osmt_Current Folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10‑Q

 


 

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

 

For the quarterly period ended March 31, 2019

OR

 

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

 

For the transition period from           to

Commission file number 001‑38709

 


 

Osmotica Pharmaceuticals plc

(Exact name of registrant as specified in its charter)

 


 

Ireland

   

Not Applicable

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

400 Crossing Boulevard

Bridgewater, NJ 08807

(Address of principal executive offices)

(Zip Code)

 

(908) 809‑1300

(Registrant’s telephone number, including area code)

 

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X  No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  X  No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

Large accelerated filer ☐

 

Accelerated filer ☐

 

 

 

Non-accelerated filer X

 

Smaller reporting company X

 

 

Emerging growth company X

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Ordinary Shares

OSMT

Nasdaq Global Select Market

 

There were 52,518,924 ordinary shares ($0.01 nominal value per share) outstanding as of  May 9, 2019.

 

 


 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report, including the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "plan," "estimate," "continue," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short- and long-term business operations and objectives and financial needs. Examples of forward-looking statements include, among others, statements we make regarding: our intentions, beliefs or current expectations concerning, among other things, future operations; future financial performance, trends and events, particularly relating to sales of current products and the development, approval and introduction of new products; FDA and other regulatory applications, approvals and actions; the continuation of historical trends; and the sufficiency of our cash balances and cash generated from operating and financing activities for future liquidity and capital resource needs.

We may not achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place significant reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include the following:

·

if we are unable to successfully develop or commercialize new products, or do so on a timely or cost effective basis, our operating results will suffer;

·

due to our dependence on a limited number of products, our business could be materially adversely affected if one or more of our key products do not perform as well as expected;

·

failures of or delays in clinical trials could result in increased costs to us and could jeopardize or delay our ability to obtain regulatory approval and commence sales of new products;

·

we are, and will continue to be in the future, a party to legal proceedings that could result in adverse outcomes;

·

as of March 31, 2019, we had total outstanding debt of approximately $267.9 million (net of deferred financing costs), and we had unused commitments of $50.0 million under our senior secured credit facilities. Our substantial debt could adversely affect our liquidity and our ability to raise additional capital to fund operations and could limit our ability to pursue our growth strategy or react to changes in the economy or our industry;

·

we face intense competition from both brand and generic companies, which could significantly limit our growth and materially adversely affect our financial results;

·

a business interruption at our manufacturing facility, our warehouses or at facilities operated by third parties that we rely on could have a material adverse effect on our business;

·

our profitability depends on our major customers, and if our relationships with them do not continue as expected, our business, prospects and results of operations could materially suffer;

·

if we are unable to develop or maintain our sales capabilities, we may not be able to effectively market or sell our products;

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·

our competitors and other third parties may allege that we are infringing their intellectual property, forcing us to expend substantial resources in resulting litigation, and any unfavorable outcome of such litigation could have a material adverse effect on our business;

·

our profitability depends on coverage and reimbursement by governmental authorities and other third-party payors and healthcare reform and other future legislation creates uncertainty and may lead to reductions in coverage or reimbursement levels;

·

we are subject to extensive governmental regulation and we face significant uncertainties and potentially significant costs associated with our efforts to comply with applicable regulations;

·

our products or product candidates may cause adverse side effects that could delay or prevent their regulatory approval, or result in significant negative consequences following regulatory approval;

·

manufacturing or quality control problems may damage our reputation, require costly remedial activities or otherwise negatively impact our business; and

·

other factors that are described in the "Risk Factors" section of  our Annual Report of Form 10-K that was filed on March 28, 2019.

The forward-looking statements included in this report are made only as of the date hereof. You should not rely upon forward-looking statements as predictions of future events. We cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.

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TABLE OF CONTENTS

 

Page

PART I. FINANCIAL INFORMATION 

 

ITEM 1. Financial Statements (unaudited). 

5

Condensed Consolidated Balance Sheets – March  31, 2019 and December 31, 2018

5

Condensed Consolidated Statements of Operations and Comprehensive Loss - Three months ended March  31, 2019 and 2018 

6

Condensed Consolidated Statement of Shareholders’  Equity - Three months ended March  31, 2019 

7

Condensed Consolidated Statements of Cash Flows - Three months ended March  31, 2019 and 2018 

8

Notes to Condensed Consolidated Financial Statements 

9

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

25

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk. 

40

ITEM 4. Controls and Procedures. 

41

PART II. OTHER INFORMATION 

 

ITEM 1. Legal Proceedings. 

41

ITEM 1A. Risk Factors. 

42

ITEM 6. Exhibits. 

42

 

 

SIGNATURES 

43

 

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PART I – FINANCIAL INFORMATION

Item 1.Financial Statements.

OSMOTICA PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

December 31, 2018

    

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

  

 

 

  

 

Current assets:

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

63,061,694

 

$

70,834,496

 

Trade accounts receivable, net

 

 

56,886,524

 

 

56,423,866

 

Inventories, net

 

 

27,814,847

 

 

24,383,021

 

Prepaid expenses and other current assets

 

 

16,198,948

 

 

20,743,685

 

Total current assets

 

 

163,962,013

 

 

172,385,068

 

Property, plant and equipment, net

 

 

30,738,375

 

 

31,263,432

 

Operating lease assets

 

 

6,364,515

 

 

 —

 

Intangibles, net

 

 

473,521,588

 

 

490,389,723

 

Goodwill

 

 

100,854,816

 

 

100,854,816

 

Other non-current assets

 

 

705,266

 

 

751,927

 

Total assets

 

$

776,146,573

 

$

795,644,966

 

Liabilities and Shareholders' Equity

 

 

  

 

 

  

 

Current liabilities:

 

 

  

 

 

  

 

Trade accounts payable

 

$

20,590,796

 

$

24,869,593

 

Accrued liabilities

 

 

72,478,973

 

 

87,236,940

 

Current portion of long-term debt, net of deferred financing costs

 

 

795,068

 

 

1,774,199

 

Current portion of obligation under finance leases

 

 

124,590

 

 

119,344

 

Current portion of lease liability

 

 

2,006,814

 

 

 —

 

Income taxes payable - current portion

 

 

496,029

 

 

393,552

 

Total current liabilities

 

 

96,492,270

 

 

114,393,628

 

Long-term debt, net of non-current deferred financing costs

 

 

267,079,556

 

 

266,802,911

 

Long-term portion of obligation under finance leases

 

 

119,672

 

 

137,949

 

Long-term portion of lease liability

 

 

4,576,768

 

 

 —

 

Income taxes payable - long term portion

 

 

1,803,512

 

 

1,803,512

 

Deferred taxes 

 

 

24,837,107

 

 

26,237,841

 

Total liabilities

 

 

394,908,885

 

 

409,375,841

 

Commitments and contingencies (See Note 12)

 

 

  

 

 

  

 

Shareholders' equity:

 

 

  

 

 

  

 

Ordinary shares ($0.01 nominal value 400,000,000 shares authorized, 52,518,924 shares issued and outstanding at March 31, 2019 and December 31, 2018)

 

 

525,189

 

 

525,189

 

Preferred shares ($0.01 nominal value 40,000,000 shares authorized, no shares issued and outstanding)

 

 

 —

 

 

 —

 

Euro deferred shares (1.00 nominal value 25,000 shares authorized, no shares issued and outstanding)

 

 

 —

 

 

 —

 

Additional paid in capital

 

 

491,118,654

 

 

489,949,791

 

Accumulated deficit

 

 

(108,559,972)

 

 

(102,359,672)

 

Accumulated other comprehensive loss

 

 

(1,846,183)

 

 

(1,846,183)

 

Total shareholders' equity

 

 

381,237,688

 

 

386,269,125

 

Total liabilities and shareholders' equity

 

$

776,146,573

 

$

795,644,966

 

 

See accompanying notes to unaudited condensed consolidated financial statements

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OSMOTICA PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

    

2018

 

 

 

  

 

 

  

Net product sales

 

$

56,399,942

 

$

58,834,206

Royalty revenue

 

 

721,207

 

 

962,828

Licensing and contract revenue

 

 

5,197

 

 

3,816

Total revenues

 

 

57,126,346

 

 

59,800,850

Cost of goods sold (inclusive of amortization of intangibles)

 

 

29,203,281

 

 

33,561,666

Gross profit

 

 

27,923,065

 

 

26,239,184

Selling, general and administrative expenses

 

 

21,655,666

 

 

17,161,962

Research and development expenses

 

 

9,764,260

 

 

10,174,301

Total operating expenses

 

 

31,419,926

 

 

27,336,263

Operating loss

 

 

(3,496,861)

 

 

(1,097,079)

Interest expense and amortization of debt discount

 

 

4,500,618

 

 

4,843,039

Other non-operating income, net

 

 

(556,947)

 

 

(137,453)

Total other non-operating expense, net

 

 

3,943,671

 

 

4,705,586

Loss before income taxes

 

 

(7,440,532)

 

 

(5,802,665)

Income tax benefit

 

 

1,240,232

 

 

1,195,319

Net loss

 

$

(6,200,300)

 

$

(4,607,346)

Other comprehensive loss, net

 

 

  

 

 

  

Change in foreign currency translation adjustments

 

 

 —

 

 

(368,114)

Comprehensive loss

 

$

(6,200,300)

 

$

(4,975,460)

Loss per share attributable to shareholders

 

 

  

 

 

  

Basic and Diluted

 

$

(0.12)

 

$

(0.11)

Weighted average shares basic and diluted

 

 

  

 

 

  

Basic and Diluted

 

 

52,518,924

 

(a)

42,855,722

 

(a)

Represents 1,000,367 weighted-average units multiplied by approximately 42.84 (rounded down to the nearest whole share), which was the ratio at which common units of Osmotica Holdings S.C.Sp. were converted to shares of Osmotica Pharmaceuticals plc immediately prior to the Company’s initial public offering.  See Note 1 for details.

See accompanying notes to unaudited condensed consolidated financial statements

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OSMOTICA PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH  31, 2019 AND MARCH 31, 2018 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

  

 

 

    

 

 

  

Accumulated

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

 

Ordinary shares

 

Additional

 

Accumulated

 

Partners’

 

comprehensive

 

 

 

 

 

Shares

 

Amount

 

paid in capital

 

deficit

 

 capital

 

loss

 

Total

Balance at December 31, 2017

 

 

 —

 

$

 —

 

$

 —

 

$

 —

 

$

436,416,914

 

$

(633,146)

 

$

435,783,768

Cumulative effect of change in accounting standard

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,047,477

 

 

 —

 

 

1,047,477

Net loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,607,346)

 

 

 —

 

 

(4,607,346)

Change in foreign currency translation

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(368,114)

 

 

(368,114)

Distributions

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,026)

 

 

 —

 

 

(2,026)

Balance at March 31, 2018

 

 

 —

 

$

 —

 

$

 —

 

$

 —

 

$

432,855,019

 

$

(1,001,260)

 

$

431,853,759

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

  

 

 

    

 

 

  

Accumulated

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

 

Ordinary shares

 

Additional

 

Accumulated

 

Partners’

 

comprehensive

 

 

 

 

 

Shares

 

Amount

 

paid in capital

 

deficit

 

 capital

 

loss

 

Total

Balance at December 31, 2018

 

 

52,518,924

 

$

525,189

 

$

489,949,791

 

$

(102,359,672)

 

$

 —

 

$

(1,846,183)

 

$

386,269,125

Net loss

 

 

 —

 

 

 —

 

 

 —

 

 

(6,200,300)

 

 

 

 

 

 —

 

 

(6,200,300)

Share compensation

 

 

 —

 

 

 —

 

 

1,168,863

 

 

 —

 

 

 

 

 

 —

 

 

1,168,863

Balance at March 31, 2019

 

 

52,518,924

 

$

525,189

 

$

491,118,654

 

$

(108,559,972)

 

$

 —

 

$

(1,846,183)

 

$

381,237,688

 

See accompanying notes to unaudited condensed consolidated financial statements

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OSMOTICA PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

    

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

  

 

 

  

Net loss

 

$

(6,200,300)

 

$

(4,607,346)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

17,992,738

 

 

20,414,303

Share compensation

 

 

1,168,863

 

 

 —

Deferred income tax benefit

 

 

(1,400,734)

 

 

(3,295,968)

Loss on sale of fixed assets

 

 

53,326

 

 

 —

Bad debt provision

 

 

(84,295)

 

 

(99,801)

Amortization of deferred financing and loan origination fees

 

 

323,304

 

 

414,735

Change in operating assets and liabilities:

 

 

 

 

 

 

Trade accounts receivable, net

 

 

(378,363)

 

 

(23,251,095)

Inventories, net

 

 

(3,431,826)

 

 

(6,604,271)

Prepaid expenses and other current assets

 

 

4,544,737

 

 

3,100,028

Other non-current assets

 

 

 —

 

 

(271,868)

Trade accounts payable

 

 

(4,278,797)

 

 

32,182,528

Accrued and other current liabilities

 

 

(14,436,427)

 

 

(10,879,666)

Net cash (used in) provided by operating activities

 

 

(6,127,774)

 

 

7,101,579

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

  

 

 

  

Purchase of property, plant and equipment

 

 

(634,585)

 

 

(1,436,771)

Net cash used in investing activities

 

 

(634,585)

 

 

(1,436,771)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

  

 

 

  

Payments to affiliates

 

 

 —

 

 

(2,026)

Payments on finance lease obligations

 

 

(31,315)

 

 

(27,064)

Repayment of insurance financing loan

 

 

(979,128)

 

 

 —

Debt repayment

 

 

 —

 

 

(2,046,685)

Net cash used in financing activities

 

 

(1,010,443)

 

 

(2,075,775)

Net change in cash and cash equivalents

 

 

(7,772,802)

 

 

3,589,033

Effect on cash of changes in exchange rate

 

 

 —

 

 

(138,401)

Cash and cash equivalents, beginning of period

 

 

70,834,496

 

 

34,743,152

Cash and cash equivalents, end of period

 

$

63,061,694

 

$

38,193,784

Supplemental disclosure of cash and non-cash transactions:

 

 

  

 

 

  

Cash paid for interest

 

$

4,069,027

 

$

4,813,017

Cash paid for taxes

 

$

214,839

 

$

94,116

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

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OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Organization and Nature of Operations

Osmotica Pharmaceuticals plc (formerly known as Lilydale Limited and Osmotica Pharmaceuticals Limited) is an Irish public limited company.  Osmotica Holdings S.C.Sp. acquired Osmotica Pharmaceuticals plc on April 30, 2018 for the purpose of facilitating an offering of ordinary shares in an initial public offering (“IPO”). On October 22, 2018, Osmotica Pharmaceuticals plc completed its IPO, in which it issued and allotted 7,647,500 ordinary shares at a public offering price of $7.00 per share.  The number of shares issued in the IPO reflected the exercise in full of the underwriters’ option to purchase 997,500 additional ordinary shares.  In addition, the Company issued and allotted 2,014,285 ordinary shares at the public offering price in a private placement to investment funds affiliated with Avista Capital Partners, Altchem Limited and an entity controlled by the Company’s Chief Financial Officer.  The aggregate net proceeds from the IPO and the private placement were approximately $58.1 million after deducting underwriting discounts and commissions and estimated offering expenses.

Immediately prior to the IPO and prior to the commencement of trading of Osmotica Pharmaceuticals plc’s ordinary shares on the Nasdaq Global Select Market, Osmotica Holdings S.C.Sp. undertook a series of restructuring transactions that resulted in Osmotica Pharmaceuticals plc being the direct parent of Osmotica Holdings S.C.Sp with each holder of common units of Osmotica Holdings S.C.Sp. receiving approximately 42.84 ordinary shares of Osmotica Pharmaceuticals plc in exchange for each such common unit.  In addition, each holder of an option to purchase common units of Osmotica Holdings S.C.Sp. received an option to purchase the number of ordinary shares of Osmotica Pharmaceuticals plc determined by multiplying the number of units underlying such option by approximately 42.84 (rounded down to the nearest whole share) and dividing the exercise price per unit for such option by approximately 42.84 (rounded up to the nearest whole cent).  These transactions are referred to as the “Reorganization”.

Until the Reorganization, Osmotica Pharmaceuticals plc did not conduct any operations (other than activities incidental to its formation, the Reorganization and the pursuit of an initial public offering). Upon the completion of the Reorganization, the historical consolidated financial statements of Osmotica Holdings S.C.Sp. became the historical financial statements of Osmotica Pharmaceuticals plc. Accordingly, the accompanying unaudited condensed consolidated financial information as of and for the three months ended March 31, 2018 included herein reflect the financial information of Osmotica Holdings S.C.Sp.    

Osmotica Holdings S.C.Sp.is a Luxembourg special limited partnership, formed on December 3, 2015. Osmotica Holdings US LLC, a subsidiary of Osmotica Holdings S.C.Sp. entered into a fifty‑fifty partnership (the “Merger”), effective February 3, 2016, pursuant to a definitive agreement between Vertical/Trigen Holdings, LLC (“Vertical/Trigen”) and members, and Osmotica Holdings Corp Limited and Subsidiaries. Osmotica Holdings S.C.Sp. and several other holding companies and partnerships were formed as a result of the Merger. Pursuant to the Merger, Vertical/Trigen was deemed to be the accounting acquirer. Osmotica is a fully integrated biopharmaceutical company focused on the development and commercialization of specialty products that target markets with underserved patient populations.

Unless otherwise indicated or required by the context, references throughout to “Osmotica,” or the “Company,”  refer to (i) prior to the completion of the Reorganization, Osmotica Holdings S.C.Sp. and its consolidated subsidiaries, including, from and after April 30, 2018, Osmotica Pharmaceuticals plc, and (ii) following the completion of the Reorganization, Osmotica Pharmaceuticals plc and its consolidated subsidiaries, including Osmotica Holdings S.C.Sp. 

 

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements included herein have been prepared by the Company in accordance with accounting principles generally accepted in the United States of

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OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

America (“GAAP”) and under the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim reporting. In management’s opinion, the interim financial data presented includes all adjustments (consisting solely of normal recurring items) necessary for fair presentation. All intercompany accounts and transactions have been eliminated. Certain information required by GAAP has been condensed or omitted in accordance with rules and regulations of the SEC. Operating results for the three months ended March 31, 2019, are not necessarily indicative of the results that may be expected for any future period or for the year ending December 31, 2019 or any period thereafter. The accompanying Condensed Consolidated Balance Sheet data as of December 31, 2018 was derived from the audited consolidated financial statements.

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2018. Except for the lease accounting policy that was updated as a result of adopting Accounting Standards Update (“ASU”) No. 2016‑02, Leases (Accounting Standards Codification (“ASC”) Topic 842), the Company’s significant accounting policies have not changed substantially from those previously described in the notes to the consolidated financial statements for the year ended December 31, 2018 that are included in the Company’s most recent Annual Report on Form 10-K.

Basic and Diluted Loss per Share—Basic and diluted net loss per share is determined by dividing net loss by the weighted average ordinary shares outstanding during the period. For all periods presented with a net loss, the shares underlying the ordinary share options have been excluded from the calculation because their effect would be anti‑dilutive. Therefore, the weighted average shares outstanding used to calculate both basic and diluted loss per share are the same for periods with a net loss.

The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as they would be anti‑dilutive as of March 31, 2019 and 2018:

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

Restricted stock units

 

1,374,335

 

 —

Options to purchase ordinary shares

 

3,187,872

(a)

3,028,440

 

(a)

Represents 70,700 units multiplied by approximately 42.84 (rounded down to the nearest whole share), which was the ratio at which common units of Osmotica Holdings S.C.Sp. were converted to shares of Osmotica Pharmaceuticals plc immediately prior to the Company’s initial public offering.  See Note 1 for details.

 

Fair Value of Financial Instruments—The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and short and long‑term debt. The fair values of cash and cash equivalents, accounts receivable, accounts payable and debt approximate book value because of the short maturity of these financial instruments.

The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy are described below:

Level 1 — Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities.

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Table of Contents

OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Level 2 — Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 — Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities.

Segment Reporting—The Company operates in one business segment which focuses on developing and commercializing pharmaceutical products that target markets with underserved patient populations. The Company’s business offerings have similar economic and other characteristics, including the nature of products, manufacturing and acquiring processes, types of customers, distribution methods and regulatory environment. The chief operating decision maker (“CODM”) reviews profit and loss information on a consolidated basis to assess performance and make overall operating decisions. The condensed consolidated financial statements reflect the financial results of the Company’s one reportable operating segment. The Company has no significant revenues or tangible assets outside of the United States.

Recently Adopted Accounting Standards

The FASB issued ASU 2016‑02, “Leases (Topic 842)” in February 2016 and subsequent ASUs in 2018 and 2019 (collectively referred to as “Topic 842”) on the treatment of leases, which guidance is effective for annual reporting periods beginning after December 15, 2019 and early adoption is permitted. Under Topic 842, lessees will be required to recognize the following for all leases (with the exception of short‑term leases) at the commencement date: 1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and 2) a right‑of‑use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Entities are allowed to apply Topic 842 using a modified retrospective approach either (1) retrospectively to each reporting period presented in the financial statements with the cumulative effect adjustment recognized at the beginning of the earliest comparative period; or (2) retrospectively at the beginning of the period of adoption through a cumulative-effective adjustment.  The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply.

On January 1, 2019, the Company adopted Topic 842 using the modified retrospective basis with a cumulative-effect adjustment at the beginning of the period of adoption and therefore did not revise prior period information or disclosure.  Further, the Company elected the package of practical expedients upon transition that allows the Company not to reassess the lease classification for expired and existing leases, whether initial direct costs qualify for capitalization for any expired or existing leases or whether any expired contracts are or contain leases.  The adoption of ASU 2016-02 resulted in the recognition of operating leases and lease liabilities of approximately $6.2 million on the consolidated balance sheet as of January 1, 2019. The operating leases and lease liabilities primarily relate to real estate lease.

The impact of the adoption of Topic 842 on the accompanying condensed consolidated balance sheet as of January 1, 2019 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

Adoption adjustment

 

January 1, 2019

Operating lease assets

 

$

 —

 

$

6,245,147

 

$

6,044,528

Deferred rent liability

 

 

200,619

 

 

(200,619)

 

 

 —

Current portion of lease liability

 

 

 —

 

 

1,709,138

 

 

1,709,138

Long-term portion of lease liability

 

 

 —

 

 

4,536,009

 

 

4,536,009

 

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Table of Contents

OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

See additional lease disclosures in Note 11.

In February 2018, the FASB issued ASU 2018‑02, Income Statement — Reporting Comprehensive Income (Topic 220) — Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and requires certain disclosures about stranded tax effects. This standard will be effective for the Company for annual periods beginning after December 15, 2018 and should be applied either in the period of adoption or retrospectively. The Company adopted that standard effective January 1, 2019 and concluded there was no financial statement impact related to ASU 2018-02.

Recent Accounting Standards

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities. The guidance establishes a new “expected loss model that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is evaluating the impact of this new accounting standard and does not expect its impact to be material.

.

 

Note 3. Revenues

The Company’s performance obligations are to provide its pharmaceutical products based upon purchase orders from distributors. The performance obligation is satisfied at a point in time, typically upon delivery, when the customer obtains control of the pharmaceutical product. The Company invoices its customers after the products have been delivered and invoice payments are generally due within 60   days of invoice date.

The following table disaggregates revenue from contracts with customers by pharmaceutical products:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

Pharmaceutical Product

    

2019

    

2018

Venlafaxine ER

 

$

21,607,089

 

$

14,821,553

Methylphenidate ER

 

 

20,789,483

 

 

28,179,261

Lorzone

 

 

4,268,518

 

 

4,239,673

Divigel

 

 

5,496,660

 

 

4,949,547

OB Complete

 

 

1,930,516

 

 

2,350,992

Other

 

 

2,307,676

 

 

4,293,180

Net product sales

 

 

56,399,942

 

 

58,834,206

Royalty revenue

 

 

721,207

 

 

962,828

License and contract revenue

 

 

5,197

 

 

3,816

Total revenues

 

$

57,126,346

 

$

59,800,850

 

When the Company receives consideration from a customer, or such consideration is unconditionally due from a customer prior to the transfer of products to the customer under the terms of a contract, the Company records a contract liability. The Company classifies contract liabilities as deferred revenue. The Company had no deferred revenue as of March 31, 2019. Upon adoption of ASC Topic 606, the Company did not have any contract assets or liabilities. The

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Table of Contents

OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Company has elected to apply the exemption under paragraph 606‑10‑50‑14(a) related to remaining performance obligations as all open purchase orders are expected to be satisfied with a period of one year from the date of the purchase order.

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 March 31, 2019. The Company has no costs to obtain or fulfill contracts meeting the capitalization criteria under ASC Topic 340, Other Assets and Deferred Costs.

 

Note 4. Accounts Receivable, Sales and Allowances

The nature of the Company’s business inherently involves, in the ordinary course, significant amounts and substantial volumes of transactions and estimates relating to allowances for product returns, chargebacks, rebates, doubtful accounts and discounts given to customers. This is typical of the pharmaceutical industry and not necessarily specific to the Company. Depending on the product, the end‑user customer, the specific terms of national supply contracts and the particular arrangements with the Company’s wholesale customers, certain rebates, chargebacks and other credits are deducted from the Company’s accounts receivable. The process of claiming these deductions depends on wholesalers reporting to the Company the amount of deductions that were earned under the terms of the respective agreement with the end‑user customer (which in turn depends on the specific end‑user customer, each having its own pricing arrangement, which entitles it to a particular deduction). This process can lead to partial payments against outstanding invoices as the wholesalers take the claimed deductions at the time of payment.

Accounts receivable result primarily from sales of pharmaceutical products, amounts due under revenue sharing, license and royalty arrangements, which inherently involves, in the ordinary course of business, estimates relating to allowances for product returns, chargebacks, rebates, doubtful accounts and discounts given to customers. Credit is extended based on the customer’s financial condition, and, generally, collateral is not required. The Company ages its accounts receivable using the corresponding sale date of the transaction and considers accounts past due based on terms agreed upon in the transaction, which is generally 30 to 60 days for branded and generic sales, depending on the customer and the products purchased.

With the exception of the provision for doubtful accounts, which is reflected as part of selling, general and administrative expense, the provisions for the following customer reserves are reflected as a reduction of revenues in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.

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Table of Contents

OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Trade accounts receivable, net consisted of the following:

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31,

 

 

2019

 

2018

Gross trade accounts receivable

 

 

  

 

 

  

Trade accounts receivable

 

$

133,641,124

 

$

146,419,682

Royalty accounts receivable

 

 

616,190

 

 

238,960

Other receivable

 

 

646,084

 

 

1,562,287

Less reserves for:

 

 

 

 

 

 

Chargebacks

 

 

(26,591,362)

 

 

(38,861,232)

Commercial rebates

 

 

(47,305,063)

 

 

(49,231,445)

Discounts and allowances

 

 

(3,883,895)

 

 

(3,510,242)

Doubtful accounts

 

 

(236,554)

 

 

(194,144)

Total trade accounts receivable, net

 

$

56,886,524

 

$

56,423,866

 

The Company recorded the following adjustments to gross product sales:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

    

2018

Gross product sales

 

$

231,548,186

 

$

217,078,496

Less provisions for:

 

 

 

 

 

 

Chargebacks

 

 

(101,233,461)

 

 

(80,362,027)

Government rebates

 

 

(2,523,254)

 

 

(5,585,698)

Commercial rebates

 

 

(64,598,259)

 

 

(59,990,953)

Product returns

 

 

(1,026,339)

 

 

(5,847,314)

Discounts and allowances

 

 

(4,701,225)

 

 

(5,085,400)

Advertising and promotions

 

 

(1,065,706)

 

 

(1,372,898)

Net product sales

 

$

56,399,942

 

$

58,834,206

 

The activity in the Company’s allowance for customer deductions against trade accounts receivable was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Discounts

    

 

 

    

 

 

 

 

 

 

 

Commercial

 

and

 

Doubtful

 

 

 

 

 

Chargebacks

 

Rebates

 

Allowances

 

Accounts

 

Total

Balance at December 31, 2018

 

$

38,861,232

 

$

49,231,445

 

$

3,510,242

 

$

194,144

 

$

91,797,063

Provision

 

 

101,233,461

 

 

64,598,259

 

 

4,701,225

 

 

(84,295)

 

 

170,448,650

Charges processed

 

 

(113,503,331)

 

 

(66,524,641)

 

 

(4,327,572)

 

 

126,705

 

 

(184,228,839)

Balance at March 31, 2019

 

$

26,591,362

 

$

47,305,063

 

$

3,883,895

 

$

236,554

 

$

78,016,874

 

The activity in the Company’s accrued liabilities for customer deductions by account was as follows:

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Government

    

 

 

 

 

Product

 

and Commercial

 

 

 

 

 

Returns

 

Rebates

 

Total

Balance at December 31, 2018

 

$

48,463,509

 

$

9,980,876

 

$

58,444,385

Provision

 

 

1,026,339

 

 

2,523,254

 

 

3,549,593

Charges processed

 

 

(3,781,493)

 

 

(4,784,874)

 

 

(8,566,367)

Balance at March 31, 2019

 

$

45,708,355

 

$

7,719,256

 

$

53,427,611

 

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Table of Contents

OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Provisions and utilizations of provisions activity in the current period which relate to the prior period revenues are not provided because to do so would be impracticable. The current systems and processes of the Company do not capture the chargeback and rebate settlements by the period in which the original sales transaction was recorded. The Company uses a combination of factors and applications to estimate the dollar amount of reserves for chargebacks and rebates at each month end. Variable consideration is included in the transaction price only to the extent a significant reversal in the amount of cumulative revenue recognized is not probable of occurring when the uncertainty associated with the variable consideration is subsequently resolved. The Company regularly monitors the reserves based on an analysis of the Company’s product sales and most recent claims, wholesaler inventory, current pricing, and anticipated future pricing changes. If amounts are different from the estimate due to changes from estimated rates, accrual rate adjustments are considered prospectively when determining provisions in accordance with authoritative GAAP.

 

Note 5. Inventories

The components of inventories, net of allowances, were as follows:

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31,

 

 

2019

 

2018

Finished goods

 

$

15,791,471

 

$

15,577,104

Work in process

 

 

739,501

 

 

1,138,906

Raw materials and supplies

 

 

11,283,875

 

 

7,667,011

 

 

$

27,814,847

 

$

24,383,021

 

The Company maintains an allowance for excess and obsolete inventory, as well as inventory where its cost is in excess of its net realizable value. The activity in the allowance for excess, obsolete, and net realizable value inventory account was as follows:

 

 

 

 

 

 

 

 

    

 

 

 

 

March 31, 

 

 

December 31,

 

 

 

2019

 

 

2018

Balance at beginning of period

 

$

1,561,082

 

$

3,066,620

Provision

 

 

759,185

 

 

2,926,472

Charges processed

 

 

(824,087)

 

 

(4,432,010)

Balance at end of period

 

$

1,496,180

 

$

1,561,082

 

 

Note 6. Goodwill and Other Intangible Assets

The Company tests goodwill and indefinite‑lived intangible assets for impairment annually as of October 1st, or more frequently whenever events or changes in circumstances indicate that the asset might be impaired. There were no events or changes in circumstances since December 31, 2018 for the Company to test for impairment of goodwill. The carrying value of goodwill was $100,854,816 as of March 31, 2019 and December 31, 2018.

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Table of Contents

OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The following table sets forth the major categories of the Company’s intangible assets and the weighted‑average remaining amortization period for those assets that were not already fully amortized:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

Gross

 

 

 

 

 

 

 

Net

 

Amortization

 

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Period

 

 

Amount

 

Amortization

 

Impairment

 

Amount

 

(Years)

Distribution Rights

 

$

98,433,377

 

$

(19,046,512)

 

$

 —

 

$

79,386,865

 

11.7

Product Rights

 

 

348,599,941

 

 

(124,192,008)

 

 

 —

 

 

224,407,933

 

3.8

Tradenames

 

 

13,485,000

 

 

(2,505,762)

 

 

 —

 

 

10,979,238

 

15.7

Developed Technology

 

 

125,460,333

 

 

(30,712,781)

 

 

 —

 

 

94,747,552

 

12.3

IPR&D

 

 

64,000,000

 

 

 —

 

 

 —

 

 

64,000,000

 

Indefinite Lived

 

 

$

649,978,651

 

$

(176,457,063)

 

$

 —

 

$

473,521,588

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Gross

 

 

 

 

 

 

 

Net

 

Remaining

 

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Amortization

 

 

Amount

 

Amortization

 

Impairment

 

Amount

 

Period (Years)

Distribution Rights

 

$

98,433,377

 

$

(17,229,374)

 

$

 —

 

$

81,204,003

 

12.0

Product Rights

 

 

326,530,149

 

 

(109,056,754)

 

 

 —

 

 

217,473,395

 

4.0

Tradenames

 

 

13,485,000

 

 

(2,329,284)

 

 

 —

 

 

11,155,716

 

16.0

Developed Technology

 

 

138,133,333

 

 

(30,973,516)

 

 

(10,303,208)

 

 

96,856,609

 

12.6

IPR&D

 

 

91,300,000

 

 

 —

 

 

(7,600,000)

 

 

83,700,000

 

Indefinite Lived

 

 

$

667,881,859

 

$

(159,588,928)

 

$

(17,903,208)

 

$

490,389,723

 

  

 

The gross carrying amount and accumulated amortization in the tables above are inclusive of $6,156,564 of accumulated amortization for assets that have been fully impaired in 2018.

Changes in the net carrying amount of intangible assets were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Distribution

    

Product

    

 

 

    

Developed

    

 

 

    

 

 

 

 

Rights

 

Rights

 

Tradenames

 

Technology

 

IPR&D