . Advertisement and promotion expenses were$4.7 million , or 0.6% of gross sales for the six month period endedJune 30, 2020 , compared to$4.9 million , or 0.5% of gross sales for the six month period endedJune 30, 2019 . [58] -------------------------------------------------------------------------------- Gross profit for the six month period endedJune 30, 2020 , was$125.6 million , or 38.6% of net revenue, compared to$121.5 million , or 35.3% of net revenue, in the corresponding prior year period. The increase in the gross profit percentage was principally due to favorable price and product mix, which was driven by sales of an unapproved product that was discontinued in the first quarter of 2020, and decreased costs associated with FDA compliance related activities. These factors were mostly offset by the impacts of the COVID-19 pandemic in the second quarter 2020, which included unfavorable volume and product mix, and unfavorable manufacturing variances. Total operating expenses were$428.4 million in the six month period endedJune 30, 2020 , an increase of$154.1 million , or 56.2%, from the prior year amount of$274.3 million . The$154.1 million increase was primarily driven by increases of$251.9 million and$2.5 million in goodwill impairments and selling, general and administrative ("SG&A"), respectively, partially offset by a decrease of$8.7 million in amortization of intangibles. The following is a discussion of the main drivers:Goodwill impairments during the six month period endedJune 30, 2020 were$267.9 million , an increase of$251.9 million , over the corresponding prior year amount of$16.0 million . The$251.9 million increase in impairments was from events that occurred that created significant uncertainty in our business and caused a significant decline in the Company's enterprise value. SG&A expenses were$136.0 million in the six month period endedJune 30, 2020 , an increase of$2.5 million , or 1.8%, from the prior year amount of$133.5 million . The major drivers of the$2.5 million increase were increases of$8.5 million related to legal and financial advisory fees and$6.4 million in employee retention expenses, which were partially offset by a decrease of$7.7 million in expenses related to the data integrity assessment projects. Amortization of intangible assets were$12.3 million in the six month period endedJune 30, 2020 , a decrease of$8.7 million , or 41.4% over the prior year amount of$21.0 million . The primary driver of the$8.7 million decrease was a lower intangible asset base during the six month period endedJune 30, 2020 compared to prior year period as a result of impairments. Non-operating expenses were$71.8 million in the six month period endedJune 30, 2020 , an increase of$33.8 million , or 88.9%, from the comparative prior year period amount of$38.0 million . The major drivers of the$33.8 million increase were increases of$25.4 million in interest expense related to the term loans,$5.8 million in reorganization items, and$1.7 million increase in amortization of deferred financing cost also related to the standstill agreement and related amendments. During the six month periods endedJune 30, 2020 and 2019, the Company recorded income tax (benefit)/provision of$(49.2) million and$2.9 million , respectively, on (loss) before income taxes. The reason for the overall tax benefit during the six month period endedJune 30, 2020 , was the due to the impact of the net operating loss carryback provision of the CARES Act that resulted in a$(36.8) million net operating (loss) carryback benefit and$(12.1) million of tax (benefit) for 2020. The Company reported a net loss of$325.4 million for the six month period endedJune 30, 2020 , compared to net loss of$193.8 million for the six month period endedJune 30, 2019 .
FINANCIAL CONDITION AND LIQUIDITY
Overview
We require certain capital resources in order to operate our business. Our primary sources of liquidity have historically been cash generated from operations and borrowings under our Term Loans and currently includes the borrowing under the DIP Facility. Historically, our principal liquidity requirements have been to maintain and expand our business, pay principal and interest obligations on our Term Loans and other expenses, and for capital expenditures to upgrade, expand and improve our manufacturing facilities. Our future capital expenditures may include substantial projects undertaken to upgrade, expand and improve our manufacturing facilities inthe United States andSwitzerland . Our cash obligations include the principal and interest payments due on our Term Loans (as described throughout this report). In recent years, our liquidity requirements have also included expenses related to FDA compliance related enhancements, interest and fees associated with the standstill agreement and related amendments, the Delaware Action and other litigation matters. The Company's financial condition and the Chapter 11 Cases raise substantial doubt about our ability to continue as a going concern within one year after the date of the issuance of these financial statements. [59] --------------------------------------------------------------------------------
Refer to Note 18 - Voluntary Reorganization Under Chapter 11 and Note 2 - Summary of Significant Accounting Policies for more information.
Cash and Cash Flows
As ofJune 30, 2020 , we had cash and cash equivalents of$83.1 million , which was$61.7 million less than our cash and cash equivalents balance of$144.8 million as ofDecember 31, 2019 . This decrease in cash and cash equivalents was primarily driven by decreases of$71.1 million and$18.6 million in net operating cash outflows and net investing cash outflows, respectively, partially offset by net financing cash inflows of$27.9 million . Our net working capital (deficit) was$(508.5) million atJune 30, 2020 , compared to$(505.5) million atDecember 31, 2019 . The negative net working capital for the period was primarily due to the classification of the Term loans as a current liability.
Operating Cash Flows
During the six month period endedJune 30, 2020 , net cash used in operating activities was$71.1 million . This negative operating cash flow was primarily driven by higher interest payments related to the term loans, payment of retention bonuses and legal and financial advisory fees. During the six month period endedJune 30, 2019 , net cash used in operating activities was$29.3 million , driven by increases in trade accounts receivable, financial advisory fees and data integrity assessment projects.
Investing Cash Flows
Net cash used in investing activities during the six month periods ended
Financing Cash Flows Financing activities provided$27.9 million in the six month period endedJune 30, 2020 , of which$30.0 million related to proceeds generated from the DIP loan, partially offset by$2.0 million used in financing cost associated with the DIP loan.
Financing activities used
Liquidity Considerations
Term Loans and the Second Amended Standstill Agreement
During 2014, in order to finance its acquisitions ofHi-Tech Pharmacal Co Inc. andVersaPharm Inc. ,Akorn, Inc. and certain of its subsidiaries (the "Company Loan Parties") entered into the Term Loan Agreement, dated as ofApril 17, 2014 (as amended, restated, supplemented or otherwise modified, the "Term Loan Agreement" and the loans outstanding thereunder, the "Term Loans" or "Term Loan") with the lenders thereunder (the "Lenders") andWilmington Savings Fund Society , FSB, in its capacity as successor administrative agent (the "Administrative Agent"). The aggregate principal amount of the Term Loans was$1,045.0 million . As ofJune 30, 2020 , outstanding debt under the Term Loan Agreement was$855.2 million . As ofJune 30, 2020 , the Term Loan has a market price of$958 per$1,000 of principal amount. The Term Loans are scheduled to mature onApril 16, 2021 . OnMay 6, 2019 , the Company Loan Parties and certain Lenders entered into a Standstill Agreement and First Amendment (the "Original Standstill Agreement") to the Term Loan Agreement. Pursuant to the terms of the Original Standstill Agreement,Akorn, Inc. was required to enter into a comprehensive amendment to the Term Loan Agreement (the "Comprehensive Amendment"). IfAkorn, Inc. did not enter into a Comprehensive Amendment byDecember 13, 2019 , or refinance or otherwise address the outstanding loans, an event of default would occur under the Term Loan Agreement. OnDecember 15, 2019 , the Company Loan Parties entered into a First Amendment to Standstill Agreement and Second Amendment to Credit Agreement (the "First Amended Standstill Agreement") with certain Lenders. Pursuant to the terms of the First Amended Standstill Agreement, the maximum duration of the "Standstill Period" was extended fromDecember 13, 2019 toFebruary 7, 2020 . [60] -------------------------------------------------------------------------------- OnFebruary 12, 2020 , the Company Loan Parties entered into the Comprehensive Amendment in the form of the Second Amended Standstill Agreement with the Standstill Lenders. Pursuant to the terms of the Second Amended Standstill Agreement, the duration of the "Standstill Period" was extended fromFebruary 7, 2020 , until the earliest of the delivery of a notice of termination of the Standstill Period by the Standstill Lenders upon the occurrence of a default under the loan agreement, or a breach of, or non-compliance with certain provisions of the Second Amended Standstill Agreement. The Second Amended Standstill Agreement provides that, for the duration of the Extended Standstill Period, among other matters, neither the Administrative Agent nor the Lenders may (i) declare any Event of Default or (ii) otherwise seek to exercise any rights or remedies, in each case of clauses (i) and (ii) above, to the extent directly relating to any alleged Event of Default arising from any alleged breach of certain covenants, to the extent the facts and circumstances giving rise to any such breach have been (x) publicly disclosed byAkorn, Inc. or (y) disclosed in writing byAkorn, Inc. to private side Lenders or certain advisors to theAd Hoc Group (collectively, the "Specified Matters"). The Second Amended Standstill Agreement provides, among other matters, that: •during the Extended Standstill Period: •Akorn, Inc. must deliver certain financial and other information to the Lenders or their advisors, including without limitation, monthly financial statements with agreed upon adjustment, monthly operational statistics broken down by facility, pipeline reporting, 13-week cash flow forecasts, weekly variance reports, certain valuation reports, weekly status updates with respect to the Sale Process (as defined below) and certain regulatory information, and participate in various update calls with the Lenders and their advisors (the "Affirmative Covenants and Milestones")? and •the Loan Parties are restricted, among other matters, from (i) consummating certain asset sales and investments, (ii) making certain restricted payments, (iii) engaging in sale and leaseback transactions, (iv) incurring certain liens and indebtedness, (v) reinvesting any proceeds received from certain asset sales and (vi) without the consent of the Required Lenders at such time, (A) designating any Restricted Subsidiary as an Unrestricted Subsidiary, or otherwise creating or forming any Unrestricted Subsidiary, (B) transferring any assets ofAkorn, Inc. or any of its Restricted Subsidiaries to any Unrestricted Subsidiary, except as otherwise permitted under the Term Loan Agreement (after giving effect to the Second Amended Standstill Agreement), and/or (C) releasing any existing Loan Guarantors or security interest granted under the Term Loan Agreement outside of the ordinary course of business (collectively, the "Negative Covenants")? •Akorn, Inc. will market and conduct the Sale Process for substantially all of its assets in accordance with the milestones set forth in the Second Amended Standstill Agreement, which milestones will depend upon whether the bids submitted and then in effect in connection with the Sale Process are sufficient to pay all obligations under the Term Loan Agreement; •the Sale Process will be consummated on either an out-of-court or in-court basis (potentially through the filing of Chapter 11 Cases under the Bankruptcy Code in order to effectuate the Sale Process); •if at any time during the Sale Process, no third party bids exist that are sufficient to pay all obligations under the Loan Agreement (taking into account available cash) there shall be a Toggle Event; •the milestones with respect to the Sale Process include: •subject to the alternative milestones described below upon the occurrence of a Toggle Event: ?on or beforeMarch 27, 2020 , binding bids in connection with the Sale Process were due; ?on or beforeApril 5, 2020 ,Akorn, Inc. was to select a stalking horse bidder and commence the Chapter 11 Cases to effectuate the Sale Process; and ?thereafter, certain additional milestones during the Chapter 11 Cases; •upon the occurrence of a Toggle Event, the application of the following alternative milestones: ?on or before twenty-six (26) days after a Toggle Event,Akorn, Inc. and theAd Hoc Group Advisors (as defined in the Second Amended Standstill Agreement) were to reach an agreement in principle with respect to a restructuring support agreement ("RSA") (such agreement not to be unreasonably withheld, conditioned or delayed); ?on or before thirty (30) days after a Toggle Event,Akorn, Inc. were to commence the Chapter 11 Cases to consummate either (A) a sale transaction pursuant with the Lenders serving as a stalking horse, and entering into a stalking horse asset purchase agreement (the "Credit Bid APA") in order to exercise their rights to credit bid under the Loan Documents or (B) a transaction backstopped by an executed RSA; and ?thereafter, certain additional milestones during the Chapter 11 Cases;; •to the extent either (i) a Toggle Event existed or (ii)Akorn, Inc. commenced the Chapter 11 Cases without a stalking horse asset purchase agreement with a bid sufficient to pay all obligations under the Term Loan Agreement (taking into account available cash in the case of cash fee, debt free bids),Akorn, Inc. would be required to prepay, on a [61] -------------------------------------------------------------------------------- ratable basis, within five (5) days prior to the commencement of the Chapter 11 Cases, all outstanding Loans under the Term Loan Agreement in an amount that, after giving effect to such prepayment, would have left the Company's pro forma cash balance at an amount not to exceed$87.5 million ; •the following exit payments are to be paid in cash to each Lender on a pro rata basis in connection with repayment of the Loans under the Term Loan Agreement: •if the Sale Process had been approved by theBankruptcy Court on or prior toJuly 15, 2020 , then: ?if the Sale Process had been consummated on or prior toJuly 15, 2020 , 0.50% of the aggregate principal amount of the Loans of such Lender then outstanding (i.e., 50 basis points); or ?if the Sale Process is consummated afterJuly 15, 2020 , 0.75% of the aggregate principal amount of the Loans of such Lender then outstanding (i.e., 75 basis points); and • if the Sale Process had not been approved by theBankruptcy Court on or prior toJuly 15, 2020 , then: ? if the Sale Process is consummated on or prior toAugust 15, 2020 , 1.00% of the aggregate principal amount of the Loans of such Lender then outstanding (i.e., 100 basis points); or ? if the Sale Process is consummated afterAugust 15, 2020 , 2.00% of the aggregate principal amount of the Loans of such Lender then outstanding (i.e., 200 basis points); •upon the earlier to occur of (i) entry into the RSA, (ii) entry into the Credit Bid APA, and one day prior toAkorn, Inc. commencing the Chapter 11 Cases without a Stalking Horse APA, 2.50% of the aggregate principal amount of the Loans of such Lender then outstanding (i.e., 250 basis points); •if at any time during the Sale Process no third-party bids exist which are sufficient to pay all obligations (net of available cash), then from the occurrence of such date until the date of a Standstill Event of Default, the interest margin payable in cash shall be further increased by 2.50% to LIBOR plus 12.50%. Subject to a five business day cure period (the "Cure Period"), the Loan Parties' failure to comply with the Affirmative Covenants and Milestones (other than perfection of the Lenders' security interests (the "Excluded Milestones")) during the Standstill Period would permit the Required Lenders to terminate the Standstill Period and exercise any rights and remedies under the Term Loan Agreement with respect to the Specified Matters or a Standstill Event of Default. The Loan Parties' failure to comply with the Negative Covenants and Excluded Milestones during the Standstill Period would permit the Required Lenders to terminate the Standstill Agreement and constitute an immediate Event of Default under the Term Loan Agreement.Akorn, Inc.'s failure to comply with any Affirmative Covenants and Milestones (subject to the Cure Period), the Excluded Milestones, Negative Covenants or other covenants in the Second Amended Standstill Agreement would also result in a further increase of the interest margins payable with respect to outstanding Loans by 0.50%, payable in kind. In addition,Akorn, Inc. has agreed (1) not to make any payments in respect of judgments or settlements of certain ongoing litigation matters without the prior written consent of the Required Lenders and (2) to make payment of fees and expenses to the advisors ofAd Hoc Group (collectively, the "Other Covenants"). The failure to comply with any of the Other Covenants would constitute an immediate Event of Default under the Term Loan Agreement. As ofMarch 28, 2020 , there were no bids in the Sale Process sufficient to pay all obligations under the Term Loan Agreement and an immediate Event of Default under the Term Loan Agreement and a Toggle Event occurred. As a result, pursuant to the Term Loan Agreement, the interest margin payable in cash under the Term Loan Agreement has increased to LIBOR plus 12.50% (provided that 0.75% of such rate shall be payable in kind by capitalizing and adding such amount to the outstanding principal balance of the loans on the applicable payment date). In addition, a default rate of 2.00% applies. The Lenders may also accelerate the obligations under the Term Loan Agreement, foreclose upon the collateral securing the debt and exercise other rights and remedies. The Company was also obligated to prepay, on a ratable basis, all outstanding loans under the Term Loan Agreement in an amount that after giving effect to the prepayment, left the Company with a pro forma cash balance of not more than$87.5 million within five (5) days prior to the commencement of the Chapter 11 Cases. Additionally, as ofApril 1, 2020 , the alternative milestones for the Sale Process set forth in the Second Amended Standstill Agreement took effect, requiring that the Company commence the Chapter 11 Cases on or beforeMay 1, 2020 . OnMay 20, 2020 , the Company Parties filed voluntary the Chapter 11 Cases.
The filing of the Chapter 11 Cases constituted an event of default that accelerated our obligations under the Term Loan Agreement. The Term Loan Agreement provides that as a result of the Chapter 11 Cases, the principal and interest due thereunder became immediately due and payable.
For information on the Chapter 11 Cases, see Note 18 - Voluntary Reorganization
Under Chapter 11 and for information about the effect of the automatic stay,
including on actions to collect indebtedness incurred prior to the Petition Date
or to exercise control over the Company Parties' property, see Note 11 -
Commitments and Contingencies - Effect of Automatic Stay upon filing under
Chapter 11 of the Bankruptcy Code.
[62]
--------------------------------------------------------------------------------Chapter 11 Cases
On the Petition Date, the Company Parties filed the Chapter 11 Cases in theBankruptcy Court . The Chapter 11 Cases are being jointly administered under the caption In reAkorn, Inc. , et al.Each Company Party continues to operate its business as a "debtor-in-possession" under the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of theBankruptcy Court . OnJune 3, 2020 ,the United States Trustee for the District ofDelaware appointed an official committee of unsecured creditors. On the Petition Date, the Company Parties filed a series of "first-day" motions with theBankruptcy Court to facilitate the Company Parties' transition into Chapter 11, including by allowing the Company Parties to make payments upon, or otherwise honor, certain obligations that arose prior to the Petition Date, including obligations related to employee wages, salaries and benefits, taxes, and certain vendors and other providers of goods and services essential to the Company Parties' businesses. OnMay 22, 2020 , theBankruptcy Court approved the relief sought in these motions on an interim basis. OnJune 15, 2020 , theBankruptcy Court approved the relief sought in these motions on a final basis.
Restructuring Support Agreement
In contemplation of the Chapter 11 Cases, on the Petition Date, the Company Parties entered into the Restructuring Support Agreement with the Consenting Term Lenders, which hold more than 75% in principal amount of the outstanding term loans under the Term Loan Agreement. The Restructuring Support Agreement provides that the Consenting Term Lenders will support certain transactions (the "Transactions") in pursuit of the Sale (as defined below) and confirmation of a Chapter 11 Plan contemplated by the plan term sheet attached to and incorporated into the Restructuring Support Agreement (the "Plan") on the terms set forth in the Restructuring Support Agreement.
The Restructuring Support Agreement contemplates, among other things:
•that the Sale will be conducted pursuant to the bidding procedures attached to and incorporated into the Restructuring Support Agreement (as amended, modified, waived or supplemented, the "Bidding Procedures"), which Bidding Procedures were approved by theBankruptcy Court onJune 15, 2020 ; •that the Sale will be conducted as follows: •in the event that the Buyer is the Successful Bidder (as defined in the Bidding Procedures), on the terms set forth in the Stalking Horse APA (as defined below), pursuant to which the full amount of indebtedness under the Term Loan Agreement shall be credit bid, or •in the event that a Qualified Bidder (as defined in the Bidding Procedures) other than the Stalking Horse Bidder is the Successful Bidder, on the terms of the purchase agreement for the Successful Bidder as approved by theBankruptcy Court ; and •commitments by the Consenting Term Lenders to provide the debtor-in-possession financing pursuant to the terms and conditions set forth in the DIP Credit Agreement (described below). In accordance with the Restructuring Support Agreement, the Consenting Term Lenders agreed, among other things, to: (i) vote in favor of the Plan, including supporting all of the debtor and third-party releases, injunctions, discharge and exculpation provisions provided in the Plan; (ii) use commercially reasonable effort to support the Transactions and take all reasonable actions necessary to implement and consummate the Transactions in accordance with the terms, conditions, and applicable deadlines set forth in the Restructuring Support Agreement, the Plan and the Bidding Procedures, as applicable; (iii) direct the Term Loan Agent (or any designated subagent) to credit bid up to the full amount of indebtedness under the Term Loan Agreement and otherwise facilitate the Transactions contemplated by the Restructuring Support Agreement and the Stalking Horse APA; and (iv) negotiate in good faith the applicable Definitive Documents (as defined in the Restructuring Support Agreement) and use their commercially reasonable efforts to agree to the form and substance of such Definitive Documents consistent with the terms of the Restructuring Support Agreement. In accordance with the Restructuring Support Agreement, the Company Parties agreed, among other things, to: (i) use commercially reasonable efforts to (a) pursue the Transactions on the terms and in accordance with the milestones set forth in [63] -------------------------------------------------------------------------------- the Restructuring Support Agreement, and (b) cooperate with the Consenting Term Lenders to obtain necessary Court approval of the Definitive Documents to consummate the Transactions; (ii) not take any action, and not encourage any other person or entity to, take any action, directly or indirectly, that would reasonably be expected to, breach or be inconsistent with this Agreement, or take any other action, directly or indirectly, that would reasonably be expected to interfere with the acceptance or implementation of the Transactions, this Agreement, the Sale, or the Plan; (iii) use commercially reasonable efforts to obtain any and all required regulatory and/or third-party approvals for the Transactions; (iv) negotiate in good faith and use commercially reasonable efforts to execute and deliver the Definitive Documents and any other required agreements to effectuate and consummate the Transactions as contemplated by this Agreement; and (v) use commercially reasonable efforts to seek additional support for the Transactions from their other material stakeholders to the extent reasonably prudent. The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones related to the filing, approval, confirmation and effectiveness of the Plan, entry of orders relating to the DIP Facility and the closing of the Sale.
Stalking Horse APA
The Company Parties entered into the Stalking Horse APA, dated as ofMay 20, 2020 , with the Buyer, pursuant to which the Buyer has agreed to the Sale. Each of the Company Parties is a debtor in the Chapter 11 Cases. The Stalking Horse APA, subject to an auction to solicit higher or otherwise better bids, was approved by theBankruptcy Court onJune 15, 2020 .The Bankruptcy Court also approved the Buyer as the "stalking horse" bidder. Under the terms of the Stalking Horse APA, the Buyer has agreed, absent any higher or otherwise better bid, to acquire substantially all of the assets of the Sellers for aggregate consideration comprising (i) the assumption of certain liabilities, (ii) the credit bid of 100% of the Lenders' pre-petition claims under the Term Loan Agreement, which amount shall be satisfied by discharging all of the Lenders' pre-petition claims pursuant to section 363(k) of the Bankruptcy Code, and (iii) an amount in cash equal to the amount set forth in the Wind-Down Budget included as an exhibit to the Stalking Horse APA. Pursuant to the Stalking Horse APA, if the Company Parties receive any bids that are higher or otherwise better, the Company Parties will conduct an auction no later than eighty-two days after the Petition Date. As the stalking horse bidder, the Buyer's offer to purchase substantially all of the assets of the Sellers, set forth in the Stalking Horse APA, serves as the minimum or floor bid on which the Company Parties, their creditors, suppliers, vendors, and other bidders may rely. Other interested bidders were permitted to participate in the auction if they submitted qualifying offers that were higher or otherwise better than the stalking horse bid. Pursuant to the Bidding Procedures approved by theBankruptcy Court , the bids for the Sale were due5:00 p.m. (prevailing Eastern Time), onAugust 3, 2020 . No qualified and actionable bids were received by the deadline. As a result, the auction was cancelled. The hearing to approve the Sale is scheduled to take place onAugust 20, 2020 .
Debtor-In-Possession Financing
OnMay 22, 2020 , the Company Parties entered into the DIP Credit Agreement with the DIP Lenders, andWilmington Savings Fund Society , FSB, as the administrative agent, setting forth the terms and conditions of the$30.0 million DIP Facility. OnMay 22, 2020 , theBankruptcy Court granted the motion to approve the Interim DIP Order. Within seven days of such approval,$10.0 million was available to the Company Parties. OnJune 15, 2020 , theBankruptcy Court entered the Final DIP Order, pursuant to which the full$30.0 million became available to the Company Parties, subject to certain conditions. The Company Parties' obligations under the DIP Credit Agreement are secured by a security interest in and lien upon substantially all of their existing and after-acquired property. The use of cash collateral and the proceeds of the loans made under the DIP Credit Agreement (the "DIP Loans") are to be used only in connection with an approved budget (adjusted for agreed variances), for the purposes of: (i) paying related transaction costs, fees and expenses with respect to the DIP Facility, (ii) making adequate protection payments (if any), and (iii) providing working capital, and for other general corporate purposes of the Company Parties and their subsidiaries, and to pay administration costs of the Chapter 11 Cases and claims or amounts approved by theBankruptcy Court in accordance with an approved budget (adjusted for agreed variances). The first$10.0 million became funded into an escrow account within three business days of the date on which the Interim DIP Order was entered and became available to the Company Parties to withdraw seven business days after the date on which the Interim DIP [64] --------------------------------------------------------------------------------
Order was entered. The remainder became available to the Company Parties to withdraw from the escrow account upon the entry of the Final DIP Order.
The maturity date of the DIP Credit Agreement will be the earliest of (a)November 20, 2020 ; (b) the date on which the obligations under the DIP Loans become due and payable, whether by acceleration or otherwise, (c) the effective date of a Chapter 11 plan of liquidation or reorganization in the Chapter 11 Cases, (d) the date of consummation of the Sale under Section 363 of the Bankruptcy Code, (e) the first business day on which the Interim DIP Order expires by its terms or is terminated, unless the Final DIP Order has been entered and become effective prior thereto, (f) conversion of any of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code or anyCompany Party filing a motion or other pleading seeking the conversion of the Chapter 11 Cases to Chapter 7 of the Bankruptcy Code unless otherwise consented to in writing by the DIP Lenders in accordance with the DIP Credit Agreement, (g) dismissal of any of the Chapter 11 Cases, unless otherwise consented to in writing by the DIP Lenders in accordance with the DIP Credit Agreement, and (h) the date on which the Final DIP Order is vacated, terminated, rescinded, revoked, declared null and void or otherwise ceases to be in full force and effect, unless consented to by the Lenders in accordance with the DIP Credit Agreement. The DIP Credit Agreement contains usual and customary affirmative and negative covenants and events of default for transactions of this type. In addition, the Company is required to maintain a minimum level of liquidity consistent with an approved budget.
Refer to Note 8 - Financing Arrangements for further detail of debt the
Company's obligations as of and for the three and six month periods ended
Effects of the Chapter 11 Cases on Our Liquidity
The filing of the Chapter 11 Cases constituted an event of default that accelerated our obligations under the Term Loan Agreement. The Term Loan Agreement provides that as a result of the Chapter 11 Cases, the principal and interest due thereunder became immediately due and payable. However, pursuant to the Bankruptcy Code and as described in Note 11 - Commitments and Contingencies of this Report, the filing of the Chapter 11 Cases automatically stayed most actions against the Company Parties, including most actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Company Parties' property. Accordingly, although the filing of the Chapter 11 Cases triggered events of default under our existing debt obligations, creditors are stayed from taking action as a result of these defaults. Additionally, under Section 502(b)(2) of the Bankruptcy Code, and subject to the terms of the DIP Orders providing for adequate protection payments to certain of our prepetition lenders, we are no longer required to pay interest on our credit facilities accruing on or after the Petition Date. Additionally, in connection with the Chapter 11 Cases, we have incurred, and expect to continue to incur, significant professional fees and other costs in connection with the Chapter 11 Cases. There can be no assurance that our current liquidity is sufficient to allow us to satisfy our obligations related to the Chapter 11 Cases. CONTRACTUAL OBLIGATIONS Except for changes to the Term Loans as a result of the Second Amended Standstill Agreement and the Chapter 11 Cases and the acceleration of substantially all of our debt as a result, each as described in this Quarterly Report on 10-Q, there have been no material changes in the information reported under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations in our Form 10-K for the fiscal year endedDecember 31, 2019 . CRITICAL ACCOUNTING POLICIES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our significant accounting policies is included in Note 2 - Summary of Significant Accounting Policies, in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , and in Note 2 - Summary of Significant Accounting Policies on this Form 10-Q. Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. The Company consolidates the financial statements of its foreign subsidiaries in accordance with ASC 830 - Foreign Currency Matters, under which the statement of operations amounts are translated from Indian Rupees ("INR") and Swiss [65] -------------------------------------------------------------------------------- Francs ("CHF"), respectively, toU.S. Dollars at the average exchange rate during the applicable period, while balance sheet amounts are generally translated at the exchange rate in effect as of the applicable balance sheet date. Cash flows are translated at the average exchange rate in place during the applicable period. Differences arising from foreign currency translation are included in accumulated other comprehensive loss and are carried as a separate component of equity on our condensed consolidated balance sheets.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have had, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
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