RVL PHARMACEUTICALS PLC The statements in the discussion and analysis regarding industry outlook, our expectations regarding the performance of our business and the forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements." Our actual results may differ materially from those contained in or implied by any forward-looking statements. This discussion and analysis is based upon the historical financial statements ofOsmotica Pharmaceuticals plc . All references to years, unless otherwise noted, refer to our fiscal years, which end onDecember 31 .
Overview
We are a specialty pharmaceutical company focused on the commercialization and development of products that target markets with underserved patient populations. InJuly 2020 , we received regulatory approval from the FDA for RVL-1201, or Upneeq, (oxymetazoline hydrocholoride ophthalmic solution, 0.1%), for the treatment of acquired blepharoptosis, or droopy eyelid, in adults. We launched Upneeq inSeptember 2020 to a limited number of eye care professionals and expanded our commercialization efforts in 2021 among ophthalmology, optometry and oculoplastic specialties. We believe Upneeq is the first non-surgical treatment option approved by the FDA for acquired blepharoptosis. OnAugust 27, 2021 , we announced the closing of the divestiture of the Company's portfolio of branded and non-promoted products and itsMarietta, Georgia manufacturing facility, (the "Legacy Business"), to certain affiliates ofAlora Pharmaceuticals ("Alora") for$111 million in cash upon closing, subject to certain post-closing adjustments, and up to$60 million in contingent milestone payments, (the "Transaction"). Pursuant to the Transaction we retained the rights to Upneeq and to arbaclofen extended release tablets, which is under development for the treatment of spasticity in multiple sclerosis. As a result, our business is now primarily focused on the commercialization and development of specialty pharmaceuticals in the ocular and medical aesthetics therapeutic areas. The Legacy Business met the criteria within Accounting Standards Codification ("ASC") 205-20, Presentation of Financial Statements to be reported as discontinued operations because the transaction was a strategic shift in business that had a major effect on our operations and financial results. Therefore, we have reported the historical results of the Legacy Business including the results of operations and cash flows as discontinued operations, and related assets and liabilities were retrospectively reclassified as assets and liabilities of discontinued operations for all periods presented herein. Unless otherwise noted, applicable amounts in the prior year have been recast to conform to this discontinued operations presentation. Refer to Note 2, "Summary of Significant Accounting Policies" of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information. Unless otherwise indicated, the following information relates to our continuing operations following the sale to Alora. A description of our business prior to the consummation of the transaction is included in Item 1. "Business", in Part I of the Annual Report on Form 10-K for the year endedDecember 31, 2020 that was previously filed with theSecurities and Exchange Commission ("SEC") onMarch 30, 2021 . With the divestiture of the Legacy Business, our commercial operations are now conducted by our wholly-owned subsidiary,RVL Pharmaceuticals, Inc. and its subsidiaryRVL Pharmacy, LLC , or RVL. RVL operates pharmacy operations dedicated to the processing and fulfillment of prescriptions for Upneeq. In addition, we are developing our late-stage product candidate arbaclofen extended-release, or ER, tablets designed for the alleviation of signs and symptoms of spasticity resulting from multiple sclerosis, or MS, for which we have completed Phase III clinical trials. InJune 2020 , we resubmitted our NDA for arbaclofen ER tablets for the alleviation of spasticity in MS to the FDA. OnJuly 17, 2020 we received notice from the FDA that it considered the resubmission a complete response to theJuly 9, 2016 action letter and set a goal date for a FDA decision on the NDA ofDecember 29, 2020 . OnDecember 28, 2020 we received a complete response letter, or CRL indicating the FDA could not approve the NDA in its then current form. The CRL stated that we did not provide adequate justification (including in our most recent NDA amendment) for the statistical analysis of the change from baseline to Day 84 in TNmAS-MAL scores comparing arbaclofen 40 mg to placebo, one of the co-primary endpoints. OnJanuary 23, 2021 , we submitted a Type A meeting request to the FDA to discuss the CRL's recommendations and obtain advice on a path forward for the NDA. 26
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The meeting took place onMarch 4, 2021 , during which we explored selective review of the currently available data and options for a path forward for FDA approval, including conducting another clinical study. OnAugust 2, 2021 , we submitted a Special Protocol Assessment, or SPA, to the FDA proposing an additional clinical study for arbaclofen ER. FDA responded in a letter datedOctober 15, 2021 , indicating that they are unable to issue an agreement on the submitted protocol. We are reviewing theFDA's comments and may request a Type A meeting with the Division to discuss the protocol. We intend to revise the protocol and statistical analysis plan and resubmit the SPA agreement request.
Business Update Regarding COVID-19
The continuing COVID-19 pandemic has presented a substantial public health and economic challenge around the world. In particular, the ongoing COVID-19 pandemic has resulted in federal, state and local governments and private entities mandating various restrictions, including travel restrictions, access restrictions, restrictions on public gatherings, and stay at home orders. The effect of these orders, government imposed quarantines and measures we have taken, such as implementing work-at-home policies, may negatively impact productivity, disrupt our business and/or could adversely affect our commercialization plans and results. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. We launched our commercial activities for Upneeq and began engaging with eye care providers to promote Upneeq inSeptember 2020 and have since expanded our field sales force. In some instances our sales force has encountered challenges engaging with eye care providers during this on-going pandemic. Although many areas ofthe United States have re-opened, or begun to re-open, access to offices and other commercial facilities, there continue to be areas where restrictions remain in place, which may have the potential to affect our ability to conduct our business. Additionally, new variants, some of which could be resistant to existing vaccines, may lead to new shutdowns or business disruptions in the future, and our ability to conduct our business in the manner and on the timeline presently planned could be materially and adversely impacted.
To date, we have been able to continue to supply Upneeq to patients without significant disruptions, and we do not currently anticipate significant interruption in the near term. However, we are continuing to monitor the potential impact of the COVID-19 pandemic on our business and operations, including our sales, expenses, and pharmacy operations.
Our third-party contract manufacturing partner for Upneeq has been able to operate its manufacturing facility at or near normal levels. While we currently do not anticipate significant interruptions in our manufacturing supply chain, the COVID-19 pandemic and related mitigation efforts may have a negative impact in the future on our third party suppliers' and contract manufacturing partner's ability to manufacture our products or to have our products reach all markets. In theU.S. , our office-based employees have been encouraged to work from home sincemid-March 2020 . During this time, we are ensuring essential staffing levels in our operations remain in place, including maintaining key personnel in our pharmacy.
For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A. Risk Factors included in our Current Report on Form 8-K.
Financial Operations Overview
Segment Information
We currently operate in one business segment focused on the development and
commercialization of pharmaceutical products that target markets with
underserved patient populations. We are not organized by market and are managed
and operated as one business. We also do not operate any separate lines of
business or separate business entities with respect to our products. A single
management team reports to our chief operating decision maker who
comprehensively manages
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our entire business. Accordingly, we do not accumulate discrete financial information with respect to separate product lines and do not have separately reportable segments. See Note 2, Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Components of Results of Operations
Revenues
As a result of the divestiture, all revenues of the Legacy Business have been
reclassified under discontinued operations. Our revenues consist of product
sales, royalty revenues and licensing revenue from the
Net product sales-Our revenues consist of sales of Upneeq sold through the pharmacy operations of RVL. RVL ships Upneeq to our customers pursuant to prescriptions which in certain cases are fulfilled by a third party pharmacy partner. All sales are made pursuant to credit cards for which we are paid prior to shipment. We recognize revenue when control has transferred to the customer, which is typically on delivery to the customer. Accordingly a portion of revenue is deferred until we have evidence the product was delivered to the customer. The amount of revenue we recognize is equal to the selling price, adjusted for any variable consideration, which largely consists of disputed chargebacks, at the time revenues are recognized. Royalty revenue-For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all the royalty has been allocated has been satisfied (or partially satisfied). Licensing revenue-We have arrangements with commercial partners that allow for the purchase of Upneeq from us by the commercial partners for the purpose of sub-distribution. Licensing revenue is recognized when the performance obligation identified in the arrangement is completed. Variable considerations, such as returns on Upneeq sales, government program rebates, price adjustments and prompt pay discounts associated with licensing revenue, are generally the responsibility of our commercial partners.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel expenses, including salaries and benefits for employees in executive, sales, marketing, finance, accounting, business development, legal and human resource functions. General and administrative expenses also include corporate facility costs, including rent, utilities, insurance, legal fees related to corporate matters, share based compensation and fees for accounting and other consulting services. Research and Development
Costs for research and development are charged as incurred and include employee-related expenses (including salaries and benefits, share based compensation, travel and expenses incurred under agreements with contract research organizations, or CROs, contract manufacturing organizations and service providers that assist in conducting clinical and preclinical studies), costs associated with preclinical activities and development activities and costs associated with regulatory operations.
Costs for certain development activities, such as clinical studies, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the patterns of costs incurred, and are reflected in our condensed consolidated financial statements as prepaid expenses or accrued expenses as applicable.
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Discontinued Operations
Due to the sale of the Legacy Business during the third quarter of 2021, the
Company has classified the results of the Legacy Business as discontinued
operations, and all assets and liabilities associated with our Legacy Business
were classified as assets and liabilities of discontinued operations for all
periods presented.
Results of Operations
Comparison of Three Months Ended
Financial Operations Overview
The following table presents revenues and expenses for the three months ended
Three Months Ended September 30,
2021 2020 % changeNet product sales $ 2,196 $ 586 275 % Royalty revenue - 165 (100) % Licensing revenue - 25,000 (100) % Total revenues 2,196 25,751 (91) % Cost of goods sold 1,147 1,185 (3) % Gross profit 1,049 24,566 (96) % Gross profit percentage 48 % 95 % Selling, general and administrative expenses 24,841 21,360 16 % Research and development expenses 1,376 1,779 (23) % Total operating expenses 26,217 23,139 13 % Operating income (loss) (25,168) 1,427 (1,864) % Interest expense and amortization of debt discount 735 1,071 (31) % Other non-operating (gain) loss 120 (51) (335) % Total other non-operating expense 855 1,020 (16) % Income (loss) before income taxes (26,023) 407 (6,494) % Income tax expense (benefit) 324 (1,308) (125) % Income (loss) from continuing operations (26,347) 1,715 (1,636) % Gain on sales of discontinued operations 4,373 - NM Income (loss) from discontinued operations before income tax expense 3,983 (10,171) (139) % Income tax expense (benefit) - discontinued operations (132) 177 (175) % Income (loss) from discontinued operations, net of tax 8,488 (10,348) (182) % Net and other comprehensive loss$ (17,859)
$ (8,633) 107 %
NM-Not Meaningful
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Revenue
The following table presents total revenues for the three months ended
Three Months Ended September 30,
Pharmaceutical Products 2021 2020 % change
Upneeq $ 2,196 $ 52 4,123 %
Osmolex - 534 (100) %
Net product sales 2,196 586 275 %
Royalty revenue - 165 (100) %
Licensing revenue - 25,000 (100) %
Total revenues $ 2,196 $ 25,751 (91) %
Total Revenues - Total revenues decreased by$23.6 million to$2.2 million for the three months endedSeptember 30, 2021 , as compared to$25.8 million for the three months endedSeptember 30, 2020 primarily due to a decrease in license revenue from theSanten license recognized during the prior year period. Net Product Sales - Net product sales increased by$1.6 million to$2.2 million for the three months endedSeptember 30, 2021 , as compared to$0.6 million for the three months endedSeptember 30, 2020 . The increase in product sales of Upneeq was primarily attributable to an increase in volume of sales as the product was commercially launched in September, 2020. The decrease in product sales of Osmolex reflects the divestiture of the product in January, 2021. Royalty Revenue - Royalty revenue decreased by$0.2 million for the three months endedSeptember 30, 2021 , relative to the three months endedSeptember 30, 2020 , as the underlying product licenses expired during the second quarter of 2021. Licensing Revenue - Licensing revenue decreased$25.0 million during the three months endedSeptember 30, 2021 as there were no milestone payments under theSanten license agreement recognized during the quarter as compared to the prior year period .
Cost of Goods Sold and Gross Profit Percentage
The following table presents a breakdown of total cost of goods sold for the
three months ended
Three Months Ended
September 30,
2021 2020 % change
Depreciation expense $ 13 $ 2 550 %
Royalty expense 144 11 1,209 %
Other costs of goods sold 990 1,172 (16) %
Total costs of goods sold $ 1,147 $ 1,185 (3) %
Total cost of goods sold decreased $0.1 million in the three months ended
September 30, 2021 to $1.1 million as compared to $1.2 million for the three
months ended September 30, 2020 . The decrease was primarily driven by the
absence of product costs for Osmolex which was divested in January, 2021 and
higher product costs for Upneeq reflecting a full quarter of product sales as
compared to the prior year period as the product was launched in September,
2020.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$3.4 million during the three months endedSeptember 30, 2021 to$24.8 million as compared to$21.4 million in the three months endedSeptember 30, 2020 . The increase in our selling, general and administrative expenses reflects higher selling expenses associated with the expanded sales force and higher marketing expenses due to the Upneeq launch during 2021 as compared to the prior year period. Selling, general and administrative expenses include share compensation expenses of$3.2 million and$1.1 million for the three months endedSeptember 30, 2021 and 2020, respectively. The increase in share compensation expense reflects the acceleration of vesting of equity awards triggered by the divestiture of the Legacy business during the quarter.
Research and Development
Research and development expenses decreased by$0.4 million in the three months endedSeptember 30, 2021 to$1.4 million as compared to$1.8 million in the three months endedSeptember 30, 2020 . The decrease primarily reflects lower spending on arbaclofen ER and lower headcount costs, partially offset by higher spending on a new formulation of Upneeq. Research and development expenses include share compensation$0.4 million and$0.1 million for the three months endedSeptember 30, 2021 and 2020, respectively. The increase of share compensation expense reflects the acceleration of vesting of equity awards triggered by the divestiture of the Legacy business during the quarter.
The following table summarizes our research and development expenses incurred for the periods indicated (dollars in thousands):
Three Months Ended September 30,
2021 2020 % change
Arbaclofen ER $ 57 $ 372 (85) %
RVL-1201 427 315 36 %
Other 892 1,092 (18) %
Total $ 1,376 $ 1,779 (23) %
Impairment of Intangible Assets
There was no impairment of intangible assets during the three months ended
Interest Expense and Amortization of Debt Discount
Interest expense and amortization of debt discount decreased by$0.4 million in the three months endedSeptember 30, 2021 to$0.7 million as compared to$1.1 million in the three months endedSeptember 30, 2020 . The decrease due to lower levels of debt reflecting prepayments made during 2020 and 2021.
Income Tax Benefit (Expense)
During the three months endedSeptember 30, 2021 , we recognized income tax expense on continued operations of$0.3 million on$26.0 million of loss before income tax, compared to$1.3 million of income tax benefit on$0.4 million of income before income tax during the comparable 2020 period. Income taxes for the interim periods have been based on an estimated annualized worldwide effective tax rate. Income tax (expense) benefit differs from the statutory income tax rate primarily due to the occurrence of orphan drug and research development credits, movement in a valuation allowance and the addition to state and foreign taxes. 31 Table of Contents The income tax expense was based on the applicable federal, state and foreign tax rates for those periods. For periods with income before provision for income taxes, favorable tax items result in a decrease in the effective tax rate, while unfavorable tax items result in an increase in the effective tax rate. For periods with a loss before benefit from income taxes, favorable tax items result in an increase in the effective tax rate, while unfavorable tax items result in a decrease in the effective tax rate.
Discontinued Operations
For the three months endedSeptember 30, 2021 the Company recognized income from discontinued operations, net of tax, of$8.5 million . For the three months endedSeptember 30, 2020 the Company recognized income from discontinued operations, net of tax of$10.4 million .
Comparison of Nine Months Ended
Financial Operations Overview
The following table presents revenues and expenses for the nine months ended
Nine Months Ended September 30,
2021 2020 % changeNet product sales $ 4,451 $ 998 346 % Royalty revenue 190 629 (70) % Licensing revenue 10,000 25,000 (60) % Total revenues 14,641 26,627 (45) % Cost of goods sold 2,535 1,794 41 % Gross profit 12,106 24,833 (51) %
Gross profit percentage 83 % 93 % Selling, general and administrative expenses 63,769 54,028 18 % Research and development expenses 5,789
9,264 (38) %
Impairment of intangibles 7,880 - NM %
Total operating expenses 77,438 63,292 22 %Gain on sales of product rights, net 5,636 - NM % Operating loss (59,696) (38,459) 55 % Interest expense and amortization of debt discount 1,750 3,560 (51) % Other non-operating (gain) loss 1,312 246 433 % Total other non-operating expense 3,062
3,806 (20) %
Loss before income taxes (62,758) (42,265) 48 %
Income tax expense (benefit) 415 (5,042) (108) %Loss from continuing operations (63,173) (37,223) 70 % Gain on sales of discontinued operations 4,373 - NM % Income from discontinued operations before income tax expense 14,219 17,571 (19) % Income tax expense - discontinued operations 617 5,063 (88) % Income from discontinued operations, net of tax 17,975 12,508 44 % Net and other comprehensive loss$ (45,198)
$ (24,715) 83 % NM-Not Meaningful 32 Table of Contents Revenue
The following table presents total revenues for the nine months ended
Nine Months Ended September 30,
Pharmaceutical Products 2021 2020 % change
Upneeq $ 4,451 $ 52 8,460 %
Osmolex - 946 (100) %
Net product sales 4,451 998 346 %
Royalty revenue 190 629 (70) %
Licensing revenue 10,000 25,000 (60) %
Total revenues $ 14,641 $ 26,627 (45) %
Total Revenues - Total revenues decreased by$12.0 million to$14.6 million for the nine months endedSeptember 30, 2021 , as compared to$26.6 million for the nine months endedSeptember 30, 2020 primarily due to a decrease in licensing revenue. Net Product Sales - Net product sales increased by$3.5 million to$4.5 million for the nine months endedSeptember 30, 2021 , as compared to$1.0 million for the nine months endedSeptember 30, 2020 . Product sales of Upneeq increased$4.4 million due to a$4.2 million increase in unit volume and a$0.2 million increase in realized price. Upneeq was commercially launched in September, 2020. The decrease in product sales of Osmolex reflects the divestiture of the product in January, 2021. Royalty Revenue - Royalty revenue decreased by$0.4 million for the nine months endedSeptember 30, 2021 , relative to the nine months endedSeptember 30, 2020 due to the expiration of the underlying product licenses during the second quarter of 2021. Licensing Revenue - Licensing revenue decreased$15.0 million during the nine months endedSeptember 30, 2021 reflecting lower milestone payments under theSanten license agreement recognized during 2021 as compared to the prior year period.
Cost of Goods Sold and Gross Profit Percentage
The following table presents a breakdown of total cost of goods sold for the
nine months ended
Nine Months Ended
September 30,
2021 2020 % change
Depreciation expense $ 42 $ 2 2,000 %
Royalty expense 287 35 720 %
Other costs of goods sold 2,206 1,757 26 %
Total costs of goods sold $ 2,535 $ 1,794 41 %
Total cost of goods sold increased $0.7 million in the nine months ended
September 30, 2021 to $2.5 million as compared to $1.8 million for the nine
months ended September 30, 2020 . The increase was primarily driven by higher
volumes of Upneeq sold during 2021 and higher royalty expense, partially offset
by a decrease in the costs of goods associated with Osmolex which was divested
in January, 2021.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$9.8 million during the nine months endedSeptember 30, 2021 to$63.8 million as compared to$54.0 million in the nine months endedSeptember 30, 2020 . The increase in our selling, general and administrative expenses primarily reflects higher selling expenses associated with a salesforce expansion and higher marketing expenses associated with the launch of Upneeq during 2021 as compared to the prior year period. Selling, general and administrative expenses include share compensation expenses of$5.0 million and$2.9 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase in share compensation expense reflects the acceleration of vesting of equity awards triggered by the divestiture of the Legacy business during the quarter.
Research and Development
Research and development expenses decreased by$3.5 million in the nine months endedSeptember 30, 2021 to$5.8 million as compared to$9.3 million in the nine months endedSeptember 30, 2020 . The decrease primarily reflects lower headcount, lower spending on arbaclofen ER, Upneeq and other R&D projects, partially offset by severance costs related to the cessation of operations in the Company's Argentine subsidiary during the second quarter. Research and development expenses include share compensation$0.7 million and$0.4 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase of share compensation expense reflects the acceleration of vesting of equity awards triggered by the divestiture of the Legacy business during the quarter.
The following table summarizes our research and development expenses incurred for the periods indicated (dollars in thousands):
Nine Months Ended September 30,
2021 2020 % change
Arbaclofen ER $ 662 $ 2,720 (76) %
RVL-1201 1,015 2,629 (61) %
Other 4,112 3,915 5 %
Total $ 5,789 $ 9,264 (38) %
Impairment of Intangible Assets
Impairment of intangible assets of$7.9 million during the three months endedSeptember 30, 2021 related to the write-down to fair value of arbaclofen ER due to delay in anticipated commercialization of the product candidate, if approved. The following table details the impairment charges for such period (in thousands): Nine Months Ended September 30, 2021 Impairment Asset/Asset Group Charge Reason For Impairment In-Process R&D Delay in anticipated commercialization of the product candidate, if Arbaclofen ER$ 7,880 approved. Total Impairment Charges for nine months ended September 30, 2021$ 7,880 34 Table of Contents
Interest Expense and Amortization of Debt Discount
Interest expense and amortization of debt discount decreased by$1.8 million in the nine months endedSeptember 30, 2021 to$1.8 million as compared to$3.6 million in the nine months endedSeptember 30, 2020 . The decrease reflects lower interest rates and prepayment of debt during 2020 and 2021.
Other non-operating (gain) loss
Other non-operating loss of$1.3 million for the nine month period ended onSeptember 30, 2021 increased$1.1 million from other non-operating gain of$0.2 million for the nine months endedSeptember 30, 2020 . The loss resulted primarily from asset disposal costs related to leasehold improvements associated with the curtailment of operations inArgentina during the second quarter of 2021. Income Tax Benefit (Expense) During the nine months endedSeptember 30, 2021 , we recognized income tax expense on continuing operations of$0.4 million on$62.8 million of loss before income tax, compared to$5.0 million of income tax benefit on$42.3 million of loss before income tax during the comparable 2020 period. Income taxes for the interim periods have been based on an estimated annualized worldwide effective tax rate. Income tax (expense) benefit differs from the statutory income tax rate primarily due to the occurrence of orphan drug and research development credits, movement in a valuation allowance and the addition to state and foreign taxes. The income tax expense was based on the applicable federal, state and foreign tax rates for those periods. For periods with income before provision for income taxes, favorable tax items result in a decrease in the effective tax rate, while unfavorable tax items result in an increase in the effective tax rate. For periods with a loss before benefit from income taxes, favorable tax items result in an increase in the effective tax rate, while unfavorable tax items result in a decrease in the effective tax rate.
Discontinued Operations
For the nine months endedSeptember 30, 2021 the Company recognized loss from discontinued operations, net of tax, of$18.0 million . For the nine months endedSeptember 30, 2020 the Company recognized income from discontinued operations, net of tax of$12.5 million .
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents on hand. We had cash and cash equivalents of$8.4 million as ofSeptember 30, 2021 . Our primary uses of cash are to fund operating expenses, product development costs, capital expenditures, and debt service payments. As ofSeptember 30, 2021 , the interest rate was 4.75% and 5.25% for our Term A Loan and Term B Loan, respectively. As ofSeptember 30, 2020 , the interest rate was 4.75% and 5.25% for our Term A Loan and Term B Loan, respectively. OnSeptember 8, 2021 , we entered into a sales agreement (the "Sales Agreement") withCantor Fitzgerald & Co. , or Cantor under which the Company may offer and sell its ordinary shares having aggregate sales proceeds of up to$75.0 million from time to time through Cantor as its sales agent by any method permitted that is deemed an "at the market offering" as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended, including, without limitation, sales made directly on the Nasdaq Global Select Market or any other existing trading market for the Company's ordinary shares. As ofSeptember 30, 2021 we had sold 146,162 of our ordinary shares for aggregate proceeds of$0.5 million and net proceeds to us of$0.04 million , after deducting commissions payable by us. OnJanuary 13, 2020 we completed an equity offering and allotted 6.9 million ordinary shares at a public offering price of$5.00 per share. The number of shares issued in this offering reflected the exercise in full of the underwriters option 35 Table of Contents to purchase 900,000 ordinary shares. The aggregate proceeds from the follow-on offering were approximately$31.8 million after deducting underwriting discounts and commissions and offering expenses. Proceeds from the offering were used for working capital and general corporate purposes. OnJuly 16, 2020 we completed a follow-on equity offering and allotted 5.0 million ordinary shares. The aggregate proceeds from the follow-on offering were approximately$30.4 million after deducting offering expenses. Proceeds from the offering will be used for working capital and general corporate purposes.
Going Concern
As ofSeptember 30, 2021 , the Company's cash and cash equivalents totaled$8.4 million . For the fiscal year endedDecember 31, 2020 and the three and nine months endedSeptember 30, 2021 the Company incurred net losses of$79.6 million ,$17.9 million and$45.2 million , respectively. OnAugust 27, 2021 , we announced the closing of the Transaction. Pursuant to the Transaction we retained the rights to Upneeq and to arbaclofen extended release tablets, which is under development for the treatment of spasticity in multiple sclerosis. Proceeds from the divestiture of the Legacy business, together with cash on hand were used to repay$186.1 million of debt. As ofSeptember 30, 2021 , the Company had interest bearing debt of$29.9 million , net of deferred financing fees, with a maturity date ofNovember 21, 2021 . OnOctober 12, 2021 the Company issued$55.0 million of senior secured notes to a lender, a portion of the proceeds of which, together with the proceeds from the underwritten offering described below, were used to repay$30.7 million of outstanding term loans, accrued interest and related fees and expenses. Also onOctober 12, 2021 the Company issued 14,000,000 ordinary shares and warrants to purchase 16,100,000 shares in an underwritten offering, raising net proceeds of approximately$32.5 million . The remaining net proceeds from the issuance of the senior notes and ordinary shares is being used for general corporate purposes. The divestiture of the Legacy Business resulted in the loss of substantially all the Company's revenue generating assets and the Company's business plan is focused on the launch of its Upneeq, which will diminish the Company's cash flows in at least the near term, in particular cash inflows from product sales. The Company will require additional capital to fund its operating needs, including the commercialization of Upneeq and other activities. Accordingly, the Company expects to incur significant expenditures and increasing operating losses in the future. As a result, the Company's current sources of liquidity will not be sufficient to meet its obligations for the 12 months following the date the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q are issued. These conditions give rise to substantial doubt as to our ability to operate as a going concern. Our ability to continue as a going concern will require us to obtain additional funding, generate positive cash flow from operations and/or enter into strategic alliances or sell assets.
Our plans to address these conditions include pursuing one or more of the following options to secure additional funding, none of which can be guaranteed or is entirely within our control:
raise funds through additional sales of our ordinary shares, through equity • sales agreements with broker/dealers or other public or private equity
financings.
•raise capital through additional debt facilities, including convertible debt.
•partner or sell a portion or all rights to any of our assets to potentially secure additional non-dilutive funds.
There can be no assurance that we will receive cash proceeds from any of these potential resources or, to the extent cash proceeds are received, such proceeds would be sufficient to support our current operating plan for at least the next 12 months from the date the condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q are issued. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock or through additional credit facilities, these securities and/or the loans under credit facilities could provide for
rights senior to those of our
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ordinary shares and could contain covenants that would restrict our operations. Additional funds may not be available when we need them, on terms that are acceptable to us, or at all.
Our unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. Our ability to continue as a going concern is dependent on our ability to obtain the necessary financing to meet our obligations and repay our liabilities arising from the normal business operations when they become due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that we will be able to continue as a going concern. Our unaudited condensed consolidated financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.
Cash Flows
The following table provides information regarding our cash flows for the periods indicated (dollars in thousands):
Nine Months Ended
September 30,
2021 2020 Change
Net cash provided by (used in) operating activities $ (30,337) $ 25,842 $ (56,179)
Net cash provided by (used in) investing activities 116,528 (2,372) 118,900
Net cash provided by (used in) financing activities (191,892) 6,758 (198,650)
Net increase (decrease) in cash and cash equivalents $ (105,701) $ 30,228 $ (135,929) Net cash provided by (used in) operating activities
Cash flows from operating activities are primarily driven by earnings from operations (excluding the impact of non-cash items), the timing of cash receipts and disbursements related to accounts receivable and accounts payable and the timing of inventory transactions and changes in other working capital amounts. Net cash used in operating activities was$30.3 million for the nine months endedSeptember 30, 2021 , and net cash provided by operating activities was$25.8 million for the nine months endedSeptember 30, 2020 .
The additional cash used in operating activities for the nine months ended
Net cash provided by (used in) investing activities
Net cash provided by investing activities was$116.5 million during the nine months endedSeptember 30, 2021 as compared to cash used in investing activities of$2.4 million during the nine months endedSeptember 30, 2020 . The change reflected proceeds of$7.3 million from the sale of Osmolex product rights inJanuary 2021 , and proceeds from the sale of the Legacy Business in August, 2021 together with lower purchases of property, plant and equipment during the nine months endedSeptember 30, 2021 .
Net cash provided by (used in) financing activities
Net cash used in financing activities was$191.9 million as compared to net cash provided by financing activities of$6.8 million during the nine months endedSeptember 30, 2021 and 2020, respectively. The change largely reflects the higher prepayment of term loans during the second and third quarters of 2021 as compared to the prior year period and the net proceeds raised from equity offerings in January, 2020.
Contractual Obligations
There have been no material changes outside the ordinary course of our business in our contractual obligations during the nine months endedSeptember 30, 2021 from those as ofDecember 31, 2020 as set forth in our filing on Form 8-K on 37 Table of Contents
Critical Accounting Estimates
The significant accounting policies and bases of presentation are described in Note 2, Basis of Presentation and Summary of Significant Accounting Policies to our condensed consolidated financial statements included elsewhere in this report. Summary of Significant Accounting Policies. The preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosures in the notes thereto. Some of these estimates can be subjective and complex. Although we believe that our estimates and assumptions are reasonable, there may be other reasonable estimates or assumptions that differ significantly from ours. Further, our estimates and assumptions are based upon information available at the time they were made. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. We have considered the impact of COVID-19 in the estimates within our financial statements and there may be changes to those estimates in future periods. Actual results could differ from those estimates. In order to understand our condensed consolidated financial statements, it is important to understand our critical accounting estimates. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and (ii) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition, results of operations or cash flows. We believe the following accounting policies and estimates to be critical:
Revenue Recognition
Product Sales-Revenue is recognized at the point in time when our performance obligations with our customers have been satisfied. At contract inception, we determine if the contract is within the scope of ASC Topic 606 and then evaluates the contract using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue at the point in time when the entity satisfies a performance obligation. Revenue is recorded at the transaction price, which is the amount of consideration we expect to receive in exchange for transferring products to a customer. We determine the transaction price based on fixed consideration. In determining the transaction price, a significant financing component does not exist since the customer pays for the product in advance of the transfer of the product. Royalty Revenue-For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all the royalty has been allocated has been satisfied (or partially satisfied). Licensing Revenue- We recognize development and regulatory milestone revenue from milestone events under our license withSanten that have been achieved and the Company is reasonably certain such revenues would not have to be reversed.
Freight-We record amounts billed to customers for shipping and handling as revenue, and record shipping and handling expenses related to product sales as selling, general and administrative expenses. We account for shipping and
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handling activities related to customers as costs to fulfill the promise to transfer the associated products. When shipping and handling costs are incurred after a customer obtains control of the products, we also have elected to account for these as costs to fulfill the promise and not as a separate performance obligation.
Valuation of long-lived assets
As of
Long-lived assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Factors that we consider in deciding when to perform an impairment review include significant changes in our forecasted projections for the asset or asset group for reasons including, but not limited to, significant under-performance of a product in relation to expectations, significant changes or planned changes in our use of the assets, significant negative industry, or economic trends, and new or competing products that enter the marketplace. The impairment test is based on a comparison of the undiscounted cash flows expected to be generated from the use of the asset group. Our long-lived intangible assets, which consist of distribution rights, product rights, tradenames and developed technology, are initially recorded at fair value upon acquisition. To the extent they are deemed to have finite lives, they are then amortized over their estimated useful lives using either the straight-line method or based on the expected pattern of cash flows. Factors giving rise to our initial estimate of useful lives are subject to change. Significant changes to any of these factors may result in a reduction in the useful life of the asset and an acceleration of related amortization expense, which could cause our operating income, net income, and net income per share to decrease. Recoverability of an asset that will continue to be used in our operations is measured by comparing the carrying amount of the asset to the forecasted undiscounted future cash flows related to the asset. In the event the carrying amount of the asset exceeds its undiscounted future cash flows and the carrying amount is not considered recoverable, impairment may exist. If impairment is indicated, the asset is written down by the amount by which the carrying value of the asset exceeds the related fair value of the asset with the related impairment charge recognized within the statements of operations.
Goodwill and indefinite-lived intangible assets are assessed for impairment on an annual basis as ofOctober 1st of each year or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill Impairment Assessment-We are organized in one reporting unit and evaluate goodwill for our company as a whole. Under the authoritative guidance issued by theFinancial Accounting Standards Board , or FASB, we have the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the goodwill impairment test is performed. We perform our goodwill impairment tests by comparing the fair value and carrying amount of our reporting unit. Any goodwill impairment charges we recognize for our reporting unit are equal to the lesser of (i) the total goodwill allocated to that reporting unit and (ii) the amount by which that reporting unit's carrying amount exceeds its fair value. The goodwill impairment test requires us to estimate the fair value of the reporting unit and to compare the fair value of the reporting unit with its carrying amount. If the carrying value exceeds its fair value, an impairment charge is recorded for the difference. If the carrying value recorded is less than the fair value calculated then no impairment loss is recognized. The fair value of our reporting unit is determined using an income approach that utilizes a discounted cash flow model or, where appropriate, the market approach, or a combination thereof. The discounted cash flow models are dependent upon our estimates of future cash flows and other factors. Our estimates of future cash flows are based on a comprehensive product by product forecast over a five-year period and involve assumptions concerning (i) future 39
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operating performance, including future sales, long-term growth rates, operating margins, variations in the amounts, allocation and timing of cash flows and the probability of achieving the estimated cash flows and (ii) future economic conditions, all which may differ from actual future cash flows. During the nine months endedSeptember 30, 2021 we assessed goodwill for indications of impairment and based on this assessment of indications performed, we determined that no additional evaluation was necessary and we did not recognize an impairment charge. A sustained decline in our market capitalization, even if due to macroeconomic or industry-wide factors, could put pressure on the carrying value of our goodwill and cause us to conduct additional impairment tests. A determination that all or a portion of our goodwill is impaired, although a non-cash charge to operations, could have a material adverse effect on our business, consolidated financial condition and results of operations. Assumptions related to future operating performance are based on management's annual and ongoing budgeting, forecasting and planning processes and represent our best estimate of the future results of our operations as of a point in time. These estimates are subject to many assumptions, such as the economic environments in which we operate, demand for the products and competitor actions. Estimated future cash flows are discounted to present value using a market participant, weighted average cost of capital. The financial and credit market volatility directly impacts certain inputs and assumptions used to develop the weighted average cost of capital such as the risk-free interest rate, industry beta, debt interest rate and our market capital structure. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The use of different inputs and assumptions could increase or decrease our estimated discounted future cash flows, the resulting estimated fair values and the amounts of related goodwill impairments, if any. IPR&D Intangible Asset Impairment Assessment-IPR&D, which are indefinite-lived intangible assets representing the value assigned to acquired Research and Development, or R&D, projects that principally represent rights to develop and sell a product that we have acquired which has not yet been completed or approved. These assets are subject to impairment testing until completion or abandonment of each project. The fair value of our indefinite-lived intangible assets is determined using an income approach that utilizes a discounted cash flow model and requires the development of significant estimates and assumptions involving the determination of estimated net cash flows for each year for each project or product (including net revenues, cost of sales, R&D costs, selling and marketing costs and other costs which may be allocated), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset's life cycle, the potential regulatory and commercial success risks, and competitive trends impacting each asset and related cash flow stream as well as other factors. The major risks and uncertainties associated with the timely and successful completion of the IPR&D projects include legal risk, market risk and regulatory risk. If applicable, upon abandonment of the IPR&D product, the assets are reduced to zero. Upon approval of the products in development for sale and placement into service, the associated IPR&D intangible assets will be placed into service and subject to amortization as an intangible asset. The useful life of an amortizing asset generally is determined by identifying the period in which substantially all of the cash flows are expected to be generated. If the fair value of the IPR&D is less than its carrying amount, an impairment loss is recognized for the difference. Beginning in 2018, we have been assessing for indications of impairment of IPR&D assets quarterly. Based on results of the assessment of impairment indications performed, we determined that the fair value of our IPR&D asset was in excess of its carrying value and, accordingly, no impairment charge was recognized in the three month period endingSeptember 30, 2021 .
Income Taxes
Income taxes are recorded under the asset and liability method of accounting.
Under this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled.
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Deferred income tax assets are reduced, as is necessary, by a valuation allowance when we determine it is more-likely-than-not that some or all of the tax benefits will not be realizable in the future. Realization of the deferred tax assets is dependent on a variety of factors, some of which are subjective in nature, including the generation of future taxable income, the amount and timing of which are uncertain. In evaluating the ability to recover the deferred tax assets, we consider all available positive and negative evidence, including cumulative income in recent fiscal years, the forecast of future taxable income exclusive of certain reversing temporary differences and significant risks and uncertainties related to our business. In determining future taxable income, management is responsible for assumptions utilized including, but not limited to, the amount ofU.S. federal, state and international pre-tax operating income, the reversal of certain temporary differences, carryforward periods available to us for tax reporting purposes, the implementation of feasible and prudent tax planning strategies and other relevant factors. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates that we are using to manage the underlying business. We assess the need for a valuation allowance each reporting period and would record any material changes that may result from such assessment to income tax expense in that period. We account for uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position's sustainability and is measured at the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The evaluation of unrecognized tax benefits is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. We evaluate unrecognized tax benefits and adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. The liabilities for unrecognized tax benefits can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the more-likely-than-not threshold or the liability becomes effectively settled through the examination process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax provision (benefit). The most significant tax jurisdictions areIreland ,the United States ,Argentina , andHungary . Significant estimates are required in determining the provision for income taxes. Some of these estimates are based on management's interpretations of jurisdiction-specific tax laws or regulations and the likelihood of settlement related to tax audit issues. Various internal and external factors may have favorable or unfavorable effects on the future effective income tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in estimates of prior years' items, changes in the international organization, likelihood of settlement, and changes in overall levels of income before taxes. As ofSeptember 30, 2021 , the Company had federal and state net operating loss carryover of$29.1 million and net operating loss carryovers in certain foreign tax jurisdictions of approximately$3.7 million which will begin to expire in 2022. AtSeptember 30, 2021 , we had total tax credit carryovers of approximately$6.7 million , primarily consisting of Federal Orphan Drug Tax Credit carryovers. These credit carryovers are expected to be fully realized prior to their expiration, beginning in 2035. We make an evaluation at the end of each reporting period as to whether or not some or all of the undistributed earnings of our subsidiaries are indefinitely reinvested. While we have concluded in the past that some of such undistributed earnings are indefinitely reinvested, facts and circumstances may change in the future. Changes in facts and circumstances may include a change in the estimated capital needs of our subsidiaries, or a change in our corporate liquidity requirements. Such changes could result in our management determining that some or all of such undistributed earnings are no longer indefinitely reinvested. In that event, we would be required to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely reinvested outside the relevant tax jurisdiction. Any future foreign withholding or income taxes associated with the undistributed earnings are not anticipated to be
material.
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Share-based Compensation
Prior to the consummation of our initial public offering, or IPO our employees
were eligible to receive awards from the Osmotica Holdings S.C.Sp. 2016 Equity
Incentive Plan. Prior to the completion of our IPO, the board of directors
approved a new equity-based incentive compensation plan, which took effect prior
to the completion of our initial public offering. Therefore, employees are now
eligible to receive awards under our 2018 Equity Incentive Plan.
Our share-based compensation cost will be measured at the grant date based on
the fair value of the award and will be recognized as expense over the requisite
service period, which will generally represent the vesting period. We will use
the Black Scholes valuation model for estimating the fair value on the date of
grant of stock options. The fair value of stock option awards will be affected
by our valuation assumptions, the volatility of equity comparables, the expected
term of the options, the risk-free interest rate, expected dividends and other
objective and subjective variables.
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