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EX-31.1 - EX-31.1 - Aralez Pharmaceuticals Inc.arlz-20160930ex311d24dae.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

 

OR

 

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

 

Commission file number:  01-37691

 


 

ARALEZ PHARMACEUTICALS INC.

(Exact Name of Registrant as Specified in its Charter)

 

British Columbia, Canada

    

98-1283375

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

7100 West Credit Avenue, Suite 101, Mississauga, Ontario, Canada L5N 0E4

(Address of registrant’s principal executive offices)

 

(905) 876-1118

(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 ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

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

 

Large accelerated filer ☐

    

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

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

 

As of the close of business on November 3, 2016, 65,427,017 common shares (no par value per share) of the registrant were issued and outstanding.

 

 

 


 

Aralez Pharmaceuticals Inc.

Form 10-Q

For the Quarter Ended September 30, 2016

 

Table of Contents

 

Item

    

Page

 

 

 

 

PART I. Financial information 

 

 

 

 

 

 

1. 

Condensed Consolidated Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2016 and 2015

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015

 

 

Notes to Condensed Consolidated Financial Statements

 

2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

35 

3. 

Quantitative and Qualitative Disclosures About Market Risk

 

50 

4. 

Controls and Procedures

 

50 

 

 

 

 

PART II. Other Information 

 

 

 

 

 

 

1. 

Legal Proceedings

 

51 

1A. 

Risk Factors

 

51 

2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

76 

3. 

Defaults Upon Senior Securities

 

76 

4. 

Mine Safety Disclosures

 

76 

5. 

Other Information

 

76 

6. 

Exhibits

 

77 

 

Signatures

 

78 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

ARALEZ PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; in thousands of U.S. dollars, except share and per share data)

 

 

 

 

 

 

 

 

 

 

    

September 30, 2016

    

December 31, 2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

56,533

 

$

24,816

 

Accounts receivable, net

 

 

8,109

 

 

5,966

 

Inventory

 

 

4,735

 

 

 —

 

Prepaid expenses and other current assets

 

 

2,965

 

 

1,225

 

Total current assets

 

 

72,342

 

 

32,007

 

Property and equipment, net

 

 

2,527

 

 

251

 

Goodwill

 

 

77,039

 

 

 —

 

Other intangible assets, net

 

 

127,724

 

 

 —

 

Other long-term assets

 

 

686

 

 

 —

 

Total assets

 

$

280,318

 

$

32,258

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

1,965

 

$

4,557

 

Accrued expenses

 

 

23,557

 

 

11,932

 

Short-term contingent consideration

 

 

600

 

 

 —

 

Other current liabilities

 

 

3,993

 

 

 —

 

Total current liabilities

 

 

30,115

 

 

16,489

 

Long-term debt, net

 

 

74,520

 

 

 —

 

Deferred tax liability

 

 

6,064

 

 

 —

 

Long-term contingent consideration

 

 

18,900

 

 

 

 

Other long-term liabilities

 

 

171

 

 

986

 

Total liabilities

 

 

129,770

 

 

17,475

 

Commitments and Contingencies

 

 

 

 

 

 

 

Preferred shares, no par value; unlimited shares authorized, issuable in series; none
 outstanding

 

 

 —

 

 

 —

 

Common shares, no par value, unlimited shares authorized, 65,357,300 shares
 issued and outstanding at September 30, 2016; common stock, $0.001 par
 value, 33,259,407 issued and outstanding at December 31, 2015 

 

 

 —

 

 

33

 

Additional paid-in capital

 

 

349,013

 

 

149,438

 

Accumulated other comprehensive income

 

 

8,085

 

 

 —

 

Accumulated deficit

 

 

(206,550)

 

 

(134,688)

 

Total shareholders’ equity

 

 

150,548

 

 

14,783

 

Total liabilities and shareholders’ equity

 

$

280,318

 

$

32,258

 

 

The accompanying unaudited notes are an integral part of the condensed consolidated financial statements.

3


 

ARALEZ PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited; in thousands of U.S. dollars, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues, net

 

$

8,058

 

$

 —

 

$

18,998

 

$

 —

 

Other revenues

 

 

5,570

 

 

5,820

 

 

15,265

 

 

15,425

 

Total revenues, net

 

 

13,628

 

 

5,820

 

 

34,263

 

 

15,425

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 —

 

Cost of product revenues (exclusive of amortization shown separately below)

 

 

3,362

 

 

 —

 

 

9,260

 

 

 —

 

Amortization of intangible assets

 

 

2,418

 

 

 —

 

 

5,824

 

 

 —

 

Selling, general and administrative

 

 

25,445

 

 

12,207

 

 

85,635

 

 

33,663

 

Research and development

 

 

2,037

 

 

1,806

 

 

7,923

 

 

5,091

 

Total costs and expenses

 

 

33,262

 

 

14,013

 

 

108,642

 

 

38,754

 

Loss from operations

 

 

(19,634)

 

 

(8,193)

 

 

(74,379)

 

 

(23,329)

 

Interest expense

 

 

(495)

 

 

 —

 

 

(1,395)

 

 

 —

 

Other (expense) income, net

 

 

(173)

 

 

17

 

 

4,354

 

 

(154)

 

Loss before income taxes

 

 

(20,302)

 

 

(8,176)

 

 

(71,420)

 

 

(23,483)

 

Provision for (benefit from) income taxes

 

 

297

 

 

(27)

 

 

442

 

 

974

 

Net loss

 

$

(20,599)

 

$

(8,149)

 

$

(71,862)

 

$

(24,457)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per common share

 

$

(0.32)

 

$

(0.25)

 

$

(1.19)

 

$

(0.75)

 

Diluted net loss per common share

 

$

(0.32)

 

$

(0.25)

 

$

(1.26)

 

$

(0.75)

 

Shares used in computing basic net loss per

 common share

 

 

65,229,055

 

 

32,732,686

 

 

60,598,676

 

 

32,476,358

 

Shares used in computing diluted net loss per 

 common share

 

 

65,229,055

 

 

32,732,686

 

 

60,676,332

 

 

32,476,358

 

 

The accompanying unaudited notes are an integral part of the condensed consolidated financial statements.

 

4


 

 

ARALEZ PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited; in thousands of U.S. dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

2016

    

2015

 

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(20,599)

 

$

(8,149)

 

$

(71,862)

 

$

(24,457)

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(2,062)

 

 

 —

 

 

8,085

 

 

 —

 

Other comprehensive (loss) income

 

 

(2,062)

 

 

 —

 

 

8,085

 

 

 —

 

Total comprehensive loss

 

$

(22,661)

 

$

(8,149)

 

$

(63,777)

 

$

(24,457)

 

 

The accompanying unaudited notes are an integral part of the condensed consolidated financial statements.

 

 

 

 

5


 

ARALEZ PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in thousands of U.S. dollars)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2016

    

2015

 

Operating Activities

 

 

 

 

 

 

 

Net loss

 

$

(71,862)

 

$

(24,457)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,019

 

 

13

 

Amortization of debt issuance costs

 

 

59

 

 

 —

 

Loss on investments in warrants

 

 

 —

 

 

200

 

Unrealized foreign currency transaction gain

 

 

(43)

 

 

 —

 

Loss of sale of property and equipment

 

 

200

 

 

 —

 

Change in fair value of warrants liability

 

 

(4,722)

 

 

 —

 

Share-based compensation expense

 

 

9,202

 

 

5,673

 

Benefit from deferred income taxes

 

 

(1,261)

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

2,135

 

 

(191)

 

Inventory

 

 

(926)

 

 

 —

 

Prepaid expenses and other current assets

 

 

(563)

 

 

186

 

Accounts payable

 

 

(2,554)

 

 

521

 

Accrued expenses

 

 

(3,260)

 

 

10,903

 

Other liabilities

 

 

(1,088)

 

 

 —

 

Net cash used in operating activities

 

 

(68,664)

 

 

(7,152)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Acquisitions of businesses, net of cash acquired

 

 

(42,887)

 

 

 —

 

Payments for intangible assets

 

 

(520)

 

 

 —

 

Purchases of property and equipment

 

 

(2,014)

 

 

(7)

 

Change in restricted cash balance

 

 

(281)

 

 

 —

 

Proceeds from sale of warrants

 

 

 —

 

 

2,479

 

Net cash (used in) provided by investing activities

 

 

(45,702)

 

 

2,472

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Proceeds from issuance of convertible debt

 

 

75,000

 

 

 —

 

Proceeds from issuance of common stock

 

 

75,000

 

 

1,684

 

Payment of debt and equity issuance costs

 

 

(673)

 

 

 —

 

Repayment of convertible note

 

 

(3,922)

 

 

 —

 

Proceeds (payments) related to net settlement of stock awards

 

 

338

 

 

(595)

 

Net cash provided by financing activities

 

 

145,743

 

 

1,089

 

Net increase (decrease) in cash and cash equivalents

 

 

31,377

 

 

(3,591)

 

Effect of change in foreign exchange rates on cash and cash equivalents

 

 

340

 

 

 —

 

Cash and cash equivalents at beginning of period

 

 

24,816

 

 

40,582

 

Cash and cash equivalents at end of period

 

$

56,533

 

$

36,991

 

 

 

 

 

 

 

 

 

Supplemental non-cash investing activities:

 

 

 

 

 

 

 

Fair value of assets acquired and liabilities assumed through acquisition of business
 (See Note 2)

 

$

115,136

 

$

 —

 

Fair value of contingent consideration payable in connection with acquisition of
 business (See Note 2)

 

$

19,500

 

$

 —

 

Non-cash additions to intangible assets (See Note 6)

 

$

415

 

$

 —

 

Non-cash purchases of property and equipment

 

$

 —

 

$

 —

 

 

The accompanying unaudited notes are an integral part of the condensed consolidated financial statements.

6


 

ARALEZ PHARMACEUTICALS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

1.ORGANIZATION, BASIS OF PRESENTATION AND ACCOUNTING POLICIES

 

Organization

 

Aralez Pharmaceuticals Inc., together with its wholly-owned subsidiaries (“Aralez”, the “Company”, “we,” “us,” or similar pronouns), is a global specialty pharmaceutical company focused on delivering meaningful products to improve patients’ lives while creating shareholder value by acquiring, developing and commercializing products primarily in cardiovascular, pain and other specialty areas. Aralez’s global headquarters is located in Mississauga, Ontario, Canada, its U.S. headquarters will be located in Princeton, New Jersey, and its Irish headquarters is located in Dublin, Ireland. The Company’s common shares are listed on the NASDAQ Global Market under the trading symbol “ARLZ” and on the Toronto Stock Exchange under the trading symbol “ARZ.” Aralez was formed for the purpose of facilitating the business combination of POZEN Inc., a Delaware corporation (“Pozen”), and Tribute Pharmaceuticals Canada Inc., a corporation incorporated under the laws of the Province of Ontario, Canada (“Tribute”), which closed on February 5, 2016. 

 

On February 5, 2016, pursuant to an Agreement and Plan of Merger and Arrangement between Aralez Pharmaceuticals Inc., Pozen, Tribute and other related parties (as amended, the “Merger Agreement”), Aralez completed the acquisition of Tribute by way of a court approved plan of arrangement in a stock transaction with a purchase price of $137.6 million made up of (i) $115.1 million related to Tribute shares, equity awards and certain warrants outstanding and (ii) $22.5 million in repayments of Tribute indebtedness. In connection with this transaction, Pozen and Tribute were combined under and became wholly-owned subsidiaries of Aralez Pharmaceuticals Inc. (the “Merger”). Pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended, Aralez Pharmaceuticals Inc. is the successor issuer to Pozen. The Merger provides the combined company with increased financial strength and product portfolio diversity and is expected to meaningfully accelerate our operating strategies.

 

On September 6, 2016, Aralez Pharmaceuticals Trading DAC, a wholly-owned subsidiary of Aralez (“Aralez Ireland”), acquired the U.S. and Canadian rights to ZONTIVITY® (vorapaxar), pursuant to an asset purchase agreement (the “ZONTIVITY Asset Purchase Agreement”) with Schering-Plough (Ireland) Company, an Irish private unlimited company and an affiliate of Merck & Co., Inc. (“Merck”).

 

Basis of Presentation and Consolidation

 

For financial reporting and accounting purposes, Pozen was the acquirer of Tribute pursuant to the Merger in a business combination. The condensed consolidated financial statements for the three and nine months ended September 30, 2015 reflect the results of operations and financial position of Pozen, but do not include the results of operations of Tribute because the Merger was completed on February 5, 2016. Aralez’s results of operations for the three and nine months ended September 30, 2016 include the results of Tribute from the closing date of the Merger. Aralez’s results of operations for the three and nine months ended September 30, 2016 also include the results of ZONTIVITY from its acquisition date (See Note 2).

 

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Aralez in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and pursuant to, and in accordance with, the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated balance sheet at December 31, 2015 was derived from audited financial statements, but certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2015, which are contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) and with applicable Canadian securities regulators on SEDAR on March 15, 2016 (“2015 Form 10-K”).

7


 

The condensed consolidated financial statements, in the opinion of management, reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations. Certain reclassifications with respect to the presentation of accrued expenses were made to prior year figures to conform with current year presentation.

 

The accompanying condensed consolidated financial statements include the accounts of Aralez Pharmaceuticals Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires the extensive use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. The most significant assumptions are employed in estimates used in determining values of: inventories; long-lived assets, including goodwill, in-process research and development (“IPR&D”), and other intangible assets; accrued expenses; contingent consideration; income taxes; share-based compensation expense; as well as estimates used in accounting for contingencies and revenue recognition. Actual results could differ from these estimates.

 

Concentration of Risk

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, including money market funds. Our investment policy places restrictions on credit ratings, maturities, and concentration by type and issuer. We are exposed to credit risk in the event of a default by the financial institutions holding our cash and cash equivalents to the extent recorded on the balance sheet.

 

We are also subject to credit risk from our accounts receivable related to product sales. We monitor our exposure within accounts receivable and record a reserve against uncollectible accounts receivable as necessary. We extend credit to pharmaceutical wholesale distributors and specialty pharmaceutical distribution companies, primarily in Canada and the United States, and to other international distributors. Customer creditworthiness is monitored and collateral is not required.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consists of cash and short-term, interest-bearing instruments with original maturities of 90 days or less at the date of purchase.

 

Inventory

 

Inventories are stated at the lower of cost or net realizable value on a first-in, first-out basis. Cost is determined to be the purchase price for raw materials and the production cost, including materials, labor and indirect manufacturing costs, for work-in-process and finished goods. The Company analyzes its inventory levels quarterly and writes-down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, inventory in excess of expected sales requirements or inventory that fails to meet commercial sale specifications to cost of product revenues. Expired inventory is disposed of and the related costs are written off to cost of product revenues.

 

Intangible Assets

 

Goodwill

 

Goodwill relates to amounts that arose in connection with the acquisitions of Tribute and ZONTIVITY. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired when accounted for using the acquisition method of accounting for business combinations. Goodwill is not amortized but is evaluated for

8


 

impairment on an annual basis, in the fourth quarter, or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of the Company's reporting unit below its carrying amount.

 

IPR&D

 

IPR&D acquired in a business combination is capitalized as indefinite-lived assets on the Company's condensed consolidated balance sheets at its acquisition-date fair value. Until the underlying project is completed, these assets are accounted for as indefinite-lived intangible assets and are subject to impairment testing. Once the project is completed, the carrying value of the IPR&D is reclassified to other intangible assets, net and is amortized over the estimated useful life of the asset. Post-acquisition research and development expenses related to the IPR&D projects are expensed as incurred. We acquired approximately $3.2 million of IPR&D assets with the acquisition of Tribute, of which $2.8 million was subsequently reclassified to other intangible assets upon receipt of regulatory approval for the related project. The remaining carrying value of IPR&D is included within other long-term assets on our condensed consolidated balance sheets at September 30, 2016.

 

IPR&D is tested for impairment on an annual basis or more frequently if impairment indicators are present. If IPR&D becomes impaired, the carrying value of the IPR&D is written down to its revised fair value with the related impairment charge recognized in the period in which the impairment occurs.

 

Other Intangible Assets, net

 

Other intangible assets consist of acquired technology rights. The Company amortizes its intangible assets using the straight-line method over their estimated economic lives. Costs to obtain, maintain and defend the Company's patents are expensed as incurred. We will evaluate the potential impairment of other intangible assets if events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Events giving rise to impairment are an inherent risk in our industry and many factors cannot be predicted. Factors that we consider in deciding when to perform an impairment review include significant changes in our forecasted projections for the asset or asset group for reasons including, but not limited to, significant under-performance of a product in relation to expectations, significant changes or planned changes in our use of the assets, significant negative industry or economic trends, and new or competing products that enter the marketplace. The impairment test is based on a comparison of the undiscounted cash flows expected to be generated from the use of the asset group and its eventual disposition to the carrying value of the asset group. If impairment is indicated, the asset is written down by the amount by which the carrying value of the asset exceeds the related fair value of the asset with the related impairment charge recognized within the statements of operations. Such impairment charges may be material to our results.  

 

Contingent Consideration

 

Certain of the Company’s business acquisitions involve the potential for future payment of consideration that is contingent upon the achievement of operational and commercial milestones and royalty payments on future product sales. The fair value of contingent consideration liabilities is determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes recorded in our condensed consolidated statements of operations. Changes in any of the inputs may result in a significantly different fair value adjustment.

 

Revenue Recognition

 

Principal sources of revenue are (i) product sales from the product portfolio acquired with our acquisition of Tribute and (ii) royalty revenues from sales of VIMOVO® by our commercialization partners. In all instances, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, and collectibility of the resulting receivable is reasonably assured.

 

9


 

Product Revenues, net

 

Revenues from the sale of products are recorded net of discounts, wholesaler fees, chargebacks, rebates, returns and allowances, and are recognized when legal title to the goods and risk of ownership has been passed to the customer. A customer’s obligation to pay the Company for products is not contingent upon the resale of those products. We have a product returns policy on some of our products that allows the customer to return pharmaceutical products within a specified period of time both prior to and subsequent to the product’s expiration date. Our estimate of the provision for returns is analyzed quarterly and is based upon many factors, including historical experience of actual returns and analysis of the level of inventory in the distribution channel, if any. We believe that the reserves we have established are reasonable based upon current facts and circumstances. Applying different judgments to the same facts and circumstances could result in the estimated amount for reserves to vary. If actual results vary with respect to our reserves, we may need to adjust our estimates, which could have a material effect on our results of operations in the period of adjustment.

 

Other revenues

 

Other revenues include revenues from licensing arrangements with other biopharmaceutical companies, including milestones payments and royalties. Revenue from royalties is recognized when the Company has fulfilled the terms in accordance with contractual agreements and has no future obligation, and the amount of the royalty fee is determinable. Royalty revenue that is reasonably estimable and determinable is recognized based on estimates utilizing information reported to us by our commercialization partners. Other revenues also include revenues from sales of ZONTIVITY from its acquisition date, recognized net of related cost of product revenues and fees paid to Merck under a transition services agreement in effect for up to twelve months from the date of acquisition.

 

Income Taxes

 

We account for income taxes using the liability method in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), Topic 740, “Income Taxes” (“ASC 740”). Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax basis assets and liabilities and are measured by applying enacted rates and laws to taxable years in which differences are expected to be recovered or settled. Further, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the rate changes. A valuation allowance is required when it is “more-likely-than-not” that all or a portion of deferred tax assets will not be realized. Since our inception, we have incurred substantial cumulative losses and may incur substantial and recurring losses in future periods. The utilization of the loss carryforwards to reduce future income taxes will depend on our ability to generate sufficient taxable income prior to the expiration of the loss carryforwards. In addition, the maximum annual use of net operating loss and research credit carryforwards is limited in certain situations where changes occur in stock ownership.

 

Aralez files federal and state income tax returns, as applicable, with the tax authorities in various jurisdictions including Canada, Ireland and the United States. Pozen is no longer subject to U.S. federal or North Carolina state income tax examinations by tax authorities for years before 2012. Tribute is no longer subject to Canadian income tax examinations by tax authorities for years before 2011. However, the loss and credit carryforwards generated by Pozen and Tribute may still be subject to change to the extent these losses and credits are utilized in a year that is subject to examination by tax authorities.

 

ASC 740 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return, including a decision whether to file or not file a return in a particular jurisdiction. Our financial statements reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts. We recognize any interest and penalties accrued related to unrecognized tax benefits as income tax expense.

 

10


 

Share-Based Compensation

 

We expense the fair value of employee share-based compensation over the employees' service periods, which are generally the vesting period of the equity award. For awards with performance conditions granted, we recognize compensation cost over the expected period to achieve the performance conditions, provided achievement of the performance conditions are deemed probable. Awards with market-based conditions are expensed over the service period regardless of whether achievement of the market condition is deemed probable or is ultimately achieved. Compensation expense is measured using the fair value of the award at the grant date, adjusted for estimated forfeitures.

 

In order to determine the fair value of option awards on the grant date, we use the Black-Scholes option pricing model. Inherent in this model are assumptions related to expected share price volatility, estimated option life, risk-free interest rate and dividend yield. Our expected share price volatility assumption is based on the historical volatility of our stock, which is obtained from public data sources. The expected life represents the weighted average period of time that share-based awards are expected to be outstanding giving consideration to vesting schedules, historical exercise patterns and post-vesting cancellations for terminated employees that have been exhibited historically, adjusted for specific factors that may influence future exercise patterns. The risk-free interest rate is based on factual data derived from public sources. We use a dividend yield of zero as we have no intention to pay cash dividends in the foreseeable future. For performance-based awards with market conditions, the Company used a Monte Carlo simulation model to determine the fair value of awards as of the grant date.

 

We estimate forfeitures based on our historical experience of pre-vesting cancellations for terminated employees. An estimated forfeiture rate is applied to all equity awards, which includes option awards and restricted stock units, including performance share units. We believe that our estimates are based on outcomes that are reasonably likely to occur. To the extent actual forfeitures differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.

 

Determining the appropriate amount to expense for awards with performance conditions based on the achievement of stated goals requires judgment, including forecasting future performance results. The estimate of expense is revised periodically based on the probability of achieving the required performance targets and adjustments are made as appropriate. The cumulative impact of any revisions is reflected in the period of change. If any applicable financial performance goals are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed.

 

Fair Value Measurements

 

The accounting standard for fair value measurements defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and requires detailed disclosures about fair value measurements. Under this standard, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. This standard classifies these inputs into the following hierarchy:

 

·

Level 1 Inputs — Quoted prices for identical instruments in active markets.

·

Level 2 Inputs — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

·

Level 3 Inputs — Instruments with primarily unobservable value drivers.

 

The fair value hierarchy level is determined by asset class based on the lowest level of significant input. In periods of market inactivity, the observability of prices and inputs may be reduced for certain instruments. This condition could cause an instrument to be reclassified between levels.

 

The carrying amount of our cash and cash equivalents approximates its fair value due to the short-term nature of these amounts. The warrants liability is carried at fair value and is included within other current liabilities on our

11


 

condensed consolidated balance sheet at September 30, 2016. We utilized Level 3 inputs to estimate the fair value of the warrants liability. The contingent consideration liability is also carried at fair value, and is recorded as separate short and long-term balances on the condensed consolidated balance sheet at September 30, 2016. We utilized Level 3 inputs to estimate the fair value of the contingent consideration liability.

 

Foreign Currency

 

Our reporting currency is the U.S. dollar. The assets and liabilities of our subsidiaries that have a functional currency other than the U.S. dollar, primarily the Canadian dollar, are translated into U.S. dollars at the exchange rates in effect at the balance sheet date with the results of operations of subsidiaries translated at average exchange rates for the period. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive income within shareholders’ equity.

 

Transactions in foreign currencies are remeasured into the functional currency of the relevant subsidiary at the exchange rate in effect at the date of the transaction. Any monetary assets and liabilities arising from these transactions are translated into the functional currency at exchange rates in effect at the balance sheet date or on settlement. Resulting gains and losses are recorded in other income (expense), net within the condensed consolidated statements of operations.

 

Accumulated Other Comprehensive Income

 

A company is required to present, either on the face of the statement where net income is presented, in a separate statement of comprehensive income or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. There were no amounts reclassified out of accumulated other comprehensive income for the three and nine months ended September 30, 2016 and 2015. Other comprehensive income for the three and nine months ended September 30, 2016 related to foreign currency translation adjustments.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which requires revenue recognition based on the transfer of promised goods or services to customers in an amount that reflects consideration Aralez expects to be entitled to in exchange for goods or services. In August 2015, the FASB issued updated guidance deferring the effective date of the revenue recognition standard. The new rules supersede prior revenue recognition requirements and most industry-specific accounting guidance. In March, April and May 2016, the FASB issued additional updated guidance, which clarifies certain aspects of the ASU and the related implementation guidance issued by the FASB-IASB Joint Transition Resource Group for Revenue Recognition. The ASU will be effective for Aralez in the first quarter of 2018, with either full retrospective or modified retrospective application required. We have not yet selected a transition method and are evaluating the impact of the ASU on our financial statements.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10), which requires equity investments to be measured at fair value with changes in fair value recognized in net income. It allows an entity to choose to measure equity investments that do not have readily determinable fair values at cost minus impairment. It also simplifies the impairment assessment of equity investments without readily determinable fair values and eliminates the requirements to disclose the methods used to estimate fair value for instruments measured at amortized cost on the balance sheet. The amendments in the ASU are effective for Aralez in the first quarter of 2018. We do not expect the adoption to have a material impact to our financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes current lease accounting guidance. The primary difference between current GAAP and the new standard is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under current GAAP. The standard requires a modified retrospective approach upon adoption, with practical expedients that may be available to elect. The standard is effective for Aralez in the first quarter of 2019 and early adoption is permitted. We are evaluating the impact of the ASU on our financial statements.

12


 

 

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718), which simplifies several aspects of the accounting for share-based payment transactions, such as the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments include the requirement to recognize excess tax benefits and tax deficiencies as income tax expense or benefit, and to recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. It also allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The amendments in the ASU are effective for Aralez in the first quarter of 2017, and early adoption is permitted. We are evaluating the impact of the ASU on our financial statements.

 

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815), which clarifies the steps required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts. The ASU clarifies that when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) is related to interest rates or credit risks. The ASU is intended to eliminate diversity in practice in assessing embedded contingent call (put) options in debt instruments. The amendments in the ASU are effective for Aralez in the first quarter of 2017, and early adoption is permitted. We do not expect the adoption to have a material impact to our financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, providing additional guidance on eight specific cash flow classification issues. The goal of the ASU is to reduce diversity in practice of classifying certain items. The amendments in the ASU are effective for Aralez in the first quarter of 2018 using a retrospective transition method, and early adoption is permitted. We are evaluating the impact of the ASU on our financial statements.

 

2.BUSINESS COMBINATIONS AND ACQUISITIONS

 

Acquisition of Tribute

 

On February 5, 2016, Aralez completed its acquisition of Tribute. The transaction provided Aralez with increased financial strength and product portfolio diversity with several marketed products and product candidates acquired. Pursuant to the transaction, Tribute shareholders received 0.1455 common shares of Aralez, no par value per share (the “Aralez Shares”) in exchange for each common share of Tribute, no par value per share (the “Tribute Shares”) held by such shareholders. At the effective time of the Merger, each share of Pozen common stock, $0.001 par value per share, was cancelled and automatically converted into the right to receive one Aralez Share.

 

We valued the entire issued and to be issued share capital of Tribute at approximately $115.1 million based on Pozen’s closing share price of $5.94 on February 5, 2016 and an exchange ratio of 0.1455. Upon the close of the transaction, (a) each outstanding Tribute warrant entitled its respective holders the right to purchase 0.1455 fully-paid and non-assessable Aralez Shares for no additional consideration beyond that set out in the respective Tribute warrant; (b) each Tribute employee stock option entitled the respective holders of the option to either (i) exchange their Tribute option for a Tribute common share immediately prior to the Merger or (ii) convert into Aralez options entitling the holder to purchase that number of Aralez Shares equivalent to 0.1455 Aralez Shares for each Tribute Share originally issuable (with the exercise price of each Aralez option equal to the original exercise price adjusted for the 0.1455 conversion); and (c) each Tribute compensation option, previously granted to certain investors of Tribute in connection with private placement financings, entitled its respective holders the right to purchase 0.1455 fully-paid and non-assessable Aralez Shares, as well as 0.1455 one-half warrants for Aralez Shares, for no additional consideration beyond that set out in the respective compensation option certificate. As a result of the Merger, the warrants, employee stock options and compensation options are fully-vested and exercisable at any time prior to their respective expiration dates.

 

13


 

The acquisition-date fair value of the consideration transferred is as follows:

 

 

 

 

 

 

 

 

At

 

 

    

February 5, 2016

 

 

 

(in thousands)

 

Equity consideration

 

$

115,136

 

Repayment of Tribute indebtedness

 

 

22,488

 

Total consideration

 

$

137,624

 

 

The acquisition-date fair value of total consideration transferred above excludes approximately $0.5 million related to the accelerated vesting of certain equity awards of Tribute pursuant to the Merger Agreement, which was included in share-based compensation expense during the three months ended March 31, 2016.

 

The transaction was accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition, with the remaining purchase price recorded as goodwill. The goodwill recognized is attributable primarily to strategic opportunities related to leveraging Tribute’s existing infrastructure. Goodwill is not deductible for tax purposes.

 

The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

 

 

 

 

 

 

 

At

 

 

    

February 5, 2016

 

 

 

(as adjusted)

 

 

 

(in thousands)

 

Cash

 

$

4,601

 

Accounts receivable

 

 

3,790

 

Inventory

 

 

3,622

 

Prepaid expenses and other current assets

 

 

1,129

 

Property, plant and equipment

 

 

684

 

Intangible assets

 

 

84,034

 

In-process research and development

 

 

3,243

 

Accounts payable and accrued expenses

 

 

(10,295)

 

Note payable

 

 

(3,604)

 

Warrants liability

 

 

(4,618)

 

Other liabilities

 

 

(7,373)

 

Deferred tax liability

 

 

(6,913)

 

Total net assets acquired

 

$

68,300

 

Goodwill

 

 

69,324

 

Total consideration

 

$

137,624

 

 

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the February 5, 2016 acquisition date. During the nine months ended September 30, 2016, we recorded immaterial measurement period adjustments. 

 

14


 

The fair values of intangible assets and IPR&D were determined using an income approach, including a discount rate applied to the projected net cash flows. We believe the assumptions are representative of those a market participant would use in estimating fair value. The preliminary fair value of intangible assets included the following:

 

 

 

 

 

 

 

 

Preliminary Fair

 

 

    

Value

 

 

 

(as adjusted)

 

 

 

(in thousands)

 

Marketed products:

 

 

 

 

Fiorinal

 

$

26,954

 

Proferrin

 

 

9,513

 

Fibricor

 

 

10,018

 

Uracyst and Neovisc

 

 

9,874

 

Cambia

 

 

7,567

 

Other marketed products

 

 

20,108

 

Total acquired technology rights

 

$

84,034

 

 

The deferred tax liability of $6.9 million relates primarily to the temporary differences associated with the identifiable intangible assets, which are not deductible for tax purposes.

 

The operating results of Tribute for the period from February 5, 2016 to September 30, 2016, including revenues of $19.0 million, have been included in our condensed consolidated financial statements as of and for the period ended September 30, 2016. The net loss attributable solely to Tribute is not practicably determinable for the nine months ended September 30, 2016 given the integration of Tribute’s operations within the combined company. We incurred a total of $7.7 million in transaction costs in connection with the acquisition, which were included in selling, general and administrative expenses within our condensed consolidated statements of operations for the nine months ended September 30, 2016.

 

Acquisition of ZONTIVITY

 

On September 6, 2016, Aralez Ireland acquired the U.S. and Canadian rights to ZONTIVITY (vorapaxar), pursuant to the ZONTIVITY Asset Purchase Agreement with Merck. ZONTIVITY represents an addition to the Company’s product portfolio in cardiovascular disease and is the first and only approved therapy shown to inhibit the protease-activated receptor-1 (PAR-1), the primary receptor for thrombin, which is considered to be the most potent activator of platelets.

 

The purchase price for ZONTIVITY consists of (i) a payment of $25 million by Aralez Ireland to Merck, which was made on the closing date of the acquisition, (ii) certain milestone payments to be payable by Aralez Ireland subsequent to the closing of the acquisition upon the occurrence of certain milestone events based on the annual aggregate net sales of ZONTIVITY, any combination product containing vorapaxar sulphate and one or more other active pharmaceutical ingredients or any line extension thereof, which in no event will exceed $80 million in the aggregate, and (iii) certain royalty payments based on the annual aggregate net sales of ZONTIVITY, any combination product containing vorapaxar sulphate and one or more other active pharmaceutical ingredients or any line extension thereof.

 

In connection with the ZONTIVITY Asset Purchase Agreement, Aralez Pharmaceuticals Inc., Pozen, Tribute (collectively, the “Credit Parties”) and certain lenders party to the Second Amended and Restated Debt Facility Agreement (“Facility Agreement”) consented to Aralez Ireland entering into the ZONTIVITY Asset Purchase Agreement and consummation of the transactions contemplated thereby. Pursuant to the terms of such consent, until December 31, 2016, subject to the satisfaction of certain conditions set forth in the Facility Agreement, the Credit Parties were permitted to borrow under the credit facility to finance the $25 million payment previously made on the closing date of the ZONTIVITY acquisition. See Note 13, “Subsequent Events,” for additional information.

 

 

 

15


 

The acquisition-date fair value of the consideration transferred is as follows:

 

 

 

 

 

 

 

At

 

 

    

September 6, 2016

 

 

 

(in thousands)

 

Cash

 

$

25,000

 

Contingent consideration

 

 

19,500

 

Total consideration

 

$

44,500

 

 

As of September 30, 2016, the fair value of the short-term and long-term contingent consideration liability in the accompanying condensed consolidated balance sheets was $0.6 million and $18.9 million, respectively.

 

Pursuant to the terms of the ZONTIVITY Asset Purchase Agreement and certain ancillary agreements entered into in connection with the acquisition, Merck has agreed to supply ZONTIVITY to Aralez Ireland for a period of up to three years following the closing of the acquisition. Merck will also provide certain transition services to Aralez Ireland following the closing of the acquisition to facilitate the transition of the supply, sale and distribution of ZONTIVITY, including distributing ZONTIVITY on behalf of Aralez Ireland in exchange for compensation specified in the transition services agreement. While the transition services agreement is in effect, at the end of each quarter, Merck will remit a net margin amount to Aralez Ireland, which will include a fee for its services. This net amount is included in other revenues on our condensed consolidated statements of operations. In addition, in connection with the foregoing transactions, Merck granted Aralez Ireland, among other things, (i) an exclusive and royalty-free license to certain trademarks solely to exploit ZONTIVITY in the U.S. and Canada and their respective territories, and (ii) an exclusive and royalty-free license to certain know-how solely in connection with the manufacture of ZONTIVITY for exploitation in the U.S. and Canada and their respective territories.

 

The transaction was accounted for as a business combination under the acquisition method of accounting. Accordingly, the identifiable intangible asset acquired was recorded at fair value as of the date of acquisition, with the remaining purchase price recorded as goodwill. The goodwill recognized is attributable primarily to strategic and synergistic opportunities.

 

The following table summarizes the estimated preliminary fair value of the asset acquired at the date of acquisition:

 

 

 

 

 

 

 

 

At

 

 

    

September 6, 2016

 

 

 

(in thousands)

 

Intangible asset

 

$

40,800

 

Total net asset acquired

 

 

40,800

 

Goodwill

 

 

3,700

 

Total consideration

 

$

44,500

 

 

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and tax basis of the asset acquired. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the September 6, 2016 acquisition date.

 

The operating results of ZONTIVITY for the period from September 6, 2016 to September 30, 2016, including net revenues of $0.2 million, have been included in the condensed consolidated financial statements as of and for the three months ended September 30, 2016. The Company incurred a total of $0.4 million in product acquisition-related costs in connection with the acquisition, which were included in selling, general and administrative expenses within our condensed consolidated statements of operations for the three and nine months ended September 30, 2016.

 

 

 

 

 

16


 

Pro Forma Impact of Business Combinations

 

The following supplemental unaudited pro forma information presents Aralez’s financial results as if the acquisitions of Tribute and ZONTIVITY had occurred on January 1, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2016

    

2015

   

2016

    

2015

 

 

 

(in thousands, except per share data)

 

Total revenues, net

 

$

14,572

 

$

13,800

 

$

39,622

 

$

37,233

 

Net loss

 

$

(22,831)

 

$

(23,055)

 

$

(70,990)

 

$

(453,885)

 

Basic and diluted net loss per share

 

$

(0.35)

 

$

(0.35)

 

$

(1.17)

 

$

(7.49)

 

 

The above unaudited pro forma information was determined based on the historical GAAP results of Aralez, Tribute, and ZONTIVITY. The historical results of ZONTIVITY for the nine months ended September 30, 2015 include an intangible asset impairment charge of $289.7 million. The pro forma financial statements also include the financial results of Medical Futures Inc. (“MFI”), a company that Tribute acquired in June 2015, which included revenues of $3.8 million and net loss of $0.5 million, for the nine months ended September 30, 2015. The unaudited pro forma condensed consolidated results are provided for informational purposes only and are not necessarily indicative of what Aralez’s consolidated results of operations actually would have been if the acquisition was completed on January 1, 2015 or what the consolidated results of operations will be in the future. The pro forma condensed consolidated net loss includes pro forma adjustments relating to the following significant recurring and non-recurring items directly attributable to the business combination, net of the pro forma tax impact utilizing applicable statutory tax rates, which were eliminated from the three and nine months ended September 30, 2016, and included in the three and nine months ended September 30, 2015, respectively:

 

(i)

$0.4 million and $13.1 million of transaction costs incurred by the combined Company for the three and nine months ended September 30, 2016, respectively;

 

(ii)

$0.0 million and $12.0 million of expense for excise tax equalization payments for the three and nine months ended September 30, 2016, respectively;

 

(iii)

$0.0 million and $4.0 million of severance charges for the three and nine months ended September 30, 2016, respectively;

 

(iv)

$0.0 million and $1.5 million of the inventory fair value step-up for the three and nine months ended September 30, 2016, respectively;

 

(v)

elimination of $0.1 million and the addition of $0.9 million in costs associated with the ZONTIVITY transition services agreement for the three and nine months ended September 30, 2016, respectively, and the addition of $1.3 million and $2.0 million in costs associated with the ZONTIVITY transition services agreement for the three and nine months ended September 30, 2015, respectively; as well as

 

(vi)

elimination of $0.4 million and $1.8 million of amortization for the three months ended September 30, 2016 and 2015, respectively, and $3.1 million and $12.5 million for the nine months ended September 30, 2016 and 2015, respectively, and the addition of amortization of finite-lived intangible assets acquired of $0.3 million and $2.4 million for the three months ended September 30, 2016 and 2015, respectively, and $3.1 million and $7.3 million for the nine months ended September 30, 2016 and 2015, respectively.

 

 

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3.BUSINESS AGREEMENTS

 

Agreements with Merck for ZONTIVITY

 

On September 6, 2016, Aralez Ireland acquired the U.S. and Canadian rights to ZONTIVITY from Merck pursuant to the ZONTIVITY Asset Purchase Agreement. Pursuant to the ZONTIVITY Asset Purchase Agreement, the purchase price for ZONTIVITY consists of (i) a payment of $25 million by Aralez Ireland to Merck, which was made on the closing date of the acquisition, (ii) certain milestone payments payable by Aralez Ireland subsequent to the closing of the acquisition upon the occurrence of certain milestone events based on the annual aggregate net sales of ZONTIVITY, any combination product containing vorapaxar sulphate and one or more other active pharmaceutical ingredients or any line extension thereof, which in no event will exceed $80 million in the aggregate, and (iii) certain royalty payments based on the annual aggregate net sales of ZONTIVITY, any combination product containing vorapaxar sulphate and one or more other active pharmaceutical ingredients or any line extension thereof. 

 

Pursuant to the terms of the ZONTIVITY Asset Purchase Agreement and certain ancillary agreements entered into in connection with the acquisition, Merck has agreed to supply ZONTIVITY to Aralez Ireland for a period of up to three years following the closing of the acquisition. Merck will also provide certain transition services to Aralez Ireland following the closing of the acquisition to facilitate the transition of the supply, sale and distribution of ZONTIVITY, including distributing ZONTIVITY on behalf of Aralez Ireland in exchange for compensation specified in the transition services agreement. In addition, in connection with the foregoing transactions, Merck granted Aralez Ireland, among other things, (i) an exclusive and royalty-free license to certain trademarks solely to exploit ZONTIVITY in the U.S. and Canada and their respective territories, and (ii) an exclusive and royalty-free license to certain know-how solely in connection with the manufacture of ZONTIVITY for exploitation in the U.S. and Canada and their respective territories.

 

Agreements with Sun Pharma and Frontida for Fibricor®

 

In May 2015, Tribute Pharmaceuticals International Inc. (“TPII”), a Barbados corporation and a wholly-owned subsidiary of Tribute, acquired the U.S. rights to Fibricor and its related authorized generic (collectively, the “Fibricor Products”) from a wholly-owned step-down subsidiary of Sun Pharmaceutical Industries Ltd. (“Sun Pharma”). Financial terms include a total payment of $10.0 million of which approximately $3.0 million was included as a liability assumed in the Merger and subsequently paid in May 2016. In connection with its acquisition of Fibricor, TPII also entered into a supply agreement with Sun Pharma pursuant to which Sun Pharma agreed to manufacture and supply the Fibricor Products to TPII. On June 3, 2016, Sun Pharma assigned the supply agreement to Frontida BioPharm, Inc. On June 30, 2016, TPII assigned its interest in the Fibricor Products to Aralez Ireland.

 

Agreements with Novartis for Fiorinal®

 

In 2014, Tribute entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Novartis AG and Novartis Pharma AG (collectively, “Novartis”) pursuant to which Tribute acquired from Novartis the Canadian rights to manufacture, market, promote, distribute and sell Fiorinal, Fiorinal C, Visken® and Viskazide® for the relief of pain from headache and for the treatment of cardiovascular conditions (the “Novartis Products”), as well as certain other assets relating to the Novartis Products, including certain intellectual property, marketing authorizations and related data, medical, commercial and technical information, and the partial assignment of certain manufacturing and supply agreements and tenders with third parties (the “Acquired Assets”). Tribute also assumed certain liabilities arising out of the Acquired Assets and the Licensed Assets (as defined below) after the acquisition, including product liability claims or intellectual property infringement claims by third parties relating to the sale of the Novartis Products by Tribute in Canada. In connection with the acquisition of the Acquired Assets, and pursuant to the terms of the Asset Purchase Agreement, Tribute concurrently entered into a license agreement with Novartis AG, Novartis Pharma AG and Novartis Pharmaceuticals Canada Inc., under which the Novartis entities agreed to license to Tribute certain assets relating to the Novartis Products, including certain intellectual property, marketing authorizations and related data, and medical, commercial and technical information (the “Licensed Assets”).

 

18


 

Agreement with Faes for BLEXTENTM

 

In 2014, Tribute entered into an exclusive license and supply agreement with Faes Farma, S.A. (“Faes”), a Spanish pharmaceutical company, for the exclusive right to sell bilastine, a product for the treatment of allergic rhinitis and chronic idiopathic urticaria (hives) in Canada, which is now named BLEXTEN. The exclusive license is inclusive of prescription and non-prescription rights for BLEXTEN, as well as adult and pediatric presentations in Canada. On March 31, 2016, Tribute assigned its interest in BLEXTEN to Aralez Ireland. Regulatory approval to sell BLEXTEN in Canada was received from Health Canada in April 2016. We will owe sales-based milestone payments of $1.7 million to Faes if certain sales targets are met.

 

Agreement with Nautilus for Cambia®

 

In 2010, Tribute signed a license agreement with Nautilus Neurosciences, Inc. (“Nautilus”) for the exclusive rights to develop, register, promote, manufacture, use, market, distribute and sell Cambia in Canada. In 2011, Tribute and Nautilus executed the first amendment to the license agreement and in 2012 executed the second amendment to the license agreement. Up to $6.0 million in sales-based milestone payments may be payable over time. Royalty rates are tiered and payable at rates ranging from 22.5% to 25.0% of net sales.

 

Agreement with Actavis for Bezalip® SR and Soriatane®

 

In 2008, Tribute signed a Sales, Marketing and Distribution Agreement with Actavis Group PTC ehf (“Actavis”) to perform certain sales, marketing, distribution, finance and other general management services in Canada in connection with the importation, marketing, sales and distribution of Bezalip SR and Soriatane (the “Actavis Products”). In 2010, a first amendment was signed with Actavis to grant Tribute the right and obligation to more actively market and promote the Actavis Products in Canada. In 2011, a second amendment was signed with Actavis that extended the term of the agreement, modified certain of the other terms of the agreement and increased Tribute’s responsibilities to include the day-to-day management of regulatory affairs, pharmacovigilance and medical information relating to the Actavis Products. Tribute pays Actavis a sales and distribution fee based on a percentage of the aggregate net sales of the products. In 2011, Tribute signed a Product Development and Profit Share Agreement with Actavis to develop, obtain regulatory approval of and market Bezalip SR in the United States. Aralez may owe a milestone payment of $5.0 million to Actavis in the event that we pursue and obtain regulatory approval to market Bezalip SR in the U.S.

 

Agreement with AstraZeneca/Horizon regarding VIMOVO®

 

In August 2006, we entered into a collaboration and license agreement, effective September 7, 2006 (the “Original AZ Agreement”), with AstraZeneca AB (“AstraZeneca”) regarding the development and commercialization of proprietary fixed dose combinations of the proton pump inhibitor (“PPI”) esomeprazole magnesium with the non-steroidal anti-inflammatory drug (“NSAID”) naproxen in a single tablet for the management of pain and inflammation associated with conditions such as osteoarthritis and rheumatoid arthritis in patients who are at risk for developing NSAID-associated gastric ulcers. Under the terms of the Original AZ Agreement, we granted to AstraZeneca an exclusive, fee-bearing license, in all countries of the world except Japan, under our patents and know-how relating to combinations of gastroprotective agents and NSAIDs (other than aspirin and its derivatives). We retained responsibility for the development and filing of the New Drug Application (“NDA”) for the product in the United States, while AstraZeneca was responsible for all development activities outside the United States, as well as for all manufacturing, marketing, sales and distribution activities worldwide. We agreed to bear all expenses related to certain specified U.S. development activities. AstraZeneca agreed to pay all other development expenses, including all manufacturing-related expenses. The Original AZ Agreement established joint committees with representation of both AstraZeneca and us to manage the development and commercialization of the product. If consensus could not be reached between AstraZeneca and us, we generally would have the deciding vote with respect to development activities required for marketing approval of the product in the United States, and AstraZeneca generally would have the deciding vote with respect to any other matters. Pursuant to the terms of the Original AZ Agreement, we received an upfront license fee of $40.0 million from AstraZeneca.

 

19


 

The Company entered into an amendment to the Original AZ Agreement, effective as of September 6, 2007 (the “Amendment to the Original AZ Agreement”). Under the terms of the Amendment to the Original AZ Agreement, AstraZeneca agreed to pay us up to $345.0 million, in the aggregate, in milestone payments upon the achievement of certain development, regulatory and sales events. To date we have received an aggregate of $85.0 million in milestone payments including an upfront payment and payments for development and regulatory milestones. An additional $260.0 million is potentially payable to us as sales performance milestones if certain aggregate sales thresholds are achieved.

 

Pursuant to the Original AZ Agreement, as amended, we receive a flat, low double-digit royalty rate during the royalty term on annual net sales of products made by AstraZeneca, its affiliates and sublicensees in the United States and royalties ranging from the mid-single digits to the high-teens on annual net sales of products made by AstraZeneca, its affiliates and sublicensees outside of the United States. The royalty rate may be reduced due to the loss of market share as a result of generic competition inside and outside of the United States. Our right to receive royalties from AstraZeneca for the sale of such products expires on a country-by-country basis upon the later of (a) expiration of the last-to-expire of certain patent rights relating to such products in that country, and (b) ten years after the first commercial sale of such products in such country.

 

Unless earlier terminated in accordance with its terms, the Original AZ Agreement, as amended, will expire upon the payment of all applicable royalties for the products commercialized under the agreement. Either party has the right to terminate by notice in writing to the other party upon or after any material breach of the agreement by the other party, if the other party has not cured the breach within 90 days after written notice to cure has been given, with certain exceptions. The parties also can terminate for cause under certain defined conditions. In addition, AstraZeneca can terminate at any time, at will, for any reason or no reason, in its entirety or with respect to countries outside the United States, upon 90 days’ notice. If terminated at will, AstraZeneca will owe us a specified termination payment or, if termination occurs after the product is launched, AstraZeneca may, at its option, under and subject to the satisfaction of conditions specified in the Original AZ Agreement, elect to transfer the product and all rights to us.

 

During 2013, AstraZeneca decided to cease promotion and sampling of VIMOVO in certain countries, including the United States and all countries in Europe, other than Spain and Portugal, which have pre-existing contractual relationships with third parties. In September 2013, we and AstraZeneca entered into a third amendment to the Original AZ Agreement which made clarifications to certain intellectual property provisions of the Original AZ Agreement to clarify that AstraZeneca’s rights under those provisions do not extend to products which contain acetylsalicylic acid. In September 2013, we and AstraZeneca also executed a letter agreement whereby we agreed that in the event that AstraZeneca divested its rights and obligations to market VIMOVO in the United States to a third-party, AstraZeneca would be relieved of its obligations under the Original AZ Agreement, as amended, with respect to the United States as of the effective date of such divestiture, including its obligation under the Original AZ Agreement, as amended, to guarantee the performance of such assignee and/or sublicensee.

 

In November 2013, AstraZeneca divested of all of its rights, title and interest to develop, commercialize and sell VIMOVO in the United States to Horizon Pharma USA, Inc. (“Horizon”). In connection with this divestiture, in November 2013, we and AstraZeneca entered into an Amended and Restated Collaboration and License Agreement for the United States (the “U.S. Agreement”) and an Amended and Restated License and Collaboration Agreement for outside the United States (the “ROW Agreement”), which agreements collectively amended and restated the Original AZ Agreement. With our consent pursuant to a letter agreement among us, AstraZeneca and Horizon, AstraZeneca subsequently assigned the U.S. Agreement to Horizon in connection with the divestiture. Further, the letter agreement establishes a process for AstraZeneca and Horizon to determine if sales milestones set forth in the Original AZ Agreement are achieved on a global basis and provides other clarifications and modifications required as a result of incorporating the provisions of the Original AZ Agreement into the U.S. Agreement and the ROW Agreement or as otherwise agreed by the parties.

 

Pursuant to an amendment of the U.S. Agreement (the “Amendment to the U.S. Agreement”) between us and Horizon, we are guaranteed an annual minimum royalty amount of $7.5 million each calendar year, provided that the patents owned by us which cover VIMOVO are in effect and no generic forms of VIMOVO are in the marketplace. The Amendment to the U.S. Agreement also provides that Horizon has assumed AstraZeneca’s right to lead the on-going Paragraph IV litigation relating to VIMOVO currently pending in the United States District Court for the District of New

20


 

Jersey and will assume all patent-related defense costs relating to such litigation, including reimbursement up to specified amounts of the cost of any counsel retained by us, amends certain time periods for Horizon’s delivery of quarterly sales reports to us, and provides for quarterly update calls between the parties to discuss performance of VIMOVO and Horizon’s commercialization efforts.

 

Agreements with GSK, Pernix and CII regarding MT 400 (including Treximet®)

 

In June 2003, we entered into an agreement with Glaxo Group Limited, d/b/a GlaxoSmithKline (“GSK”) for the development and commercialization of proprietary combinations of a triptan (5-HT1B/1D agonist) and a long-acting NSAID (the “GSK Agreement”). The combinations covered by the GSK Agreement are among the combinations of MT 400 (including Treximet). Under the terms of the GSK Agreement, GSK had exclusive rights in the United States to commercialize all combinations which combine GSK’s triptans, including Imitrex® (sumatriptan succinate) or Amerge® (naratriptan hydrochloride), with a long-acting NSAID. We were responsible for development of the first combination product, while GSK provided formulation development and manufacturing.

 

Pursuant to the terms of the GSK Agreement, we received an initial $25.0 million payment from GSK and an aggregate of $55.0 million in milestone payments associated with the development and approval of Treximet. In addition, Pernix Therapeutics Holdings, Inc. (“Pernix”), as assignee of GSK, will pay two sales performance milestones totaling up to $80.0 million if certain sales thresholds are achieved. Pernix, as assignee of GSK, will pay royalties on all net sales of marketed products until at least the expiration of the last-to-expire issued applicable patent based upon the scheduled expiration of currently issued patents. Pernix may reduce, but not eliminate, the royalty payable to us if generic competitors attain a pre-determined share of the market for the combination product, or if Pernix owes a royalty to one or more third parties for rights it licenses from such third parties to commercialize the product.

 

In November 2011, we entered into a purchase agreement with CPPIB Credit Investments Inc. (“CII”), pursuant to which we sold, and CII purchased, our right to receive future royalty payments arising from U.S. sales of MT 400, including Treximet. By virtue of the agreement, we will receive a 20% interest in royalties, if any, paid on net sales of Treximet and such other products in the United States to CII relating to the period commencing in the second quarter of 2018.

 

In May 2014, we, GSK, CII and Pernix, entered into certain agreements in connection with GSK’s divestiture of all of its rights, title and interest to develop, commercialize and sell Treximet in the United States to Pernix. Upon the closing of the transaction in August 2014, with our consent, GSK assigned the GSK Agreement to Pernix. Immediately following the closing of the transaction, we entered into an amendment to the GSK Agreement with Pernix. This amendment, among other things, amends the royalty provisions to provide for a guaranteed quarterly minimum royalty of $4 million for the calendar quarters commencing in January 2015 and ending in March 2018 and requires that Pernix continue certain of GSK’s ongoing development activities and to undertake certain new activities, for which we will provide reasonable assistance. This amendment to the GSK Agreement also eliminates restrictions in the GSK Agreement on our right to develop and commercialize certain dosage forms of sumatriptan/naproxen combinations outside of the United States and permits us to seek approval for these combinations on the basis of the approved NDA for Treximet. Pernix also granted us a warrant to purchase 500,000 shares of Pernix common stock at an exercise price equal to $4.28 per share, which represented the closing price of Pernix common stock as reported on the NASDAQ Global Market on May 13, 2014. In the first quarter of 2015, the Company sold the warrant for $2.5 million. In July 2014, we and Pernix entered into a second amendment of the GSK Agreement, effective upon the closing of the transaction in August 2014, which permits Pernix’s Irish affiliate (to which Pernix assigned its rights) to further assign the GSK Agreement without our prior written consent as collateral security for the benefit of certain lenders.

 

 

21


 

4.FAIR VALUE

 

The following tables set forth the Company’s assets and liabilities that are measured at fair value on a recurring basis at:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

    

Financial Instruments Carried at Fair Value

 

 

    

 

    

Significant

    

 

    

 

 

 

 

Quoted prices in

 

other

 

Significant

 

 

 

 

 

active markets for

 

observable

 

unobservable 

 

 

 

 

    

identical items

    

inputs

    

inputs

    

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

56,533

 

$

 —

 

$

 —

 

$

56,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 —

 

$

 —

 

$

19,500

 

$

19,500

 

Warrants liability

 

 

 —

 

 

 —

 

 

47

 

 

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Financial Instruments Carried at Fair Value

 

 

    

 

    

Significant

    

 

    

 

 

 

    

Quoted prices in

    

other

    

Significant

    

 

 

 

 

active markets for

 

observable

 

unobservable 

 

 

 

 

 

identical items

 

inputs

 

inputs

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,816

 

$

 

$

 

$

24,816

 

 

Warrants Liability

 

In connection with the acquisition of Tribute, the Company assumed a liability for warrants that are treated as derivatives under accounting guidance for derivatives and hedging as they were issued with exercise prices denominated in a currency different than the Company’s reporting currency. Approximately 46,000 of the total 0.9 million common shares underlying the warrants outstanding as of September 30, 2016 are classified as liabilities. The warrants liability is valued using a Black-Scholes valuation model, which incorporates Level 3 assumptions including the volatility of the underlying share price and the expected term. The change in the fair value of the warrants liability of $4.7 million is included within other (expense) income, net in the condensed consolidated statements of operations for the nine months ended September 30, 2016. There was no change in the fair value of the warrants liability for the three months ended September 30, 2016. A majority of our liability-classified warrants expired in the third quarter of 2016. See Note 9, “Shareholders’ Equity and Earnings Per Share,” for additional information.

 

Contingent Consideration

 

In connection with the acquisition of ZONTIVITY, the Company recorded a short-term and long-term contingent consideration liability for future cash payments based on the occurrence of certain milestone events and royalty payments. The contingent consideration is based on the annual aggregate net sales of ZONTIVITY, any combination product containing vorapaxar sulphate and one or more other active pharmaceutical ingredients or any line extension thereof, not to exceed $80 million in the aggregate, and certain royalty payments based on the annual aggregate net sales of ZONTIVITY, any combination product containing vorapaxar sulphate and one or more other active pharmaceutical ingredients or any line extension thereof. The contingent consideration liability is valued using a model, which incorporates Level 3 assumptions, including the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. There was no change in the fair value of the contingent consideration liability between the ZONTIVITY acquisition date and September 30, 2016. See Note 2, “Business Combinations and Acquisitions,” for additional information.

22


 

 

Level 3 Disclosures

 

The following table provides quantitative information associated with the fair value measurement of the Company’s Level 3 inputs at September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

(in thousands)

    

Valuation technique

    

Unobservable Inputs

    

Inputs Utilized

 

Warrants liability

 

$

47

 

Black-Scholes

 

Volatility

 

65%

 

 

 

 

 

 

 

 

Expected term in years

 

0.6

 

Contingent consideration

 

 

19,500

 

Monte Carlo

 

Volatility

 

43%

 

 

 

 

 

 

 

 

Discount rate

 

13%

 

 

The significant unobservable inputs used in the fair value measurement of our warrants liability include the volatility of our share price and the expected term. Significant increases or decreases in the volatility and expected term utilized would result in a significantly higher or lower fair value measurement, respectively. The significant unobservable inputs used in the fair value measurement of our contingent consideration liability include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to calculate the present value of the probability-weighted cash flows.

 

The table below provides a roll-forward of the warrants liability fair value balances that used Level 3 inputs (in thousands):

 

 

 

 

 

 

Balance at December 31, 2015

 

$

 —

 

Warrants liability assumed in Merger

 

 

4,618

 

Change in fair value during the period

 

 

(4,721)

 

Impact of foreign exchange

 

 

150

 

Balance at September 30, 2016

 

$

47

 

 

The table below provides a roll-forward of the contingent consideration liability fair value balances that used Level 3 inputs (in thousands):

 

 

 

 

 

 

Balance at December 31, 2015

 

$

 —

 

Contingent consideration recorded in ZONTIVITY acquisition

 

 

19,500

 

Change in fair value during the period

 

 

 —

 

Balance at September 30, 2016

 

$

19,500

 

 

 

 

 

5.INVENTORY

 

Inventory consisted of the following at:

 

 

 

 

 

 

 

 

 

 

    

September 30, 2016

    

December 31, 2015

 

 

 

(in thousands)

 

Raw materials

 

$

847

 

$

 —

 

Work-in-process

 

 

345

 

 

 —

 

Finished goods

 

 

3,543

 

 

 —

 

Total Inventory

 

$

4,735

 

$

 —

 

 

 

 

 

23


 

6.GOODWILL AND OTHER INTANGIBLE ASSETS, NET

 

Goodwill

 

The table below provides a roll-forward of our goodwill balances (as adjusted, in thousands):

 

 

 

 

 

 

Goodwill balance at December 31, 2015

 

$

 —

 

Goodwill from acquisition of Tribute

 

 

69,324

 

Goodwill from acquisition of ZONTIVITY

 

 

3,700

 

Impact of foreign exchange

 

 

4,015

 

Goodwill balance at September 30, 2016

 

$

77,039

 

 

There were no accumulated impairment losses to goodwill at September 30, 2016.

 

Other Intangible Assets, Net

 

Other intangible assets, net consisted of the following at:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

Average

 

 

    

Amount

    

Amortization

    

Amount

    

Life

 

 

 

 

 

 

(in thousands)

 

 

 

 

(in years)

 

Acquired technology rights

 

$

133,548

 

$

(5,824)

 

$

127,724

 

11

 

 

The gross carrying amount of acquired technology rights from the Merger increased $8.8 million between the Merger closing date and September 30, 2016 due to (i) the addition of $2.8 million reclassified from acquired IPR&D for BLEXTEN, which was approved in April 2016, (ii) approximately $1.0 million in regulatory milestones due to Faes as a result of the approval of BLEXTEN, and (iii) $5.0 million from the impact of foreign currency translation adjustments between the Canadian and U.S. dollars. The gross carrying amount of acquired technology rights at September 30, 2016 also includes $40.8 million recorded in the ZONTIVITY acquisition.

 

Amortization expense was $2.4 million and $5.8 million for the three and nine months ended September 30, 2016, respectively. There was no amortization expense for the three and nine months ended September 30, 2015.

 

The estimated aggregate amortization of intangible assets as of September 30, 2016, for each of the five succeeding years and thereafter is as follows:

 

 

 

 

 

 

 

 

Estimated

 

 

 

Amortization

 

For the Years Ending December 31,

    

Expense

 

 

 

(in thousands)

 

Remainder of 2016

 

$

3,040

 

2017

 

 

12,190

 

2018

 

 

12,190

 

2019

 

 

12,190

 

2020

 

 

12,190

 

Thereafter

 

 

75,924

 

Total amortization expense

 

$

127,724

 

 

 

 

 

24


 

7.ACCRUED EXPENSES

 

Accrued expenses consisted of the following at:

 

 

 

 

 

 

 

 

 

 

    

September 30, 2016

    

December 31, 2015

 

 

 

(in thousands)

 

Accrued professional fees

 

$

5,427

 

$

3,012

 

Accrued marketing fees

 

 

1,747

 

 

 —

 

Accrued revenue reserves

 

 

1,404

 

 

 —

 

Accrued royalties

 

 

2,009

 

 

 —

 

Accrued pre-commercialization expense

 

 

1,505

 

 

 —

 

Accrued employee-related expenses

 

 

7,704

 

 

5,229

 

Other accrued liabilities

 

 

3,761

 

 

3,691

 

Total accrued expenses

 

$

23,557

 

$

11,932

 

 

Exit and Disposal Activities

In connection with the Merger, the Company incurred certain exit costs, primarily severance benefits to former Pozen and Tribute employees. The Company incurred severance expense of $0.6 million and $2.1 million during the three and nine months ended September 30, 2016, respectively, which is primarily included within selling, general and administrative expenses in the condensed consolidated statements of operations. 

 

The following table summarizes the exit activity within accrued expenses and other long-term liabilities in the condensed consolidated balance sheets (in thousands):

 

 

 

 

 

 

Accrued severance balance at December 31, 2015

 

$

3,986

 

Accrued severance liability assumed in the Merger

 

 

2,484

 

Severance expense

 

 

2,144

 

Cash payments

 

 

(5,194)

 

Impact of foreign exchange

 

 

54

 

Accrued severance balance at September 30, 2016

 

$

3,474

 

 

Of the accrued severance amounts, the Company expects to pay $2.6 million in 2016 and $0.9 million in 2017.

 

 

8.DEBT

 

Convertible Notes

 

On February 5, 2016, Aralez issued $75.0 million aggregate principal of 2.5% senior secured convertible notes due February 2022 (“2022 Notes”) resulting in net proceeds to Aralez, after debt issuance costs, of $74.5 million in connection with the Facility Agreement, which was executed in December 2015 among the Credit Parties and certain lenders. The 2022 Notes are convertible into common shares of Aralez at an initial conversion premium of 32.5%, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $8.28 per common share. Holders of the 2022 Notes may convert the 2022 Notes at any time and the 2022 Notes are not pre-payable by Aralez. Interest is payable to the note holders quarterly in arrears on the first business day of each January, April, July and October. Interest expense for the three and nine months ended September 30, 2016 was $0.5 million and $1.3 million, respectively, which includes the amortization of debt issuance costs. We estimated the fair value of the $75.0 million aggregate principal amount of the outstanding 2022 Notes to be approximately $64.9 million as of September 30, 2016, using a bond plus call option model that utilizes Level 3 fair value inputs. The carrying amount of the 2022 Notes was $74.5 million as of September 30, 2016, which is the principal amount outstanding, net of $0.5 million of unamortized debt issuance costs to be amortized over the remaining term of the 2022 Notes.

 

25


 

Credit Facility

 

Under the terms of the Facility Agreement, Aralez also had the ability to borrow from the lenders up to $200 million under a credit facility until April 30, 2017. The credit facility can be drawn upon for permitted acquisitions and is to be repaid on the sixth anniversary from each draw. Amounts drawn under the credit facility will bear an interest rate of 12.5% per annum and shall be prepayable in whole or in part at any time following the end of the sixth month after the funding date of each draw. The Facility Agreement contains various representations and warranties, and affirmative and negative covenants, customary for financings of this type, including, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens and dividends. There were no outstanding borrowings under the credit facility as of September 30, 2016.

 

On October 31, 2016, Aralez drew down $25 million under the credit facility to replenish the Company’s cash balance for the initial upfront payment of $25 million in cash previously paid at the closing of the ZONTIVITY acquisition in September 2016 and drew down an additional $175 million to finance the upfront cash payment for the acquisition of Toprol-XL. In addition, pursuant to a consent to the Facility Agreement entered into in connection with the acquisition of Toprol-XL, the lenders under the Facility Agreement agreed that they and/or affiliated funds will have available sufficient capital to make additional loans to Aralez in an aggregate amount of up to $250 million for the payment of the purchase price of any acquisitions permitted by the terms of the Facility Agreement (as modified by such consent) with respect to target businesses mutually approved by, and as otherwise mutually agreed upon, by Aralez and the lenders, subject to the satisfaction of certain conditions set forth in the Facility Agreement.

 

MFI Note

 

On June 16, 2015, Tribute acquired MFI. As part of the consideration paid, Tribute issued a one-year unsecured convertible promissory note in the aggregate amount of C$5.0 million ($3.9 million) to the prior owner of MFI (“MFI Note”). The MFI Note had an interest rate of 8% per annum and was convertible in whole or in part at the holder’s option during the term into Aralez common shares at a conversion rate of approximately C$12.21 per Aralez common share. The MFI Note was repaid in full along with accrued interest at its maturity date of June 16, 2016, for a total payment of approximately $4.2 million.

 

 

9. SHAREHOLDERS’ EQUITY AND EARNINGS PER SHARE

 

The following table presents a reconciliation of our beginning and ending balances in shareholders’ equity for the nine months ended September 30, 2016 (in thousands):

 

 

 

 

 

 

Shareholders' equity at January 1, 2016

 

$

14,783

 

Issuance of common shares in connection with Merger with Tribute

 

 

115,136

 

Issuance of common shares to investors, net of equity issue costs

 

 

74,866

 

Warrants exercised

 

 

636

 

Payments related to net settlement of share awards

 

 

(298)

 

Non-cash share-based compensation expense

 

 

9,202

 

Foreign currency translation adjustment

 

 

8,085

 

Net loss

 

 

(71,862)

 

Shareholders' equity at September 30, 2016

 

$

150,548

 

 

Shareholders’ equity at September 30, 2016 included (i) $115.1 million related to the issuance of 18.5 million shares as consideration for the acquisition of Tribute on February 5, 2016, and (ii) $74.9 million related to the issuance of 12.0 million shares immediately prior to the consummation of the acquisition to certain investors in connection with the Amended and Restated Subscription Agreement, net of equity issue costs. Refer to Note 1 to the Aralez financial statements included in our 2015 Form 10-K for additional information.

26


 

 

Basic and Diluted Net Loss Per Common Share

 

Basic net loss per common share has been computed by dividing net loss by the weighted average number of shares outstanding during the period. Except where the result would be antidilutive to income from continuing operations, diluted net loss per common share is computed assuming the conversion of convertible obligations and the elimination of the interest expense related to the 2022 Notes, the exercise of options to purchase common shares, the exercise of warrants, and the vesting of restricted stock units (“RSUs”), as well as their related income tax effects. Diluted net loss per common share differs from basic net loss per common share for the nine months ended September 30, 2016 given potential common shares underlying the warrants liability are dilutive when considering the unrealized gain recognized for the change in the fair value of the warrants during the period.