Document and Entity Information - shares |
9 Months Ended | |
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Sep. 30, 2018 |
Nov. 19, 2018 |
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| Document and Entity Information | ||
| Entity Registrant Name | Egalet Corp | |
| Entity Central Index Key | 0001586105 | |
| Document Type | 10-Q | |
| Document Period End Date | Sep. 30, 2018 | |
| Amendment Flag | false | |
| Current Fiscal Year End Date | --12-31 | |
| Entity Current Reporting Status | Yes | |
| Entity Filer Category | Non-accelerated Filer | |
| Entity Small Business | true | |
| Entity Emerging Growth Company | true | |
| Entity Ex Transition Period | true | |
| Entity Common Stock, Shares Outstanding | 56,772,101 | |
| Document Fiscal Year Focus | 2018 | |
| Document Fiscal Period Focus | Q3 |
Consolidated Balance Sheets (Parenthetical) - $ / shares |
Sep. 30, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Consolidated Balance Sheets | ||
| Common stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
| Common stock, authorized | 275,000,000 | 75,000,000 |
| Common stock, issued | 56,772,101 | 45,939,663 |
| Common stock, outstanding | 56,772,101 | 45,939,663 |
Consolidated Statements of Comprehensive Loss - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
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| Consolidated Statements of Comprehensive Loss | ||||
| Net loss | $ (51,227) | $ (18,948) | $ (75,540) | $ (70,800) |
| Other comprehensive income (loss): | ||||
| Unrealized gain (loss) on available for sale securities | 7 | 19 | 36 | (18) |
| Foreign currency translation adjustments | (21) | 166 | (132) | 786 |
| Comprehensive loss | $ (51,241) | $ (18,763) | $ (75,636) | $ (70,032) |
Organization and Description of the Business |
9 Months Ended |
|---|---|
Sep. 30, 2018 | |
| Organization and Description of the Business | |
| Organization and Description of the Business | 1. Organization and Description of the Business
Organization and Business Overview
Egalet Corporation (the “Company”) is a fully integrated specialty pharmaceutical company developing, manufacturing and commercializing innovative treatments for pain. Given the need for acute and chronic pain products and the issue of prescription abuse, the Company is focused on bringing non-narcotic and abuse-discouraging formulations of opioids to patients and healthcare providers. The Company is currently marketing SPRIX® (ketorolac tromethamine) Nasal Spray (“SPRIX Nasal Spray”) and OXAYDO® (oxycodone HCI, USP) tablets for oral use only—CII (“OXAYDO”). SPRIX Nasal Spray is a nonsteroidal anti-inflammatory drug (“NSAID”) indicated in adult patients for the short‑term (up to five days) management of moderate to moderately severe pain that requires analgesia at the opioid level. OXAYDO is an immediate release (“IR”) oxycodone product designed to discourage abuse via snorting, indicated for the management of acute and chronic pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. Using its proprietary Guardian Technology (“GT”), the Company developed ARYMO ER, an extended-release (“ER”) morphine product formulated with abuse-deterrent (“AD”) properties, which is approved for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. Due to, among other things, lack of market adoption of branded, ER morphine, Egalet discontinued the manufacturing and promotion of ARYMO ER on September 28, 2018. In addition to ARYMO ER, the Company developed a pipeline of products also using GT, which it may look to partner. The Company plans to continue to grow revenues of its commercial products, explore business development opportunities and leverage its proprietary technology. On October 30, 2018, the Company entered into a definitive asset purchase agreement (the “Purchase Agreement”) to acquire four non-narcotic marketed pain products and one development product from Iroko Pharmaceuticals (“Iroko”). To facilitate the transactions contemplated by the Purchase Agreement (the “Iroko Acquisition”) and to reorganize its financial structure, the Company and its wholly-owned subsidiaries (the “Debtors”) filed voluntary petitions for reorganization (the “Bankruptcy Petitions”) under Chapter 11 of the United States (“U.S.”) Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (the “Court”) and a related Joint Plan of Reorganization (the “Plan”) on October 30, 2018. If consummated, this transaction will enable Egalet to expand its commercial portfolio with four additional non-narcotic marketed pain products while improving its capital structure. Refer to Note 17 – Subsequent Events for additional details. Liquidity and Substantial Doubt in Going Concern Nasdaq Transfer and Delisting; Tender Offer On July 31, 2018, the Company filed a Tender Offer Statement on Schedule TO with respect to the right of each holder of its 5.50% Convertible Senior Notes due 2020 (the "5.50% Notes") to sell, and the obligation of the Company to repurchase for cash, all or a portion of each such holder’s 5.50% Notes on September 19, 2018, on the terms and subject to the conditions set forth in the Fundamental Change Company Notice, Make-Whole Fundamental Change Company Notice and Offer to Repurchase to Holders of the 5.50% Convertible Senior Notes due 2020, dated July 31, 2018, as amended August 10, 2018 (the “Offer”). The Offer was commenced in accordance with the requirements of the indenture governing the 5.50% Notes (the “5.50% Notes Indenture”) as a result of the determination by The Nasdaq Stock Market LLC (“Nasdaq”) that the Company had ceased to meet the requirements for the listing of its common stock on The Nasdaq Global Market and to transfer such listing to The Nasdaq Capital Market effective at the open of business on July 11, 2018 (the “Nasdaq Transfer”). The Nasdaq Transfer constituted both a Fundamental Change and a Make-Whole Fundamental Change under the 5.50% Notes Indenture. In accordance with the terms of the 5.50% Notes Indenture, as a result of the Nasdaq Transfer, the Company was required, on or before the 20th calendar day following the Nasdaq Transfer, to give notice of the Fundamental Change and Make-Whole Fundamental Change to the holders of the 5.50% Notes and to make an offer to purchase all of the 5.50% Notes. The scheduled expiration time of the Offer was 5:00 p.m., New York City time, on September 18, 2018 (the “Expiration Time”), and the scheduled repurchase date was September 19, 2018 (the “Fundamental Change Repurchase Date”).
In order to address the Company’s continued non-compliance with certain continued listing requirements for the listing of its common stock on the Nasdaq Capital Market and the potential consequences under the 5.50% Notes Indenture, the indenture governing the Company's 6.50% Convertible Senior Notes due 2024 (the "6.50% Notes," and such indenture, the "6.50% Notes Indenture") and the indenture governing the Company's 13% Senior Secured Notes (the "13% Notes, and such indenture, the "13% Notes Indenture") related thereto, as well as in connection with the Company’s ongoing assessment of its financial condition, the Company considered, and engaged in preliminary, confidential discussions with a limited number of holders of its 13% Notes and certain other third parties regarding, a number of potential strategic alternatives. As these discussions progressed following the commencement of the Offer, the combination of the potential restructuring of the Company’s indebtedness and the Iroko Acquisition increasingly appeared to present the most viable alternative. As such discussions further progressed, information received from the counterparties suggested that, despite the Company potentially having the cash available to complete the Offer, the consummation of the Offer would create substantial difficulties in reaching a consensus regarding a restructuring and consummating the proposed transactions.
In addition, the Company recognized that if it was unable to regain compliance with Nasdaq’s continued listing requirements, the delisting of the Company’s common stock from the Nasdaq Capital Market would constitute a “Fundamental Change” under the 6.50% Notes Indenture and would require the Company to make an offer to purchase all of the 6.50% Notes on the terms set forth therein. As of September 30, 2018, there was approximately $48.6 million of aggregate principal amount of convertible notes outstanding – approximately $24.7 million principal amount of the 5.50% Notes and approximately $23.9 million of the 6.50% Notes. Further, the 13% Notes Indenture would have prohibited the Company from repurchasing the aggregate $48.6 million of convertible notes outstanding and, to the extent that the Company was unable to make any such payment in accordance with the terms of the 13% Notes Indenture, it would have resulted in a default under the 13% Notes Indenture, cross-defaults under the 5.50% Notes Indenture and 6.50% Notes Indenture and other adverse consequences, including the ability of the holders of the 13% Notes to exercise the remedies available to them as secured lenders.
On September 18, 2018, the day prior to the Fundamental Change Repurchase Date and shortly before the Expiration Time, the Company received written notification from Nasdaq indicating that, as the Company had not regained compliance with Nasdaq’s continued listing requirements for the listing of the Company’s common stock on the Nasdaq Capital Market or fulfilled certain of the milestones and conditions contained in a compliance plan originally submitted to the Nasdaq Hearings Panel by the Company in June 2018, the Nasdaq Hearings Panel determined to delist the Company’s common stock from the Nasdaq Capital Market and that there would be a suspension of trading in the Company’s common stock effective at the open of business on September 19, 2018 (the “Delisting Notice”). As of September 30, 2018, shares of the Company’s common stock were quoted on the OTCQX Bulletin Board (the “OTCQX”) following the suspension of trading of the Company’s common stock on the Nasdaq Capital Market on September 19, 2018.
Events of Default; Forbearance Agreement; Chapter 11 Cases
Also on September 18, 2018, following the Company’s receipt of the Delisting Notice, the Company and its subsidiaries determined to enter into a Forbearance Agreement (the “Forbearance Agreement”) with certain holders (the “FA Supporting Holders”) of the 13% Notes. Pursuant to the Forbearance Agreement, the FA Supporting Holders agreed to forbear from exercising their rights and remedies under the 13% Notes Indenture and the related security documents until the earlier of (a) 11:59 p.m. on October 14, 2018 and (b) following an Event of Termination (as defined in the Forbearance Agreement) (such period, the “Forbearance Period”) with respect to certain potential events of default arising under the 13% Notes Indenture. Following the period of this report, on each of October 14, 2018, October 21, 2018 and October 24, 2018, the Company and the FA Supporting Holders entered into amendments to the Forbearance Agreement to extend the Outside Time to 11:59 New York City time on October 21, 2018, October 24, 2018 and October 28, 2018, respectively. Refer to Note 17 – Subsequent Events – Support Agreement and Forbearance Agreement Amendments for additional details.
The Events of Termination included, among other things, the Company or any of its subsidiaries making any purchase of the 5.50% Notes or the 6.50% Notes. As a result, the consummation of the Offer would have resulted in an Event of Termination under the Forbearance Agreement and permitted the holders of 13% Notes to exercise all rights and remedies available under the 13% Notes Indenture and related security documents. The expiration, termination and withdrawal of the Offer without payment resulted in none of the 5.50% Notes that were tendered in the Offer being accepted for purchase and no consideration was paid to holders of 5.50% Notes who tendered their 5.50% Notes in the Offer. All 5.50% Notes previously tendered and not withdrawn were returned or credited back to the respective holders thereof. Consequently, the failure of the Company to complete the Offer in accordance with the terms of the 5.50 % Notes Indenture constituted an Event of Default thereunder and resulted in a cross-defaults under the 13% Notes Indenture and 6.50% Notes Indenture.
Following the period of this report, on October 30, 2018, the Company and its subsidiaries filed the Bankruptcy Petitions under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware on October 30, 2018. Refer to Note 17 — Subsequent Events for additional details.
Substantial Doubt in Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses since inception. As of September 30, 2018, the Company had an accumulated deficit of $368.9 million, a working capital deficit of $97.1 million and its ability to continue as a going concern is contingent upon the Court's approval of the Plan and its ability to, among other factors, successfully implement the Plan including, without limitation, consummating the Iroko Acquisition. Such conditions raise substantial doubt as to the Company’s ability to continue as a going concern and, as a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. Among other things, the filing of the Chapter 11 petitions constituted an event of default with respect to certain of our existing debt obligations, as described in more detail below under Note 17 – Subsequent Events. Further, any restructuring plan may impact the amounts and classifications of assets and liabilities reported in our financial statements in the future. During the pendency of the Chapter 11 Cases, the Company expects to fund operations with cash on hand. These factors, in combination with others described above, raise substantial doubt about the ability of the Company to continue as a going concern within one year after the date that these financial statements are issued. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. |
Summary of Significant Accounting Policies and Basis of Accounting |
9 Months Ended |
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Sep. 30, 2018 | |
| Summary of Significant Accounting Policies and Basis of Accounting | |
| Summary of Significant Accounting Policies and Basis of Accounting | 2. Summary of Significant Accounting Policies and Basis of Accounting
Basis of Presentation
The unaudited consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Certain information and footnotes normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. The Company’s consolidation policy requires the consolidation of entities where a controlling financial interest is held. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying consolidated financial information at September 30, 2018 and the three and nine months ended September 30, 2017 and 2018 is unaudited. The interim unaudited financial statements have been prepared on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s consolidated financial position as of September 30, 2018, the consolidated results of its operations and comprehensive loss for the three and nine months ended September 30, 2017 and 2018, and consolidated cash flows for the nine months ended September 30, 2017 and 2018. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2017 and 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018, any other interim periods or any future year or period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2017 filed on March 16, 2018 with the SEC.
The Company’s significant accounting policies are described in Note 2 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Since the date of those financial statements, there have been no changes to the Company’s significant accounting policies, except as described in Note 3 – Revenue from Contracts with Customers.
Recent Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash. The new standard requires changes in restricted cash during the period to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Company’s consolidated statements of cash flows. If cash, cash equivalents and restricted cash are presented in more than one line on the Company’s consolidated balance sheets, the new guidance requires a reconciliation of the total in the statements of cash flows to the related captions in the Company’s consolidated balance sheets. ASU 2016-18 was effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted. The amendments in this ASU increased the beginning and ending cash balances in the Company’s consolidated statements of cash flows. The Company has adopted the standard in the first quarter of 2018. The adoption had no material impact on the Company’s consolidated statements of cash flows and had no impact on the Company’s consolidated balance sheets or statements of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has defined a process to meet the accounting and reporting requirements of the guidance and is assessing lease arrangements in order to determine the impact ASU 842 adoption will have on its financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 was effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company adopted the standard in the first quarter of 2018 and determined there to be no material impact of the adoption in the three and nine months ended September 30, 2018. In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers, which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires an entity to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. ASU 2014-09 defines a five-step approach for recognizing revenue, which may require an entity to use more judgment and make more estimates than under the current guidance. The new guidance became effective in calendar year 2018. Two methods of adoption were permitted: (a) full retrospective adoption, meaning the standard is applied to all periods presented; or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized at the date of initial application as an adjustment to the opening retained earnings balance. In March 2016, April 2016 and December 2016, the FASB issued ASU No. 2016-08, Revenue From Contracts with Customers: Principal Versus Agent Considerations, ASU No. 2016-10, Revenue From Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers, respectively, which further clarify the implementation guidance on principal versus agent considerations contained in ASU No. 2014-09. In May 2016, the FASB issued ASU 2016-12 Revenue from Contracts with Customers, narrow-scope improvements and practical expedients which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition (collectively “ASC 606”). These standards were effective for the Company beginning in the first quarter of 2018. The Company formed a task force that analyzed the Company’s customer contracts and the impacts the standard had on previously reported revenues and future revenues. Under ASC 606, the Company recognizes net product sales at the time it ships its products to its customers (primarily wholesalers and specialty pharmacies), rather than its historic policy of recognizing net product sales when prescriptions are dispensed to patients. As a result, the Company now recognizes net product sales under such contracts earlier under ASC 606 than it would have recognized under the historic guidance.
The Company adopted the new standard effective January 1, 2018 using the modified retrospective approach. Refer to Note 3 — Revenue From Contracts with Customers for further details.
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Revenue from Contract with Customers |
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| Revenue from Contract with Customers | 3. Revenue From Contracts with Customers
Adoption of ASC Topic 606, Revenue from Contracts with Customers The Company adopted ASC 606 on January 1, 2018, using the modified retrospective method for all contracts not completed as of the date of adoption, referred to herein as the “new guidance”. The reported results as of, and for the three and nine months ended September 30, 2018 reflect the application of ASC 606 guidance while the reported results as of, and for the three and nine months ended September 30, 2017 were prepared under the guidance of ASC 605, Revenue Recognition (“ASC 605”), which is also referred to herein as "legacy GAAP" or the "previous guidance". The adoption of ASC 606 had a material impact on the Company’s consolidated financial position, results of operations and stockholders’ deficit as of the adoption date and for the three and nine months ended September 30, 2018. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's products to its customers and will provide financial statement readers with enhanced disclosures. Financial Statement Impact of Adopting ASC 606 The cumulative effect of applying the new guidance to all contracts with customers for which all performance obligations were satisfied as of January 1, 2018, was recorded as an adjustment to accumulated deficit as of the adoption date. For contracts which were modified before the adoption date, the Company has not restated the contract for those modifications. Rather, the Company has reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price, if necessary. As a result of applying the modified retrospective method in adopting the new revenue guidance, the following adjustments were made to accounts on the Company’s consolidated balance sheets as of January 1, 2018:
Under ASC 606, the Company recognizes net product sales at the time it ships its products to its customers (primarily wholesalers and specialty pharmacies), rather than the legacy GAAP policy of recognizing net product sales when prescriptions are dispensed to patients. As a result, the adjustments reflect the recognition of all deferred revenue related to product shipped to the Company’s customers, but not yet dispensed to patients and the related decrease in inventory. In addition, the Company recorded accrued expenses for patient discount programs, commercial and government rebates and a reduction in accounts receivable for estimated returns. An adjustment to accumulated deficit was recorded for the net impact of the preceding adjustments as of January 1, 2018. Revenue Recognition Under ASC 606, revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. To recognize revenue pursuant to the provisions of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect substantially all the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses whether the goods or services promised within each contract are distinct to determine those that are performance obligations. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. To the extent that the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price to which the Company expects to be entitled after giving effect to returns, rebates, sales allowances and other variable elements with contracts between the Company and its customers. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance under the contract and all information (historical, current and forecasted) that is reasonably available. Sales taxes and other taxes collected on behalf of third parties are excluded from revenue. When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the significant financing practical expedient, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of September 30, 2018. The Company’s existing contracts with customers contain only a single performance obligation and, as such, the entire transaction price is allocated to the single performance obligation. Should future contracts contain multiple performance obligations, those would require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on observable prices or a cost-plus margin approach when one is not available. The Company’s performance obligations are to provide pharmaceutical products to several wholesalers or a single specialty pharmaceutical distributor. All of the Company's performance obligations, and associated revenue, are generally transferred to customers at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring control of a promised good to a customer, which is typically upon delivery. Payments for invoices are generally due within 30 to 65 days of invoice date. Disaggregation of Revenue The following table summarizes revenue by revenue source for the three and nine months ended September 30, 2018:
Reserves for Variable Consideration Revenues from product sales are recorded at the transaction price, which includes estimates of variable consideration for which reserves are established and which result from returns, rebates and sales allowances that are offered within or impacted by contracts between the Company and its customers. Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as the Company’s historical experience, current contractual requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract as of the date of determination. The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known. Product Returns Consistent with industry practice, the Company generally offers customers a limited right of return for its products. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company estimates product return liabilities using the expected value method based on its historical sales information and other factors that it believes could significantly impact its expected returns, including product discontinuations, product recalls and expirations, of which it becomes aware. These factors include its estimate of actual and historical return rates for non-conforming product and open return requests. Specialty Pharmacy Fees The Company pays certain specialty pharmaceutical distributor fees based on a contractually determined rate. The Company records the fees on shipment to the distributor and recognizes the fees as a reduction of revenue in the same period the related revenue is recognized. Wholesaler Fees The Company pays certain pharmaceutical wholesalers fees based on a contractually determined rate. The Company accrues the fees on shipment to the respective wholesalers and recognizes the fees as a reduction of revenue in the same period the related revenue is recognized. Prompt Pay Discount The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. The Company estimates cash discounts using the mostly likely amount method by reducing accounts receivable by the prompt pay discount amount. The discount is recognized as a reduction of revenue in the same period as the related revenue. Patient Discount Programs The Company offers co-pay discount programs to patients for each of its products, in which patients receive a co-pay discount on their prescriptions. For discount amounts that are not immediately available, the Company estimates the total amount that will be redeemed using the expected value method based on the quantity of product shipped. The Company recognizes the discount as a reduction of revenue in the same period as the related revenue. Commercial and Government Rebates The Company contracts with various commercial and government payor organizations, primarily private insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its products. The Company estimates these rebates using the expected value method and records such estimates in the same period the related revenue is recognized, resulting in a reduction of net product sales and the establishment of an accrued expense. The following table summarizes activity in each of the net product sales allowance and reserve categories for the nine months ended September 30, 2018:
Impact of New Revenue Guidance on Financial Statement Line Items The following table compares the Company’s reported consolidated balance sheet as of September 30, 2018 to the pro-forma amounts had the previous guidance been in effect:
Under ASC 606, the Company recognizes net product sales at the time it ships its products to its customers (primarily wholesalers and specialty pharmacies), rather than the legacy GAAP policy of recognizing net product sales when prescriptions are dispensed to patients. As a result, the adjustments reflect the accrual of deferred revenue related to product shipped to the Company’s customers, but not yet dispensed to patients and the related increase in inventory for deferred cost of goods sold. In addition, the Company would not have accrued expenses for patient discount programs, commercial and government rebates or a reduction in accounts receivable for estimated returns until the product was dispensed to patients. The adjustment to accumulated deficit represents the net impact of these items. The following table compares the Company’s reported consolidated statement of operations for the three and nine months ended September 30, 2018 to the pro-forma amounts had the previous guidance been in effect:
Amounts reported on certain line items within net cash used in operating activities on the consolidated statement of cash flows changed as a result of the adoption of ASU 2014-09, but there was no change in the reported amounts of total operating, investing and financing cash flow. Transaction Price Allocated to Future Performance Obligations ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of September 30, 2018. The guidance provides certain practical expedients that limit this requirement including performance obligations that are part of a contract that has an original expected duration of one year or less. All of the Company’s contracts are eligible for the practical expedient provided by ASC 606, therefore the Company elected not to disclose any remaining performance obligations. Contract Balances from Contracts with Customers When the Company receives consideration from a customer, or such consideration is unconditionally due from a customer prior to the transfer of goods or services to the customer under the terms of a contract, the Company records a contract liability. Contract liabilities are recognized as revenue after control of the products is transferred to the customer and all revenue recognition criteria have been met. The Company classifies contract liabilities as deferred revenue. The Company had no deferred revenue as of January 1, 2018 or September 30, 2018.
Contract assets primarily relate to rights to consideration for goods or services transferred to the customer when the right is conditional on something other than the passage of time. Contract assets are transferred to accounts receivable when the rights become unconditional. The Company had no contract assets as of January 1, 2018 or September 30, 2018. Costs to Obtain and Fulfill a Contract The Company accounts for shipping and handling activities related to contracts with 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, the Company has elected to account for these as costs to fulfill the promise and not as a separate performance obligation. Shipping and handling costs associated with the distribution of finished products to customers are expensed as incurred and are recorded in costs of goods sold in the accompanying consolidated statements of operations. The Company expenses incremental costs of obtaining a contract with a customer (for example, commissions) when incurred as the period of benefit is less than one year. |
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Investments |
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| Investments | 4. Investments
Marketable Securities
Marketable securities consisted of the following at December 31, 2017:
Marketable securities consisted of the following as of September 30, 2018:
The fair value of marketable securities as of September 30, 2018 with a maturity of less than one year was $16.0 million. There were no marketable securities with a maturity of greater than one year as of September 30, 2018.
At September 30, 2018, the Company held eleven marketable securities that were in a continuous loss position for less than one year and no marketable securities that were in a continuous loss position for more than one year. The unrealized losses are immaterial in amount and are the result of current economic and market conditions and the Company has determined that no other than temporary impairment exists at September 30, 2018. |
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| Inventory | 5. Inventory
Inventory is stated at the lower of cost or market using actual cost net of reserve for excess and obsolete inventory. The following represents the components of inventory at December 31, 2017 and September 30, 2018:
As a result of the discontinuation of manufacturing and promotion of ARYMO ER effective September 28, 2018, the Company recognized a write-down of the remaining inventory of ARYMO ER of $707,000 in the three and nine months ended September 30, 2018, which is included in Restructuring and other charges on the Company’s consolidated statements of operations. |
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Intangible Assets |
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| Intangible Assets | 6. Intangible Assets
The following represents the balance of the intangible assets at December 31, 2017:
The following represents the balance of the intangible assets at September 30, 2018:
There was no impairment to the OXAYDO and SPRIX Nasal Spray intangible assets in the three and nine months ended September 30, 2017 or in the three and nine months ended September 30, 2018. As a result of the discontinuation of manufacturing and promotion of ARYMO ER effective September 28, 2018, the Company recognized a write-down of the remaining intangible asset value of the IP R&D intangible asset associated with the Guardian Technology of $115,000 in the three and nine months ended September 30, 2018, which is included in Restructuring and other charges on the Company’s consolidated statements of operations.
Collaboration and License Agreement with Acura Pharmaceuticals, Inc. (“Acura”)
In January 2015, the Company entered into a Collaboration and License Agreement with Acura to commercialize OXAYDO™ (oxycodone hydrochloride) tablets containing Acura’s Aversion® Technology (the “OXAYDO License Agreement”). The Company paid Acura an upfront payment of $5.0 million in January 2015 and a $2.5 million milestone payment in October 2015 as a result of the first commercial sale of OXAYDO. The Company also incurred transaction costs of $172,000 associated with the OXAYDO License Agreement. The Company recorded an intangible asset of $7.7 million related to this transaction. Refer to Note 15 — Acquisitions and License and Collaboration Agreements for additional details.
During the three and nine months ended September 30, 2017, the Company recognized amortization expense of $274,000 and $813,000, respectively, related to the OXAYDO product rights intangible asset. During the three and nine months ended September 30, 2018, the Company recognized amortization expense of $274,000 and $824,000, respectively, related to the OXAYDO product rights intangible asset.
Purchase Agreement with Luitpold Pharmaceuticals, Inc. (“Luitpold”)
In January 2015, the Company entered into and consummated the transactions contemplated by the Purchase Agreement with Luitpold to purchase SPRIX Nasal Spray (the “SPRIX Purchase Agreement”). Pursuant to the SPRIX Purchase Agreement, the Company acquired specified assets and liabilities associated with SPRIX (ketorolac tromethamine) Nasal Spray for a purchase price of $7.0 million. The Company recorded an intangible asset of $4.6 million related to this transaction. Refer to Note 15 — Acquisitions and License and Collaboration Agreements for additional details.
During the three and nine months ended September 30, 2017, the Company recognized amortization expense of $246,000 and $714,000, respectively, related to the SPRIX Nasal Spray product rights intangible asset. During the three and nine months ended September 30, 2018, the Company recognized amortization expense of $248,000 and $748,000, respectively, related to the SPRIX Nasal Spray product rights intangible asset.
In-Process Research and Development (“IP R&D”)
In connection with the acquisition of Egalet A/S, the Company recognized an IP R&D asset related to the Company’s drug delivery platform specifically designed to help deter physical abuse of pain medications, the Guardian Technology. Through December 31, 2017, the IP R&D was considered an indefinite-lived intangible asset and was assessed for impairment annually or more frequently if impairment indicators existed. Following the approval of ARYMO ER in January 2017, the Company began to amortize the intangible asset over a useful life of five years.
During the three and nine months ended September 30, 2017, the Company recognized amortization expense of $9,000 and $26,000, respectively, related to the IP R&D intangible asset. During the three and nine months ended September 30, 2018, the Company recognized amortization expense of $9,000 and $27,000, respectively, related to the IP R&D intangible assets. The remaining IP R&D intangible asset was written off in the three and nine months ended September 30, 2018 due to the Company's decision to discontinue the manufacturing and promotion of ARYMO ER. |
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| Accrued Expenses | 7. Accrued Expenses
Accrued expenses were as follows:
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| Debt | 8. Debt
5.50% Convertible Senior Notes Due 2020
In April and May 2015, the Company issued through a private placement $61.0 million in aggregate principal amount of the 5.50% Notes. Interest on the 5.50% Notes is payable semi-annually in arrears on April 1 and October 1 of each year and commenced on October 1, 2015. As of September 30, 2018, a total of $24.7 million in principal amount of the 5.50% Notes remained outstanding.
The 5.50% Notes are general, unsecured and unsubordinated obligations of Egalet Corporation and rank senior in right of payment to all of Egalet Corporation’s indebtedness that is expressly subordinated in right of payment to the 5.50% Notes. The 5.50% Notes are effectively subordinated to any secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness.
The Company may not redeem the 5.50% Notes prior to maturity. Prior to the filing of the Bankruptcy Petitions (the “Petition Date”), the 5.50% Notes were convertible prior to maturity, subject to certain conditions described below, into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at an initial conversion rate of 67.2518 shares per $1,000 principal amount of the 5.50% Notes (equivalent to an initial conversion price of approximately $14.87 per share of Common Stock). This conversion rate is subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for accrued and unpaid interest. The Company is obligated to satisfy the conversion obligation by paying or delivering, as the case may be, cash, shares of the Company’s Common Stock or a combination thereof, at the Company’s election.
Prior to the Petition Date, holders would have the right to convert all or any portion of their 5.50% Notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the business day immediately preceding January 1, 2020 only under the following circumstances:
On or after January 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date (April 1, 2020), holders may convert all or any portion of their 5.50% Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
Upon conversion, the Company would be obligated to pay or deliver cash, shares of the Company’s Common Stock or a combination of cash and shares of the Company’s Common Stock, at the Company’s election, and an interest make-whole payment in shares of the Company’s Common Stock, if applicable. If the Company satisfies the conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of the Company’s Common Stock, the amount of cash and shares of the Company’s Common Stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 50 trading day observation period.
In addition, following certain corporate events that occur prior to the maturity date, the Company is obligated to increase the conversion rate for a holder who elects to convert its 5.50% Notes in connection with such a corporate event in certain circumstances. Holders will not receive any additional cash payment or additional shares representing accrued and unpaid interest, if any, upon conversion of a note, except in limited circumstances. Instead, interest will be deemed to be paid in full, rather than cancelled, extinguished or forfeited from the consideration paid to the holders upon conversion of a 5.50% Note.
On or after the date that is six months after the last date of original issuance of the 5.50% Notes, if the last reported sale price of the Company’s Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending within the five trading days immediately preceding a conversion date is greater than or equal to the conversion price for the 5.50% Notes on each applicable trading day, the Company is obligated to, in addition to the other consideration payable or deliverable in connection with such conversion, make an interest make-whole payment to the converting holder equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the 5.50% Notes to be converted had such notes remained outstanding from the conversion date through April 1, 2018, computed using a discount rate equal to 2%. The Company is obligated to pay any interest make-whole payment by delivering shares of the Company’s Common Stock valued at 95% of the simple average of the daily volume weighted average price for the 10 trading days ending on and including the trading day immediately preceding the conversion date. Notwithstanding the foregoing, the number of shares the Company may deliver in connection with a conversion of the 5.50% Notes, including those delivered in connection with an interest make-whole payment, will not exceed 77.3395 shares of the Company’s Common Stock per $1,000 principal amount of 5.50% Notes, subject to adjustment. The Company will not be required to make any cash payments in lieu of any fractional shares or have any further obligation to deliver any shares of the Company’s Common Stock or pay any cash in excess of the threshold described above. In addition, if in connection with any conversion the conversion rate is adjusted, then such holder will not receive the interest make-whole payment with respect to such 5.50% Note.
Certain provisions in the 5.50% Notes could require accelerated payment of principal and interest. The 5.50% Notes provide that the delisting of the Company’s Common Stock from the Nasdaq Global Market would constitute a “fundamental change” under the 5.50% Notes, which would entitle the holder, at the holder’s option, to require the Company to repurchase for cash all or any portion of such holder’s 5.50% Notes at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon. On July 31, 2018, the Company filed a Tender Offer Statement on Schedule TO with respect to the Offer in accordance with the requirements of the indenture governing the 5.50% Notes Indenture. The expiration, termination and withdrawal of the Offer without payment on September 19, 2018 resulted in none of the 5.50% Notes that were tendered in the Offer being accepted for purchase and no consideration was paid to holders of 5.50% Notes who tendered their 5.50% Notes in the Offer. All 5.50% Notes previously tendered and not withdrawn were returned or credited back to the respective holders thereof. Consequently, the failure of the Company to complete the Offer in accordance with the terms of the 5.50 % Notes Indenture constituted an Event of Default thereunder. Refer to Note 1– Organization and Description of the Business – Liquidity and Substantial Doubt in Going Concern – Nasdaq Transfer and Delisting; Tender Offer and Note 17 – Subsequent Events for further details. As a result of the Nasdaq Transfer and the corresponding Fundamental Change under the 5.50% Notes Indenture, the conversion criteria for the 5.50% Notes was met as of July 11, 2018 and, as an Event of Default (as defined in the 5.50% Indenture) occurred on September 19, 2018 when the Company failed to consummate the Offer and is continuing, the trustee or the holders of at least 25% in aggregate principal amount of the outstanding 5.50% Notes have the right pursuant to the 5.50% Note Indenture to declare all the outstanding 5.50% Notes to be due and payable immediately. However, any efforts to enforce such payment obligations under the 5.50% Notes Indenture are automatically stayed as a result of the Bankruptcy Petitions and the creditors’ rights of enforcement in respect of the 5.50% Notes Indenture are subject to the applicable provisions of the Bankruptcy Code. In addition, pursuant to the Support Agreement, the Supporting Noteholders have agreed to forbear from exercising any of their rights and remedies under the applicable Existing Debt Instruments (as defined below) pending the outcome of the Bankruptcy Petitions.
The Company accounts for convertible debt instruments by recording the liability and equity components of the convertible debt separately. The liability is computed based on the fair value of a similar debt instrument that does not include the conversion option. The liability component includes both the value of the embedded interest make-whole derivative and the carrying value of the 5.50% Notes. The equity component is computed based on the total debt proceeds less the fair value of the liability component. The equity component is also recorded as debt discount and amortized as interest expense over the expected term of the 5.50% Notes, using the effective interest method.
The failure of the Company to complete the Tender Offer in accordance with the terms of the Indenture governing the 5.50% Notes constituted an Event of Default. Accordingly, the holders of the 5.50% Notes (or the trustee under the applicable indenture) have the right to accelerate and declare due and payable immediately all principal and accrued but unpaid interest with respect to the 5.50% Notes.
The liability component of the 5.50% Notes on the date of issuance was computed as $41.6 million, including the value of the embedded interest make-whole derivative of $0.9 million and the carrying value of the 5.50% Notes of $40.6 million. Accordingly, the equity component on the date of issuance was $19.4 million. The discount on the 5.50% Notes is being amortized to interest expense over the term of the 5.50% Notes, using the effective interest method.
Transaction costs of $4.1 million related to the issuance of the 5.50% Notes were allocated to the liability and equity components in proportion to the allocation of the proceeds and accounted for as debt discount and equity issuance costs, respectively. Approximately $1.3 million of this amount was allocated to equity and the remaining $2.8 million was recorded as debt discount at issuance.
In September 2016, in connection with the issuance of the 13% Notes (as defined below), the Company and its subsidiaries entered into supplemental indentures with the trustee for the 5.50% Notes pursuant to which the Company’s subsidiaries became guarantors under the 5.50% Notes Indenture.
In December 2017, the Company exchanged, with certain existing 5.50% Noteholders, $36.4 million in principal amount of the 5.50% Notes for (i) approximately $23.9 million of the Company’s new 6.50% Notes, (ii) a warrant exercisable for 3.5 million shares of the Company’s Common Stock and (iii) payments, in cash, of all accrued but unpaid interest as of the closing of the 5.50% Notes exchanged in the transaction. This exchange was accounted for as a debt extinguishment and the gain on debt extinguishment of $13.2 million, inclusive of the make-whole payments and write-off of deferred financing fees, is reflected in the Company’s consolidated statements of operations during the year ended December 31, 2017.
The following table summarizes how the issuance of the 5.50% Notes is reflected in the Company’s consolidated balance sheets at December 31, 2017 and September 30, 2018:
The carrying value of the 5.50% Notes was classified as a non-current liability on the Company’s consolidated balance sheets at December 31, 2017. The carrying value of the 5.50% Notes was classified as a current liability on the Company’s consolidated balance sheets at September 30, 2018 due to the circumstances described above with respect to the continuing Events of Default. Given these continuing Events of Default, the Company reevaluated the remaining contractual term of the 5.50% Notes and recorded a charge to interest expense of $2.9 million during the three and nine months ended September 30, 2018. Refer to Note 1- Organization and Description of the Business and Note 17 – Subsequent Events for further details.
6.50% Convertible Notes Due 2024
In December 2017, the Company entered into exchange agreements (the “Exchange Agreements”) with certain holders (the “Holders”) of the Company’s 5.50% Notes pursuant to which the Holders agreed to exchange, in the aggregate, approximately $36.4 million of outstanding principal amount of the 5.50% Notes for, in the aggregate, (i) approximately $23.9 million of the Company’s new 6.50% Notes, (ii) a warrant exercisable for 3.5 million shares of the Company’s Common Stock at an exercise price of $0.01 per share and (iii) payments, in cash, of all accrued but unpaid interest as of the closing on the 5.50% Notes exchanged in the transaction (the “Exchange”). At the closing of the Exchange, 2.5 million warrants were exercised. The remaining 1.0 million warrants were exercised in January 2018.
The Company consummated the Exchange in reliance upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended (the “Securities Act”) and pursuant to an indenture (the “Indenture”), dated December 27, 2017, by and among the Company, the subsidiary guarantors party thereto as of the date thereof, and The Bank of New York Mellon, as trustee (the “Trustee”).
At the date of Exchange, December 27, 2017, the Company did not have sufficient unissued authorized shares to cover the conversion of the outstanding 6.50% Notes and as a result was required to account for the bifurcated conversion feature as a derivative liability which results in a debt discount on the 6.50% Notes. The fair value of the derivative liability for the conversion feature at the date of Exchange was determined to be approximately $15.0 million and was classified as a liability in the Company’s consolidated balance sheet as of December 31, 2017, with subsequent changes to fair value recorded through earnings at each reporting period on the Company’s consolidated statements of operations and comprehensive loss as change in fair value of derivative liabilities.
As a result of the Charter Amendment, as of February 14, 2018, the Company had reserved sufficient shares of its Common Stock to satisfy the conversion provisions of the 6.50% Notes and accordingly, the conversion feature is considered indexed to the Company’s Common Stock and the fair value of the conversion feature at the date of approval, $12.5 million, was reclassified from a liability into stockholders' equity during the first quarter of 2018.
The Company is obligated to pay interest on the 6.50% Notes semiannually in arrears on January 1 and July 1 of each year commencing July 1, 2018 at a rate of 6.50% per year, which rate is subject to adjustment in accordance with the terms of the Indenture (the 6.50% Notes Indenture”) and as described below. The 6.50% Notes are general unsecured obligations of the Company and rank equally in right of payment with all of its other existing and future senior unsecured indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness. The 6.50% Notes will mature on December 31, 2024, unless earlier repurchased, redeemed or converted in accordance with the terms of the 6.50% Notes Indenture prior to such date. Subject to certain conditions, on or after January 1, 2021, the Company may redeem for cash all or a part of the 6.50% Notes. The 6.50% Notes will be convertible at any time until the close of business on the business day immediately preceding the maturity date. Upon conversion and subject to certain conditions, holders of the 6.50% Notes are entitled to receive shares of the Company’s Common Stock at an initial conversion rate of 749.6252 shares of Common Stock per $1,000 principal amount of 6.50% Notes, which is equivalent to an initial conversion price of approximately $1.33 per share and is subject to adjustment under the terms of the 6.50% Notes Indenture. Similar to the 5.50% Notes, the 6.50% Notes provide for an interest make-whole payment in connection with conversions that occur prior to January 1, 2021. For any Conversion Date that occurs prior to the close of business on the business day immediately preceding January 1, 2021, the Company is obligated to, in addition to the other consideration payable or deliverable in connection with any conversion of Notes, make an interest make-whole payment in cash or in shares of Common Stock, at the Company’s election, to such converting Holder equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the Notes to be converted had such Notes remained outstanding from the Conversion Date through January 1, 2021. The present values will be computed using a discount rate equal to 2% by a U.S. nationally recognized independent investment banking firm. If an event of default (as defined in the 6.50% Notes Indenture) occurs and is continuing (other than specified events of bankruptcy or insolvency with respect to the Company), the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding 6.50% Notes may declare all the outstanding 6.50% Notes to be due and payable immediately. If an event of default relating to specified events of bankruptcy or insolvency with respect to the Company occurs, all the outstanding 6.50% Notes will immediately become due and payable without any declaration or other act on the part of the trustee or any holders of the 6.50% Notes. Notwithstanding the foregoing, the 6.50% Notes Indenture provides that, to the extent the Company elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the 6.50% Notes Indenture will, for the first 180 days after such event of default, consist exclusively of the right to receive additional interest on the 6.50% Notes. Events of default under the 6.50% Notes Indenture include, among other things, a default in payment of principal on the 6.50% Notes (including upon any required repurchase), a default in payment of any other indebtedness for money borrowed in excess of $5,000,000 if such default is not cured or waived within 30 days and certain events of bankruptcy or insolvency, both voluntary and involuntary. In addition, the 6.50% Notes Indenture required the Company to use its reasonable best efforts to (i) seek stockholder approval of an amendment to the Company’s Third Amended & Restated Certificate of Incorporation, as amended, to increase the amount of authorized shares available for issuance thereunder, and (ii) upon such approval, to reserve from such amount the number of shares that may be issued in respect of the 6.50% Notes and any other securities issued in connection with the Exchange. In February 2018, the Company held a special meeting of stockholders (the “Special Meeting”) and received stockholder approval of an amendment to the Company’s Third Amended and Restated Certificate of Incorporation (the “Charter Amendment”) to increase authorized shares by 200,000,000 shares. Refer to Note 9- Stockholders’ Equity for further details. The Exchange Agreements also provide that, for a period of nine months, the Company will not enter into additional exchange transactions with the other holders of the 5.50% Notes the economic terms of which, taken is a whole, are more favorable to the 5.50% Note holders than the December 2017 Exchange.
Certain provisions in the 6.50% Notes could require accelerated payment of principal and interest. The 6.50% Notes provide that the delisting of the Company’s Common Stock from the Nasdaq Capital Market would constitute a “fundamental change” under the 6.50% Notes, which would require the Company to make an offer to repurchase for cash all or any portion of each holder’s 6.50% Notes at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon. The Nasdaq Transfer did not constitute a fundamental change under the 6.50% Notes, but the Company’s delisting from the Nasdaq Capital Market on September 19, 2018 did constitute a fundamental change under the 6.50% Notes Indenture when complete. In addition, the expiration, termination and withdrawal of the Offer without payment resulted in none of the 5.50% Notes that were tendered in the Offer being accepted for purchase and no consideration was paid to holders of 5.50% Notes who tendered their 5.50% Notes in the Offer. All 5.50% Notes previously tendered and not withdrawn were returned or credited back to the respective holders thereof. Consequently, the failure of the Company to complete the Offer in accordance with the terms of the 5.50 % Notes Indenture constituted a cross-defaults under the 6.50% Notes Indenture. Accordingly, the holders of the 6.50% Notes (or the trustee under the applicable indenture) would have the right to accelerate and declare due and payable immediately all principal and accrued but unpaid interest with respect to the 6.50% Notes if the 5.50% Notes holders (or the trustee under the 5.50% Notes Indenture) were to accelerate the 5.50% Notes in accordance with their rights under the 5.50% Notes Indenture. The filing of the Chapter 11 Cases after the period of this report also constituted an Event of Default under the 6.50% Notes Indenture. However, any efforts to enforce such payment obligations under the 6.50% Notes Indenture are automatically stayed as a result of the Bankruptcy Petitions and the creditors’ rights of enforcement in respect of the 6.50% Notes Indenture are subject to the applicable provisions of the Bankruptcy Code. In addition, pursuant to the Support Agreement, the Supporting Noteholders have agreed to forbear from exercising any of their rights and remedies under the applicable Existing Debt Instruments pending the outcome of the Bankruptcy Petitions. Refer to Note 1- Organization and Description of the Business and Note 17 – Subsequent Events for further details. Transaction costs of $1.7 million related to the issuance of the 6.50% Notes were accounted for as debt discount. The following table summarizes how the issuance of the 6.50% Notes is reflected in the Company’s consolidated balance sheets at December 31, 2017 and September 30, 2018:
The carrying value of the 6.50% Notes was classified as a non-current liability on the Company’s consolidated balance sheet at December 31, 2017. The carrying value of the 6.50% Notes was classified as a current liability on the Company’s consolidated balance sheets at September 30, 2018 due to the fundamental change provisions of the 6.50% Notes Indenture and the Event of Default. Given the Event of Default, the Company reevaluated the remaining contractual term of the 6.50% Notes and recorded a charge to interest expense $20.8 million during the three and nine months ended September 30, 2018. Refer to Note 1 – Organization and Description of the Business and Note 17 - Subsequent Events for further details
13% Senior Secured Notes (the “13% Notes”)
In August 2016, the Company completed the initial closing (the “Initial Closing”) of its offering (the “Offering”) of up to $80.0 million aggregate principal amount of its 13% Notes and entered into an indenture (the “Indenture”) governing the 13% Notes with the guarantors party thereto (the “Guarantors”) and U.S. Bank National Association, a national banking association, as trustee (the “Trustee”) and collateral agent (the “Collateral Agent”).
The Company issued $40.0 million aggregate principal amount of the 13% Notes at the Initial Closing and issued an additional $40.0 million aggregate principal amount upon the FDA’s approval of ARYMO™ ER in January 2017 (the “Second Closing”). Net proceeds from the Initial Closing and Second Closing were $37.2 million and $38.3 million, respectively, after deducting the estimated Offering expenses payable by the Company in connection with the Initial Closing and Second Closing. The 13% Notes were sold only to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended.
The Company has used the net proceeds from the 13% Notes and the Royalty Rights (as defined below) to repay all outstanding obligations to Hercules under the Loan Agreement with Hercules, to support the commercialization of ARYMO ER and for general corporate purposes.
Prior to the Second Closing, interest on the 13% Notes accrued at a rate of 13% per annum and was payable semi-annually in arrears on March 20 and September 20 of each year (each, a “Payment Date”) commencing on March 20, 2017. On each Payment Date commencing on March 20, 2018, the Company was required to also pay an installment of principal of the 13% Notes pursuant to a straight-line fixed amortization schedule. Following the Second Closing in January 2017, in lieu of the straight-line fixed amortization schedule, on each Payment Date commencing on March 20, 2018, the Company is obligated to pay an installment of principal on the 13% Notes in an amount equal to 15% (or 17% if certain sales targets are not met) of the aggregate net sales of SPRIX Nasal Spray, OXAYDO, ARYMO ER and, if approved, Egalet-002 for the two consecutive fiscal quarterly period most recently ended, less the amount of interest payable on the 13% Notes on such Payment Date.
The 13% Notes are senior secured obligations of the Company and equal in right of payment to all existing and future pari passu indebtedness of the Company (including the 5.50% Notes), will be senior in right of payment to all existing and future subordinated indebtedness of the Company, have the benefit of a security interest in the 13% Notes collateral and are junior in lien priority in respect of any collateral that secures any first priority lien obligations incurred, which includes intellectual property (“IP”), from time to time in accordance with the indenture governing the 13% Notes (the “13% Notes Indenture”). Following the Second Closing, the stated maturity date of the 13% Notes became September 30, 2033. Upon the occurrence of a Change of Control, subject to certain conditions, or certain Asset Sales events (each, as defined in the 13% Notes Indenture), holders of the 13% Notes may require the Company to repurchase for cash all or part of their 13% Notes at a repurchase price equal to 101.00% of the principal amount of the 13% Notes to be repurchased, plus accrued and unpaid interest to the date of repurchase.
The Company was entitled to redeem the 13% Notes at its option, in whole or in part from time to time, prior to August 31, 2018, at a redemption price equal to 100.00% of the principal amount of the 13% Notes being redeemed, plus accrued and unpaid interest, if any, through the redemption date, plus a make-whole premium computed using a discount rate equal to the treasury rate in respect of such redemption date plus 100 basis points. The Company may redeem the 13% Notes at its option, in whole or in part from time to time, on or after August 31, 2018 at a redemption price equal to: (i) from and including August 31, 2018 to and including August 30, 2019, 109.00% of the principal amount of the 13% Notes to be redeemed, (ii) from and including August 31, 2019 to and including August 30, 2020, 104.50% of the principal amount of the 13% Notes to be redeemed, and (iii) from and including August 31, 2020 and thereafter, 100.00% of the principal amount of the 13% Notes to be redeemed, in each case, plus accrued and unpaid interest to the redemption date. In addition, prior to August 31, 2018, the Company may redeem, at its option, up to 35% of the aggregate principal amount of the 13% Notes with the proceeds of one or more public or private equity offerings at a redemption price equal to 113.50% of the aggregate principal amount of the 13% Notes to be redeemed, plus accrued and unpaid interest to the date of redemption in accordance with the 13% Notes Indenture; provided that at least 65% of the aggregate principal amount of 13% Notes issued under the 13% Notes Indenture remains outstanding immediately after each such redemption and provided further that each such redemption occurs within 90 days of the date of closing of each such equity offering. No sinking fund is provided for the 13% Notes, which means that the Company is not required to periodically redeem or retire the 13% Notes.
The obligations of the Company under the 13% Notes Indenture and the 13% Notes are unconditionally guaranteed on a secured basis by the Guarantors. Under the terms of the 13% Notes Indenture, the Company may designate entities within its corporate structure as unrestricted subsidiaries, which entities will therefore not be guarantors provided that certain conditions set forth in the Indenture are met.
Pursuant to the 13% Notes Indenture, the Company and its restricted subsidiaries must also comply with certain affirmative covenants, such as furnishing financial statements to the holders of the 13% Notes, and negative covenants, including limitations on the following: the incurrence of debt; the issuance of preferred and/or disqualified stock; the payment of dividends, the repurchase of shares and under certain conditions making certain other restricted payments; the prepayment, redemption or repurchase of subordinated debt; the merger, amalgamation or consolidation involving the Company; engaging in certain transactions with affiliates; and the making of investments other than those permitted by the 13% Notes Indenture.
The 13% Notes Indenture contains customary events of default with respect to the 13% Notes, and upon certain events of default occurring and continuing, the Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding 13% Notes by notice to the Company and the Trustee, may (subject to the provisions of the 13% Notes Indenture) declare 100% of the principal of and accrued and unpaid interest, if any, on all of the 13% Notes to be due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, as well as the then-applicable optional redemption premium under the 13% Notes Indenture, will be due and payable immediately. In the case of certain events of bankruptcy, insolvency or reorganization involving the Company or a Restricted Subsidiary (as defined in the 13% Notes Indenture), the 13% Notes will automatically become due and payable. Events of default under the 13% Notes Indenture include, among other things, a default in payment of principal on the 13% Notes (including upon any required repurchase or redemption), a default in payment of any other indebtedness for money borrowed in excess of $2,000,000 and certain events of bankruptcy or insolvency, both voluntary and involuntary.
In connection with the filing of the Bankruptcy Petitions, which constitutes an event of default under the 13% Notes Indenture, with the principal and accrued but unpaid interest thereunder subject to acceleration to be due and payable, the Company reclassified the principal and accrued but unpaid interest balance to current liabilities. However, any efforts to enforce such payment obligations under the 13% Notes Indenture are automatically stayed as a result of the Bankruptcy Petitions and the creditors’ rights of enforcement in respect of the 13% Notes Indenture are subject to the applicable provisions of the Bankruptcy Code. In addition, pursuant to the Support Agreement, the Supporting Noteholders have agreed to forbear from exercising any of their rights and remedies under the applicable Existing Debt Instruments pending the outcome of the Bankruptcy Petitions. Refer to Note 1- Organization and Description of the Business and Note 17 – Subsequent Events for further details.
In connection with the Initial Offering in August 2016, the Company entered into royalty rights agreements with each of the 13% Notes Purchasers pursuant to which the Company sold to such Purchasers the right to receive, in the aggregate, a payment equal to 1.5% of the aggregate net sales of OXAYDO and SPRIX Nasal Spray from the Initial Closing through December 31, 2019, inclusive (the “Royalty Rights”). Following the approval of ARYMO ER in January 2017, the Royalty Rights will continue through December 31, 2020 and include royalties of ARYMO ER as described below.
The Company also entered into separate royalty rights agreements with each of the Purchasers pursuant to which the Company sold to such Purchasers the right to receive 1.5% of the aggregate net sales of ARYMO ER payable from the date of first sale of ARYMO ER through December 31, 2020, inclusive. The royalty rights agreements also include other terms and conditions customary in agreements of this type.
The Royalty Rights were determined to be a freestanding element with respect to the 13% Notes and the Company is accounting for the Royalty Rights obligation relating to future royalties as a debt instrument. The Company has Royalty Rights obligations of $4.1 million and $1.9 million as of December 31, 2017 and September 30, 2018, respectively, which are classified within current and non-current debt in the Company’s consolidated balance sheets.
The Company incurred fees and legal expenses of $4.5 million in connection with the issuance of the 13% Notes, which have been recorded as a discount on the debt in the Company’s consolidated balance sheets and are amortized using the effective interest method. Due to the default on the 13% Notes and the subsequent filing of the Bankruptcy petition, the Company wrote off the remaining unamortized discount of $6.7 million in the three and nine months ended September 30, 2018.
The accounting for the 13% Notes requires the Company to make certain estimates and assumptions about the future net sales of OXAYDO and SPRIX Nasal Spray in the U.S., and historically, future net sales of ARYMO ER. The estimates of the magnitude and timing of OXAYDO and SPRIX Nasal Spray net sales are subject to significant variability due to the recent product launch and the extended time period associated with the financing transaction and are thus subject to significant uncertainty. Therefore, these estimates and assumptions are likely to change as the Company continues to gain experience marketing OXAYDO and SPRIX Nasal Spray. The fair value of the Royalty Rights associated with certain net product sales was estimated to be $5.0 million at the issuance of the 13% Notes using a probability-weighted present value analysis. Upon informing the FDA in September 2018 that the Company was discontinuing the manufacture and promotion of ARYMO ER, the Company adjusted the fair value of the Royalty Rights associated with ARYMO ER by reducing the liability by $691,000 and interest expense in the three and nine months ended September 30, 2018.
The following table summarizes how the issuance of the 13% Notes is reflected in the Company’s consolidated balance sheets at December 31, 2017 and September 30, 2018:
The carrying value of the 13% Notes was classified as a non-current liability on the Company’s consolidated balance sheets at December 31, 2017. The carrying value of the 13% Notes was classified as a current liability on the Company’s consolidated balance sheets at September 30, 2018 due to the default of the 13% Notes Indenture. Given the Event of Default, the Company reevaluated the remaining contractual term of the 13% Notes and recorded a charge to interest expense of $7.6 million during the three months ended September 30, 2018. Refer to Note 1 – Organization and Description of the Business for further details. The Royalty Rights issued in connection with the 13% Notes at December 31, 2017 were $4.1 million. The Royalty Rights remaining at September 30, 2018 based on net sales of OXAYDO and SPRIX total $1.9 million, which are recorded as a component of debt-current, net $720,000 and debt-non-current portion, net $1.2 million on the Company’s consolidated balance sheets. |
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| Stockholders' Equity | 9. Stockholders’ Equity
Chapter 11 Cases
In connection with the Chapter 11 Cases, the Company expects to extinguish all of its outstanding equity interests in accordance with the terms of the Plan. Refer to Note 17 — Subsequent Events for additional details.
At the Market Offering
In July 2015, the Company entered into a Controlled Equity Offering Sales Agreement (“2015 Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”), under which the Company could, at its discretion, from time to time, sell shares of its Common Stock, for an aggregate offering price of up to $30.0 million. The Company provided Cantor with customary indemnification rights, and Cantor is entitled to a commission at a fixed rate of 3% of the gross proceeds per share sold. Sales of the shares of the Company’s Common Stock under the 2015 Sales Agreement have been made in transactions deemed to be “at the market offerings”, as defined in Rule 415 under the Securities Act of 1933, as amended.
The Company initiated sales of shares under the 2015 Sales Agreement at various times beginning in March 2017 and has sold an aggregate of 9,786,622 shares of its Common Stock through September 30, 2018, resulting in gross proceeds of $9.5 million before deducting commissions of $286,000. The Company has suspended all sales under the 2015 Sales Agreement.
July 2017 Equity Offering
On July 6, 2017, the Company entered into an underwriting agreement with Cantor relating to an underwritten public offering (the “July 2017 Equity Offering”) of 16,666,667 shares of its Common Stock and accompanying warrants to purchase 16,666,667 shares of its Common Stock, at a combined public offering price of $1.80 per share and accompanying warrant, for gross proceeds of $30.0 million. The net offering proceeds were $28.6 million after deducting underwriting discounts and commissions and offering-related costs of $1.4 million. Each warrant had an initial exercise price of $2.70, subject to adjustment in certain circumstances. As of September 30, 2018, the warrants had an exercise price of $1.92. The shares of the Company’s Common Stock and warrants were issued separately. The warrants may be exercised at any time on or after the date of issuance and will expire five years from the date of issuance.
The Company accounted for the warrants using ASC 480 – Distinguishing Liabilities from Equity and determined that the warrants were a freestanding financial instrument that are subject to liability classification. Pursuant to the terms of the agreement, the Company could be required to settle the warrants in cash in the event of an acquisition of the Company, and as a result the warrants are required to be measured at fair value and reported as a liability in the Company’s consolidated balance sheets. The warrant exercise price is subject to adjustment upon the issuance of certain equity securities at a price less than the exercise price of the warrants then in effect.
The fair value of the warrants to purchase shares of the Company’s Common Stock in connection with the July 2017 Equity Offering was $9.7 million on the date of issuance, which was determined using a lattice model that takes into account various future financing scenarios and the impact of those scenarios on the fair value of the warrants. The fair value of the warrants of $9.7 million on the date of issuance was recorded as a liability which will be marked to its estimated fair value at each reporting period. Refer to Note 10- Fair Value Measurements for further details. As of September 30, 2018, the Company determined the warrant liability had a fair value of $0 based primarily on the value of the Company’s equity securities and the liquidity events discussed in Note 17 – Subsequent Events.
Reclassification of the Derivative Liability
In February 2018, the Company received shareholder approval to increase the number of its authorized shares of its Common Stock by 200,000,000 additional shares. Prior to this approval, the embedded conversion options in the 6.50% Notes were required to be separately accounted for as a derivative liability. Upon the shareholder approval to increase the number of authorized shares, the Company had sufficient authorized shares of its Common Stock to satisfy the conversion provisions of the 6.50% Notes. The fair value of the derivative liability of $12.5 million was reclassified from a liability into stockholders’ equity during the first quarter of 2018.
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| Fair Value Measurements | 10. Fair Value Measurements
The Company measures certain assets and liabilities at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The guidance in ASC 820 outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, the Company maximizes the use of quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:
The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liabilities measured at fair value on a recurring basis:
The following tables set forth a summary of changes in the fair value as of September 30, 2018:
Interest make-whole derivative
The 6.50% Notes include an interest make-whole feature whereby if a noteholder converts any of the 6.50% Notes prior to July 1, 2021, the Company is obligated to, in addition to the other consideration payable or deliverable in connection with such conversion, make an interest make-whole payment to the converting holder equal to the sum of the present value of the remaining scheduled payments of interest that would have been made on the 6.50% Notes to be converted had such notes remained outstanding from the conversion date through July 1, 2021, computed using a discount rate equal to 2%.
The fair value of the 6.50% Notes interest make-whole features was calculated utilizing the binomial lattice tree model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value measurement was based on several factors including:
As of September 30, 2018, the Company determined that the 6.50% Notes interest make-whole features had a fair value of $0 based primarily on the value of the Company’s equity securities and the liquidity events discussed in Note 17 – Subsequent Events.
Conversion feature
The embedded conversion options in the 6.50% Notes were required to be separately accounted for as derivatives as at December 31, 2017 as the Company did not have sufficient available authorized shares to cover the conversion obligation as of the date of issuance as of December 31, 2017. In February 2018, the Company received stockholder approval for the Charter Amendment, which increased the Company’s authorized shares of its Common Stock by 200,000,000. As the Company had reserved sufficient shares of its Common Stock to satisfy the conversion provisions of the 6.50% Notes, the conversion feature is considered indexed to its stock and the fair value of the conversion feature at the date of approval, $12.5 million, was reclassified from a liability into stockholders' equity during the first quarter of 2018.
The Company has determined that the above features of the interest make-whole provision and conversion features are embedded derivatives and has recognized the fair value of the derivatives as liabilities in the Company’s consolidated balance sheets, with subsequent changes to fair value recorded through earnings at each reporting period on the Company’s consolidated statements of operations and comprehensive loss as change in fair value of derivative liabilities.
Warrant liability
The fair value of the Company’s warrant liability was estimated utilizing a lattice tree model both for the initial valuation and as of September 30, 2018. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. As of September 30, 2018, the Company determined the warrant liability had a fair value of $0 based primarily on the value of the Company’s equity securities and the liquidity events discussed in Note 17 – Subsequent Events.
The fair value and carrying value of the Company’s 5.50% Notes and 6.50% Notes at December 31, 2017 was as follows:
The fair value and carrying value of the Company’s 5.50% Notes and 6.50% Notes at September 30, 2018 was as follows:
As of September 30, 2018, the Company determined that the fair value of the 13% Notes is significantly below the current $80.0 million carrying value given the liquidity events discussed in Note 17 – Subsequent Events. |
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| Net Loss Per Common Share | 11. Net Loss Per Common Share
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:
The following outstanding securities for the three and nine months ended September 30, 2017 and 2018 have been excluded from the computation of diluted weighted shares outstanding, as they would have been anti-dilutive:
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| Stock-Based Compensation | 12. Stock-Based Compensation
Chapter 11 Cases
In connection with the Chapter 11 Cases, the Company expects to extinguish all of its outstanding equity interests and, accordingly, to terminate each of the plans described below in accordance with the terms of the Plan. Refer to Note 17 — Subsequent Events for additional details.
2013 Stock-Based Incentive Compensation Plan
In November 2013, the Company adopted its 2013 Stock-Based Incentive Compensation Plan (as subsequently amended from time to time, the “2013 Plan”). Pursuant to the 2013 Plan, the compensation committee of the Company’s board of directors is authorized to grant equity-based incentive awards to its directors, executive officers and other employees and service providers, including officers, employees and service providers of its subsidiaries and affiliates. The number of shares of the Company’s Common Stock initially reserved for issuance under the 2013 Plan was 1,680,000 in the form of Common Stock, deferred stock, restricted stock awards, restricted stock units, stock options and stock appreciation rights. Share increases of 2,000,000, 2,600,000 and 6,000,000, to the number of shares originally reserved for issuance under the 2013 Plan were authorized by the Company’s stockholders in June 2014, June 2016, and May 2018, respectively. The amount, terms of grants and exercisability provisions are determined by the compensation committee, and in certain circumstances pursuant to delegated authority, the Company’s chief executive officer and chief financial officer, acting jointly. The term of the options may be up to 10 years, and options are exercisable in cash or as otherwise determined by the compensation committee. All stock options vest over time as stipulated in the individual award agreements. In September 2015, the compensation committee voted to amend the 2013 Plan to, among other things, allow for monthly vesting of stock options granted thereunder after the first annual vesting.
2017 Inducement Plan In December 2016, the Company adopted its 2017 Inducement Plan (the “Inducement Plan”), which became effective in January 2017. Pursuant to the Inducement Plan, the Company’s compensation committee is authorized to grant equity-based incentive awards to its employees, including employees of its subsidiaries, who were not previously employees or non-employee directors of the Company or any of its subsidiaries (or who have had a bona fide period of non-employment with the Company and its subsidiaries) in compliance with Rule 5635(c)(4) of the NASDAQ Global Market. The number of shares of the Company’s Common Stock initially reserved for issuance under the Plan was 300,000, in the form of Common Stock, deferred stock, restricted stock awards, restricted stock units, stock options and stock appreciation rights. The amount, terms of grants and exercisability provisions are determined by the compensation committee of the Company’s board of directors. The term of stock options issued under the Inducement Plan may be up to 10 years, and stock options are exercisable in cash or as otherwise determined by the compensation committee of the Company’s board of directors. All stock options vest over time as stipulated in the individual award agreements.
Employee Stock Purchase Plan
In January 2016, the Company established an Employee Stock Purchase Plan (the “Purchase Plan”), which was approved by the Company’s stockholders in June 2016. A total of 750,000 shares of the Company’s Common Stock were originally approved for future issuance under the Purchase Plan pursuant to purchase rights granted to the Company’s employees. Under the Company’s Purchase Plan, eligible employees can purchase the Company’s Common Stock through accumulated payroll deductions at such times as established by the administrator. The Purchase Plan is administered by the Company’s compensation committee. Under the Purchase Plan, eligible employees may purchase the Company’s Common Stock at 85% of the lower of the fair market value of a share of the Company’s Common Stock on the first day of an offering period or on the last day of the offering period. Eligible employees may contribute up to 10% of their eligible compensation. A participant may purchase a maximum of 1,500 shares of common stock per offering period. Under the Purchase Plan, a participant may not accrue rights to purchase more than $25,000 worth of the Company’s common stock for each calendar year in which such right is outstanding.
At the end of each offering period, shares of the Company’s Common Stock may be purchased at 85% of the lower of the fair market value of the Company’s Common Stock on the first or last day of the respective offering period. In accordance with the guidance in ASC 718-50 – Compensation – Stock Compensation, the ability to purchase shares of the Company’s Common Stock at the lower of the price on the first day of the offering period or the last day of the offering period (i.e. the pricing date) represents a stock option and, therefore, the Purchase Plan is a compensatory plan under this guidance. Accordingly, stock-based compensation expense is determined based on the option’s grant-date fair value and is recognized over the requisite service period of the option. The Company recognized stock-based compensation expense of $19,000 and $89,000, respectively during the three and nine months ended September 30, 2017 and stock-based compensation expense of $4,000 and $18,000, respectively, during the three and nine months ended September 30, 2018 related to the Purchase Plan.
The Company terminated the Purchase Plan effective September 30, 2018. No purchases will be made at the end of the offering period ending December 31, 2018.
Shares Available for Future Grant Under Equity Compensation Plans
As of September 30, 2018, the Company has reserved the following shares to be granted under its equity compensation plans:
The estimated grant-date fair value of the Company’s share-based awards is amortized ratably over the awards’ service periods. Stock-based compensation expense recognized was as follows:
Stock Options Granted Under Equity Compensation Plans
The intrinsic value of the 4,740,688 stock options outstanding as of September 30, 2018 was $0, based on a per share price of $0.12, the Company’s closing stock price on that date, and a weighted-average exercise price of $5.00 per share.
The Company uses the Black-Scholes valuation model in determining the fair value of equity awards. For stock options granted to employees and directors with only service-based vesting conditions, the Company measures stock-based compensation expense at the grant date based on the estimated fair value of the award and recognizes it as expense over the requisite service period on a straight-line basis. The Company records the expense of equity compensation for non-employees based on the estimated fair value of the stock option as of the respective vesting date. Further, the Company expenses the fair value of non-employee stock options that contain only service-based vesting conditions over the requisite service period of the underlying stock options. Following the adoption of ASU 2016-09, the Company no longer estimates forfeitures in calculating its stock-based compensation expense and adjusts each period to reflect actual forfeitures.
On June 8, 2017, the Company granted stock options for 630,000 shares of the Company’s Common Stock to nine senior executives (the “June 2017 Grant”). The contractual term of each of the grants made in the June 2017 Grant is 10 years and the exercise price is $2.38 per share. Provided that the grantee is still employed by the Company, the vesting terms of the June 2017 Grant include a combination of market and service-based conditions as follows:
The Company used the binomial model to estimate the compensation cost for the June 2017 Grant. Key assumptions used in calculating the total estimated compensation cost of $1,334,000 included (i) an estimated term of 5.6 years, (ii) expected volatility of 95.54%, (iii) expected dividends of $0.00 and (iv) a risk-free return of 1.80%. Stock-based compensation expense related to the June 2017 Grant will be recognized ratably over the requisite service period of 5.6 years. The Company recognized stock-based compensation expense of $60,000 and $76,000, respectively, for the three and nine months ended September 30, 2017 and stock-based compensation expense of $53,000 and $156,000, respectively, for the three and nine months ended September 30, 2018 related to the June 2017 Grant.
The per-share weighted-average grant date fair value of the options granted to employees during the nine months ended September 30, 2018 was estimated at $0.46 per share on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
The weighted-average valuation assumptions were determined as follows:
As of September 30, 2018, there was $5.2 million of total unrecognized stock-based compensation expense, related to unvested options granted under the 2013 Plan and the Inducement Plan.
Restricted Stock
A summary of the status of the Company’s restricted stock awards and restricted stock units at September 30, 2018 and of changes in restricted stock awards and restricted stock units outstanding under the 2013 Plan for the nine months ended September 30, 2018 is as follows:
For restricted stock awards and restricted stock units that vest subject to the satisfaction of service requirements, stock-based compensation expense is measured based on the fair value of the award on the date of grant and is recognized as expense on a straight-line basis over the requisite service period. All of the restricted stock awards and restricted stock units reflected above vest based on performance conditions or over time as stipulated in the individual award agreements. In the event of a change in control, the unvested awards will be accelerated and fully vested immediately prior to the change in control.
As of September 30, 2018, there was $0.8 million of total unrecognized stock-based compensation expense, related to restricted stock awards and restricted stock units under the 2013 Plan. |
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Restructuring and Other Charges |
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| Restructuring and Other Charges | 13. Restructuring and Other Charges
The following table presents a summary of the Company’s restructuring and other charges for the three and nine months ended September 30, 2017 and September 30, 2018.
Restructuring and other charges for the three and nine months ended September 30, 2017 reflect costs related to the Company’s expense reduction plan announced in August 2017 to decrease the operating expenses that did not directly support the growth of the Company’s commercial business. Restructuring and other charges for the three and nine months ended September 30, 2018 reflect the write-down of assets related to the discontinuation of ARYMO ER, a termination payment to Halo Pharmaceuticals also related to the discontinuance of ARYMO ER, which was accrued as of September 30, 2018 and legal fees related to the Company’s Chapter 11 filing, of which $686,000 is included in Accounts Payable and Accrued Expenses as of September 30, 2018. Refer to Note 17 – Subsequent Events for additional information. |
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Commitments and Contingencies |
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| Commitments and Contingencies | 14. Commitments and Contingencies
Legal Proceedings
On January 27, 2017 and February 10, 2017, respectively, two putative securities class actions were filed in the U.S. District Court for the Eastern District of Pennsylvania that named as defendants Egalet Corporation and current officer Robert S. Radie and former officers Stanley J. Musial and Jeffrey M. Dayno (the “Officer Defendants” and together with Egalet Corporation, the “Defendants”). These two complaints, captioned Mineff v. Egalet Corp. et al., No. 2:17-cv-00390-MMB and Klein v. Egalet Corp. et al., No. 2:17-cv-00617-MMB, assert securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) on behalf of putative classes of persons who purchased or otherwise acquired Egalet Corporation securities between December 15, 2015 and January 9, 2017. On May 1, 2017, the Court entered an order consolidating the two cases (the “Securities Class Action Litigation”) before it, appointing the Egalet Investor Group (consisting of Joseph Spizzirri, Abdul Rahiman and Kyle Kobold) as lead plaintiff and approving their selection of lead and liaison counsel. On July 3, 2017, the plaintiffs filed their consolidated amended complaint, which named the same Defendants and also asserted claims for purported violations of Sections 10(b) and 20(a) of the Exchange Act. Plaintiffs brought their claims individually and on behalf of a putative class of all persons who purchased or otherwise acquired shares of the Company between November 4, 2015 and January 9, 2017 inclusive. The consolidated amended complaint based its claims on allegedly false and/or misleading statements and/or failures to disclose information about the likelihood that ARYMO ER would be approved for intranasal abuse-deterrent labeling. The Defendants moved to dismiss the consolidated amended complaint on September 1, 2017 (the “Motion to Dismiss”), the plaintiffs filed their opposition on October 31, 2017, and the Defendants filed their reply on December 8, 2017. The Court heard oral arguments on the Motion to Dismiss on February 20, 2018, and entered an order pursuant to which the plaintiffs filed a motion for leave to file a second amended complaint on March 6, 2018. The Defendants responded on March 20, 2018 and the plaintiffs filed their reply on March 27, 2018. The Court heard oral arguments on the plaintiffs’ motion for leave to file a second amended complaint on July 12, 2018. On August 2, 2018, the Court granted the Defendants’ Motion to Dismiss and dismissed the Securities Class Action Litigation with prejudice. On August 31, 2018, plaintiffs filed their notice of appeal with the United States Court of Appeal for the Third Circuit. On November 7, 2018, the Defendants filed a notice of suggestion of bankruptcy and unopposed motion to stay the appeal as to the Officer Defendants (the appeal was automatically stayed as to the Company upon the Chapter 11 filing).
On March 15, 2018, a lawsuit was filed by the State of Arkansas and multiple local governments in Arkansas in the Circuit Court of Crittenden County, Arkansas, against the Company and other pharmaceutical manufacturers, distributors and retailers, and physicians. The action alleges a variety of claims related to opioid marketing and distribution practices, including false advertising, deceptive trade practices, public nuisance, unjust enrichment, violations of state narcotics statutes and civil conspiracy. The suit seeks monetary penalties. The Company was served with the lawsuit on April 30, 2018 and filed its answer on May 30, 2018. On August 10, 2018, the Company was dismissed from the action without prejudice.
On April 4, 2018, Egalet US, Inc. and Egalet Ltd., subsidiaries of the Company, filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Teva Pharmaceuticals USA, Inc. (“Teva”). The lawsuit was filed under the Hatch-Waxman Act for Teva’s infringement of one of the Company’s patents for ARYMO ER listed in the Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book— U.S. Patent No. 9,044,402 (the “’402 Patent”). The lawsuit was filed in response to a paragraph IV certification that the Company received from Teva on February 23, 2018, stating that Teva had submitted an Abbreviated New Drug Application (“ANDA”) to the U.S. Food and Drug Administration (“FDA”) for a generic version of ARYMO ER. Teva’s paragraph IV certification alleged that this U.S. patent is invalid and/or will not be infringed by Teva’s proposed product. This patent for ARYMO ER was granted following review by the U.S. Patent and Trademark Office, is presumed to be valid under governing law, and can only be invalidated in federal court with clear and convincing evidence. Under the Hatch-Waxman Act, the Company was permitted to file suit within 45 days from its receipt of the paragraph IV certification and thereby automatically stay or bar the FDA from approving Teva’s ANDA for 30 months or until a district court decision that is adverse to the asserted patent, whichever is earlier. On May 29, 2018, Teva filed its answer to the Company’s complaint and alleged certain counterclaims. On July 23, 2018, Egalet US, Inc. and Egalet Ltd. and Teva filed a Joint Stipulation and Proposed Order of Dismissal of Teva’s Counterclaims Pertaining to U.S. Patent No. 9,549,899 (the “’899 Patent”), which is one of the patents covering ARYMO ER. The parties entered into a Covenant Not to Sue regarding the ‘899 Patent related to the dismissal. In connection with the Company’s discontinuation of ARYMO ER, Egalet US Inc. and Egalet Ltd. executed a Covenant Not to Sue Teva related to the ‘402 Patent and on October 30, 2018, the action was dismissed with prejudice.
Halo Manufacturing Agreement
In February 2017, the Company entered into a Drug Product Manufacturing Services Agreement (the “Manufacturing Agreement”) with Halo Pharmaceutical, Inc. (“Halo”) pursuant to which the Company engaged Halo to provide certain services related to the manufacture and supply of ARYMO ER tablets for commercial use in the U.S. The Company was obligated to purchase all its requirements for ARYMO ER from Halo through 2019, and seventy-five percent of its requirements thereafter, subject to certain limited exceptions. The Company was obligated to purchase ARYMO ER pursuant to binding purchase orders at a fixed price based on dosage strength, with specified percentage rebates for annual volumes of product ordered over a specified amount. In addition, the Company had agreed to purchase certain minimum amounts of manufacturing and additional services per calendar quarter from Halo over the term of the Agreement (the “Quarterly Minimum”). Under the Manufacturing Agreement, if the Company failed to meet the Quarterly Minimum, it was required to pay to Halo the resulting shortfall.
On October 29, 2018, the Company and Halo entered into a termination agreement with respect to the Manufacturing Agreement. Refer to Note 17 — Subsequent Events – Halo Manufacturing Agreement Termination for additional details.
Bankruptcy Court Filings
On October 30, 2018, the Company and its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware on October 30, 2018. Refer to Note 17 — Subsequent Events for additional details.
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Acquisitions and License and Collaboration Agreements |
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| Acquisitions and License and Collaboration Agreements | 15. Acquisitions and License and Collaboration Agreements
Collaboration and License Agreement with Acura
In January 2015, the Company entered into the OXAYDO License Agreement with Acura to commercialize OXAYDO tablets containing Acura’s Aversion Technology. OXAYDO (formerly known as Oxecta®) is currently approved by the FDA for marketing in the U.S. in 5 mg and 7.5 mg strengths, but was not actively marketed at the time of the OXAYDO License Agreement. Under the terms of the OXAYDO License Agreement, Acura transferred the approved New Drug Application (“NDA”) for OXAYDO to the Company and the Company was granted an exclusive license under Acura’s intellectual property rights for development and commercialization of OXAYDO worldwide in all strengths.
The Company paid Acura an upfront payment of $5.0 million in January 2015 and a $2.5 million milestone payment in October 2015 as a result of the first commercial sale of OXAYDO. In addition, Acura will be entitled to a one-time $12.5 million milestone payment when OXAYDO net sales reach a level of $150.0 million in a calendar year.
The Company has recorded a product rights intangible asset of $7.7 million related to the arrangement, which includes $172,000 of transaction costs related to the License Agreement. The OXAYDO intangible asset is being amortized over a useful life of 7 years, which coincides with the patent protection of the product in the U.S.
In addition, Acura receives from the Company, a tiered royalty percentage based on sales thresholds. Based on the Company’s current level of net sales, the royalty percentage payable to Acura is in the mid-single digits; however, the percentage may increase in future years in the event we achieve the higher sales thresholds set forth in the License Agreement. In addition, in any calendar year in which net sales exceed a specified threshold, Acura is entitled receive a double-digit royalty on all OXAYDO net sales in that year. The Company’s royalty payment obligations commenced on the first commercial sale of OXAYDO and expire, on a country-by-country basis, upon the expiration of the last to expire valid patent claim covering OXAYDO in such country (or if there are no patent claims in such country, then upon the expiration of the last valid claim in the U.S.). Royalties will be reduced upon the entry of generic equivalents, as well for payments required to be made by the Company to acquire intellectual property rights to commercialize OXAYDO, with an aggregate minimum floor. The term of the Acura license agreement expires, in its entirety, upon the final expiration of any such patent claim in any country. OXAYDO is currently sold in the United States and is covered by six U.S. patents that expire between 2023 and 2025. Patents covering OXAYDO in foreign jurisdictions expire in 2024. Either the Company or Acura may terminate the license agreement for certain customary reasons, including cause, insolvency or patent challenge. The Company may terminate the license agreement upon 90 days prior written notice. During the pendency of the Chapter 11 Cases, any efforts by Acura to terminate the agreement pursuant to the provisions described above are automatically stayed as a result of the Bankruptcy Petitions and Acura’s rights of enforcement is subject to the applicable provisions of the Bankruptcy Code.
Purchase Agreement with Luitpold
In January 2015, the Company entered into and consummated the transactions contemplated by the SPRIX Nasal Spray Purchase Agreement with Luitpold (the “SPRIX Purchase Agreement”). Pursuant to the SPRIX Purchase Agreement, the Company acquired specified assets and liabilities associated with SPRIX Nasal Spray for a purchase price of $7.0 million. The Company concurrently purchased an additional $1.1 million of glassware, equipment and active pharmaceutical ingredient (“API”) from Luitpold and agreed to purchase an additional $340,000 of API after closing. Based on the projected future cash flows of SPRIX Nasal Spray through December 31, 2019, the SPRIX Nasal Spray intangible asset is being amortized over a useful life of 5 years.
The Company accounted for the arrangement as a business combination.
Under the SPRIX Purchase Agreement pursuant to which the Company acquired certain assets and liabilities associated with SPRIX Nasal Spray, the Company was assigned an exclusive license with Recordati Ireland Ltd. (“Recordati”) for intranasal formulations of ketorolac tromethamine (the “Licensed Product”), the active ingredient in SPRIX Nasal Spray. The Company is required to pay a fixed, single-digit royalty to Recordati on net sales of the Licensed Product. The exclusive term of the license agreement expires, on a country-by-country basis, on the later of the final expiration of any patent right in such country that contains a valid claim covering the Licensed Product, or ten years from the date of the first commercial sale of the Licensed Product in such country, and thereafter the Company will retain a non-exclusive, perpetual license in such country. In addition, during the exclusivity period with respect to the United States, Canada and Latin America, the royalty payable to Recordati is decreased if no patent containing a valid claim is in force in the country at the time of sale. SPRIX Nasal Spray is currently sold in the United States and is covered by a patent that expires in December 2018 and the first commercial sale of SPRIX Nasal Spray in the United States occurred in May 2011.
During the pendency of the Chapter 11 Cases, any efforts by Recordati to terminate the license agreement pursuant to the provisions thereof are automatically stayed as a result of the Bankruptcy Petitions and Acura’s rights of enforcement is subject to the applicable provisions of the Bankruptcy Code.
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Income Taxes |
9 Months Ended |
|---|---|
Sep. 30, 2018 | |
| Income Taxes | |
| Income Taxes | 16. Income Taxes
In accordance with ASC Topic No. 270 Interim Reporting and ASC Topic No. 740 Income Taxes at the end of each interim period, the Company is required to determine the best estimate of its annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis. For the three and nine months ended September 30, 2017 and 2018, the Company had no tax provision since it had a full valuation allowance for federal, foreign and state purposes.
The Company had no deferred tax liability for the three and nine months ended September 30, 2017. The Company reduced the deferred tax liability by $981,000, with an offsetting increase to additional paid in capital during the three months ended September 30, 2018, due to the reversal of the state tax impact of the embedded conversion liability derivative. The Company had no deferred tax liability for the nine months ended September 30, 2018. Refer to Note 9 – Stockholders Equity for further details. The Company maintains a full valuation against all net deferred tax assets for federal and foreign purposes as management has determined that it is not more likely than not that the Company will realize these future tax benefits.
The Tax Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017, became effective January 1, 2018. The Tax Act had significant changes to U.S. tax law, including the lowering of U.S. corporate income tax rates, implementing a territorial tax system, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries and modified the taxation of other income and expense items. Due to the valuation allowance on the Company’s deferred tax assets, these provisions do not have any material impact on the Company.
The Tax Act contains additional international provisions which may impact the Company prospectively, including the tax on Global Intangible Low-Taxed Income. The Company does not believe the impact will be material given the historical losses in its international subsidiary and projected future losses.
Upon further analyses of certain aspects of the Tax Act and refinement of the Company’s calculations during the three and nine months ended September 30, 2018, the Company determined that an adjustment to the provisional amount is not necessary at this time. The Company will continue to monitor for future updates to guidance or interpretations issued from the Internal Revenue Service.
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Subsequent Events |
9 Months Ended |
|---|---|
Sep. 30, 2018 | |
| Subsequent Events. | |
| Subsequent Events | 17. Subsequent Events
Asset Purchase Agreement
On October 30, 2018, the Company and Egalet US Inc., a wholly-owned subsidiary of the Company (“Egalet US,” and together with the Company, “Egalet”), entered into the Purchase Agreement with Iroko pursuant to which, upon the terms and subject to the conditions set forth therein, Egalet US will acquire certain assets and rights of Iroko, referred to in the Purchase Agreement as the “Transferred Assets,” and assume certain liabilities of Iroko, referred to in the Purchase Agreement as the “Assumed Liabilities,” including assets related to Iroko’s marketed products VIVLODEX®, TIVORBEX®, ZORVOLEX® and INDOCIN® (indomethacin) oral suspension and suppositories (“INDOCIN”). Egalet expects the Iroko Acquisition to close in the first quarter of 2019.
Structure; Plan of Reorganization
As further described below, the Iroko Acquisition is to be effectuated pursuant to, and is conditioned upon, the occurrence of the effective date (the “Effective Date”) of the Plan related to the Bankruptcy Petitions filed by the Debtors in the United States Bankruptcy Court for the District of Delaware on October 30, 2018.
Consideration
Subject to the terms and conditions of the Purchase Agreement, at the closing of the Iroko Acquisition, as consideration for the Transferred Assets, in addition to the assumption of the Assumed Liabilities, the Company will issue to Iroko (or its designees) (i) $45 million in aggregate principal amount of Series A-2 Notes (as defined below) and (ii) 49.0% of the aggregate number of shares of New Egalet Common Stock (as defined below) outstanding on the Effective Date (without giving effect to any shares issued or to be issued pursuant to the Management Incentive Plan (as defined below)), a portion of which may be issuable in the form of warrants in accordance with the terms of the Purchase Agreement. The consideration will also include the Iroko Royalty (as defined below).
In addition, as consideration for certain pre-closing inventory purchases and regulatory fees to be paid by Iroko, at the closing of the transactions contemplated by the Purchase Agreement, the Company will issue to Iroko an unsecured promissory note in the aggregate principal amount of $4.5 million as reimbursement for such amounts (the “Interim Payments Note”). In connection with the issuance of the Series A-2 Notes, on the Effective Date, Iroko and the Company will also enter into a royalty rights agreement pursuant to which Egalet will pay a 1.5% royalty on net sales of the combined company’s products following the closing.
Iroko Royalty
Subject to the terms and conditions of the Purchase Agreement, during the Royalty Term (as defined below), Iroko will be entitled to receive the Royalty Payments (as defined in the Purchase Agreement) (the “Iroko Royalty”) from the Company on a quarterly basis based upon Indocin Net Sales (as defined in the Purchase Agreement). The “Royalty Term” will commence on the later of January 1, 2019 and the Closing Date (as defined in the Purchase Agreement) and end on the tenth anniversary of the Effective Date. For the fiscal year ending December 31, 2019, the Iroko Royalty will be equal to: 15% of Indocin Net Sales greater than $20.0 million for the period from the Effective Date through December 31, 2019; and for each subsequent fiscal year during the Royalty Term, the Iroko Royalty will be equal to 20% of annual Indocin Net Sales for such fiscal year greater than $20.0 million. The Iroko Royalty target will be prorated for any fiscal year during the Royalty Period that is not a full fiscal year in accordance with the terms of the Purchase Agreement.
Board of Directors; Stockholder’s Agreement
The Purchase Agreement provides that, on the Effective Date, the term of each member of the board of directors of the Company will expire and the Company’s board of directors will consist of seven (7) members designated as follows: (i) two members designated by Iroko (the “Iroko Directors”), (ii) the current Chief Executive Officer of the Company (the “CEO”), (iii) the current Chairman of the Board of Directors of the Company, (iv) one member designated by the members of the Ad Hoc Secured Noteholder Committee (as defined in the Plan) after consultation with the CEO, (v) one member designated by the members of the Ad Hoc Convertible Noteholder Committee (as defined in the Plan) after consultation with the CEO, and (vi) one member designated jointly by the mutual agreement of members of the Ad Hoc Secured Noteholder Committee, the members of the Ad Hoc Convertible Noteholder Committee and Iroko after consultation with the CEO.
In connection with the closing of the transactions contemplated by the Purchase Agreement, the Company and Iroko will also enter into a stockholder agreement pursuant to which, among other things, Iroko will agree to customary lock-up and standstill provisions with respect to its New Egalet Common Stock. The stockholder agreement will also provide Iroko with certain rights related to the designation, appointment, replacement and removal of the Iroko Directors.
Covenants, Representations and Warranties
Egalet and Iroko have each made customary covenants in the Purchase Agreement, including, among others, covenants relating to confidentiality and regulatory matters (including anti-trust filings), as well as covenants to conduct their respective businesses in the ordinary course between the execution of the Purchase Agreement and the consummation of the Iroko Acquisition (subject to certain exceptions, including the implementation of the transactions contemplated by the Plan on the terms described therein). In addition, the Purchase Agreement contains provisions that restrict each party’s ability to initiate, solicit, or knowingly encourage or facilitate competing third-party proposals for any transaction involving a merger of such party or the acquisition of a significant portion of its stock or assets, subject to certain exceptions. Further, Iroko and certain of its affiliates have agreed to certain restrictive covenants including with respect to non-competition and non-solicitation of customers, suppliers and employees for periods of up to 18 months following the Effective Date.
In addition, as compensation for certain royalty payments payable by Iroko to third parties following the Closing Date, pursuant to the Purchase Agreement the Company has agreed to pay to Iroko, on a quarterly basis, with respect to any payments or proceeds whatsoever arising from a Naproxen Product, Tivorbex Product or Zorvolex Product (each as defined in the Purchase Agreement), five percent (5%) of Net Sales (as defined in the Purchase Agreement) and certain other amounts in respect of a sublicense of any such product.
Egalet and Iroko have also made customary representations and warranties regarding their respective businesses, including representations and warranties regarding organization, due authority, their respective financial statements, intellectual property matters, tax matters, compliance with law, their respective material contracts, sufficiency of assets, employee and employee benefit matters and regulatory matters.
Conditions
Consummation of the Iroko Acquisition is subject to certain conditions, including, among others: (i) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976; (ii) the absence of any order or injunction prohibiting the consummation of the Iroko Acquisition; (iii) approval of the Plan and entry of the Confirmation Order (as defined in the Purchase Agreement); (iv) subject to certain exceptions, the accuracy of representations and warranties of Egalet or Iroko contained in the Purchase Agreement as if made on the closing date; (v) each of Egalet and Iroko having performed their respective obligations pursuant to the Purchase Agreement; (vi) the receipt of certain third party consents and release of liens on Transferred Assets; (vii) the filing of certain information with the FDA and there being no recall of Iroko’s or the Company’s products, (viii) the Company having (A) an aggregate cash balance of at least $10.2 million minus a buffer of fifteen percent (15%) of that amount and (B) current liabilities of no more than $40.93 million plus a buffer of 7.5% of that amount, in each case, as of the Effective Date and after giving effect to the Plan, (ix) the Company having no outstanding indebtedness other than the New Secured Notes and the Interim Payments Note (as defined in the Purchase Agreement), and (x) no Material Adverse Effect (as defined in the Purchase Agreement) having occurred with respect to Iroko’s or the Company’s respective businesses.
Termination
The Purchase Agreement contains certain termination rights for Egalet and Iroko including (i) by mutual written consent of Iroko and the Company, (ii) in the event of certain breaches or inaccuracies of a representation, warranty or covenant that, if continuing on the Closing Date would cause certain closing conditions to be unsatisfied, (iii) if any governmental authority enjoins the Iroko Acquisition or the Company converts the Chapter 11 Cases (as defined below) to cases under Chapter 7 of the Bankruptcy Code. In addition, the Purchase Agreement automatically terminates without any further notice or action by Egalet or Iroko on the earliest to occur of the following dates: (i) the date that is five (5) days after the date of the Purchase Agreement unless the Petition Date (as defined in the Plan) shall have occurred; (ii) the date that is 120 days after the Petition Date unless the Plan has been confirmed by the Bankruptcy Court pursuant to the Confirmation Order and the Confirmation Order is in full force and effect and has not been stayed, modified or vacated; and (iii) January 31, 2019; provided that the Company and Iroko may mutually agree in writing, each in its sole discretion, to extend any such deadlines or milestones. If the Purchase Agreement is terminated, under certain circumstances, the Company may be required to reimburse a portion of Iroko’s transaction fees up to a maximum aggregate amount of $1.5 million (the “Buyer Reimbursement Obligation”). Within ten (10) Business Days after the Petition Date, Egalet is required to file with the Bankruptcy Court a motion, in form and substance reasonably satisfactory to Iroko, seeking approval of the Buyer Reimbursement Obligation as an administrative expense of the Debtors’ Chapter 11 Cases under section 503(b) of the Bankruptcy Code.
Indemnification
Egalet and Iroko have agreed to indemnify each other and certain of their respective affiliates and related persons from and against certain Damages (as defined in the Purchase Agreement) including Damages resulting from breaches of representations, warranties and covenants. In addition, Iroko has agreed to indemnify the Company from and against any Damages related to Excluded Liabilities and Excluded Assets (each as defined in the Purchase Agreement) and Egalet has agreed to indemnify Iroko from and against any Damages related to the Assumed Liabilities and certain liabilities related to the Plan and the Disclosure Statement.
Iroko’s indemnification obligations pursuant to the Purchase Agreement will be supported by (i) a right of set-off in favor of Egalet against amounts otherwise owed to Iroko by Egalet, including with respect to the Series A-2 Notes, the New Royalty Rights Agreements, and the Iroko Royalty and (ii) a right of recoupment. In addition, certain affiliates of Iroko have agreed to indemnify Egalet against Damages relating to Excluded Liabilities in certain circumstances and subject to certain limitations.
Each party’s indemnification obligations are subject to customary caps, deductibles, survival periods and other limitations.
Services Agreements
In connection with the Iroko Acquisition, Iroko and the Company will enter into a transition services agreement, pursuant to which, in order to assist the Company with the integration of Iroko’s business following the Effective Date, Iroko will provide the Company certain transition services for specified periods of time in exchange for the payment of agreed-upon amounts or other appropriate consideration for such services. In addition, on the date of the Purchase Agreement, the Company entered into two separate master services agreements with each of Athilio Pharma, LLC (“Athilio”) and 42 North, LLC (“42 North”) pursuant to which Athilio and 42 North will provide certain services to the Company with respect to Iroko’s business and the transition thereof.
Registration Rights Agreement
In connection with the closing of the transactions contemplated by the Purchase Agreement, the Company and Iroko will enter into a registration rights agreement pursuant to which the Company will grant to Iroko customary demand and piggyback registration rights with respect to the shares of New Egalet Common Stock issued as consideration to Iroko.
New Secured Notes Term Sheet
As described in part above, in connection with the transactions contemplated by the Purchase Agreement and the Plan, the Company and its subsidiaries intend to enter into an indenture with respect to new first-lien secured notes (the “New Senior Secured Notes”) with an interest rate of 13% per annum payable in cash semi-annually in arrears, a maturity date of five (5) years from the date of issuance, and otherwise on substantially similar terms to, and secured by substantially similar collateral as, the Existing Senior Secured Notes, provided that: (i) the New Senior Secured Notes will be issued in two series, (x) the “Series A-1 Notes,” to be issued to holders of New Senior Secured Notes other than Iroko and which will be subject to an interest holiday from the date of issuance through November 1, 2019 and (y) the “Series A-2 Notes,” to be issued to Iroko and which will be subject to the rights of set-off and recoupment and related provisions set forth in the Purchase Agreement; (ii) the indenture governing the New Senior Secured Notes will include a financial maintenance covenant; (iii) the definition of “Net Sales” and certain other related definitions will be amended to include the Company’s existing products as well as the products to be acquired in the Iroko Acquisition; and (iv) certain other changes agreed to by the Company and the holders of the New Senior Secured Notes, including an increase in the amount of additional indebtedness the Company may incur pursuant to an asset-based lending facility from $10.0 million to $20.0 million and the other changes described in the term sheet attached as Exhibit J to the Purchase Agreement. In connection with the issuance of the New Senior Secured Notes, the Company will enter into new or amended royalty rights agreements, as applicable, with the holders of the New Senior Secured Notes which will provide for the payment of an aggregate 1.5% royalty on Net Sales (as defined in the indenture governing the New Senior Secured Notes) from the issuance date through December 31, 2022.
Restructuring Support Agreement and Forbearance Agreement Amendments
On October 30, 2018, the Company entered into a Restructuring Support Agreement (the “Support Agreement”) with creditors holding approximately 94% in aggregate principal amount outstanding and in excess of a majority in number of the 13% Notes and approximately 67% in aggregate principal amount outstanding of the 5.50% Notes and 6.50% Notes, taken together as a single class (collectively, the “Supporting Noteholders”), in connection with the Debtors’ filing of the Bankruptcy Petitions on October 30, 2018.
The Support Agreement contemplates, among other things, the financial restructuring of the existing indebtedness of the Debtors through pre-arranged Chapter 11 bankruptcy filings (the “Restructuring”) on terms consistent with the Support Agreement and the Plan attached thereto. The Plan provides for the following, among other things: (i) payment in full, in cash, of all allowed administrative claims, priority tax claims, statutory fees, professional fee claims and certain other priority and secured claims; (ii) the cancellation of all of the Company’s common stock and all other equity interests in the Company; (iii) the conversion of approximately $80.0 million of claims related to the 13% Notes (the “First Lien Secured Notes Claims”) into (1) $50.0 million in aggregate principal amount of Series A-1 Notes, (2) a number of shares of common stock of the reorganized Company (“New Egalet Common Stock”) representing, in the aggregate, 19.38% of the New Egalet Common Stock outstanding as of the Effective Date (subject to dilution only on account of the Management Incentive Plan) (the “First Lien Equity Distribution”), (3) $20.0 million in cash less certain amounts related to adequate protection payments, and (4) cash in an amount equal to certain unpaid fees and expenses of the trustee under the indenture governing the 13% Notes provided, however, that if the Debtors elect to consummate an offering (the “Rights Offering”) of subscription rights (the “Subscription Rights”) to eligible holders of the 5.50% Notes and 6.50% Notes to purchase up to $10.0 million of shares of New Egalet Common Stock, the shares of New Egalet Common Stock otherwise allocable to the First Lien Note Equity Distribution shall be distributed pursuant to the Rights Offering, and the holders of First Lien Secured Notes Claims shall receive up to $10.0 million in cash instead of the First Lien Note Equity Distribution; (iii) the conversion of $48.6 million of claims related to the 5.50% Notes and 6.50% Notes into (1) a number of shares of New Egalet Common Stock representing, in the aggregate, 31.62% of the New Egalet Common Stock as of the Effective Date (subject to dilution only on account of the Management Incentive Plan), and (2) if the Debtors elect to consummate the Rights Offering and such holder is eligible to participate, the Subscription Rights; (iv) the implementation of a customary incentive plan for Company management pursuant to which 10.0% of the New Egalet Common Stock outstanding as of the Effective Date shall be reserved for participants on terms to be determined by the Company’s board of directors after the Effective Date (the “Management Incentive Plan”); and (v) the consummation of the Iroko Acquisition pursuant to the Purchase Agreement. Under certain circumstances, holders of claims may elect to receive warrants to purchase New Egalet Common Stock in lieu of shares of New Egalet Common Stock issuable in respect of their claims.
The Support Agreement permits the Supporting Noteholders to terminate the agreement upon the occurrence (or failure to occur) of certain events, including: (i) the Petition Date (as defined in the Support Agreement) not having occurred on or before October 31, 2018; (ii) the Court not having entered certain orders within designated periods of time following the Petition Date; (iii) the Effective Date not having occurred on or before the date that is ninety five days after the Petition Date; and (iv) the termination of the Purchase Agreement. The Support Agreement also includes a customary “fiduciary out” provision.
As described above, prior to entering into the Support Agreement, on September 18, 2018, the Company and its subsidiaries entered into the Forbearance Agreement (“FA”) with the FA Supporting Holders. On each of October 14, 2018, October 21, 2018 and October 24, 2018, the Obligors and the FA Supporting Holders entered into amendments to the Forbearance Agreement to extend the Outside Time to 11:59 New York City time on October 21, 2018, October 24, 2018 and October 28, 2018, respectively.
Chapter 11 Cases
On October 30, 2018, the Debtors filed the Bankruptcy Petitions in the U.S. Bankruptcy Court for the District of Delaware. The Debtors’ have requested that the Chapter 11 cases (the “Chapter 11 Cases”) be jointly administered for procedural purposes only under the caption In re Egalet Corporation, et al., Case No. 18-12439. The Debtors intend to continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. The Debtors expect ordinary course operations to continue substantially uninterrupted during the Chapter 11 Cases and are seeking approval from the Court for relief under certain “first day” motions authorizing the Debtors to continue to conduct their businesses in the ordinary course. The Debtors’ filings with the Court and other information related to the Chapter 11 Cases are available at a website administered by the Debtors claims agent at www.kccllc.net/egalet (the “Chapter 11 Site”). Included in the information filed with the Court on October 30, 2018 are the Plan and the related disclosure statement (the “Disclosure Statement”). Information contained in, or that can be accessed through, the Chapter 11 Site is not a part of, and is not incorporated into, this Quarterly Report on Form 10-Q.
Operation and Implications of the Chapter 11 Cases
The accompanying financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s ability to continue as a going concern is contingent upon the Court's approval of the Plan and its ability to successfully implement the Plan including, without limitation, the Iroko Acquisition, among other factors. Such conditions raise substantial doubt as to the Company’s ability to continue as a going concern and, as a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. Among other things, the filing of the Chapter 11 petitions constituted an event of default with respect to certain of the Company’s existing debt obligations, as described in more detail below. Further, any restructuring plan may impact the amounts and classifications of assets and liabilities reported in its financial statements in the future. During the pendency of the Chapter 11 Cases, the Company expects to fund operations with cash on hand.
Significant Bankruptcy Court Actions
On November 1, 2018 after the first-day hearing of the Chapter 11 Cases, the Court issued certain interim orders relating to the Debtors’ businesses. These orders authorized the Debtors to, among other things, use cash collateral and their existing cash management system on an interim basis and pay certain prepetition debts related to customer programs, critical vendors, insurance programs, taxes, and employee wages and benefits. In addition, during the first-day hearings, the Court set December 3, 2018 as the date for the second-day hearing in the Chapter 11 Cases. The Company expects that at the second-day hearing the Court will consider issuing final orders related to the matters approved in the interim orders as well as certain other related matters. These orders are significant because they allow the Company to operate its business in the normal course.
Events of Default
The filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s and its subsidiaries obligations under the following existing debt instruments (the “Existing Debt Instruments”): (i) the Indenture, dated August 31, 2016, by and among Egalet, Egalet US, Egalet Limited (“Egalet UK”) and U.S. Bank National Association, as trustee and collateral agent, and the related security documents, governing the 13% Notes; (ii) the Indenture, dated April 7, 2015, by and among Egalet, Egalet US, Egalet UK and The Bank of New York Mellon, as trustee, governing the 5.50% Notes; and (iii) the Indenture, dated December 27, 2017, by and among Egalet, Egalet US, Egalet UK and The Bank of New York Mellon, as trustee, governing the 6.50% Notes.
The Existing Debt Instruments provide that as a result of the Bankruptcy Petitions and corresponding events of default, the principal and accrued but unpaid interest due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the Existing Debt Instruments are automatically stayed as a result of the Bankruptcy Petitions and the creditors’ rights of enforcement in respect of the Existing Debt Instruments are subject to the applicable provisions of the Bankruptcy Code. In addition, pursuant to the Support Agreement, the Supporting Noteholders have agreed to forbear from exercising any of their rights and remedies under the applicable Existing Debt Instruments.
In addition, the Company’s failure to complete its previously announced offer to repurchase the 5.50% Notes set forth in the Fundamental Change Company Notice, Make-Whole Fundamental Change Company Notice and Offer to Repurchase to Holders of the 5.50% Convertible Senior Notes due 2020, dated July 31, 2018, as amended August 10, 2018 and its failure to pay interest on the 5.50% Notes when due on October 1, 2018 each also constituted an event of default and/or default under certain of the Existing Debt Instruments. Refer to Note 8 – Debt for additional details.
Common Stock Trading Market
Pursuant to the listing standards of the OTCQX Market (the “OTCQX”), an issuer may not be listed on the OTCQX if it is subject to bankruptcy or reorganization proceedings. Accordingly, the filing of the Chapter 11 Cases resulted in the listing of the Company’s Common Stock being removed from the OTCQX and being moved to the OTC Pink Open Market (the “Pink Sheets”).
Halo Manufacturing Agreement Termination
On October 29, 2018, the Company entered into a Termination and Settlement Agreement (the “Halo Termination Agreement”) with Halo Pharmaceutical Inc. (“Halo”) pursuant to which, in connection with the Company’s previously announced discontinuation of the marketing of ARYMO ER, the Company terminated its Drug Product Manufacturing Services Agreement by and between Halo, on the one hand, and the Company and its subsidiaries, on the other hand, dated as of February 28, 2017 (the “Manufacturing Agreement”). Pursuant to the Halo Termination Agreement, the Company paid Halo an aggregate sum of $3.1 million in full satisfaction of its obligations to Halo under the Manufacturing Agreement and with respect to certain ongoing services to be performed by Halo in connection with certain activities related to the commercial wind-down of the products. The Halo Termination Agreement also contained a customary mutual release by the parties.
Musial Resignation and Consulting Agreement
On October 14, 2018, Stan Musial, the Company’s former Executive Vice President and Chief Financial Officer, tendered his resignation as an officer of the Company effective November 9, 2018 to pursue other opportunities. In connection with Mr. Musial’s resignation, on October 30, 2018, the Company and Mr. Musial entered into a separation agreement and release (the “Separation Agreement”) pursuant to which, among other things, (i) Mr. Musial will provide consulting services to the Company following his departure as an officer through December 31, 2018 for aggregate compensation of $130,000, (ii) Mr. Musial will receive payments related to accrued wages, unreimbursed expenses and in lieu of certain healthcare coverage benefits, (iii) Mr. Musial has agreed to a customary release of claims against the Company and (iv) Mr. Musial has agreed to certain customary restrictive covenants, including with respect to non-competition and non-solicitation.
6.50% Notes Waiver Agreements
On October 3, 2018, the Company entered into waiver agreements (the “Waiver Agreements”) with certain holders who hold, in the aggregate, approximately 46% of the 6.50% Notes. Pursuant to the Waiver Agreements, the holders waived their respective rights to convert all or any portion of their 6.50% Notes into shares of the Company’s Common Stock pursuant to the terms of the indenture governing the 6.50% Notes. |
Summary of Significant Accounting Policies and Basis of Accounting (Policies) |
9 Months Ended |
|---|---|
Sep. 30, 2018 | |
| Summary of Significant Accounting Policies and Basis of Accounting | |
| Basis of Presentation | Basis of Presentation
The unaudited consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Certain information and footnotes normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. The Company’s consolidation policy requires the consolidation of entities where a controlling financial interest is held. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying consolidated financial information at September 30, 2018 and the three and nine months ended September 30, 2017 and 2018 is unaudited. The interim unaudited financial statements have been prepared on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s consolidated financial position as of September 30, 2018, the consolidated results of its operations and comprehensive loss for the three and nine months ended September 30, 2017 and 2018, and consolidated cash flows for the nine months ended September 30, 2017 and 2018. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2017 and 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018, any other interim periods or any future year or period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2017 filed on March 16, 2018 with the SEC.
The Company’s significant accounting policies are described in Note 2 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Since the date of those financial statements, there have been no changes to the Company’s significant accounting policies, except as described in Note 3 – Revenue from Contracts with Customers. |
| Recent Accounting Pronouncements | Recent Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash. The new standard requires changes in restricted cash during the period to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Company’s consolidated statements of cash flows. If cash, cash equivalents and restricted cash are presented in more than one line on the Company’s consolidated balance sheets, the new guidance requires a reconciliation of the total in the statements of cash flows to the related captions in the Company’s consolidated balance sheets. ASU 2016-18 was effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted. The amendments in this ASU increased the beginning and ending cash balances in the Company’s consolidated statements of cash flows. The Company has adopted the standard in the first quarter of 2018. The adoption had no material impact on the Company’s consolidated statements of cash flows and had no impact on the Company’s consolidated balance sheets or statements of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has defined a process to meet the accounting and reporting requirements of the guidance and is assessing lease arrangements in order to determine the impact ASU 842 adoption will have on its financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 was effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company adopted the standard in the first quarter of 2018 and determined there to be no material impact of the adoption in the three and nine months ended September 30, 2018. In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers, which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires an entity to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. ASU 2014-09 defines a five-step approach for recognizing revenue, which may require an entity to use more judgment and make more estimates than under the current guidance. The new guidance became effective in calendar year 2018. Two methods of adoption were permitted: (a) full retrospective adoption, meaning the standard is applied to all periods presented; or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized at the date of initial application as an adjustment to the opening retained earnings balance. In March 2016, April 2016 and December 2016, the FASB issued ASU No. 2016-08, Revenue From Contracts with Customers: Principal Versus Agent Considerations, ASU No. 2016-10, Revenue From Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers, respectively, which further clarify the implementation guidance on principal versus agent considerations contained in ASU No. 2014-09. In May 2016, the FASB issued ASU 2016-12 Revenue from Contracts with Customers, narrow-scope improvements and practical expedients which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition (collectively “ASC 606”). These standards were effective for the Company beginning in the first quarter of 2018. The Company formed a task force that analyzed the Company’s customer contracts and the impacts the standard had on previously reported revenues and future revenues. Under ASC 606, the Company recognizes net product sales at the time it ships its products to its customers (primarily wholesalers and specialty pharmacies), rather than its historic policy of recognizing net product sales when prescriptions are dispensed to patients. As a result, the Company now recognizes net product sales under such contracts earlier under ASC 606 than it would have recognized under the historic guidance.
The Company adopted the new standard effective January 1, 2018 using the modified retrospective approach. Refer to Note 3 — Revenue From Contracts with Customers for further details. |
Revenue from Contract with Customers (Tables) |
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| Revenue from Contract with Customers | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of financial statement impact of adopting ASU 606 |
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| Schedule of disaggregation of revenue |
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| Schedule of net product sales allowance and reserve |
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| Impact of new revenue guidance on financial statement line items |
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| Schedule of disclosure of reported consolidated statement of operations for the period to the pro-forma amounts had the previous guidance been in effect |
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Investments (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of marketable securities | Marketable securities consisted of the following at December 31, 2017:
Marketable securities consisted of the following as of September 30, 2018:
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Inventory (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventory | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of components of inventory |
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Intangible Assets (Tables) |
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| Intangible Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of indefinite-lived intangible assets |
The following represents the balance of the intangible assets at September 30, 2018:
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Accrued Expenses (Tables) |
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Expenses | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of accrued expenses |
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Debt (Tables) |
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||
| 5.50% Notes | |||||||||||||||||||||||||||||||||||||||||||
| Summary of debt reflected in the balance sheet |
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| 6.50% Notes | |||||||||||||||||||||||||||||||||||||||||||
| Summary of debt reflected in the balance sheet |
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| 13% Notes | |||||||||||||||||||||||||||||||||||||||||||
| Summary of debt reflected in the balance sheet |
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Fair Value Measurements (Tables) |
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| Fair Value Measurements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of information about each major category of financial assets and liabilities measured at fair value on a recurring basis |
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| Summary of changes in the fair value of Level 3 liabilities |
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| Schedule of fair value and carrying value of convertible debt | The fair value and carrying value of the Company’s 5.50% Notes and 6.50% Notes at December 31, 2017 was as follows:
The fair value and carrying value of the Company’s 5.50% Notes and 6.50% Notes at September 30, 2018 was as follows:
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Net Loss Per Common Share (Tables) |
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss Per Common Share | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of computation of basic and diluted net loss per share |
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| Schedule of outstanding securities excluded from the computation of diluted weighted shares outstanding |
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Stock-Based Compensation (Tables) |
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| Stock-Based Compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of shares available for future grant |
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| Schedule of stock-based compensation expense recognized |
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| Schedule of stock options outstanding under the 2013 stock-based incentive plan |
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| Schedule of weighted-average assumptions |
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| Summary of status and change in restricted stock awards |
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Restructuring and Other Charges (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring and Other Charges | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of restructuring and other charges |
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Revenue from Contract with Customers (Details) - USD ($) $ in Thousands |
Sep. 30, 2018 |
Jan. 01, 2018 |
Dec. 31, 2017 |
|---|---|---|---|
| Revenue, Initial Application Period Cumulative Effect Transition [Line Items] | |||
| Accounts receivable | $ 10,841 | $ 3,749 | $ 4,120 |
| Inventory | 3,039 | 3,068 | 3,225 |
| Accrued expenses | 27,001 | 21,132 | 16,104 |
| Deferred revenue | 0 | 0 | 7,456 |
| Accumulated deficit | (368,940) | $ (293,400) | (295,300) |
| ASU 2014-09 | Adjustments | |||
| Revenue, Initial Application Period Cumulative Effect Transition [Line Items] | |||
| Accounts receivable | 371 | (371) | |
| Inventory | 421 | (157) | |
| Accrued expenses | (9,555) | 5,028 | |
| Deferred revenue | 13,509 | (7,456) | |
| Accumulated deficit | $ (2,870) | $ 1,900 |
Revenue from Contract with Customers - Disaggregation of Revenue (Details) $ in Thousands |
3 Months Ended | 9 Months Ended |
|---|---|---|
|
Sep. 30, 2018
USD ($)
|
Sep. 30, 2018
USD ($)
|
|
| Disaggregation of Revenue [Line Items] | ||
| Total | $ 8,153 | $ 21,857 |
| Cash discounts | 2 | |
| SPRIX Nasal Spray | ||
| Disaggregation of Revenue [Line Items] | ||
| Total | 6,097 | $ 16,314 |
| OXAYDO tablets | ||
| Disaggregation of Revenue [Line Items] | ||
| Total | 1,882 | 4,831 |
| ARYMO ER | ||
| Disaggregation of Revenue [Line Items] | ||
| Total | $ 174 | $ 712 |
| Minimum | ||
| Disaggregation of Revenue [Line Items] | ||
| Period in which payments for invoices are due | 30 days | |
| Maximum | ||
| Disaggregation of Revenue [Line Items] | ||
| Period in which payments for invoices are due | 65 days |
Revenue from Contract with Customers - Transaction Price Allocated to Future Performance Obligations (Details) - USD ($) $ in Thousands |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2018 |
Jan. 01, 2018 |
Dec. 31, 2017 |
|
| Costs to Obtain and Fulfill a Contract | |||
| Practical expedient performance obligation | true | ||
| Deferred revenue | $ 0 | $ 0 | $ 7,456 |
| Contract assets | $ 0 | $ 0 |
Revenue from Contract with Customers - Costs to Obtain and Fulfill a Contract (Details) |
9 Months Ended |
|---|---|
Sep. 30, 2018 | |
| Costs to Obtain and Fulfill a Contract | |
| Practical expedient, incremental costs of obtaining contracts as an expense when incurred as the period of benefit is less than one year | true |
Investments (Details) |
9 Months Ended | |
|---|---|---|
|
Sep. 30, 2018
USD ($)
security
|
Dec. 31, 2017
USD ($)
|
|
| Marketable Securities | ||
| Cost Basis | $ 15,977,000 | $ 60,000,000 |
| Unrealized Losses | (11,000) | (47,000) |
| Fair Value | 15,966,000 | 59,953,000 |
| Fair value of marketable securities with a maturity of less than one year | 16,000,000 | |
| Fair value of marketable securities with a maturity greater than one year | $ 0 | |
| Number of marketable securities which were in a continuous loss position for less than one year | security | 11 | |
| Number of marketable securities which were in a continuous loss position for greater than one year | security | 0 | |
| Other than temporary impairment | $ 0 | |
| Corporate notes and bonds | ||
| Marketable Securities | ||
| Cost Basis | 15,977,000 | 60,000,000 |
| Unrealized Losses | (11,000) | (47,000) |
| Fair Value | $ 15,966,000 | $ 59,953,000 |
Inventory (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2018 |
Jan. 01, 2018 |
Dec. 31, 2017 |
|
| Raw materials | $ 1,468 | $ 1,468 | $ 850 | |
| Work in process | 772 | |||
| Finished goods | 1,571 | 1,571 | 1,446 | |
| Deferred cost of sales | 157 | |||
| Total | 3,039 | 3,039 | $ 3,068 | $ 3,225 |
| ARYMO ER | ||||
| Write-down of the remaining inventory | $ 707 | $ 707 |
Accrued Expenses (Details) - USD ($) $ in Thousands |
Sep. 30, 2018 |
Jan. 01, 2018 |
Dec. 31, 2017 |
|---|---|---|---|
| Accrued Expenses | |||
| Sales allowances | $ 15,815 | $ 4,721 | |
| Payroll and related | 3,194 | 4,349 | |
| HALO termination payment | 3,100 | ||
| Interest | 1,355 | 3,270 | |
| Professional services | 1,005 | 627 | |
| Royalties | 507 | 800 | |
| Sales and marketing | 199 | 1,247 | |
| Manufacturing services | 66 | 579 | |
| Clinical research | 46 | 355 | |
| Other | 1,714 | 156 | |
| Total | $ 27,001 | $ 21,132 | $ 16,104 |
Stock-based Compensation - Restricted Stock (Details) - Restricted stock awards |
9 Months Ended |
|---|---|
|
Sep. 30, 2018
$ / shares
shares
| |
| Shares | |
| Unvested balance at the beginning of the period (in shares) | shares | 25,047 |
| Granted (in shares) | shares | 2,100,000 |
| Vested restricted stock awards (in shares) | shares | (6,828) |
| Unvested balance at the end of the period (in shares) | shares | 2,118,219 |
| Weighted-average Grant Date Fair Value per Share | |
| Outstanding balance at the beginning of the period (in dollars per share) | $ / shares | $ 7.07 |
| Granted (in dollars per share) | $ / shares | 0.55 |
| Vested restricted stock awards (in dollars per share) | $ / shares | 7.07 |
| Outstanding balance at the end of the period (in dollars per share) | $ / shares | $ 0.61 |
Stock-based Compensation - Employee Stock Purchase Plans (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
|
| Stock-based Compensation | ||||
| The maximum value of shares an employee can accrue to purchase under the plan per calendar year | $ 25,000 | |||
| Share-based compensation expense recognized | $ 1,140,000 | $ 1,694,000 | $ 3,094,000 | $ 5,056,000 |
| Employee stock purchase plan | ||||
| Stock-based Compensation | ||||
| Purchase price of common stock expressed as a percentage of its fair value | 85.00% | |||
| Maximum employee contribution rate | 10.00% | 10.00% | ||
| Maximum number of shares to purchase per employee per period | 1,500 | |||
| Share-based compensation expense recognized | $ 4,000 | $ 19,000 | $ 18,000 | $ 89,000 |
Restructuring and Other Charges (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | |||
|---|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
Dec. 31, 2017 |
|
| ARYMO write down of assets | $ 8,184 | $ 8,184 | |||
| Halo termination fee | 3,100 | 3,100 | |||
| Legal Fees | 2,580 | 2,580 | |||
| Severance | $ 2,983 | $ 2,983 | |||
| Total restructuring and other costs | 13,864 | $ 2,983 | 13,864 | $ 2,983 | |
| Professional services - Chapter 11 | 1,005 | 1,005 | $ 627 | ||
| Accounts Payable and Accrued Liabilities | |||||
| Professional services - Chapter 11 | $ 686 | $ 686 | |||
Commitments and Contingencies (Detail) - security |
1 Months Ended | ||
|---|---|---|---|
Feb. 10, 2017 |
Jan. 27, 2017 |
Feb. 28, 2017 |
|
| Loss Contingencies [Line Items] | |||
| Number of putative securities | 2 | 2 | |
| Drug Product Manufacturing Agreement | Halo Pharmaceutical, Inc | |||
| Loss Contingencies [Line Items] | |||
| Percentage of requirements to be purchased after second financial year. | 75.00% |
Acquisitions and License and Collaboration Agreements - Shionogi and Acura (Details) - OXAYDO tablets |
1 Months Ended | ||
|---|---|---|---|
|
Jan. 31, 2015
USD ($)
|
Sep. 30, 2018
item
|
Oct. 31, 2015
USD ($)
|
|
| License and collaboration agreement | |||
| Number of U.S. patents that expire between 2023 and 2025 | item | 6 | ||
| Collaboration and License Agreement | Acura | |||
| License and collaboration agreement | |||
| Upfront payment paid | $ 5,000,000 | ||
| Milestone payment payable | $ 2,500,000 | ||
| Milestone payment payable upon achievement of net product sales in calendar year threshold | 12,500,000 | ||
| Net product sales threshold in calendar year to be met for one-time milestone payment | 150,000,000 | ||
| Intangible assets | 7,700,000 | ||
| Transaction costs | $ 172,000 | ||
| Useful life | 7 years |
Acquisitions and License and Collaboration Agreements - Luitpold Agreement (Details) |
1 Months Ended |
|---|---|
|
Jan. 31, 2015
USD ($)
| |
| SPRIX Nasal Spray product rights | |
| Acquisition | |
| Purchase agreement term from date of first commercial sale | 10 years |
| Luitpold | |
| Acquisition | |
| Purchase price | $ 7,000,000 |
| Additional glassware, equipment and active pharmaceutical ingredient purchased | 1,100,000 |
| Additional pharmaceutical ingredient to be purchased after closing | $ 340,000 |
| Useful life | 5 years |
Income Taxes (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
|
| Income tax expense (benefit) | $ 0 | $ 0 | $ 0 | $ 0 |
| Deferred tax liability | $ 0 | |||
| State | ||||
| Deferred tax liability | $ 981,000 | $ 0 | $ 0 | |