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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 September 30, 2021

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)

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

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 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 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  

Smaller reporting company  

Emerging growth company  

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.

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

There were 83,280,591 ordinary shares ($0.01 nominal value per share) outstanding as of November 12, 2021.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans, and the impact of the COVID-19 pandemic on the sufficiency of our product supply, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "plan," "should," "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 our product and the development, approval and introduction of new products; U.S. Food and Drug Administration, or the FDA, and other regulatory applications, approvals and actions; the continuation of historical trends; our ability to manage costs and service our debt; 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:

Due to our dependence on Upneeq, our business would be materially adversely affected if this product does not perform as well as expected;
our ability to continue our operations requires that we raise additional capital and our operations could be curtailed if we are unable to obtain additional funding as or when needed;
Upneeq may fail to achieve market acceptance by clinicians and patients, or others in the medical community, and the market opportunity for Upneeq may be smaller than we estimate;
failures of or delays in clinical trials could result in increased costs to us and could prevent 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;
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 may face competition, including from other drug manufacturers and compounding pharmacies, which could significantly limit our growth and materially adversely affect our financial results;
a business interruption at our pharmacy or at facilities operated by third parties that we rely on, could have a material adverse effect on our business;
if we are unable to develop or maintain our sales capabilities, we may not be able to effectively market or sell Upneeq or any other products we may develop;

2

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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;
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 product or product candidates may cause undesirable side effects or have other adverse properties that could delay or prevent their regulatory approval or limit the scope of any approved package insert or market acceptance, or result in significant negative consequences following marketing approval;
manufacturing or quality control problems may damage our reputation, require costly remedial activities or otherwise negatively impact our business;
we may in the future become subject to rules applicable to PFICs;
our business may be adversely affected by the continuing coronavirus pandemic; and
other factors that are described in the "Risk Factors" section of this Quarterly Report on Form 10-Q and our Current Report on Form 8-K filed on September 8, 2021.

The forward-looking statements included in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.

3

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TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements (unaudited).

5

Condensed Consolidated Balance Sheets – September 30, 2021 and December 31, 2020

5

Condensed Consolidated Statements of Operations and Comprehensive Loss – Three and Nine months ended September 30, 2021 and 2020

6

Condensed Consolidated Statement of Shareholders’ Equity – Three and Nine months ended September 30, 2021 and 2020

7

Condensed Consolidated Statements of Cash Flows - Three and Nine months ended September 30, 2021 and 2020

8

Notes to Condensed Consolidated Financial Statements

9

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

26

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

42

ITEM 4. Controls and Procedures.

42

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings.

43

ITEM 1A. Risk Factors.

43

ITEM 6. Exhibits.

45

SIGNATURES

46

4

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PART I – FINANCIAL INFORMATION

Item 1.Financial Statements.

OSMOTICA PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

    

September 30, 2021

    

December 31, 2020

    

(Unaudited)

Assets

 

  

 

  

 

Current assets:

 

  

 

  

 

Cash and cash equivalents

$

8,352

$

114,053

Accounts receivable, net

 

4,190

 

3,149

Inventories, net

 

824

 

1,831

Prepaid expenses and other current assets

 

10,019

 

12,592

Assets held for sale

41,529

Total current assets

 

23,385

 

173,154

Property, plant and equipment, net

 

851

 

2,391

Operating lease assets

1,651

1,953

Intangibles, net

 

27,210

 

35,090

Goodwill

 

55,847

 

55,847

Other non-current assets

603

373

Assets held for sale

 

 

102,141

Total assets

$

109,547

$

370,949

Liabilities and Shareholders' Equity

 

  

 

  

Current liabilities:

 

  

 

  

Trade accounts payable

$

4,449

$

3,128

Accrued liabilities

 

18,521

 

16,951

Current portion of debt, net of deferred financing costs

29,925

Current portion of obligation under finance leases

6

20

Current portion of lease liability

1,029

1,199

Income taxes payable - current portion

 

 

2

Liabilities held for sale

34,484

Total current liabilities

 

53,930

 

55,784

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

 

 

219,525

Long-term portion of lease liability

701

871

Income taxes payable - long term portion

 

1

 

Deferred taxes

 

165

 

345

Liabilities held for sale

568

Total liabilities

 

54,797

 

277,093

Commitments and contingencies (See Note 12)

 

  

 

  

Shareholders' equity:

 

  

 

  

Ordinary shares ($0.01 nominal value 400,000,000 shares authorized, 63,127,288 and 62,545,832 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively)

631

625

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

554,156

548,070

Accumulated deficit

(497,808)

(452,610)

Accumulated other comprehensive loss

 

(2,229)

 

(2,229)

Total shareholders' equity

 

54,750

 

93,856

Total liabilities and shareholders' equity

$

109,547

$

370,949

See accompanying notes to unaudited condensed consolidated financial statements

5

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OSMOTICA PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

    

  

  

  

  

Net product sales

$

2,196

$

586

$

4,451

$

998

Royalty revenue

 

 

165

 

190

 

629

Licensing revenue

 

 

25,000

 

10,000

 

25,000

Total revenues

 

2,196

 

25,751

 

14,641

 

26,627

Cost of goods sold

 

1,147

1,185

 

2,535

 

1,794

Gross profit

 

1,049

 

24,566

 

12,106

 

24,833

Selling, general and administrative expenses

 

24,841

21,360

 

63,769

 

54,028

Research and development expenses

 

1,376

1,779

 

5,789

 

9,264

Impairment of intangibles

7,880

Total operating expenses

 

26,217

 

23,139

 

77,438

 

63,292

Operating income (loss)

 

(25,168)

 

1,427

 

(65,332)

 

(38,459)

Gain on sales of product rights, net

5,636

Operating income (loss)

(25,168)

1,427

(59,696)

(38,459)

Interest expense and amortization of debt discount

 

735

1,071

 

1,750

 

3,560

Other non-operating (gain) loss

 

120

(51)

 

1,312

 

246

Total other non-operating expense

 

855

 

1,020

 

3,062

 

3,806

Income (loss) before income taxes

 

(26,023)

407

 

(62,758)

 

(42,265)

Income tax expense (benefit)

 

324

 

(1,308)

 

415

 

(5,042)

Income (loss) from continuing operations

(26,347)

1,715

(63,173)

(37,223)

Gain on sales of discontinued operations

4,373

4,373

Income (loss) from discontinued operations before income tax expense

3,983

(10,171)

14,219

17,571

Income tax expense (benefit) - discontinued operations

 

(132)

 

177

 

617

 

5,063

Income (loss) from discontinued operations, net of tax

8,488

(10,348)

17,975

12,508

Net and other comprehensive loss

$

(17,859)

$

(8,633)

$

(45,198)

$

(24,715)

(Loss) income per share attributable to shareholders:

Basic and Diluted, loss from continuing operations

$

(0.42)

$

0.03

$

(1.01)

$

(0.62)

Basic and Diluted, income from discontinued operations

0.13

(0.16)

0.29

0.21

Basic and Diluted loss per share

$

(0.28)

$

(0.14)

$

(0.72)

$

(0.41)

Weighted average shares basic and diluted:

 

  

 

 

  

 

Basic

 

62,945,898

62,785,866

 

62,798,123

59,979,834

Diluted

 

62,945,898

63,285,258

 

62,798,123

59,979,834

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 AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND SEPTEMBER 30, 2020

(Unaudited)

(In thousands, except share data)

  

  

  

  

Accumulated

  

other

Ordinary shares

Additional

Accumulated

comprehensive

Shares

Amount

paid in capital

deficit

loss

Total

Balance at January 1, 2020

51,845,742

$

518

$

489,440

$

(373,021)

$

(2,229)

$

114,708

Repurchase of ordinary shares

(29,000)

(167)

(167)

Share compensation

181,966

2

1,107

1,109

Net loss

(3,083)

(3,083)

Payments for taxes related to the net share settlement of equity awards

(616)

(616)

Proceeds from issuance of ordinary shares, net of offering costs

6,900,000

69

31,720

31,789

Balance at March 31, 2020

58,898,708

589

521,484

(376,104)

(2,229)

143,740

Repurchase of ordinary shares

(169,257)

(2)

(917)

(919)

Share compensation

31,295

1

1,221

1,222

Net loss

(12,999)

(12,999)

Payments for taxes related to the net share settlement of equity awards

(133)

(133)

Balance at June 30, 2020

58,760,746

588

521,655

(389,103)

(2,229)

130,911

Repurchase of ordinary shares

(677,468)

(7)

(3,742)

(3,749)

Share compensation

22,554

1,508

1,508

Net loss

(8,633)

(8,633)

Proceeds from issuance of ordinary shares, net of offering costs

5,000,000

50

30,599

30,649

Balance at September 30, 2020

63,105,832

$

631

$

550,020

$

(397,736)

$

(2,229)

$

150,686

Balance at January 1, 2021

62,545,832

$

625

$

548,070

$

(452,610)

$

(2,229)

$

93,856

Share compensation

173,299

2

1,309

1,311

Net loss

(9,612)

(9,612)

Payments for taxes related to the net share settlement of equity awards

(358)

(358)

Balance at March 31, 2021

62,719,131

627

549,021

(462,222)

(2,229)

85,197

Share compensation

128,931

1

1,232

1,233

Net loss

(17,727)

(17,727)

Payments for taxes related to the net share settlement of equity awards

(249)

(249)

Balance at June 30, 2021

62,848,062

628

550,004

(479,949)

(2,229)

68,454

Share compensation

133,064

2

4,277

4,279

Net loss

(17,859)

(17,859)

Payments for taxes related to the net share settlement of equity awards

(160)

(160)

Proceeds from issuance of ordinary shares, net of offering costs

146,162

1

35

36

Balance at September 30, 2021

63,127,288

$

631

$

554,156

$

(497,808)

$

(2,229)

$

54,750

See accompanying notes to unaudited condensed consolidated financial statements

7

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OSMOTICA PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Nine Months Ended September 30, 

    

2021

    

2020

Cash Flows from Operating Activities:

 

  

 

  

Net loss from continuing operations

$

(63,173)

$

(37,223)

Net income from discontinued operations

17,975

12,508

Net loss

(45,198)

(24,715)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

Depreciation and amortization

 

8,068

 

16,589

Share compensation

6,592

3,836

Impairment of intangibles

7,880

23,157

Deferred income tax benefit

 

(180)

 

(974)

Gain on sale of product rights, net

(5,636)

Gain on sale of discontinued operations

(4,373)

Loss on sale of fixed and leased assets

1,229

281

Bad debt provision

 

 

6

Amortization of deferred financing and loan origination fees

746

985

Write off of deferred financing and loan origination fees in connection with prepayment

1,387

496

Change in operating assets and liabilities:

 

 

Accounts receivable, net

 

4,643

 

22,339

Inventories, net

 

2,256

 

(398)

Prepaid expenses and other current assets

 

(3,316)

 

4,741

Other non-current assets

 

(603)

 

Trade accounts payable

 

515

 

(586)

Accrued and other current liabilities

 

(4,347)

 

(19,915)

Net cash provided by (used in) operating activities

 

(30,337)

 

25,842

Cash Flows from Investing Activities:

 

  

 

Proceeds from sale of fixed and leased assets

40

50

Payments on disposal of leased assets

(209)

Proceeds from product rights disposal

7,300

Proceeds from discontinued operations

110,845

Purchase of property, plant and equipment

(1,657)

(2,213)

Net cash provided by (used in) investing activities

 

116,528

 

(2,372)

Cash flows from Financing Activities:

 

  

 

  

Payments on finance lease obligations

 

(35)

(98)

Proceeds from public offering, net of issuance costs

36

62,440

Proceeds from purchases of stock under ESPP

234

Debt repayment

(191,360)

(50,000)

Repurchases of ordinary shares

(4,835)

Payments for taxes related to net share settlement of equity awards

(767)

(749)

Net cash provided by (used in) financing activities

 

(191,892)

 

6,758

Net change in cash and cash equivalents

 

(105,701)

 

30,228

Cash and cash equivalents, beginning of period

 

114,053

95,865

Cash and cash equivalents, end of period

$

8,352

$

126,093

Supplemental disclosure of cash and non-cash transactions:

 

 

Cash paid for interest

$

7,166

$

12,014

Cash paid for taxes

$

2,060

$

1,439

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, an Irish public limited company (the “Company”), together with its subsidiaries, is a specialty pharmaceutical company focused on the commercialization and development of products that target markets with underserved patient populations. In July 2020, the Company received regulatory approval from the FDA for RVL-1201, or Upneeq, (oxymetazoline hydrocholoride ophthalmic solution, 0.1%), for the treatment of acquired blepharoptosis, or droopy eyelid, in adults. Upneeq was commercially launched September 2020 to a limited number of eye care professionals with commercialization operations expanded in 2021 among ophthalmology, optometry and oculoplastic specialties.

On August 27, 2021, the Company closed the divestiture of its portfolio of branded and non-promoted products and its Marietta, Georgia manufacturing facility, (the “Legacy Business”) to certain affiliates of Alora Pharmaceuticals, or Alora, for $111 million in cash upon closing, subject to certain adjustments, and up to $60 million in contingent milestone payments. Pursuant to the agreement the Company post-closing retained the rights to Upneeq and to arbaclofen extended release tablets which is under development for the treatment of spasticity in multiple sclerosis. With the divestiture of the Legacy Business the primary focus of the Company will be on the commercialization and development of specialty pharmaceuticals in the ocular and medical aesthetics therapeutic areas.

With the divestiture of the Legacy Business the Company’s commercial operations would be conducted by its wholly-owned subsidiaries, RVL Pharmaceuticals, Inc. and RVL Pharmacy, LLC, or RVL. RVL operates pharmacy operations dedicated to the processing and fulfillment of prescriptions for Upneeq.

Unless otherwise indicated or required by the context, references throughout to “Osmotica,” or the “Company”, refer to our continuing operations following the sale or the Legacy Business to Alora. A description of our business prior to the consummation of the transaction is included in Item 1. “Business”, in Part I of the Annual Report on Form 10-K for the year ended December 31, 2020 that was previously filed with the Securities and Exchange Commission (“SEC”) on March 30, 2021.

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

Going Concern Evaluation

As of September 30, 2021, the Company’s cash and cash equivalents totaled $8.4 million. For the fiscal year ended December 31, 2020 and the three and nine months ended September 30, 2021 the Company incurred net losses of $79.6 million, $17.9 million and $45.2 million, respectively. On August 27, 2021, the Company announced the closing of the divestiture of the Company’s portfolio of branded and non-promoted products and its Marietta, Georgia manufacturing facility, or the Legacy Business, to certain affiliates of Alora Pharmaceuticals for $111 million in cash upon closing, subject to certain post-closing adjustments, and up to $60 million in contingent milestone payments, or the Transaction. Pursuant to the Transaction the Company retained the rights to Upneeq and to arbaclofen extended release tablets, which is under development for the treatment of spasticity in multiple sclerosis. Proceeds from the divestiture of the Legacy business, together with cash on hand were used to repay $186.1 million of debt. As of September 30, 2021, the Company had interest bearing debt of $29.9 million, net of deferred financing fees, with a maturity date of November 21, 2021.

On October 12, 2021 the Company issued $55.0 million of senior secured notes to a lender, a portion of the proceeds of which, together with the proceeds from the underwritten offering described below, were used to repay $30.7 million of outstanding term loans, accrued interest and related fees and expenses. Also on October 12, 2021 the Company issued 14,000,000 ordinary shares and warrants to purchase 16,100,000 shares in an underwritten offering, raising net proceeds

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OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

of approximately $32.5 million. The remaining net proceeds from the issuance of the senior notes and ordinary shares is being used for general corporate purposes.

The divestiture of the Legacy Business resulted in the loss of substantially all the Company’s revenue generating assets and the Company’s business plan is focused on the launch of its commercial product, Upneeq, which diminished the Company’s cash flows in at least the near term, in particular cash inflows from product sales. The Company will require additional capital to fund its operating needs, including the commercialization of Upneeq and other activities. Accordingly, the Company expects to incur significant expenditures and increasing operating losses in the future. As a result, the Company’s current sources of liquidity will not be sufficient to meet its obligations for the 12 months following the date the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q are issued. These conditions give rise to substantial doubt as to our ability to operate as a going concern. Our ability to continue as a going concern will require us to obtain additional funding, generate positive cash flow from operations and/or enter into strategic alliances or sell assets.

The Company’s plans to address these conditions include pursuing one or more of the following options to secure additional funding, none of which can be guaranteed or are entirely within our control:

raise funds through additional sales of our ordinary shares, through equity sales agreements with broker/dealers or other public or private equity financings.

raise capital through additional debt facilities, including convertible debt.

partner or sell a portion or all rights to any of our assets to potentially secure additional non-dilutive funds.

There can be no assurance the Company will receive cash proceeds from any of these potential resources or, to the extent cash proceeds are received, such proceeds would be sufficient to support the Company’s current operating plan for at least the next 12 months from the date the condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q are issued. The sale of additional equity or convertible debt securities may result in additional dilution to the Company’s stockholders. If we raise additional funds through the issuance of debt securities or preferred stock or through additional credit facilities, these securities and/or the loans under credit facilities could provide for rights senior to those of the Company’s ordinary shares and could contain covenants that would restrict the Company’s operations. Additional funds may not be available when needed, on terms that are acceptable to the Company, or at all.

The unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. The Company’s ability to continue as a going concern is dependent on the Company’s ability to obtain the necessary financing to meet its obligations and repay liabilities arising from the normal business operations when they become due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that the Company will be able to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

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 America (“GAAP”) and under the rules and regulations of the 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 and

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OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for any future period or for the year ending December 31, 2021 or any period thereafter. The accompanying Condensed Consolidated Balance Sheet data as of December 31, 2020 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, 2020.

The Company accounted for the sale of the Legacy Business in accordance with Accounting Standards Codification, ASC, 205 Discontinued Operations and Accounting Standards Update, ASU, No. 2014-08, Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity. The Company followed the held-for-sale criteria as defined in ASC 360 and ASC 205. ASC 205 requires that a component of an entity that has been disposed of or is classified as held for sale and has operations and cash flows that can be clearly distinguished from the rest of the entity be reported as assets held for sale and discontinued operations. In the period a component of an entity has been disposed of or classified as held for sale, the results of operations for the periods presented are reclassified into separate line items, net of tax, in the unaudited condensed consolidated statements of operations. Assets and liabilities are also reclassified into separate line items on the related condensed consolidated balance sheets for the periods presented. The statements of cash flows for the periods presented are also reclassified to reflect the results of discontinued operations as separate line items. ASU 2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity’s operations and financial results be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations.

Due to the sale of the Legacy Business during the third quarter of 2021, in accordance with ASC 205, Discontinued Operations, the Company has classified the results of the Legacy Business as discontinued operations in our unaudited condensed consolidated statements of operations and cash flows for all periods presented. All assets and liabilities associated with our Legacy Business were therefore classified as assets and liabilities of discontinued operations in our condensed consolidated balance sheets as of December 31, 2020. All amounts included in the notes to the unaudited condensed consolidated financial statements relate to continuing operations unless otherwise noted. For additional information, see Note 3, Discontinued Operations.

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 and time and performance-based restricted stock units 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 September 30, 2021 and 2020:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Performance and restricted stock units

1,456,910

2,092,419

1,456,910

2,591,811

Options to purchase ordinary shares

2,650,946

2,772,805

2,650,946

2,772,805

Shares to be purchased through employee stock purchase plan

79,919

79,919

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

11

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OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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.

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.

Note 3. Discontinued Operations

On August 27, 2021, we closed the divestiture of the Company’s Legacy Business, to certain affiliates of Alora Pharmaceuticals for $111 million in cash upon closing, subject to certain post-closing adjustments, and up to $60 million in contingent milestone payments.

We have determined the divestiture of the Legacy Business represents a strategic shift that will have a major effect on our business and therefore met the criteria for classification as discontinued operations at September 30, 2021. Accordingly, the Legacy Business is reported as discontinued operations in accordance with ASC 205-20, Discontinued Operations. The related assets and liabilities of the Legacy Business are classified as assets and liabilities of discontinued operations in the condensed consolidated balance sheets as of December 31, 2020 and the results of operations from the Legacy Business as discontinued operations in the condensed consolidated statements of operations. Applicable amounts in prior years have been recast to conform to this discontinued operations presentation. We recognized a gain on the sale of the Legacy Business upon closing.

12

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OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The following table presents the results of the discontinued operations for the three- and nine -month periods ended September 30, 2021 and 2020:

Three months ended

Nine months ended

September 30,

September 30,

2021

    

2020

2021

2020

Total revenues

$

15,551

    

$

31,421

$

61,785

    

$

116,726

Cost of goods sold (exclusive of depreciation and amortization shown separately below)

 

4,973

 

10,938

 

23,435

 

41,583

Selling, general and administrative expense

 

740

 

2,185

 

4,209

 

7,247

Depreciation and amortization

 

 

4,592

 

6,583

 

13,925

Impairment of intangibles

 

 

19,539

 

 

23,157

Research and development expenses

3,189

1,947

5,882

5,921

Income (loss) from operations

 

6,649

 

(7,780)

 

21,676

 

24,893

Interest expense

 

1,495

 

2,493

 

6,399

 

7,808

Other income (loss), net

 

1,171

 

(102)

 

1,058

 

(486)

Income (loss) from discontinued operations before costs of disposal and provision for income taxes

 

3,983

 

(10,171)

 

14,219

 

17,571

Income tax expense (benefit)

 

(132)

 

177

 

617

 

5,063

Income (loss) from discontinued operations before gain on disposal

4,115

(10,348)

13,602

12,508

Gain on sales of discontinued operations

4,373

4,373

Income (loss) from discontinued operations, net of tax

$

8,488

$

(10,348)

$

17,975

$

12,508

The following table presents the significant non-cash items and purchases of property, plant and equipment for the discontinued operations for the Legacy Business that are included in the accompanying consolidated statements of cash flows.

Nine months ended

September 30,

Cash flows from operating activities:

2021

    

2020

Depreciation and amortization

$

6,583

$

13,925

Share compensation

619

260

Impairment of intangibles

23,157

Cash flows from investing activities:

Purchase of property, plant and equipment

$

(1,335)

$

(1,707)

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OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations as of December 31, 2020.

    

December 31, 2020

Cash and cash equivalents

$

Accounts receivable, net

23,263

Inventories

 

16,103

Prepaid expenses and other current assets

 

2,163

Total current assets of discontinued operations

 

41,529

Property, plant and equipment, net

 

25,663

Operating lease right-of-use assets

 

803

Goodwill

 

45,008

Intangible assets, net

 

30,667

Total non-current assets of discontinued operations

 

102,141

Total assets of discontinued operations

$

143,670

Accounts payable

$

3,640

Accrued liabilities

 

30,566

Current portion of operating lease liabilities

 

278

Total current liabilities of discontinued operations

 

34,484

Operating lease liabilities, net of current portion

 

568

Total non-current liabilities of discontinued operations

 

568

Total liabilities of discontinued operations

 

35,052

Net assets of discontinued operations

$

108,618

The following table presents the gain on the sale for the quarter ended September 30, 2021:

September 30, 2021

Cash proceeds

$

111,848

Less: transaction costs

(6,335)

Less: net assets transferred

(101,140)

Gain on sale, pre-tax

$

4,373

Note 4. Revenues

The Company’s performance obligations are to provide its pharmaceutical products based upon purchase orders from customers. The performance obligation is satisfied at a point in time, typically upon delivery, when the customer obtains control of the pharmaceutical product. The Company collects payments in advance from its customers.

14

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OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The following table disaggregates revenue with customers by pharmaceutical products (dollars in thousands):

Three Months Ended September 30, 

Nine Months Ended September 30, 

Pharmaceutical Products

    

2021

    

2020

    

2021

    

2020

    

Upneeq

$

2,196

$

52

$

4,451

$

52

Osmolex

 

 

534

 

946

Net product sales

 

2,196

 

586

 

4,451

 

998

Royalty revenue

 

 

165

 

190

629

Licensing revenue

 

 

25,000

 

10,000

25,000

Total revenues

$

2,196

$

25,751

$

14,641

$

26,627