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EX-32.2 - EX-32.2 - Aralez Pharmaceuticals Inc.arlz-20170331ex3229abc6c.htm
EX-32.1 - EX-32.1 - Aralez Pharmaceuticals Inc.arlz-20170331ex32126e616.htm
EX-31.2 - EX-31.2 - Aralez Pharmaceuticals Inc.arlz-20170331ex312c3ac61.htm
EX-31.1 - EX-31.1 - Aralez Pharmaceuticals Inc.arlz-20170331ex31159fed7.htm
EX-10.1 - EX-10.1 - Aralez Pharmaceuticals Inc.arlz-20170331ex101c3bb2d.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 MARCH 31, 2017

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer                   Accelerated filer ☒ Non-accelerated filer   

Smaller reporting company  Emerging growth company

 

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

 

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

 

As of the close of business on May 4, 2017 65,845,754 common shares (no par value per share) of the registrant were issued and outstanding.

 

 


 

Aralez Pharmaceuticals Inc.

Form 10-Q

For the Quarter Ended March 31, 2017

 

Table of Contents

 

Item

    

Page

 

 

 

 

PART I. Financial information 

 

 

 

 

 

 

1. 

Condensed Consolidated Financial Statements (Unaudited)

 

3

 

Condensed Consolidated Balance Sheets at March 31, 2017 and December 31, 2016

 

3

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016

 

4

 

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2017 and 2016

 

5

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016

 

6

 

Notes to Condensed Consolidated Financial Statements

 

7

2. 

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

 

33

3. 

Quantitative and Qualitative Disclosures About Market Risk

 

49

4. 

Controls and Procedures

 

49

 

 

 

 

PART II. Other Information 

 

 

 

 

 

 

1. 

Legal Proceedings

 

50

1A. 

Risk Factors

 

50

2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

50

3. 

Defaults Upon Senior Securities

 

50

4. 

Mine Safety Disclosures

 

50

5. 

Other Information

 

50

6. 

Exhibits

 

51

 

Signatures

 

52

 

 

2


 

PART I. FINANCIAL INFORMATION

 

ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

ARALEZ PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

    

March 31, 2017

    

December 31, 2016

  

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

73,729

 

$

64,943

 

Accounts receivable, net

 

 

9,048

 

 

20,405

 

Inventory

 

 

4,132

 

 

4,548

 

Prepaid expenses and other current assets

 

 

4,774

 

 

2,435

 

Total current assets

 

 

91,683

 

 

92,331

 

Property and equipment, net

 

 

8,172

 

 

7,316

 

Goodwill

 

 

77,384

 

 

76,694

 

Other intangible assets, net

 

 

332,306

 

 

340,194

 

Other long-term assets

 

 

1,017

 

 

842

 

Total assets

 

$

510,562

 

$

517,377

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

25,942

 

$

8,833

 

Accrued expenses

 

 

26,275

 

 

32,141

 

Short-term contingent consideration

 

 

10,266

 

 

10,430

 

Other current liabilities

 

 

6,288

 

 

5,870

 

Total current liabilities

 

 

68,771

 

 

57,274

 

Long-term debt, net

 

 

274,467

 

 

274,441

 

Deferred tax liability

 

 

3,305

 

 

3,273

 

Long-term contingent consideration

 

 

65,167

 

 

60,685

 

Other long-term liabilities

 

 

2,630

 

 

2,218

 

Total liabilities

 

 

414,340

 

 

397,891

 

Commitments and Contingencies

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

Common shares, no par value, unlimited shares authorized, 65,845,754 and 65,640,607 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

355,268

 

 

352,336

 

Accumulated other comprehensive income

 

 

6,097

 

 

4,816

 

Accumulated deficit

 

 

(265,143)

 

 

(237,666)

 

Total shareholders’ equity

 

 

96,222

 

 

119,486

 

Total liabilities and shareholders’ equity

 

$

510,562

 

$

517,377

 

 

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, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

2016

    

Revenues:

 

 

 

 

 

 

 

Product revenues, net

 

$

6,686

 

$

3,565

 

Other revenues

 

 

19,283

 

 

4,492

 

Total revenues, net

 

 

25,969

 

 

8,057

 

Costs and expenses:

 

 

 

 

 

 

 

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

 

 

2,756

 

 

2,538

 

Selling, general and administrative

 

 

30,846

 

 

37,459

 

Research and development

 

 

94

 

 

4,412

 

Amortization of intangible assets

 

 

8,513

 

 

1,272

 

Change in fair value of contingent consideration

 

 

4,443

 

 

 —

 

Total costs and expenses

 

 

46,652

 

 

45,681

 

Loss from operations

 

 

(20,683)

 

 

(37,624)

 

Interest expense

 

 

(6,653)

 

 

(307)

 

Other  income, net

 

 

411

 

 

4,797

 

Loss before income taxes

 

 

(26,925)

 

 

(33,134)

 

Income tax expense

 

 

552

 

 

654

 

Net loss

 

$

(27,477)

 

$

(33,788)

 

 

 

 

 

 

 

 

 

Basic net loss per common share

 

$

(0.42)

 

$

(0.65)

 

Diluted net loss per common share

 

$

(0.42)

 

$

(0.73)

 

Shares used in computing basic net loss per common share

 

 

65,690

 

 

52,156

 

Shares used in computing diluted net loss per common share

 

 

65,690

 

 

52,491

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

2016

    

 

 

 

 

 

 

 

 

Net loss

 

$

(27,477)

 

$

(33,788)

 

Other comprehensive income:

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

1,281

 

 

9,700

 

Other comprehensive income

 

 

1,281

 

 

9,700

 

Total comprehensive loss

 

$

(26,196)

 

$

(24,088)

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

    

2017

    

2016

 

    

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(27,477)

 

$

(33,788)

 

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,875

 

 

1,311

 

 

Amortization of debt issuance costs

 

 

26

 

 

15

 

 

Change in fair value of contingent consideration

 

 

4,443

 

 

 —

 

 

Unrealized foreign currency transaction (gain) loss

 

 

 7

 

 

(154)

 

 

Gain of sale of property and equipment

 

 

(266)

 

 

 —

 

 

Change in fair value of warrants liability

 

 

(24)

 

 

(4,581)

 

 

Share-based compensation expense

 

 

2,824

 

 

3,910

 

 

Benefit from deferred income taxes

 

 

 —

 

 

(305)

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

11,421

 

 

(879)

 

 

Inventory

 

 

452

 

 

(533)

 

 

Prepaid expenses and other current assets

 

 

(1,302)

 

 

(1,424)

 

 

Accounts payable

 

 

17,109

 

 

460

 

 

Accrued expenses

 

 

(6,380)

 

 

(8,189)

 

 

Other liabilities

 

 

545

 

 

2,844

 

 

Other, net

 

 

235

 

 

 —

 

 

Net cash provided by (used in) operating activities

 

 

10,488

 

 

(41,313)

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Acquisitions of businesses, net of cash acquired

 

 

 —

 

 

(17,887)

 

 

Purchases of property and equipment

 

 

(1,461)

 

 

(399)

 

 

Other

 

 

(215)

 

 

 —

 

 

Net cash used in investing activities

 

 

(1,676)

 

 

(18,286)

 

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible debt

 

 

 —

 

 

75,000

 

 

Proceeds from issuance of common stock

 

 

 —

 

 

75,000

 

 

Payment of debt and equity issuance costs

 

 

 —

 

 

(673)

 

 

Payment of contingent consideration

 

 

(125)

 

 

 —

 

 

Proceeds (payments) related to settlement of stock awards

 

 

108

 

 

(700)

 

 

Net cash (used in) provided by financing activities

 

 

(17)

 

 

148,627

 

 

Net increase in cash and cash equivalents

 

 

8,795

 

 

89,028

 

 

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

 

 

(9)

 

 

182

 

 

Cash and cash equivalents at beginning of period

 

 

64,943

 

 

24,816

 

 

Cash and cash equivalents at end of period

 

$

73,729

 

$

114,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Taxes paid

 

$

 5

 

$

 —

 

 

Interest paid

 

$

4,719

 

$

 —

 

 

 

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)

(tabular dollars and shares in thousands, except per share data)

 

 

1.ORGANIZATION, BASIS OF PRESENTATION AND ACCOUNTING POLICIES

 

Organization

 

Aralez Pharmaceuticals Inc., together with its wholly-owned subsidiaries (“Aralez” or the “Company”), 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 is located in Princeton, New Jersey, United States, 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 (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.

 

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”).

 

On September 15, 2016, the Company announced that the U.S. Food and Drug Administration (“FDA”) approved Yosprala®  (aspirin and omeprazole) for the secondary prevention of cardiovascular and cerebrovascular events in patients at risk for aspirin-associated gastric ulcers. 

 

On October 31, 2016, Aralez Ireland acquired the U.S. rights to Toprol-XL® (metoprolol succinate) and its currently marketed authorized generic (the “AG”) pursuant to an asset purchase agreement (the “Toprol-XL Asset Purchase Agreement”) entered into between AstraZeneca AB (“AstraZeneca”), Aralez Ireland and Aralez Pharmaceuticals Inc.

 

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 that was completed on February 5, 2016. Aralez’s condensed consolidated financial statements for the three months ended March 31, 2016 include the results of Tribute only from the closing date of the Merger, but do not include the results of Zontivity or Toprol-XL and the AG as these acquisitions were completed on September 6, 2016 and October 31, 2016, respectively. Aralez’s results of operations for the three months ended March 31, 2017 include the results of Tribute, Zontivity and Toprol-XL and the AG (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, 2016 was derived from audited financial statements, but certain information

7


 

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 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 13, 2017 (the “2016 Form 10‑K”).

 

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. The Company’s investment policy places restrictions on credit ratings, maturities, and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash and cash equivalents to the extent recorded on the balance sheet.

 

The Company is also subject to credit risk from accounts receivable related to product sales and monitors its exposure within accounts receivable and records a reserve against uncollectible accounts receivable as necessary. The Company extends 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.

 

8


 

Intangible Assets

 

Goodwill

 

Goodwill relates to amounts that arose in connection with the acquisitions of Tribute, Zontivity and Toprol-XL and the AG. 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 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.

 

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. The Company 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 the pharmaceutical industry and many factors cannot be predicted. Factors that are considered in deciding when to perform an impairment review include significant changes in 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 the Company’s 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 the Company’s results. The valuation techniques utilized in performing the initial valuation of other intangible assets or subsequent quantitative impairment tests incorporate significant assumptions and judgments to estimate the fair value. The use of different valuation techniques or assumptions could result in significantly different fair value estimates.

 

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 the 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) net revenues from sales of Zontivity, Toprol-XL and the AG, and Yosprala (ii) product sales from the product portfolio acquired with the Company’s acquisition of Tribute, and (iii) royalty revenues from sales of VIMOVO by the Company’s 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.

 

Product Sales

 

Revenues from the sale of products acquired by the Company in the Tribute acquisition are distributed through Canadian wholesalers to Canadian retail pharmacies and 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

9


 

to the customer which in this case is the Canadian wholesaler. Discounts, wholesaler fees, chargebacks, rebates, returns and allowances are not significant for these product sales and are not expected to be significant in the future given the Canadian marketplace.

 

Revenues from the sale of Yosprala® in the United States are recorded on a sell through method since the Company does not have sufficient historical data to estimate returns. As such, the Company defers revenue and costs of inventory for all Yosprala products shipped to wholesalers in the United States until the product is sold through to the end customer. Revenue recorded from product sales of Yosprala in the United States was not significant during the first quarter of 2017. Product sales from Fibricor® are recorded on a sell in method and were not significant during the first quarter of 2017. 

 

All of the Company’s products have a returns policy 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. The Company’s estimate of the provision for returns for those products that use a sell in method is analyzed quarterly and is based upon many factors, including historical data of actual returns and analysis of the level of inventory in the distribution channel, if any. The Company believes that the reserves it has 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 the Company’s reserves, the Company may need to adjust its estimates, which could have a material effect on the Company’s results of operations in the period of adjustment. To date, such adjustments have not been material.

 

Other Revenues

 

Other revenues principally include revenues from licensing arrangements with other biopharmaceutical companies (principally royalty revenues from VIMOVO), 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 the Company by its commercialization partners.

 

Other revenues also include net 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 through March 31, 2017. Similarly, the Company also includes net revenues from sales of Toprol-XL and the AG from its acquisition date, recognized net of related cost of product revenues and fees paid to AstraZeneca under a transition services agreement in effect through December 31, 2017 (as extended from July 31, 2017 pursuant to an amendment to the transition services agreement). The Company records these revenues net of related cost since it is not the principal in the arrangements and expects to record this revenue similar to a royalty arrangement until the Company is deemed to be the principal in the sales and marketing of these products, at which point it will record net sales and costs of revenue separately. Effective March 31, 2017, the Company will record revenues of Zontivity on a sell in method, which will be classified as product sales.

 

Income Taxes

 

The Company accounts 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 the Company’s inception, substantial cumulative losses have been incurred and substantial and recurring losses may be incurred in future periods. The utilization of the loss carryforwards to reduce future income taxes will depend on the Company’s 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.

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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 2013. 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. The financial statements reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts. The Company recognizes any interest and penalties accrued related to unrecognized tax benefits as income tax expense.

 

Share-Based Compensation

 

The Company expenses 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, the Company recognizes 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, the Company uses 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. The expected share price volatility assumption is based on the historical volatility of the Company’s common shares, 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. The Company uses a dividend yield of zero as it has no intention to pay cash dividends in the foreseeable future. For performance-based awards with market conditions, the Company uses a Monte Carlo simulation model to determine the fair value of awards on the date of grant.

 

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.

 

In the first quarter of 2017, the Company adopted Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718), (“ASU 2016-09”). As a result of the adoption of ASU 2016-09, the Company recognizes, on a prospective basis, the impact of forfeitures when they occur, with no adjustment for estimated forfeitures, and recognizes excess tax benefits as a reduction of income tax expense regardless of whether the benefit reduces income taxes payable. Additionally, the Company now recognizes the cash flow impact of such excess tax benefits in operating activities in its condensed consolidated statements of cash flows. The classification of excess tax benefits on the statement of cash flows for the prior period have not been adjusted. There was no net impact on the Company’s opening accumulated deficit upon application of this guidance using the modified retrospective transition method as the total cumulative-effect adjustment for previously deferred excess  tax benefits was offset by a related change in the valuation allowance.

 

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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 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 the consolidated balance sheet at March 31, 2017. The significant unobservable inputs used in the fair value measurement of the Company’s warrants liability, which uses a Black-Scholes valuation model, include the volatility of the Company’s common shares and the expected term. The contingent consideration liability is also carried at fair value, and is recorded as separate short and long-term balances on the consolidated balance sheet at March 31, 2017. The significant unobservable inputs used in the fair value measurement of the Company’s 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 present value the probability-weighted cash flows. The use of different inputs in the valuation of either the warrants liability or the contingent consideration liability could result in materially different fair value estimates.

 

Foreign Currency

 

The Company’s reporting currency is the U.S. dollar. The assets and liabilities of the Company’s 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, 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 months ended March 31, 2017 and 2016. Other comprehensive income for the three months ended March 31, 2017 related to foreign currency translation adjustments.

 

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Recent Accounting Pronouncements

 

In May 2014, the FASB issued 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. Although the Company is still evaluating the full impact of this ASU, the Company expects to use a modified retrospective approach with the most significant impact of the new guidance relating to the recognition of variable consideration. The new guidance requires the Company to estimate variable consideration and include in revenue amounts for which is it probable that a significant revenue reversal will not occur. This may result in revenue being recognized earlier than under the current guidance, particularly for products where the Company uses the sell through revenue recognition model.

 

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15,   Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which defines management’s responsibility to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures if there is substantial doubt about its ability to continue as a going concern. The new standard is effective for the annual period ending after December 15, 2016, and for interim periods thereafter. The Company adopted ASU 2014-15 in the fourth quarter of 2016, which resulted in no change to the Company’s financial statements. Additionally, the Company is required to perform quarterly evaluations to identify current conditions which may raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.

 

As noted in its liquidity disclosure, the Company’s principal sources of liquidity are cash generated from the royalty payments received from its commercialization partners for net sales of VIMOVO; the operating income of Tribute; sales of Fibricor and its authorized generic, Yosprala, Zontivity, and Toprol-XL and the AG; and the financings completed on February 5, 2016 and October 31, 2016. The Company’s principal liquidity requirements are for working capital; operational expenses; commercialization activities for products, including Yosprala, Zontivity, Toprol-XL and the AG,  Fibricor and the Company’s Canadian product portfolio, and product candidates; contractual obligations, including any royalty and milestone payments that may become due; capital expenditures; and debt service payments. As of March 31, 2017, the Company had approximately $73.7 million of cash and cash equivalents which, together with cash expected to be generated from its business, it currently believes is sufficient to fund its operations for at least the next twelve months, including its principal liquidity requirements set forth above.

 

Since the merger with Tribute in February 2016, the Company has incurred significant net losses. The Company has incurred net losses of $27.5 million for the three months ended March 31, 2017, and $103.0 million for the year ended December 31, 2016. The Company’s ability to become profitable and/or to generate positive cash from operations depends upon, among other things, its ability to generate revenues from sales of its products and prudently manage its expenses. New sources of product revenue have only recently been approved, in the case of Yosprala in the United States and Blexten in Canada, or acquired by the Company, in the case of Zontivity in the United States and Canada and Toprol-XL and the AG in the United States. If the Company does not generate sufficient product revenues, or prudently manage its expenses, its business, financial condition, cash flows and results of operations could be materially and adversely affected.

 

The Company has begun implementing a program of cost savings initiatives, which include a 32% reduction in its U.S. sales force and realignment of certain financial resources to support the launch of Zontivity, together with a significant decrease in marketing spend on Yosprala  and other cost reductions across the business.  In addition, the Company is actively exploring other initiatives, such as business development opportunities and refinancing options, to improve its future liquidity. There can be no assurances that these other initatives will be available on reasonable terms, or at all. If the Company is not successful in any or all of in these initiatives, or if the Company’s future operations fail to

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meet its current expectations, the Company’s projected future liquidity may be limited, which may impact its assessment under this accounting standard in the future and could materially and adversely affect its business, financial condition, cash flows and results of operations.

 

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. The Company does not expect the adoption to have a material impact on the consolidated 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. The Company is evaluating the impact of the ASU on the consolidated 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. The Company is evaluating the impact of the ASU on the consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for Aralez in the first quarter of 2018 on a prospective basis and early adoption is permitted.

 

2.BUSINESS AGREEMENTS

 

Agreements with AstraZeneca for Toprol-XL

 

On October 31, 2016, Aralez Ireland acquired the U.S. rights to Toprol-XL (metoprolol succinate) and the AG pursuant to the Toprol-XL Asset Purchase Agreement entered into between AstraZeneca, Aralez Ireland and Aralez Pharmaceuticals Inc. Toprol-XL is a cardioselective beta-blocker indicated for the treatment of hypertension, alone or in combination with other antihypertensives, the long term treatment of angina pectoris and treatment of stable, symptomatic (NYHA class II or III) heart failure of specific origins. The purchase price consists of (i) a payment of $175 million by Aralez Ireland to AstraZeneca, 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 Toprol-XL and the AG and other contingent events, which in no event will exceed $48 million in the aggregate; (iii) royalty payments of (A) 15% of total quarterly net sales of Toprol-XL and any other authorized or owned generic version of Toprol-XL that is marketed, distributed or sold by or on behalf of, or under a license or sublicense from, Aralez (other than the AG), and (B) 15% of quarterly net sales of the AG, but for purposes of royalty payments and clause (B) only, net sales do not include the supply price paid for the AG by Aralez Ireland to AstraZeneca under the supply agreement entered into between Aralez Ireland and AstraZeneca in respect of the applicable period and (iv) a payment for the value of the finished inventory of Toprol-XL and the AG at closing of the transaction, not to exceed a cap specified in the Toprol-XL Asset Purchase Agreement.

 

On October 31, 2016, in connection with the Toprol-XL acquisition, Aralez Ireland entered into a Supply Agreement (the “Toprol-XL Supply Agreement”) with AstraZeneca. Pursuant to the terms of the Toprol-XL Supply Agreement and except as otherwise expressly set forth therein, AstraZeneca will be the exclusive manufacturer and

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supplier to Aralez Ireland of Toprol-XL and the AG, each in finished bottled form for exploitation and commercialization in the United States. The initial term of the Toprol-XL Supply Agreement is 10 years (the “Toprol-XL Supply Initial Term”). The Toprol-XL Supply Agreement will continue indefinitely following the expiration of the Toprol-XL Supply Initial Term unless terminated in accordance with its terms. Except in the case of certain uncured material breaches of the Toprol-XL Supply Agreement by Aralez Ireland or certain insolvency related events affecting Aralez Ireland, AstraZeneca may not terminate the Toprol-XL Supply Agreement unless it satisfies certain conditions related to, among other things, the transfer of technology. In addition to termination rights upon certain uncured material breaches of the Toprol-XL Supply Agreement by AstraZeneca or certain insolvency related events affecting AstraZeneca, Aralez Ireland may terminate the Toprol-XL Supply Agreement at any time following the Toprol-XL Supply Initial Term upon providing 12 months prior written notice to AstraZeneca. AstraZeneca also provides certain transition services to Aralez Ireland through December 31, 2017 (as extended from July 31, 2017) to facilitate the transition of the supply, sale and distribution of Topol-XL and the AG, in exchange for compensation specified in the transition services agreement.

 

Agreement with the United States Government Regarding Toprol-XL

 

On February 23, 2017, Aralez Pharmaceuticals US Inc. (“Aralez US”), a Delaware company and a wholly-owned, indirect subsidiary of Aralez Pharmaceuticals Inc., entered into a Novation Agreement (the “Novation Agreement”) with AstraZeneca Pharmaceuticals LP (“AstraZeneca LP”) and the United States of America (the “Government”) pursuant to which all of the rights and responsibilities of AstraZeneca LP under that certain VA National Contract signed February 11, 2016 and effective April 29, 2016 between AstraZeneca LP and the Government  were novated to Aralez US (as novated, the “VA Contract”). The Novation Agreement was entered into pursuant to the Toprol-XL Asset Purchase Agreement.

 

Under the VA Contract, Aralez US provides all requirements of certain pharmaceutical products containing metroprolol succinate as the active pharmaceutical ingredient at fixed prices for the U.S. Department of Veterans Affairs and certain other United States federal government agencies. The VA Contract has a one-year term expiring April 28, 2017, renewable at the option of the Government for four successive additional one year terms. The VA Contract is terminable at the convenience of the Government at any time.  On April 6, 2017, Aralez US and the Government entered into a Modification of Contract with respect to the VA Contract, pursuant to which the Government exercised its first renewal option under the VA Contract, extending the term of the VA Contract by one year to April 28, 2018 with reduced pricing for the duration thereof.  See Note 13 – Subsequent Events.

 

Agreements with Merck for 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 currently the 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 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) royalty payments in the low double digits 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 (although, the packaging component must be transferred within one year). Merck also provided certain transition services to Aralez Ireland following the closing of the acquisition through March 31, 2017 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

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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.

 

Agreement with AstraZeneca/Horizon regarding VIMOVO®

 

In August 2006, the Company entered into a collaboration and license agreement, effective September 7, 2006 (the “Original AZ Agreement”), with 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, the Company granted to AstraZeneca an exclusive, fee-bearing license, in all countries of the world except Japan, under the Company’s patents and know-how relating to combinations of gastroprotective agents and NSAIDs (other than aspirin and its derivatives). The Company developed VIMOVO with AstraZeneca pursuant to this collaboration arrangement, with AstraZeneca responsible for commercialization of VIMOVO.

 

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 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, the Company 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 and Japan (the “ROW Agreement”), which agreements collectively amended and restated the Original AZ Agreement (as amended prior to the date of the U.S. Agreement and ROW Agreement). With the Company’s consent pursuant to a letter agreement among the Company, 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 certain sales milestones are achieved on a global basis and provides other clarifications and modifications required as a result of the contractual framework implemented among, or as otherwise agreed by, the parties. An additional $260.0 million is potentially payable to the Company if such sales milestones are achieved.

 

Under the U.S. Agreement, Horizon is obligated to pay us a 10% royalty on net sales of VIMOVO and certain other products covered thereby in the United States.  Pursuant to an amendment of the U.S. Agreement (the “Amendment to the U.S. Agreement”) between the Company and Horizon, the Company is guaranteed an annual minimum royalty amount of $7.5 million each calendar year, provided that the patents owned by the Company which cover such products are in effect and certain types of competing products are not in the marketplace (including competing products entering pursuant to a license to enter the market prior to expiration of the applicable patents). 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 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 the Company, and provides for quarterly update calls between the parties to discuss performance of VIMOVO and Horizon’s commercialization efforts.

 

Pursuant to the ROW Agreement, AstraZeneca retained the rights to commercialize VIMOVO and certain other products covered thereby outside of the United States and Japan and paid us a royalty of 6% on net sales within the applicable territory through 2015 and started paying us a royalty of 10% of net sales commencing in the first quarter of 2016.

 

The royalty rates above may be reduced due to the loss of market share as a result of certain competition inside and outside of the United States, as applicable (including competing products entering pursuant to a license to enter the market prior to expiration of the applicable patents).  Furthermore, the Company’s right to receive royalties from AstraZeneca or Horizon, as applicable, expires on a country-by country basis upon the later of (a) expiration of the last-

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to expire of certain patent rights related to the applicable product(s) in that country, and (b) ten years after the first commercial sale of such product(s) in such country. As the result of an unfavorable outcome in certain patent litigation in Canada, Mylan’s generic naproxen/esomeprazole magnesium tablets recently became available in Canada.  See Note 11 – Commitments and Contingencies, for more information.

 

Agreements with Patheon regarding Yosprala

 

In December 2011, the Company entered into a Manufacturing Services Agreement with Patheon Pharmaceuticals, Inc. (“Patheon”), as amended in July 2013 (as amended, the “Supply Agreement”), pursuant to which Patheon has agreed to manufacture, and the Company has agreed to purchase, a specified percentage of the Company’s requirements of Yosprala 325/40 and Yosprala 81/40 for sale in the United States. The term of the Supply Agreement extends until December 31st of the fourth year after the date that is 60 days after the Company submits its first firm order to Patheon under the Supply Agreement (the “Initial Term”), and will automatically renew thereafter for periods of two years, unless terminated by either party upon 18 months’ written notice prior to the expiration of the Initial Term or 12 months’ written notice prior to the expiration of any renewal term. In addition to usual and customary termination rights which allow each party to terminate the Supply Agreement for material, uncured breaches by the other party, the Company can terminate the Supply Agreement upon 30 days’ prior written notice if a governmental or regulatory authority takes any action or raises any objection that prevents the Company from importing, exporting, purchasing or selling Yosprala or if it is determined that the formulation or sale of Yosprala infringes any patent rights or other intellectual property rights of a third-party. The Company can also terminate the Supply Agreement upon 24 months’ prior written notice if it licenses, sells, assigns or otherwise transfers any rights to commercialize Yosprala in the United States to a third-party. The Supply Agreement contains general and customary commercial supply terms and conditions, as well as establishes pricing, subject to annual adjustments, for bulk product and different configurations of packaged product.

 

Agreement to Acquire MFI

 

In June 2015, Tribute acquired Medical Futures Inc. (“MFI”) pursuant to a Share Purchase Agreement between Tribute and the former shareholders of MFI (“MFI Purchase Agreement”). The MFI acquisition diversified Tribute’s product portfolio with the addition of both marketed products, including Proferrin, and product candidates. The amounts payable pursuant to the MFI Purchase Agreement included (a) $8.5 million (CAD) in cash on closing (including a $0.2 million (CAD) deposit previously paid) to the former MFI shareholders, (b) $5.0 million (CAD) through the issuance of 3,723,008 Tribute Shares to the former MFI shareholders, (c) $5.0 million (CAD) in the form of a one-year unsecured convertible promissory note from Tribute to the former owner of MFI (the “MFI Note”), (d) retention payments of $0.5 million (CAD) to MFI employees, (e) consent payments of $3.35 million (CAD) and $2.35 million (CAD) to the former MFI shareholders payable on receipt of certain third party consents, and (f) two payments of $1.25 million (CAD) to the former MFI shareholders payable on regulatory approval of two product candidates, respectively, or change of control of Tribute. The MFI Note was repaid in June 2016. The $3.35 million (CAD) consent payment was made in 2015 and the $2.35 million (CAD) consent payment has not been made. The two $1.25 million (CAD) payments became payable upon the closing of the Merger. One such payment was made in full to the former shareholders of MFI and the second was paid in part with the remainder offset in settlement of certain indemnity claims by the Company against the former shareholders of MFI, in each case in 2016.

 

Certain Other Agreements

 

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.

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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”).

 

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 and the Company began commercializing Blexten in Canada in December 2016. The Company 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 the Company pursues and obtains regulatory approval to market Bezalip SR in the U.S.

 

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

 

In June 2003, the Company 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

18


 

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. The Company was responsible for development of the first combination product, while GSK provided formulation development and manufacturing.

 

In November 2011, the Company entered into a purchase agreement with CPPIB Credit Investments Inc. (“CII”), pursuant to which the Company sold, and CII purchased, the Company’s right to receive future royalty payments arising from U.S. sales of MT 400, including Treximet. By virtue of the agreement, the Company 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, the Company, GSK, CII and Pernix Therapeutics Holdings, Inc. (“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 the Company’s consent, GSK assigned the GSK Agreement to Pernix. Pernix assumed the obligation to pay two sales performance milestones totaling up to $80.0 million if certain sales thresholds are achieved as well as 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 the Company 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. Immediately following the closing of the transaction, the Company 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 the Company will provide reasonable assistance. This amendment to the GSK Agreement also eliminates restrictions in the GSK Agreement on the Company’s right to develop and commercialize certain dosage forms of sumatriptan/naproxen combinations outside of the United States and permits the Company to seek approval for these combinations on the basis of the approved NDA for Treximet.

 

Agreement with Endo Regarding Toprol-XL AG

 

The Company is party to a Distribution Agreement with Endo Ventures Limited (“Endo”) pursuant to which Endo distributes the Toprol-XL AG (the “Toprol-XL AG Agreement”).  The agreement was originally entered into by AstraZeneca with PAR Pharmaceutical, Inc. (“PAR”) in August 2006 and was assigned by PAR to Endo in February 2016 in connection with Endo International plc’s acquisition of PAR. AstraZeneca assigned such agreement to Aralez in connection with the Company’s acquisition of Toprol-XL and the AG in October 2016.  Pursuant to the Toprol-XL AG Agreement, Endo has the exclusive rights in the United States to promote the AG, while Aralez retains the right to promote the branded Toprol-XL and to promote the AG to certain mail service pharmacy providers.  Pursuant to the terms of the Toprol-XL AG Agreement, the Company supplies the AG product to Endo for a base purchase price, which ranges depending on dosage strength.  In addition to the base purchase price, Endo pays to the Company, on a monthly basis, a deferred purchase price equal to a certain percentage of the specified profit of this business for the applicable period. The agreement expires at the end of 2017 and may be terminated by either party under certain circumstances, including performance measures.

19


 

 

3.BUSINESS COMBINATIONS AND ACQUISITIONS

 

Pro Forma Impact of Business Combinations

 

The following supplemental unaudited pro forma information presents Aralez’s financial results as if the acquisitions of Tribute, which was completed on February 5, 2016, Zontivity, which was completed on September 6, 2016, and Toprol-XL and the AG, which was completed on October 31, 2016, had each occurred on January 1, 2016:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

   

2017

    

2016

    

 

 

 

Actual

 

 

Pro forma

 

 

 

 

 

 

 

 

 

Total revenues, net

 

$

25,969

 

$

32,843

 

Net loss

 

$

(27,477)

 

$

(16,584)

 

Diluted net loss per share

 

$

(0.42)

 

$

(0.32)

 

 

The above unaudited pro forma information was determined based on the historical GAAP results of Aralez, Tribute, Zontivity and Toprol-XL and the AG. The unaudited pro forma 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 had the acquisition been completed on the dates indicated or what the consolidated results of operations will be in the future. The pro forma consolidated net loss includes pro forma adjustments relating to the following significant recurring and non-recurring items directly attributable to the business combinations, net of the pro forma tax impact utilizing applicable statutory tax rates, as follows:

 

(i)

elimination of $12.0 million of expense for excise tax equalization payments for the three months ended March 31, 2016;

 

(ii)

elimination of $3.5 million of severance charges for the three months ended March 31, 2016;

 

(iii)

elimination of $0.7 million of the inventory fair value step-up for the three months ended March 31, 2016;  

 

(iv)

elimination of $0.5 million of stock based compensation expense for the three months ended March 31, 2016;

 

(v)

elimination of $12.4 million of transaction costs incurred by the combined Company for the three months ended March 31, 2016;

 

(vi)

elimination of $0.3 million for the three months ended March 31, 2016, and the addition of amortization of finite-lived intangible assets acquired of $7.3 million for the months ended March 31, 2016; and

 

(vii)

elimination of $0.3 million of interest expense related to the Tribute acquisition for the three months ended March 31, 2016, and the addition of $6.2 million in interest expense related to the financing of the Zontivity and Toprol-XL acquisitions for the three months ended March 31, 2016.

 

 

20


 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

    

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

 

$

73,729

 

$

 —

 

$

 —

 

$

73,729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 —

 

$

 —

 

$

75,433

 

$

75,433

 

Warrants liability

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 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

 

$

64,943

 

$

 —

 

$

 —

 

$

64,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 —

 

$

 —

 

$

71,115

 

$

71,115

 

Warrants liability

 

$

 —

 

$

 —

 

$

24

 

$

24

 

 

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 thousand of the total 0.9 million common shares underlying the warrants outstanding as of March 31, 2017 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. A decrease in the fair value of the warrants liability of $24 thousand and $4.6 million for the three months ended March 31, 2017 and 2016, respectively, is included within other income, net in the condensed consolidated statements of operations. See Note 9, “Earnings Per Share,” for additional information.

 

Contingent Consideration

 

In connection with the acquisitions of Zontivity and Toprol-XL and the AG, the Company recorded short-term and long-term contingent consideration liabilities for future cash payments based on the occurrence of certain milestone events and royalty payments. The contingent consideration liability for both Zontivity and Toprol-XL and the AG 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. During the three months ended March 31, 2017, the Zontivity contingent consideration liability increased by $0.6 million, while the fair value of the Toprol-XL contingent consideration liability increased by $3.7 million for the same period.  There was no corresponding contingent consideration liability recorded during the three months ended March 31, 2016.

 

21


 

Level 3 Disclosures

 

The following table provides quantitative information associated with the fair value measurement of the Company’s Level 3 inputs at March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Range of

 

 

    

 

    

Valuation technique

    

Unobservable Inputs

 

Inputs Utilized

 

Contingent consideration

 

$

75,433

 

Monte Carlo

 

Volatility

 

33% - 68%

 

 

 

 

 

 

 

 

Discount rate

 

13%

 

 

 

 

 

 

 

 

 

 

 

 

Warrants liability

 

$

 —

 

Black-Scholes

 

Volatility

 

120%

 

 

 

 

 

 

 

 

Expected term in years

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

The significant unobservable inputs used in the fair value measurement of the Company’s warrants liability include the volatility of the Company’s 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 the Company’s 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:

 

 

 

 

 

Balance at December 31, 2016

    

$

24

Change in fair value during the period

 

 

(24)

Impact of foreign exchange

 

 

 —

Balance at March 31, 2017

 

$

 —

 

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

 

 

 

 

 

 

Balance at December 31, 2016

    

$

71,115

 

Cash payments

 

 

(125)

 

Change in fair value during the period

 

 

4,443

 

Balance at March 31, 2017

 

$

75,433

 

 

 

5.INVENTORY

 

Inventory consisted of the following at:

 

 

 

 

 

 

 

 

 

 

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

Raw materials

 

$

1,110

 

$

1,129

 

Work-in-process

 

 

211

 

 

189

 

Finished goods

 

 

2,811

 

 

3,230

 

Total Inventory

 

$

4,132

 

$

4,548

 

 

Inventories are net of reserves for excess and obsolete inventory of approximately $0.6 million and $0.1 million as of March 31, 2017 and December 31, 2016, respectively.

 

 

22


 

6.GOODWILL AND OTHER INTANGIBLE ASSETS, NET

 

Goodwill

 

The table below provides a roll-forward of the Company’s goodwill balances:

 

 

 

 

 

 

Goodwill balance at December 31, 2016

    

$

76,694

 

Impact of foreign exchange

 

 

690

 

Goodwill balance at March 31, 2017

 

$

77,384

 

 

Other Intangible Assets, Net

 

Other intangible assets, net consisted of the following at:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

Average

 

 

    

Amount

    

Amortization

    

Amount

    

Life

 

 

 

 

 

(in years)

 

Toprol-XL

 

$

224,600

 

$

(9,358)

 

$

215,242

 

10

 

ZONTIVITY

 

 

40,800

 

 

(2,231)

 

 

38,569

 

11

 

Tribute Merger and other

 

 

87,961

 

 

(9,466)

 

 

78,495

 

11

 

Acquired technology rights

 

$

353,361

 

$

(21,055)

 

$

332,306

 

 

 

 

The gross carrying amount of acquired technology rights increased by $0.7 million due to the impact of foreign currency translation adjustments between the Canadian and U.S. dollars. Amortization expense was $8.5 million and $1.3 million for the three months ended March 31, 2017 and 2016, respectively.

 

The estimated aggregate amortization of intangible assets as of March 31, 2017, for each of the five succeeding years and thereafter is as follows:

 

 

 

 

 

 

 

 

Estimated

 

 

 

Amortization

 

For the Years Ending December 31,

    

Expense

 

 

 

 

 

Remainder of 2017

 

$

25,609

 

2018

 

 

34,145

 

2019

 

 

34,145

 

2020

 

 

34,145

 

2021

 

 

34,145

 

Thereafter

 

 

170,117

 

Total amortization expense

 

$

332,306

 

 

 

23


 

7.ACCRUED EXPENSES

 

Accrued expenses consisted of the following at:

 

 

 

 

 

 

 

 

 

 

    

March 31, 2017

    

December 31, 2016

 

 

 

 

 

Accrued professional fees

 

$

6,397

 

$

6,258

 

Accrued marketing fees

 

 

2,350

 

 

4,852

 

Accrued revenue reserves

 

 

3,393

 

 

3,783

 

Accrued royalties

 

 

4,339

 

 

2,996

 

Accrued employee-related expenses

 

 

2,471

 

 

9,153

 

Accrued interest

 

 

6,627

 

 

4,715

 

Other accrued liabilities

 

 

698

 

 

384

 

Total accrued expenses

 

$

26,275

 

$

32,141

 

 

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

 

 

 

 

 

Accrued severance balance at December 31, 2016

    

$

2,300

Cash payments

 

 

(1,246)

Impact of foreign exchange

 

 

 8

Accrued severance balance at March 31, 2017

 

$

1,062

 

The Company expects to pay the remaining accrued severance balance of $1.1 million during the remainder of 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 Second Amended and Restated Debt Facility Agreement (the “Facility Agreement”), dated December 7, 2015, among Aralez Pharmaceuticals Inc., Pozen, Tribute (“ the Credit Parties”) and certain lenders party thereto. 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 months ended March 31, 2017 and March 31, 2016 was $0.5 million and $0.3 million, respectively, which includes the amortization of debt issuance costs. The Company estimated the fair value of the $75.0 million aggregate principal amount of the outstanding 2022 Notes to be approximately $52.9 million as of March 31, 2017, using a bond plus call option model that utilizes Level 3 fair value inputs. The carrying amount of the 2022 Notes was $74.6 million as of March 31, 2017, which is the principal amount outstanding, net of $0.4 million of unamortized debt issuance costs to be amortized over the remaining term of the 2022 Notes.

 

Credit Facility

 

Under the terms of the Facility Agreement, Aralez also had the ability to borrow from the lenders up to $200.0 million under a credit facility until April 30, 2017. On October 31, 2016, Aralez drew down $25.0 million under the credit facility to replenish the Company’s cash balance for the initial upfront payment of the $25.0 million in cash

24


 

previously paid at the closing of the Zontivity acquisition in September 2016 and drew down an additional $175.0 million to finance the upfront cash payment for the acquisition of Toprol-XL and the AG.  Amounts drawn under the credit facility must be repaid on the sixth anniversary from each draw, bear an interest rate of 12.5% per annum and are 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.

 

Interest is payable to the noteholders under the credit facility quarterly in arrears on the first business day of each January, April, July and October. Interest expense for the three months ended March 31, 2017 was $6.2 million, which includes the amortization of debt issuance costs. The Company estimated the fair value of the $200.0 million aggregate principal amount of the outstanding borrowings under the credit facility under the Facility Agreement to be approximately $210.0 million as of March 31, 2017, using a bond model that utilizes Level 3 fair value inputs. The carrying amount of the borrowings under the credit facility was $199.9 million as of March 31, 2017, which is the principal amount outstanding, net of $0.1 million of unamortized debt issuance costs to be amortized over the remaining term of the credit facility.

 

In addition, pursuant to a consent to the Facility Agreement entered into in connection with the acquisition of Toprol-XL and the AG, 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 $250.0 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. At the time of such consent, the Facility Agreement was amended to include additional financial performance thresholds, including a minimum adjusted EBITDA threshold and a minimum specified revenue threshold relating to net sales of Toprol-XL and the AG received by the Company.

 

9. EARNINGS PER SHARE

 

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 three months ended March 31, 2017 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.

 

25


 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

    

2017

    

 

2016

    

 

 

 

 

 

 

 

 

 

 

Net loss, basic

 

$

(27,477)

 

$

(33,788)

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

Change in fair value of warrants liability

 

 

(24)

 

 

(4,581)

 

 

Net loss, diluted

 

$

(27,501)

 

$

(38,369)

 

 

 

 

 

 

 

 

 

 

 

Shares used in calculating basic net loss per common share

 

 

65,690

 

 

52,156

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

Effect of dilutive stock options, RSUs

 

 

 —

 

 

 —

 

 

Warrants to purchase common shares - liability-classified

 

 

 —

 

 

335

 

 

Shares used in calculating diluted net loss per common share

 

 

65,690

 

 

52,491

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share, basic

 

$

(0.42)

 

$

(0.65)

 

 

Net loss per common share, diluted

 

$

(0.42)

 

$

(0.73)

 

 

 

Potential common shares excluded from the calculation of diluted net loss per common share as their inclusion would have been antidilutive were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

2016

    

 

 

 

 

 

 

Options to purchase common shares, RSUs and PSUs

 

8,441

 

8,652

 

Warrants to purchase common shares - equity-classified

 

930

 

992

 

2022 Notes convertible into common shares

 

9,057

 

9,057

 

 

The Company assumed outstanding warrants in connection with the acquisition of Tribute. The warrants are classified either as a liability, if the exercise price is denominated in Canadian dollars, or as equity if the exercise price is denominated in U.S. dollars. The following is a summary of warrants outstanding and exercisable as of March 31, 2017, and grouped in accordance with their respective expiration dates, with Canadian dollar exercise prices translated to U.S. dollars at the foreign exchange rate in effect at March 31, 2017:

 

 

 

 

 

 

 

 

 

No. of Warrants

 

Weighted-Average

Quarterly period of expiration

    

Outstanding

    

Exercise Price

Q2 2017

 

46

 

$

4.74

Q1 2018

 

599

 

 

4.12

Q3 2018

 

16

 

 

3.78

Q4 2019

 

108

 

 

4.81

Q3 2020

 

110

 

 

4.09

Q1 2021

 

51

 

 

2.91

 

 

930

 

$

4.16

 

 

10.SHARE-BASED COMPENSATION

 

Summary of Share-Based Compensation Plans

 

In December 2015, the Company’s Board of Directors adopted the Aralez Pharmaceuticals 2016 Long-Term Incentive Plan (the “2016 Plan”), which became effective on February 5, 2016, upon consummation of the Merger. The 2016 Plan is the only existing plan in which the Company is authorized to grant equity-based awards. The 2016 Plan provides for grants of stock options, stock appreciation rights, stock awards, stock units, performance shares, performance units, and other stock-based awards to employees, directors, and consultants. Under the 2016 Plan, the Company initially reserved 2,300,000 common shares for grant plus (i) the number of shares available for issuance under both the Pozen Inc. 2010 Equity Compensation Plan and the Amended and Restated Option Plan of Tribute

26


 

Pharmaceuticals Canada Inc. that were not subject to outstanding awards upon the effective date and (ii) the number of shares required to cover each stock option granted in substitution of stock options held by employees of Tribute, as required to consummate the Merger. At March 31, 2017, there were approximately 1,000 common shares remaining available for grant under the 2016 Plan. On May 3, 2017, the Company’s shareholders approved the Amended and Restated 2016 Long-Term Incentive Plan (the “Plan”), which  increases the number of common shares covered by and reserved for issuance under this Plan by 4,300,000 common shares.

 

Summary of Share-Based Compensation Expense

 

Share-based compensation expense recorded in the condensed consolidated statements of operations for the three months ended March 31, 2017 and 2016, was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

    

2017

    

2016

 

    

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

$

2,820

 

$

3,583

 

 

Research and development

 

 

 4

 

 

327

 

 

Total non-cash share-based compensation expense

 

$

2,824

 

$

3,910

 

 

 

Included in the table above is approximately $0.5 million of share-based compensation expense related to the accelerated vesting of certain Tribute equity awards upon consummation of the Merger, which was recorded as selling, general and administrative expense for the three months ended March 31, 2016. There was no such charge for the three months ended March 31, 2017.

 

Options to Purchase Common Shares

 

A summary of option activity for the three months ended March 31, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

Weighted-

 

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

Underlying

 

Exercise

 

 

Remaining

 

Intrinsic

 

Stock Option Awards

    

Shares

    

Price

 

    

Contractual Term

    

Value

  

Outstanding at December 31, 2016