Osmotica Pharmaceuticals plc - FORM 10-Q

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EX-32.2 - EX-32.2 - Osmotica Pharmaceuticals plc	osmt-20210331ex3224414d9.htm
EX-32.1 - EX-32.1 - Osmotica Pharmaceuticals plc	osmt-20210331ex3216af9ae.htm
EX-31.2 - EX-31.2 - Osmotica Pharmaceuticals plc	osmt-20210331ex312fa7b81.htm
EX-31.1 - EX-31.1 - Osmotica Pharmaceuticals plc	osmt-20210331ex311c80e91.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2021

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

For the transition period from to

Commission file number 001-38709

Osmotica Pharmaceuticals plc

(Exact name of registrant as specified in its charter)


Ireland		Not Applicable
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

400 Crossing Boulevard

Bridgewater, NJ 08807

(Address of principal executive offices)

(Zip Code)

(908) 809-1300

(Registrant’s telephone number, including area code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Ordinary Shares	OSMT	Nasdaq Global Select Market

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

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

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


Large accelerated filer ☐		Accelerated filer ☐

Non-accelerated filer ☒		Smaller reporting company ☒
		Emerging growth company ☒

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

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

There were 62,719,131 ordinary shares ($0.01 nominal value per share) outstanding as of May 12, 2021.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans, including the impact of the COVID-19 pandemic on the sufficiency of our product supply, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "plan," "should," "estimate," "continue," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short- and long-term business operations and objectives and financial needs. Examples of forward-looking statements include, among others, statements we make regarding: our intentions, beliefs or current expectations concerning, among other things, future operations; future financial performance, trends and events, particularly relating to sales of current products and the development, approval and introduction of new products; U.S. Food and Drug Administration, or the FDA, and other regulatory applications, approvals and actions; the continuation of historical trends; our ability to manage costs and service our debt; and the sufficiency of our cash balances and cash generated from operating and financing activities for future liquidity and capital resource needs.

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

●

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

●

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

●

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

●

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

●

as of March 31, 2021, we had total outstanding debt of approximately $219.8 million (net of deferred financing costs), and we had unused commitments of $50.0 million under our senior secured credit facilities. Our substantial debt could adversely affect our liquidity and our ability to raise additional capital to fund operations and could limit our ability to pursue our growth strategy or react to changes in the economy or our industry;

●

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

●

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

●

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

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●

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

●

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

●

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

●

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

●

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

●

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

●

our business may be adversely affected by the continuing coronavirus pandemic; and

●

other factors that are described in the "Risk Factors" section of our Annual Report on Form 10-K that was filed on March 30, 2021.

The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. You should not rely upon forward-looking statements as predictions of future events. We cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.

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TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited).	5
Condensed Consolidated Balance Sheets – March 31, 2021 and December 31, 2020	5
Condensed Consolidated Statements of Operations and Comprehensive Loss – Three months ended March 31, 2021 and 2020	6
Condensed Consolidated Statement of Shareholders’ Equity – Three months ended March 31, 2021 and 2020	7
Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2021 and 2020	8
Notes to Condensed Consolidated Financial Statements	9
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	24
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.	41
ITEM 4. Controls and Procedures.	42
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.	42
ITEM 1A. Risk Factors.	43
ITEM 6. Exhibits.	44

SIGNATURES	44

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PART I – FINANCIAL INFORMATION

Item 1.Financial Statements.

OSMOTICA PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


	March 31, 2021		December 31, 2020
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	109,212	$	114,053
Trade accounts receivable, net		22,592		26,412
Inventories, net		16,950		17,934
Prepaid expenses and other current assets		12,600		14,755
Total current assets		161,354		173,154
Property, plant and equipment, net		27,123		28,054
Operating lease assets		2,386		2,755
Intangibles, net		63,124		65,758
Goodwill		100,855		100,855
Other non-current assets		326		373
Total assets	$	355,168	$	370,949
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable	$	4,522	$	6,768
Accrued liabilities		42,720		47,517
Current portion of obligation under finance leases		27		40
Current portion of lease liability		1,375		1,457
Income taxes payable - current portion		6		2
Total current liabilities		48,650		55,784
Long-term debt, net of non-current deferred financing costs		219,755		219,525
Long-term portion of obligation under finance leases		2		4
Long-term portion of lease liability		1,136		1,436
Income taxes payable - long term portion		1		—
Deferred taxes		427		344
Total liabilities		269,971		277,093
Commitments and contingencies (See Note 11)
Shareholders' equity:
Ordinary shares ($0.01 nominal value 400,000,000 shares authorized, 62,719,131 and 62,545,832 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively)		627		625
Preferred shares ($0.01 nominal value 40,000,000 shares authorized, no shares issued and outstanding)		—		—
Euro deferred shares (€1.00 nominal value 25,000 shares authorized, no shares issued and outstanding)		—		—
Additional paid in capital		549,021		548,070
Accumulated deficit		(462,222)		(452,610)
Accumulated other comprehensive loss		(2,229)		(2,229)
Total shareholders' equity		85,197		93,856
Total liabilities and shareholders' equity	$	355,168	$	370,949

See accompanying notes to unaudited condensed consolidated financial statements

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OSMOTICA PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)


	Three Months Ended March 31,
	2021		2020

Net product sales	$	22,529	$	47,308
Royalty revenue		1,123		869
Licensing and contract revenue		228		472
Total revenues		23,880		48,649
Cost of goods sold (inclusive of amortization of intangibles)		13,490		20,590
Gross profit		10,390		28,059
Selling, general and administrative expenses		18,922		21,176
Research and development expenses		3,310		5,688
Total operating expenses		22,232		26,864
Gain on sales of product rights, net		5,636		—
Operating (loss) income		(6,206)		1,195
Interest expense and amortization of debt discount		2,960		4,064
Other non-operating gain		(87)		(746)
Total other non-operating expense		2,873		3,318
Loss before income taxes		(9,079)		(2,123)
Income tax expense		533		960
Net and other comprehensive loss	$	(9,612)	$	(3,083)
Loss per share attributable to shareholders
Basic and Diluted	$	(0.15)	$	(0.05)
Weighted average shares basic and diluted
Basic and Diluted		62,678,130		58,257,191

See accompanying notes to unaudited condensed consolidated financial statements

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OSMOTICA PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND MARCH 31, 2020

(Unaudited)

(In thousands, except share data)



									Accumulated
									other
	Ordinary shares				Additional		Accumulated		comprehensive
	Shares		Amount		paid in capital		deficit		loss		Total
Balance at January 1, 2020		51,845,742		518	$	489,440	$	(373,021)	$	(2,229)	$	114,708
Net loss		—		—		—		(3,083)		—		(3,083)
Share compensation		181,966		2		1,107		—		—		1,109
Payments for taxes related to the net share settlement of equity awards		—		—		(616)		—		—		(616)
Proceeds from issuance of ordinary shares, net of offering costs		6,900,000		69		31,720		—		—		31,789
Repurchase of ordinary shares		(29,000)		—		(167)		—		—		(167)
Balance at March 31, 2020		58,898,708		589	$	521,484	$	(376,104)	$	(2,229)	$	143,740

Balance at January 1, 2021		62,545,832		625	$	548,070	$	(452,610)	$	(2,229)	$	93,856
Net loss		—		—		—		(9,612)		—		(9,612)
Share compensation		173,299		2		1,309		—		—		1,311
Payments for taxes related to the net share settlement of equity awards		—		—		(358)		—		—		(358)
Balance at March 31, 2021		62,719,131		627	$	549,021	$	(462,222)	$	(2,229)	$	85,197

See accompanying notes to unaudited condensed consolidated financial statements

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OSMOTICA PHARMACEUTICALS PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Three Months Ended March 31,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(9,612)	$	(3,083)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		3,986		5,562
Share compensation		1,177		1,107
Deferred income tax benefit		83		829
Gain on sale of product rights, net		(5,636)		—
Loss on sale of fixed and leased assets		(3)		(3)
Bad debt provision		5		29
Amortization of deferred financing and loan origination fees		277		333
Change in operating assets and liabilities:
Trade accounts receivable, net		3,817		11,242
Inventories, net		655		769
Prepaid expenses and other current assets		1,398		891
Other non-current assets		—		(18)
Trade accounts payable		(2,246)		289
Accrued and other current liabilities		(5,387)		(18,011)
Net cash used in operating activities		(11,486)		(64)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed and leased assets		3		4
Payments on disposal of leased assets		—		(1)
Proceeds from product rights disposal		7,300		—
Purchase of property, plant and equipment		(422)		(949)
Net cash provided by (used in) investing activities		6,881		(946)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on finance lease obligations		(16)		(33)
Proceeds from public offering, net of issuance costs		—		31,791
Proceeds from purchases of stock under ESPP		138		—
Repurchases of ordinary shares		—		(167)
Payments for taxes related to net share settlement of equity awards		(358)		(616)
Net cash provided by (used in) financing activities		(236)		30,975
Net change in cash and cash equivalents		(4,841)		29,965
Cash and cash equivalents, beginning of period		114,053		95,865
Cash and cash equivalents, end of period	$	109,212	$	125,830
Supplemental disclosure of cash and non-cash transactions:
Cash paid for interest	$	2,706	$	5,375
Cash paid for taxes	$	258	$	474

See accompanying notes to unaudited condensed consolidated financial statements

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OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Organization and Nature of Operations

Osmotica Pharmaceuticals plc, an Irish public limited company, together with its subsidiaries, is a fully integrated biopharmaceutical company focused on the development and commercialization of specialty products that target markets with underserved patient populations. The Company generates revenues across an existing portfolio of promoted specialty neurology and women’s health products, as well as non-promoted products, many of which are primarily complex formulations of generic drugs.

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

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

Until the Reorganization, Osmotica Pharmaceuticals plc did not conduct any operations (other than activities incidental to its formation, the Reorganization and the pursuit of an IPO). Upon the completion of the Reorganization, the historical consolidated financial statements of Osmotica Holdings S.C.Sp. became the historical financial statements of Osmotica Pharmaceuticals plc. Accordingly, the accompanying unaudited condensed consolidated financial information as of and for the three months ended March 31, 2021 included herein reflect the financial information of Osmotica Holdings S.C.Sp.

Osmotica Holdings S.C.Sp.is a Luxembourg special limited partnership, formed on December 3, 2015 in connection with a business combination (the “Merger”), effective February 3, 2016, pursuant to a definitive agreement among Osmotica Holdings S.C.Sp., Vertical/Trigen Holdings, LLC (“Vertical/Trigen”) and its members, and Osmotica Holdings Corp Limited and its shareholders, among others. Osmotica Holdings S.C.Sp. and several other holding companies and partnerships were formed as a result of the Merger. Pursuant to the Merger, Vertical/Trigen was deemed to be the accounting acquirer.

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OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

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

Going Concern Evaluation

The Company devotes significant financial resources to the manufacture, marketing and commercialization of its approved products, and support of its research and development efforts. The Company’s future operating performance depends on many assumptions, including assumptions with respect to product sales and expenses, commercialization costs, research and development expenses as well as other factors. These assumptions may prove to be wrong or other factors may adversely affect the Company’s operating results. As a result, the Company’s operating results may fluctuate significantly quarter to quarter or year to year. The Company expects its near term levels of profitability to be negatively affected by price competition on its generic products, and increased expenses associated with new product launches. As a result, it is possible the Company would not be able to comply with financial covenants in its credit agreement or generate sufficient cash to service its debt obligations.

The Company is currently undertaking a comprehensive review of strategic options to maximize shareholder value. The options under consideration include divestitures of non-strategic assets and refinancing. In the event the Company is unable to generate sufficient proceeds from these strategic options such that it can reduce, retire or refinance its existing debt, the Company believes it has sufficient plans to effectively manage its expenses and avail itself of cure provisions provided for in its credit agreement, in order to maintain compliance with its debt covenants therein. The use of the cure provisions would result in utilization cash to pay down the debt balance.

A significant portion of the Company’s expense base is discretionary and the Company has the ability to reduce or defer spending to reduce expenses and improve profitability and cash flow to maintain compliance with its debt covenants. This could include, among other things, significant reductions in its general and administrative expenses, research and development expenses, including deferral of clinical trial programs, and deferrals of certain promotional and capital spending programs which could negatively impact the Company’s revenue growth and plans. The Company has previously demonstrated an ability to implement various cost reduction initiatives. During the third quarter of 2019 and continuing into 2020, the Company reduced its field force by an aggregate of 90 positions, generating annualized savings of approximately $10 million, and took measures to realign its operating infrastructure to prepare for the launch of Upneeq and implemented other cost-savings measures to reduce its expenses.

Based on the current facts and circumstances, including the availability of the cure provisions provided for in the credit agreement, which would result in utilizing cash to prepay debt, and the Company’s ability to implement spending reductions and program deferrals, the Company believes it is probable that it can effectively manage its spending to improve profitability in order to maintain compliance with the debt covenants and other obligations in its credit agreement for at least the next 12 months, even if the strategic review does not generate sufficient proceeds to reduce, retire or refinance our existing debt. As a result, the Company has concluded that, after consideration of management’s plans it has sufficient liquidity to meet its obligations within one year after the issuance date of its Consolidated Financial Statements, and it does not have substantial doubt about its ability to continue as a going concern.

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OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements included herein have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and under the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim reporting. In management’s opinion, the interim financial data presented includes all adjustments (consisting solely of normal recurring items) necessary for fair presentation. All intercompany accounts and transactions have been eliminated. Certain information required by GAAP has been condensed or omitted in accordance with rules and regulations of the SEC. Operating results for the three months ended March 31, 2021, are not necessarily indicative of the results that may be expected for any future period or for the year ending December 31, 2021 or any period thereafter. The accompanying Condensed Consolidated Balance Sheet data as of December 31, 2020 was derived from the audited consolidated financial statements.

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2020.

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

The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as they would be anti-dilutive as of March 31, 2021 and 2020:


	Three Months Ended
	March 31,
	2021	2020
Performance and restricted stock units	2,545,483	1,165,364
Options to purchase ordinary shares	2,864,016	3,046,086
Shares to be purchased through employee stock purchase plan	28,227	—

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

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

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

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

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OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

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

Recently Adopted Accounting Standards

The Company has adopted Accounting Standards Update 2019-12, Income Taxes ( Topic 740), simplifying the Accounting for Income Taxes . The amendments are effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The amendments, among other things, simplified accounting for income taxes by requiring the Company to recognize franchise taxes that are partially based on income as an income tax. The amendments had an immaterial effect on the Company’s financial statements.

Note 3. Revenues

The Company’s performance obligations are to provide its pharmaceutical products based upon purchase orders from distributors. The performance obligation is satisfied at a point in time, typically upon delivery, when the customer obtains control of the pharmaceutical product. The Company invoices its customers after the products have been delivered and invoice payments are generally due within 30 to 60 days of invoice date.

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


	Three Months Ended March 31,
Pharmaceutical Product	2021		2020
Venlafaxine ER (VERT)	$	2,511	$	14,118
Methylphenidate ER		5,823		8,396
Divigel		6,505		7,581
Nitrofurantoin		1,300		4,608
Lorzone		45		2,428
OB Complete		840		1,877
Other		5,505		8,300
Net product sales		22,529		47,308
Royalty revenue		1,123		869
License and contract revenue		228		472
Total revenues	$	23,880	$	48,649

When the Company receives consideration from a customer, or such consideration is unconditionally due from a customer prior to the transfer of products to the customer under the terms of a contract, the Company records a contract liability. The Company classifies contract liabilities as deferred revenue. The Company had an immaterial amount of deferred revenue as of March 31, 2021. The Company has elected to apply the exemption under

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OSMOTICA PHAMACEUTICALS PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

Contract assets primarily relate to rights to consideration for goods or services transferred to the customer when the right is conditional on something other than the passage of time. Contract assets are transferred to accounts receivable when the rights become unconditional. The Company had no contract assets as of March 31, 2021. The Company has no costs to obtain or fulfill contracts meeting the capitalization criteria under ASC Topic 340, Other Assets and Deferred Costs.

Note 4. Accounts Receivable, Sales and Allowances

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

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

The Company is exposed to credit losses primarily through sales of its products. Accounts receivable are recorded at amortized cost less an allowance for expected credit losses that are not expected to be recovered. The Company’s expected loss methodology for accounts receivable is developed using historical collection experience, a review of the current status of customer’s trade receivables, and current and future market conditions. Due to the short-term nature of such receivables, the estimate of accounts receivable that may not be collected is based on the aging of accounts receivable balances and the financial condition of customers. The Company’s monitoring activities include timely account reconciliations, dispute resolution, payment confirmation, consideration of customers’ financial condition and macroeconomic conditions. Balances are written-off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding a novel strain of the coronavirus, referred to as 2019-ncov, COVID-19 coronavirus epidemic, or COVID-19, and determined that the estimate of credit losses was not significantly impacted.

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

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(UNAUDITED)

Trade accounts receivable, net consisted of the following (dollars in thousands):


	March 31,		December 31,
	2021		2020
Gross trade accounts receivable
Trade accounts receivable	$	26,898	$	38,546
Royalty accounts receivable		1,190		1,267
Other receivable		5,864		4,639
Less reserves for:
Chargebacks		(8,015)		(9,921)
Commercial rebates		(2,731)		(7,344)
Discounts and allowances		(609)		(775)
Allowance for credit losses		(5)		—
Total trade accounts receivable, net	$	22,592	$	26,412

The Company recorded the following adjustments to gross product sales (dollars in thousands):


	Three Months Ended March 31,
	2021		2020
Gross product sales	$	53,038	$	109,030
Less provisions for:
Chargebacks		(20,394)		(50,173)
Government and managed care rebates		(3,426)		(4,846)
Commercial rebates		(4,236)		(3,220)
Product returns		(923)		(309)
Discounts and allowances		(1,122)		(2,380)
Advertising and promotions		(408)		(794)
Net product sales	$	22,529	$	47,308

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


					Discounts
			Commercial		and		Credit
	Chargebacks		Rebates		Allowances		Losses		Total
Balance at January 1, 2020	$	14,624	$	13,579	$	1,591	$	138	$	29,932
Provision		122,592		22,488		7,003		6		152,089
Charges processed		(127,295)		(28,723)		(7,819)		(144)		(163,981)
Balance at December 31, 2020	$	9,921	$	7,344	$	775	$	—	$	18,040
Provision		20,394		4,236		1,122		5		25,757
Charges processed		(22,300)		(8,849)		(1,288)		—		(32,437)
Balance at March 31, 2021	$	8,015	$	2,731	$	609	$	5	$	11,360

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(UNAUDITED)

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


			Government and
	Product		Managed Care
	Returns		Rebates		Total
Balance at January 1, 2020	$	33,457	$	4,867	$	38,324
Provision		2,825		18,211		21,036
Charges processed		(14,256)		(19,633)		(33,889)
Balance at December 31, 2020	$	22,026	$	3,445	$	25,471
Provision		923		3,426		4,349
Charges processed		(3,246)		(3,802)		(7,048)
Balance at March 31, 2021	$	19,703	$	3,069	$	22,772

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

Note 5. Inventories

The components of inventories, net of allowances, were as follows (dollars in thousands):


	March 31,		December 31,
	2021		2020
Finished goods	$	12,787	$	13,352
Work in process		1,293		618
Raw materials and supplies		2,870		3,964
	$	16,950	$	17,934

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



		March 31,		December 31,
		2021		2020
Balance at beginning of period	$	926	$	1,069
Provision		1,298		1,001
Charges processed		(528)		(1,144)
Balance at end of period	$	1,696	$	926

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(UNAUDITED)

Note 6. Goodwill and Other Intangible Assets

The Company tests goodwill and indefinite-lived intangible assets for impairment annually as of October 1^st, or more frequently whenever events or changes in circumstances indicate that the asset might be impaired. Goodwill is net of accumulated impairment charges of $86.3 million at March 31, 2021 and December 31, 2020. There were no events or circumstances requiring the Company to test for impairment of goodwill during the quarter ended March 31, 2021. The following table sets forth the carrying value of goodwill as of March 31, 2021 and December 31, 2020.


	Goodwill
January 1, 2020	$	100,855
Impairments		—
December 31, 2020	$	100,855
Impairments		—
March 31, 2021	$	100,855

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


	March 31, 2021
									Weighted
									Average
									Remaining
	Gross						Net		Amortization
	Carrying		Accumulated				Carrying		Period
	Amount		Amortization		Impairment		Amount		(Years)
Distribution Rights	$	24,253	$	(24,041)	$	—	$	212	0.5
Product Rights		183,028		(166,553)		—		16,475	1.8
Tradenames		13,485		(3,918)		—		9,567	13.7
Developed Technology		38,193		(36,413)		—		1,780	8.3
IPR&D		35,090		—		—		35,090	Indefinite Lived
	$	294,049	$	(230,925)	$	—	$	63,124

The table above is inclusive of a gross carrying amount of $85.9 million and $62.1 million of accumulated amortization for assets that have been fully impaired as of March 31, 2021.


	December 31, 2020
									Weighted
									Average
	Gross						Net		Remaining
	Carrying		Accumulated				Carrying		Amortization
	Amount		Amortization		Impairment		Amount		Period (Years)
Distribution Rights	$	33,714	$	(23,893)	$	(9,461)	$	360	0.8
Product Rights		202,567		(164,336)		(19,539)		18,692	2.1
Tradenames		13,485		(3,741)		—		9,744	14.0
Developed Technology		52,466		(36,321)		(14,273)		1,872	8.6
IPR&D		64,000		—		(28,910)		35,090	Indefinite Lived
	$	366,232	$	(228,291)	$	(72,183)	$	65,758

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(UNAUDITED)

The table above is inclusive of a gross carrying amount of $85.9 million and $62.1 million of accumulated amortization for assets that have been fully impaired as of December 31, 2020.

Changes in the net carrying amount of intangible assets were as follows (dollars in thousands):


	Distribution		Product				Developed
	Rights		Rights		Tradenames		Technology		IPR&D		Total
January 1, 2020	$	11,423	$	50,219	$	10,450	$	17,894	$	64,000	$	153,986
Amortization		(1,602)		(11,988)		(706)		(1,749)		—		(16,045)
Impairments		(9,461)		(19,539)		—		(14,273)		(28,910)		(72,183)
December 31, 2020	$	360	$	18,692	$	9,744	$	1,872	$	35,090	$	65,758
Amortization		(148)		(2,217)		(177)		(92)		—		(2,634)
Impairments		—		—		—		—		—		—
March 31, 2021	$	212	$	16,475	$	9,567	$	1,780	$	35,090	$	63,124

Amortization expense of $2.6 million and $4.4 million for the three months ended March 31, 2021 and 2020, respectively, was recorded as cost of goods sold. The amortization expense of acquired intangible assets for each of the following periods are expected to be as follows (dollars in thousands):


	Amortization
Years ending December 31	Expense
Remainder of 2021	$	7,560
2022		5,625
2023		4,739
2024		2,790
2025		1,074
Thereafter		6,246
Total	$	28,034

Note 7. Accrued Liabilities

Accrued liabilities consist of the following (dollars in thousands):


	March 31,		December 31,
	2021		2020
Accrued product returns	$	19,703	$	22,026
Accrued royalties		2,276		2,246
Accrued compensation		5,032		8,022
Accrued government and managed care rebates		3,069		3,445
Accrued research and development		476		1,000
Accrued expenses and other liabilities		11,999		10,578
Customer coupons		165		200
Total	$	42,720	$	47,517

In the ordinary course of business, the Company enters into contractual agreements with wholesalers pursuant to which the wholesalers distribute sales of Company products to customers and provide sales data to the Company. In return the wholesalers charge the Company a fee for services and other customary rebates and chargebacks based on distribution sales of Company products through the wholesalers and downstream customers.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Note 8. Financing Arrangements

The composition of the Company’s debt and financing obligations is as follows (dollars in thousands):


	March 31,		December 31,
	2021		2020
CIT Bank, N.A. Term Loan due December 21, 2022, net of deferred financing costs of $1.6 million and $1.8 million as of March 31, 2021 and December 31, 2020, respectively	$	219,755	$	219,525
Total debt		219,755		219,525
Less: current portion		—		—
Long-term debt	$	219,755	$	219,525

Term Loan

As of March 31, 2021, the interest rate was 4.75% for the Company’s Term A Loan and 5.25% for the Term B Loan. As of December 31, 2020, the interest rate was 4.75% for the Term A Loan and 5.25% for the Term B Loan. The Company was in compliance with all covenants of the Term Loan Agreement as of March 31, 2021.

Revolving Facility

As of March 31, 2021 there were no amounts drawn under the $50 million Revolving Facility with CIT Bank, N.A.

Note 9. Concentrations and Credit Risk

In the three months ended March 31, 2021 and 2020, a significant portion of the Company’s gross product sales reported were through three customers, and a significant portion of the Company’s accounts receivable as of March 31, 2021 and December 31, 2020 were due from these customers as well. The following table sets forth the percentage of the Company’s gross sales and accounts receivable attributable to these customers for the periods indicated:


	Gross Product Sales
	Three Months Ended
	March 31,
	2021		2020
Amerisource Bergen	29	%	31	%
Cardinal Health	17	%	22	%
McKesson	47	%	43	%
Combined Total	93	%	96	%

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	Gross Account
	Receivables
	March 31,		December 31,
	2021		2020
Amerisource Bergen	25	%	21	%
Cardinal Health	20	%	20	%
McKesson	49	%	52	%
Combined Total	94	%	93	%

Purchasing

For the three months ended March 31, 2021 and 2020, one supplier accounted for approximately 86% and 65%, respectively, of the Company’s purchases of raw materials for products that are manufactured by the Company. Company for both periods.

The Company purchases various Active Pharmaceutical Ingredient, (“API”) of finished products at contractual minimum levels through agreements with third parties. Individually, none of these agreements are material to the Company, therefore, the Company does not believe that any of the purchase obligations represent levels above the normal course of business as of March 31, 2021.

Note 10. Incentive Plans

The Company recognized share-based compensation expense of $1.2 million and $1.0 million during the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, the total remaining unrecognized compensation cost related to non-vested share-based compensation awards, amounted to $11.1 million. During the three months ended on March 31, 2021 and 2020, There were 69,000 grants of restricted stock units, during the three months ended on March 31, 2021, and no such grants in the three months ended March 31, 2020. During the three months ended March 31, 2021 and 2020, shares vested were 214,231 and 237,163, respectively. As of March 31, 2021 there were 2,545,483 restricted units, including performance stock units outstanding and the weighted-average remaining requisite service period of the non-vested stock options was 1.08 years and for non-vested restricted stock units, including performance stock units, was 2.73 years.

Note 11. Commitments and Contingencies

Contingent Milestone Payments

The Company has entered into strategic business agreements for the development and marketing of finished dosage form pharmaceutical products with various pharmaceutical development companies. Each strategic business agreement includes a future payment schedule for contingent milestone payments and in certain strategic business agreements, minimum royalty payments. The Company will be responsible for contingent milestone payments and minimum royalty payments to these strategic business partners based upon the occurrence of future events. Each strategic business agreement defines the triggering event of its future payment schedule, such as meeting product development progress timelines, successful product testing and validation, successful clinical studies, various U.S. Food and Drug Administration and other regulatory approvals and the achievement of certain sales levels during a pre-defined period. The Company believes that aggregate amount of future milestone payments are currently immaterial to its financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Supply Agreement Obligations

The Company is engaged in various supply agreements with third parties which obligate the Company to purchase various API or finished products at contractual minimum levels. None of these agreements are individually or in the aggregate material to the Company. Further, the Company does not believe that any of the purchase obligations represent levels above that of normal business demands as of March 31, 2021.

Legal Proceedings

The Company is a party in legal proceedings and potential claims arising from time to time in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined. Despite the inherent uncertainties of litigation, management of the Company believes that the ultimate disposition of such proceedings and exposures will not have a material adverse impact on the financial condition, results of operations, or cash flows of the Company.

On February 16, 2018, the Company received FDA approval for its amantadine extended release tablets under the trade name Osmolex ER. On that same date the Company filed in the Federal District Court for the District of Delaware a Complaint for Declaratory Judgment of Noninfringement of certain patents owned by Adamas Pharmaceuticals, Inc. (Osmotica Pharmaceutical US LLC and Vertical Pharmaceuticals, LLC vs. Adamas Pharmaceuticals, Inc. and Adamas Pharma, LLC). Adamas was served with the Complaint on February 21, 2018. Adamas filed an answer on April 13, 2018 denying the allegations in the Complaint and reserving the ability to raise counterclaims as the litigation progresses. On September 20, 2018, Adamas filed an amended answer to the Company’s Complaint for Declaratory Judgment of Noninfringement, with counterclaims alleging infringement of certain patents included in the Company’s Complaint and requesting that the court grant Adamas damages, injunctive relief and attorneys’ fees. On December 2, 2020, we entered into an agreement to settle the litigation with Adamas. Under the terms of the agreement, both parties agreed to drop their respective claims relating to the patent litigation, and Adamas agreed to acquire the global rights to Osmolex ER from the Company for $7.5 million. The sale of the global rights to Osmolex ER closed in January 2021 at which time the related gain was recorded. The sale of the global rights to Osmolex ER closed in January 2021 and a gain of $5.6 million was recorded in the condensed consolidated statements of operations and comprehensive loss under gain on sale of product rights, net.

Additionally, in connection with the settlement and the sale of the global rights to Osmolex ER, the parties entered into a supply agreement pursuant to which the Company agreed to supply Adamas with amantadine extended release tablets for a six-year term, subject to possible two-year extensions and customary closing conditions at market rates.

On April 30, 2019, the Company was served with a complaint in an action entitled Leo Shumacher, et al., v. Osmotica Pharmaceuticals plc, et al., Superior Court of New Jersey, Somerset County No. SOM-L-000540-19. On May 10, 2019, a Complaint entitled Jeffrey Tello, et al., v. Osmotica Pharmaceuticals plc, et al., Superior Court of New Jersey, Somerset County No. SOM-L-000617-19 was filed in the same court as the Shumacher action. The complaints named the Company, certain of the Company’s directors and officers and the underwriters of the Company’s initial public offering as defendants in putative class actions alleging violations of Sections 11 and 15 of the Securities Act of 1933 related to the disclosures contained in the registration statement and prospectus used for the Company’s initial public offering of ordinary shares. On July 22, 2019, the plaintiffs filed an amended complaint consolidating the two actions, reiterating the previously pled allegations and adding an additional individual defendant. The parties participated in a mediation and reached an agreement in principle to settle the litigation on December 15, 2020. The agreement in principle calls for a payment by the Company of $5.25 million (a portion of which we expect would be covered by applicable insurance of approximately $2.6 million recorded in the condensed consolidated balance sheets under trade accounts receivable, net) and would fully resolve all claims asserted in the litigation against all defendants named in the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

litigation, including the Company. No party would admit any wrongdoing as part of the proposed settlement, which was reached to avoid the further cost and distraction of litigation. The agreement in principle contemplates the negotiation and execution of a final settlement agreement. The settlement is also subject to preliminary approval by the Superior Court of New Jersey, notice to the putative class, and subsequent final approval by the Superior Court of New Jersey.

Note 12. Income Taxes

During the three months ended March 31, 2021, the Company recognized an income tax expense of $0.5 million on $9.1 million of loss before income tax, compared to $1.0 million of income tax expense on $2.1 million of loss before income tax during the comparable 2020 period.

Income taxes for the interim periods have been based on an estimated annual worldwide effective tax rate. Income tax (expense) benefit differs from the statutory income tax rate primarily due to the occurrence of orphan drug and research development credits, movement in a valuation allowance and the addition of state and foreign taxes.

The Company provides reserves for potential payments of income tax to various tax authorities or does not recognize income tax benefits related to uncertain tax positions and other issues. Tax benefits for uncertain tax positions are based on a determination of whether a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized, assuming that the matter in question will be decided based on its technical merits. The Company’s policy is to record interest and penalties in the provision for income taxes.

Valuation Allowance

Net deferred tax assets arise due to the recognition of income and expense items for tax purposes, which differ from those used for financial statement purposes. ASC 740, Income Taxes, provides for the recognition of deferred tax assets if the realization of such assets is more likely than not. In assessing the need for a valuation allowance in the three months ended March 31, 2021, the Company considered all available objective and verifiable evidence both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, expectations and risks associated with estimates of future pre-tax income, and prudent and feasible tax planning strategies.

The Company assesses the realizability of the deferred tax assets at each balance sheet date based on actuals and forecasted operating results in order to determine the proper amount, if any, of a valuation allowance. As a result of this analysis, the Company determined that it is more likely than not that it will not realize the benefits of its net deferred tax assets and therefore has recorded a valuation allowance to reduce the carrying value of its net deferred tax assets. The Company continues to maintain valuation allowances on deferred tax assets applicable to entities in foreign jurisdictions for which separate income tax returns are filed, where realization of the related deferred tax assets from future profitable operations is not reasonably assured.

Note 13. Related Parties

On August 22, 2018, the Company entered into a Master Service Agreement with United Biosource, LLC or (“UBC”), an Avista Capital Partners portfolio company, for prescription processing and patient access services. In November 2018, the Company and UBC entered into a Statement of Work for services valued at approximately $2.4 million. During 2019, the Company amended the initial Statement of Work to add approximately $275,000 of additional services for 2019. On January 1, 2020, the Company entered into an additional Statement of Work for services during 2020

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

valued at approximately $1.7 million. The Company had no accrued liabilities related to this agreement as of March 31, 2021 and had recognized no related expense for the three months ended March 31, 2021.

Note 14. Shareholders’ Equity

Ordinary Share Repurchase Program

In September 2019, the Company’s Board of Directors authorized the repurchase of up to 5,251,892 ordinary shares pursuant to a share repurchase program. Purchases under the ordinary share repurchase program can be made on the open market or in privately negotiated transactions, with the size and timing of these purchases based on a number of factors, including the price and business and market conditions. The Company expects to retire ordinary shares acquired under the repurchase program. In the three months ended March 31, 2021, the Company did not repurchase ordinary shares.

2019 Employee Share Purchase Plan

In September 2019, the Company’s board of directors adopted and approved, the Employee Share Purchase Plan (the “ESPP”). The ESPP allows each eligible employee who is participating in the plan to purchase shares by authorizing payroll deductions of up to $2,000 per payroll period. Unless the participating employee has previously withdrawn from the offering, accumulated payroll deductions will be used to purchase shares on the last business day of the offering period at a price equal to 85 percent of the fair market value of the shares on the first business day or the last business day of the offering period, whichever is lower. Under applicable tax rules, an employee may purchase no more than $25,000 worth of ordinary shares, valued at the start of the purchase period, under the ESPP in any calendar year. There is no minimum holding period associated with shares purchased pursuant to this plan. An employee’s purchase rights terminate immediately upon termination of employment.

The Company accounts for employee stock purchases made under its ESPP using the estimate grant date fair value of accounting in accordance with ASC 718, Stock Compensation. The purchase price discount and the look-back feature cause the ESPP to be compensatory and the Company to recognize compensation expense. The compensation cost is recognized on a straight-line basis over the requisite service period. The Company recognized less than $0.1 million of compensation expense for the three months ended March 31, 2021. The Company values ESPP shares using the Black-Scholes model.

As of March 31, 2021, there was less than $0.1 million of unrecognized ordinary share compensation expense related to the ESPP, which is expected to be recognized over a weighted-average period of 0.50 years. On January 5, 2021, the Company issued 39,321 ordinary shares to the employees who participated in the ESPP during the offering period ended December 31, 2020.

2020 Equity Offering

On January 13, 2020 we completed an equity offering and allotted 6.9 million ordinary shares at a public offering price of $5.00 per share. The number of shares issued in this offering reflected the exercise in full of the underwriters option to purchase 900,000 ordinary shares. The aggregate proceeds from the follow-on offering were approximately $31.8 million after deducting underwriter discounts and commissions and offering expenses.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Note 15. Subsequent Events

On April 19, 2021, we were served with a complaint in an action entitled United States ex rel. Lupinetti, et al. v. Exeltis USA, Inc., et al., Northern District of Illinois, No. 1:19-cv-00825. The complaint named us and four other pharmaceutical manufacturers as defendants in a suit alleging violations of the federal False Claims Act and state corollary statutory schemes related to the labelling, marketing, and reimbursement of several prenatal vitamins. The United States government declined to intervene in the action and the plaintiff has chosen to proceed with the litigation as a qui tam relator on behalf of the federal government and 29 individual states seeking monetary damages, statutory civil penalties, and costs and fees. We are reviewing the allegations in the complaint and have retained outside counsel to defend us against the claims.

In July 2020, we announced that we entered into an exclusive license agreement with Santen Pharmaceutical Co., Ltd, or Santen, covering the development, registration, and commercialization rights in Japan, China, and other Asian countries as well as EMEA countries to RVL-1201, or Upneeq. Santen is responsible for further development of RVL-1201 as well as regulatory approvals and commercialization of RVL-1201 in the licensed territories. Under the terms of the license agreement with Santen, we are entitled to receive a $10 million milestone following the acceptance by the Japanese Pharmaceuticals and Medical Devices Agency, or PMDA, of Santen’s proposed development plan for RVL-1201 which was discussed with PMDA earlier this year. On May 11, 2021, we received confirmation from Santen that they had a successful meeting with the PMDA triggering the $10 million milestone which will be paid, per the terms of the license agreement, by June 9, 2021.

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

The statements in the discussion and analysis regarding industry outlook, our expectations regarding the performance of our business and the forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements. This discussion and analysis is based upon the historical financial statements of Osmotica Pharmaceuticals plc. All references to years, unless otherwise noted, refer to our fiscal years, which end on December 31.

Overview

We are a fully integrated biopharmaceutical company focused on the development and commercialization of specialty products that target markets with underserved patient populations. In the three months ended March 31, 2021, we generated total revenues across our existing portfolio of promoted specialty ophthalmology, neurology and women’s health products, and other non-promoted products, many of which are complex formulations of generic drugs. In 2018, we received regulatory approval from the FDA for Osmolex ER (amantadine extended-release tablets) for the treatment of Parkinson’s disease and drug-induced extrapyramidal reactions, which are involuntary muscle movements caused by certain medications, in adults. We completed the launch of Osmolex ER in January 2019, and in January 2021, we completed the sale of the product. In July 2020, we received regulatory approval from the FDA for RVL-1201, or Upneeq, (oxymetazoline hydrocholoride ophthalmic solution, 0.1%), for the treatment of acquired blepharoptosis, or droopy eyelid, in adults. We launched Upneeq in September 2020 to a limited number of eye care professionals.

We are focused on continuing the transition of our business to a specialty pharmaceutical company focused on proprietary products primarily in the eye care and neuroscience areas.

Our core competencies span drug development, manufacturing and commercialization. Our sales representatives are fully engaged in the launch and in-person promotion of Upneeq, while we continue to maintain non-personal promotional efforts for certain other products in our portfolio, including M-72 in specialty neurology, OB Complete, our family of prescription prenatal dietary supplements, and Divigel (estradiol gel, 0.1%) in women’s health. As of March 31, 2021, our commercial portfolio of promoted and non-promoted products consists of approximately 35 products. Certain of our key products, particularly those that incorporate our proprietary Osmodex drug delivery system, are or are expected to be manufactured in our Marietta, Georgia facility. Some of our products benefit from intellectual property protection, formulation and manufacturing complexities, data exclusivity, as well as U.S. Drug Enforcement Administration, or DEA, regulation and quotas for API.

Many of our generic products compete in markets where barriers to entry are lower than markets in which certain of our promoted products compete. Generic products generally contribute most significantly to revenues and gross margins at the time of launch or in periods where no other or a limited number of competing products have been approved and launched. In the U.S., the consolidation of buyers in recent years has increased competitive pressures on the industry as a whole. As such, the timing of new product launches can have a significant impact on a company’s financial results. The entrance into the market of additional competition can have a negative impact on the pricing and volume of the affected products which are outside of our control. In particular, methylphenidate ER tablets, venlafaxine ER tablets, or VERT, and Lorzone have experienced, and are expected to continue to experience, significant pricing and market erosion due to additional competition from other generic pharmaceutical companies. This generic pricing erosion has resulted in, and is expected to continue to result in, lower net sales, revenue and profitability from methylphenidate ER tablets, VERT and Lorzone for the remainder of 2021, and this erosion is expected to continue in subsequent years.

On July 8, 2020, the FDA approved our NDA for Upneeq for the treatment of acquired blepharoptosis in adults. Upneeq was approved based on three Phase III clinical studies that supported Upneeq's efficacy and safety. Results from Upneeq's first Phase III clinical trial showed that the formulation met its primary efficacy endpoint and was well-tolerated.

We believe Upneeq is the first non-surgical treatment option approved by the FDA for acquired blepharoptosis. We currently make Upneeq available exclusively through RVL Pharmacy, Inc. our wholly-owned pharmacy.

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In addition, we are developing our late-stage product candidate arbaclofen extended-release, or ER, tablets designed for the alleviation of signs and symptoms of spasticity resulting from multiple sclerosis, or MS, for which we have completed Phase III clinical trials. In June 2020, we resubmitted our NDA for arbaclofen ER tablets for the alleviation of spasticity in MS to the FDA. On July 17, 2020 we received notice from the FDA that it considered the resubmission a complete response to the July 9, 2016 action letter and set a goal date for a FDA decision on the NDA of December 29, 2020. On December 28, 2020 we received a complete response letter, or CRL indicating the FDA could not approve the NDA in its then current form. The CRL stated that we did not provide adequate justification (including in our most recent NDA amendment) for the statistical analysis of the change from baseline to Day 84 in TNmAS-MAL scores comparing arbaclofen 40 mg to placebo, one of the co-primary endpoints. On January 23, 2021, we submitted a Type A meeting request to the FDA to discuss the CRL’s recommendations and obtain advice on a path forward for the NDA. The meeting took place on March 4, 2021, during which we explored selective review of the currently available data and options for a path forward for FDA approval, including conducting another clinical study.

On November 10, 2020, we and our board of directors announced that we were undertaking a comprehensive review of strategic options to maximize shareholder value. The options currently under consideration include divestitures of non-strategic assets.

Business Update Regarding COVID-19

The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, patients, communities and business operations, as well as the U.S. economy and financial markets. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

To date, we have been able to continue to supply our products to our patients without significant disruptions. We do not currently anticipate significant interruptions in supply in the near term. However, we are continuing to monitor the potential impact of the COVID-19 pandemic on our business and operations, including our sales, expenses, manufacturing and clinical trials.

We and our third-party contract manufacturing partners have been able to operate our manufacturing facilities at or near normal levels. While we currently do not anticipate significant interruptions in our manufacturing supply chain, the COVID-19 pandemic and related mitigation efforts may have a negative impact in the future on our third party suppliers’ and contract manufacturing partners’ ability to manufacture our products or to have our products reach all markets.

We are monitoring the demand for our products, including the duration and degree to which we may see declines in customer orders or new prescriptions for our products, as health care providers are dedicating more resources for the treatment of COVID-19 patients. During the first quarter of 2020, we took action to reduce the size of our field sales force with the remaining sales personnel, in many cases, engaging with physicians remotely as we seek to continue to support healthcare professionals and patient care.

In the U.S. and in most other key markets, our office-based employees have been encouraged to work from home since mid-March 2020. During this time, we are ensuring essential staffing levels in our operations remain in place, including maintaining key personnel in our laboratories and manufacturing facilities.

For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A. Risk Factors included in our annual report on Form 10-K.

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Financial Operations Overview

Segment Information

We currently operate in one business segment focused on the development and commercialization of pharmaceutical products that target markets with underserved patient populations. We are not organized by market and are managed and operated as one business. We also do not operate any separate lines of business or separate business entities with respect to our products. A single management team reports to our chief operating decision maker who comprehensively manages our entire business. Accordingly, we do not accumulate discrete financial information with respect to separate product lines and do not have separately reportable segments. See Note 2, Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Components of Results of Operations

Revenues

Our revenues consist of product sales, royalty revenues and licensing and contract revenue.

Net product sales—Our revenues consist primarily of our promoted products, principally Divigel and the OB Complete family of prescription prenatal dietary supplements, M-72, Lorzone, and our other non-promoted products. We ship our products to our customers pursuant to purchase orders, which in certain cases are pursuant to a master agreement with that customer, and we invoice the customer upon shipment. For these sales we recognize revenue when control has transferred to the customer, which is typically on delivery to the customer. The amount of revenue we recognize is equal to the selling price, adjusted for any variable consideration, which includes estimated chargebacks, commercial rebates, discounts and allowances at the time revenues are recognized.

Royalty revenue—For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all the royalty has been allocated has been satisfied (or partially satisfied).

Licensing and contract revenue—We have arrangements with commercial partners that allow for the purchase of product from us by the commercial partners for the purpose of sub-distribution. Licensing revenue is recognized when the performance obligation identified in the arrangement is completed. Variable considerations, such as returns on product sales, government program rebates, price adjustments and prompt pay discounts associated with licensing revenue, are generally the responsibility of our commercial partners.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of personnel expenses, including salaries and benefits for employees in executive, sales, marketing, finance, accounting, business development, legal and human resource functions. General and administrative expenses also include corporate facility costs, including rent, utilities, insurance, legal fees related to corporate matters, share based compensation and fees for accounting and other consulting services. We expect to continue to incur additional general and administrative expenses as a public company, including costs associated with the preparation of our SEC filings, increased legal and accounting costs, investor relations costs and, incremental director and officer liability insurance costs, as well as costs related to compliance with the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Research and Development

Costs for research and development are charged as incurred and include employee-related expenses (including salaries and benefits, share based compensation, travel and expenses incurred under agreements with contract research organizations, or CROs, contract manufacturing organizations and service providers that assist in conducting clinical and

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preclinical studies), costs associated with preclinical activities and development activities and costs associated with regulatory operations.

Costs for certain development activities, such as clinical studies, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the patterns of costs incurred, and are reflected in our condensed consolidated financial statements as prepaid expenses or accrued expenses as applicable.

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Results of Operations

Comparison of Three Months Ended March 31, 2021 and 2020

Financial Operations Overview

The following table presents revenues and expenses for the three months ended March 31, 2021 and 2020 (dollars in thousands):


	Three Months Ended March 31,
	2021			2020			% Change
Net product sales	$	22,529		$	47,308		(52)	%
Royalty revenue		1,123			869		29	%
Licensing and contract revenue		228			472		(52)	%
Total revenues		23,880			48,649		(51)	%
Cost of goods sold (inclusive of amortization of intangibles)		13,490			20,590		(34)	%
Gross profit		10,390			28,059		(63)	%
Gross profit percentage		44	%		58	%
Selling, general and administrative expenses		18,922			21,176		(11)	%
Research and development expenses		3,310			5,688		(42)	%
Total operating expenses		22,232			26,864		(17)	%
Sales of product rights, net		5,636			—		NM
Operating (loss) income		(6,206)			1,195		(619)
Interest expense and amortization of debt discount		2,960			4,064		(27)	%
Other non-operating gain		(87)			(746)		(88)	%
Total other non-operating expense		2,873			3,318		(13)	%
Loss before income taxes		(9,079)			(2,123)		328	%
Income tax expense		533			960		(44)	%
Net loss	$	(9,612)			(3,083)		212	%

NM-Not Meaningful

Revenue

The following table presents total revenues for the three months ended March 31, 2021 and 2020 (dollars in thousands):


	Three Months Ended March 31,
	2021		2020		% Change
Venlafaxine ER (VERT)	$	2,511	$	14,118	(82)	%
Methylphenidate ER		5,823		8,396	(31)	%
Divigel		6,505		7,581	(14)	%
Nitrofurantoin		1,300		4,608	(72)	%
Lorzone		45		2,428	(98)	%
OB Complete		840		1,877	(55)	%
Other		5,505		8,300	(34)	%
Net product sales		22,529		47,308	(52)	%
Royalty revenue		1,123		869	29	%
Licensing and contract revenue		228		472	(52)	%
Total revenues	$	23,880	$	48,649	(51)	%

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Total Revenues - Total revenues decreased by $24.8 million to $23.9 million for the three months ended March 31, 2021, as compared to $48.6 million for the three months ended March 31, 2020 primarily due to a decrease in net product sales.

Net Product Sales - Net product sales decreased by $24.8 million to $22.5 million for the three months ended March 31, 2021, as compared to $47.3 million for the three months ended March 31, 2020. Approximately $8.8 million of this decrease is attributable to lower realized net prices, and $16.0 million was due to lower volumes of products sold. Net sales of VERT and methylphenidate ER (including M-72) decreased 82% and 31%, respectively, reflecting additional generic competition resulting in lower volumes and net realized selling prices. Product sales of Lorzone decreased by $2.4 million to less than $0.1 million for the three months ended March 31, 2021, as compared to $2.4 million for the three months ended March 31, 2020, reflecting lower sales volumes due to the launches of generic competitors in late 2019 and 2020 and the transition of sales to our authorized generic product which accounts for substantially all the volume of Lorzone sold during the quarter. We expect that additional competition for methylphenidate ER and VERT and Lorzone from current competitors, as well as additional generic product approvals and launches in the future, if any, will continue to negatively affect our sales of these products during the remainder of 2021 and in future years. VERT sales were favorably impacted by $1.4 million in the aggregate due to adjustments related to product returns during the three months ended March 31, 2021 based on actual experience. There can be no assurance that actual product returns experience and other adjustments will continue to favorably impact net sales in 2021 or in future periods.

Sales of Divigel decreased approximately 14% in the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 driven primarily by lower volumes of product sold during the quarter due to a reduction of promotional resources beginning in the second quarter of 2020. Product sales of nitrofurantoin decreased to $1.3 million for the three months ended March 31, 2021 compared to $4.6 million for the three months ended March 31, 2020 primarily due the entry of additional competitor in 2020 affecting both pricing and volumes of products sold. Product sales of OB Complete decreased by $1.0 million to $0.8 million, for the three months ended March 31, 2021 compared to $1.9 million for the three months ended March 31, 2020 due to lower sales volumes and realized net pricing. Other sales decreased $2.8 million largely due to additional competition on these non-promoted products, partially offset by sales of Upneeq, which was launched in September, 2020.

Royalty Revenue - Royalty revenue increased by $0.3 million for the three months ended March 31, 2021, relative to the three months ended March 31, 2020, reflecting higher sales of licensed products by our license partner.

Licensing and Contract Revenue - Licensing and contract revenue decreased $0.3 million during the three months ended March 31, 2021.

Cost of Goods Sold and Gross Profit Percentage

The following table presents a breakdown of total cost of goods sold for the three months ended March 31, 2021 and 2020 (dollars in thousands):


	Three Months Ended
	March 31,
	2021		2020		% Change
Amortization of intangible assets	$	2,634	$	4,363	(40)	%
Depreciation expense		692		634	9	%
Royalty expense		1,681		3,042	(45)	%
Other cost of goods sold		8,483		12,551	(32)	%
Total cost of goods sold	$	13,490	$	20,590	(34)	%

Total cost of goods sold decreased $7.1 million in the three months ended March 31, 2021 to $13.5 million as compared to $20.6 million for the three months ended March 31, 2020. The decrease was primarily driven by a decrease in amortization of intangible assets largely due to lower amortization of VERT and methylphenidate ER, lower royalty expenses and lower samples and regulatory fees, partially offset by higher production costs and inventory reserves.

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Gross profit percentage decreased to 44% for the three months ended March 31, 2021 compared to 58% in the same period in 2020. Excluding amortization and depreciation, our gross profit percentage decreased to 57% as compared to 68% for each of the three months ended March 31, 2021 and 2020, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $2.3 million during the three months ended March 31, 2021 to $18.9 million as compared to $21.2 million in the three months ended March 31, 2020. The decrease in our selling, general and administrative expenses reflects salesforce reductions in the three months ended March 31, 2020, offset by higher marketing expenses related to Upneeq.

Research and Development

Research and development expenses decreased by $2.4 million in the three months ended March 31, 2021 to $3.3 million as compared to $5.7 million in the three months ended March 31, 2020. The decrease primarily reflects lower spending on arbaclofen ER, Upneeq and other R&D projects with lower headcount related expenses during the quarter.

The following table summarizes our research and development expenses incurred for the periods indicated (dollars in thousands):


	Three Months Ended March 31,
	2021		2020		% Change
Arbaclofen ER		384		1,083	(65)	%
RVL-1201		197		1,093	(82)	%
Other		2,729		3,512	(22)	%
Total	$	3,310	$	5,688	(42)	%

Interest Expense and Amortization of Debt Discount

Interest expense and amortization of debt discount decreased by $1.1 million in the three months ended March 31, 2021 to $3.0 million as compared to $4.1 million in the three months ended March 31, 2020. The decrease reflects lower interest rates and prepayment of debt during 2020.

Income Tax Benefit (Expense)

During the three months ended March 31, 2021, we recognized income tax expense of $0.5 million on $9.1 million of loss before income tax, compared to $1.0 million of income tax expense on $2.1 million of loss before income tax during the comparable 2020 period.

Income taxes for the interim periods have been based on an estimated annualized worldwide effective tax rate. Income tax (expense) benefit differs from the statutory income tax rate primarily due to the occurrence of orphan drug and research development credits, movement in a valuation allowance and the addition to state and foreign taxes.

The income tax expense was based on the applicable federal, state and foreign tax rates for those periods. For periods with income before provision for income taxes, favorable tax items result in a decrease in the effective tax rate, while unfavorable tax items result in an increase in the effective tax rate. For periods with a loss before benefit from income taxes, favorable tax items result in an increase in the effective tax rate, while unfavorable tax items result in a decrease in the effective tax rate.

Liquidity and Capital Resources

Our principal sources of liquidity are cash and cash equivalents on hand, cash generated from operations and amounts available to be drawn under our Revolving Credit Facility, or Revolver. Our primary uses of cash are to fund operating

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expenses, product development costs, capital expenditures, debt service payments, as well as strategic business and product acquisitions.

As of March 31, 2021, we had cash and cash equivalents of $109.2 million and borrowing availability under the Revolver of $50.0 million. We also had $219.8 million aggregate principal amount borrowed under our term loans.

As of March 31, 2021, the interest rate was 4.75% and 5.25% for our Term A Loan and Term B Loan, respectively. As of March 31, 2020, the interest rate was 4.82% and 5.32% for our Term A Loan and Term B Loan, respectively.

At March 31, 2021, we had $50 million available under the revolver, and there were no outstanding borrowings or outstanding letters of credit under the Revolver.

On January 13, 2020 we completed an equity offering and allotted 6.9 million ordinary shares at a public offering price of $5.00 per share. The number of shares issued in this offering reflected the exercise in full of the underwriters option to purchase 900,000 ordinary shares. The aggregate proceeds from the follow-on offering were approximately $31.8 million after deducting underwriting discounts and commissions and offering expenses. Proceeds from the offering were used for working capital and general corporate purposes.

On July 16, 2020 we completed a follow-on equity offering and allotted 5.0 million ordinary shares. The aggregate proceeds from the follow-on offering were approximately $30.4 million after deducting offering expenses. Proceeds from the offering will be used for working capital and general corporate purposes.

Our non-promoted products, including methylphenidate ER, and VERT, compete in generic markets for which competition has eroded, and will continue to erode, profitability over time. During the year ended December 31, 2020, there were two launches of generic VERT, and as of March 31, 2020 there were six approved AB rated generic forms of Lorzone. Additionally, there was an additional approval of competing dosage strengths of VERT during 2020 which launched in early 2021. As a result, we have experienced, and anticipate that we will continue to experience, price and volume erosion negatively affecting profitability of these products and possibly others in 2021 and future years.

Our future operating performance and the adequacy of our cash resources depends on many assumptions, including assumptions with respect to product sales and expenses, commercialization costs, research and development expenses as well as other factors. These assumptions may prove to be wrong or other factors may adversely affect our operating results. As a result, our operating results may fluctuate significantly quarter to quarter or year to year. We expect our near term levels of profitability and cash flow to be negatively affected by price competition on our generic products, and increased expenses associated with new product launches. As a result, it is possible that we would not be able to comply with financial covenants in our credit agreement or generate sufficient cash to service our debt obligations. This could, among other things, force us to raise additional funds or force us to reduce our expenses through cost cutting measures either of which could have a material adverse affect on our business.

We are currently undertaking a comprehensive review of strategic options to maximize shareholder value. The options under consideration include divestitures of non-strategic assets and refinancing. In the event we are unable to generate sufficient proceeds from these strategic options such that we can reduce, retire or refinance its existing debt, we believe we have sufficient plans to effectively manage our expenses and avail ourself of cure provisions provided for in our credit agreement in order to maintain compliance with its debt covenants therein. The use of the cure provisions would result in the utilization cash to prepay debt.

A significant portion of our expense base is discretionary and we have the ability to reduce or defer spending to reduce expenses and improve profitability and cash flow to maintain compliance with our debt covenants. This could include, among other things, significant reductions in our general and administrative expenses, research and development expenses, including deferral of clinical trial programs, and deferrals of certain promotional and capital spending programs which could negatively impact our revenue growth and plans. We have previously demonstrated an ability to implement various cost reduction initiatives. During the third quarter of 2019 and continuing into 2020, the Company reduced our field force by an aggregate of 90 positions, generating annualized savings of approximately $10 million, and

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took measures to realign our operating infrastructure to prepare for the launch of Upneeq and implemented other cost-savings measures to reduce our expenses.

Based on the current facts and circumstances, including the availability of the cure provisions provided for in the credit agreement, which will result in utilizing cash to prepay debt, and our ability to implement spending reductions and program deferrals, we believe it is probable that we can effectively manage our spending to improve profitability in order to maintain compliance with the debt covenants and other obligations in our credit agreement for at least the next 12 months, even if the strategic review does not result in a transaction generating sufficient proceeds to reduce, retire or refinance our existing debt. As a result, we have concluded that, after consideration of management’s plans our existing cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our anticipated cash needs for the next 12 months.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, our shareholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our shareholders. Additionally, certain financings may require the consent of the lenders under our senior secured credit facilities. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our intellectual property, technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

Cash Flows

The following table provides information regarding our cash flows for the periods indicated (dollars in thousands):


	Three Months Ended
	March 31,
	2021		2020		Change
Net cash used in operating activities	$	(11,486)	$	(64)	$	(11,422)
Net cash provided by (used in) investing activities		6,881		(946)		7,827
Net cash provided by (used in) financing activities		(236)		30,975		(31,211)
Net increase in cash and cash equivalents	$	(4,841)	$	29,965	$	(34,806)

Net cash used in operating activities

Cash flows from operating activities are primarily driven by earnings from operations (excluding the impact of non-cash items), the timing of cash receipts and disbursements related to accounts receivable and accounts payable and the timing of inventory transactions and changes in other working capital amounts. Net cash used in operating activities was $11.5 million for the three months ended March 31, 2021, and net cash provided by operating activities was less than $0.1 million for the three months ended March 31, 2020.

The additional cash used in operating activities for the three months ended March 31, 2021, was primarily as a result of lower net income after considering non-cash adjustments, partially offset by lower cash used in working capital assets and liabilities as compared to the three months ended March 31, 2020.

Net cash provided by (used in) investing activities

Net cash provided by investing activities was $6.9 million during the three months ended March 31, 2021 as compared to cash used in investing activities of $0.9 million during the three months ended March 31, 2020. The change reflected proceeds of $7.3 million from the sale of Osmolex product rights in January 2021, and lower purchases of property, plant and equipment during the three months ended March 31, 2021.

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Net cash provided by (used in) financing activities

Net cash used in financing activities was $0.2 million as compared to net cash provided by financing activities of $31.0 million during the three months ended March 31, 2021 and 2020, respectively. The change largely reflects net proceeds raised from equity offerings in January, 2020.

Contractual Obligations

There have been no material changes outside the ordinary course of our business in our contractual obligations during the three months ended March 31, 2021 from those as of December 31, 2020 as set forth in our filed Annual Report on Form 10-K. We believe the aggregate amount of potential future milestone payments are currently immaterial to our financial statements.

Critical Accounting Estimates

The significant accounting policies and bases of presentation are described in Note 2, Basis of Presentation and Summary of Significant Accounting Policies to our condensed consolidated financial statements included elsewhere in this report.

Summary of Significant Accounting Policies. The preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosures in the notes thereto. Some of these estimates can be subjective and complex. Although we believe that our estimates and assumptions are reasonable, there may be other reasonable estimates or assumptions that differ significantly from ours. Further, our estimates and assumptions are based upon information available at the time they were made. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. We have considered the impact of COVID-19 in the estimates within our financial statements and there may be changes to those estimates in future periods. Actual results could differ from those estimates.

In order to understand our condensed consolidated financial statements, it is important to understand our critical accounting estimates. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and (ii) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition, results of operations or cash flows. We believe the following accounting policies and estimates to be critical:

Revenue Recognition

Product Sales—Revenue is recognized at the point in time when our performance obligations with our customers have been satisfied. At contract inception, we determine if the contract is within the scope of ASC Topic 606 and then evaluates the contract using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue at the point in time when the entity satisfies a performance obligation.

Revenue is recorded at the transaction price, which is the amount of consideration we expect to receive in exchange for transferring products to a customer. We considered the unit of account for each purchase order that contains more than one product. Because all products in a given purchase order are generally delivered at the same time and the method of revenue recognition is the same for each, there is no need to separate an individual order into separate performance obligations. In the event that we fulfilled an order only partially because a requested item is on backorder, the portion of the purchase order covering the item is generally cancelled, and the customer has the option to submit a new one for the

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backordered item. We determine the transaction price based on fixed consideration in our contractual agreements, which includes estimates of variable consideration, and the transaction price is allocated entirely to the performance obligation to provide pharmaceutical products. In determining the transaction price, a significant financing component does not exist since the timing from when we deliver product to when the customers pay for the product is less than one year and the customers do not pay for product in advance of the transfer of the product.

We record product sales net of any variable consideration, which includes estimated chargebacks, commercial rebates, discounts and allowances and credit losses. We utilize the expected value method to estimate all elements of variable consideration included in the transaction. The variable consideration is recorded as a reduction of revenue at the time revenues are recognized. We will only recognize revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period. These estimates may differ from actual consideration amount received and we will re-assess these estimates each reporting period to reflect known changes in factors.

Royalty Revenue—For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all the royalty has been allocated has been satisfied (or partially satisfied).

Licensing and Contract Revenue— We have arrangements with commercial partners that allow for the purchase of product from us by the commercial partner for purposes of sub-distribution. We recognize revenue from an arrangement when control of such product is transferred to the commercial partner, which is typically upon delivery. In these situations the performance obligation is satisfied when product is delivered to our commercial partner. Licensing revenue is recognized in the period in which the product subject to the sublicensing arrangement is sold. Sales deductions, such as returns on product sales, government program rebates, price adjustments, and prompt pay discounts in regard to licensing revenue is generally the responsibility of our commercial partners and not recorded by us.

Freight—We record amounts billed to customers for shipping and handling as revenue, and record shipping and handling expenses related to product sales as selling, general and administrative expenses. We account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. When shipping and handling costs are incurred after a customer obtains control of the products, we also have elected to account for these as costs to fulfill the promise and not as a separate performance obligation.

Sales Deductions

Product sales are recorded net of estimated chargebacks, commercial and governmental rebates, discounts, allowances, copay discounts, advertising and promotions and estimated product returns, or collectively, “sales deductions.”

Provision for estimated chargebacks, commercial rebates, discounts and allowances and credit losses settled in sales credits at the time of sales are analyzed and adjusted, if necessary, monthly and recorded against gross trade accounts receivable. Estimated product returns, commercial and governmental rebates and customer coupons settled in cash are analyzed and adjusted, if necessary, monthly and recorded as a component of accrued expenses.

Calculating certain of these items involves estimates and judgments based on sales or invoice data, contractual terms, historical utilization rates, new information regarding changes in applicable regulations and guidelines that would impact the amount of the actual rebates, our expectations regarding future utilization rates and estimated customer inventory levels. Amounts accrued for sales deductions are adjusted when trends or significant events indicate that adjustment is appropriate and to reflect actual experience. The most significant items deducted from gross product sales where we exercise judgment are chargebacks, commercial and governmental rebates, product returns, discounts and allowances and advertising and promotions.

Where available, we have relied on information received from our wholesaler customers about the quantities of inventory held, including the information received pursuant to days of sales outstanding, which we have not independently verified. For other customers, we have estimated inventory held based on buying patterns. In addition, we have evaluated market conditions for products primarily through the analysis of wholesaler and other third party

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sell-through, as well as internally-generated information, to assess factors that could impact expected product demand at March 31, 2021. We believe that the estimated level of inventory held by our customers is within a reasonable range as compared to both: (i) historical amounts and (ii) expected demand for each respective product at March 31, 2021.

If the assumptions we use to calculate our allowances for sales deductions do not appropriately reflect future activity, our financial position, results of operations and cash flows could be materially impacted.

The following table presents the activity and ending balances for our product sales provisions for the three months ended March 31, 2021 (in thousands):


					Government				Discounts
			Commercial		and Managed		Product		and
	Chargebacks		Rebates		Care Rebates		Returns		Allowances		Total
Balance at January 1, 2020	$	14,624	$	13,579	$	4,867	$	33,457	$	1,591	$	68,118
Provision		122,592		22,488		18,211		2,825		7,003		173,119
Charges processed		(127,295)		(28,723)		(19,633)		(14,256)		(7,819)		(197,726)
Balance at December 31, 2020	$	9,921	$	7,344	$	3,445	$	22,026	$	775	$	43,511
Provision		20,394		4,236		3,426		923		1,122		30,101
Charges processed		(22,300)		(8,849)		(3,802)		(3,246)		(1,288)		(39,485)
Balance March 31, 2021	$	8,015	$	2,731	$	3,069	$	19,703	$	609	$	34,127

Total items deducted from gross product sales were $30.1 million (excluding $0.4 million in provisions for advertising and promotion), or 56.8% as a percentage of gross product sales during the three months ended March 31, 2021. As gross product sales have declined due to recent decreases in selling prices, sales deductions as a percentage of gross product sales are correspondingly less.

Chargebacks—We enter into contractual agreements with certain third parties such as retailers, hospitals and group-purchasing organizations, or GPOs, to sell certain products at predetermined prices. Most of the parties have elected to have these contracts administered through wholesalers that buy the product from us and subsequently sell it to these third parties. When a wholesaler sells products to one of these third parties that are subject to a contractual price agreement, the difference between the price paid to us by the wholesaler and the price under the specific contract is charged back to us by the wholesaler. Utilizing this information, we estimate a chargeback percentage for each product and record an allowance for chargebacks as a reduction to gross sales when we record our sale of the products. We reduce the chargeback allowance when a chargeback request from a wholesaler is processed. Our provision for chargebacks is fully reserved for at the time when sales revenues are recognized.

We obtain product inventory reports from major wholesalers to aid in analyzing the reasonableness of the chargeback allowance and to monitor whether wholesaler inventory levels do not significantly exceed customer demand. We assess the reasonableness of our chargeback allowance by applying a product chargeback percentage that is based on a combination of historical activity and current price and mix expectations to the quantities of inventory on hand at the wholesalers according to wholesaler inventory reports. In addition, we estimate the percentage of gross sales that were generated through direct and indirect sales channels and the percentage of contract compared to non-contract revenue in the period, as these each affect the estimated reserve calculation. In accordance with our accounting policy, we estimate the percentage amount of wholesaler inventory that will ultimately be sold to third parties that are subject to contractual price agreements based on a trend of such sales through wholesalers. We use this percentage estimate until historical trends indicate that a revision should be made. On an ongoing basis, we evaluate our actual chargeback rate experience, and new trends are factored into our estimates each quarter as market conditions change.

Events that could materially alter chargebacks include: changes in product pricing as a result of competitive market dynamics or negotiations with customers changes in demand for specific products due to external factors such as competitor supply position or consumer preferences, and customer shifts in buying patterns from direct to indirect through wholesalers, which could either individually or in aggregate increase or decrease the chargebacks depending on the direction and trend of the change(s).

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Chargebacks were $20.4 million, or 38.5% as a percentage of gross product sales for the three months ended March 31, 2021. We expect that chargebacks will continue to significantly impact our reported net product sales.

Commercial Rebates—We maintain an allowance for commercial rebates that we have in place with certain customers. Commercial rebates vary by product and by volume purchased by each eligible customer. We track sales by product number for each eligible customer and then apply the applicable commercial rebate percentage, using both historical trends and actual experience to estimate our commercial rebates. We reduce gross sales and increase the commercial rebates allowance by the estimated rebate amount when we sell our products to eligible customers. We reduce the commercial rebate allowance when we process a customer request for a rebate. At each month end, we analyze the allowance for commercial rebates against actual rebates processed and make necessary adjustments as appropriate. Our provision for commercial rebates is fully reserved for at the time sales revenues are recognized.

The allowance for commercial rebates takes into consideration price adjustments which are credits issued to reflect increases or decreases in the invoice or contract prices of our products. In the case of a price decrease, a shelf-stock adjustment credit is given for product remaining in customer’s inventories at the time of the price reduction. Contractual price protection results in a similar credit when the invoice or contract prices of our products increase, effectively allowing customers to purchase products at previous prices for a specified period of time. Amounts recorded for estimated shelf-stock adjustments and price protections are based upon specified terms with direct customers, estimated changes in market prices, and estimates of inventory held by customers. We regularly monitor these and other factors and evaluate the reserve as additional information becomes available.

We ensure that commercial rebates are reasonable through review of contractual obligations, review of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter commercial rebates include: changes in product pricing as a result of competitive market dynamics or negotiations with customers changes in demand for specific products due to external factors, such as competitor supply position or consumer preferences, and customer shifts in buying patterns from direct to indirect through wholesalers, which could either individually or in aggregate increase or decrease the commercial rebates depending on the direction and velocity of the change(s).

Commercial rebates were $4.2 million, or 8.0% as a percentage of gross product sales for the three months ended March 31, 2021. We expect that commercial rebates will continue to significantly impact our reported net sales.

Government Program Rebates—Federal law requires that a pharmaceutical distributor, as a condition of having federal funds being made available to the states for the manufacturer’s drugs under Medicaid and Medicare Part B, must enter into a rebate agreement to pay rebates to state Medicaid programs for the distributor’s covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program under a fee-for-service arrangement. CMS is responsible for administering the Medicaid rebate agreements between the federal government and pharmaceutical manufacturers. Rebates are also due on the utilization of Medicaid managed care organizations, or MMCOs. We also pay rebates to MCOs for the reimbursement of a portion of the sales price of prescriptions filled that are covered by the respective plans. The liability for Medicaid, Medicare and other government program rebates is settled in cash and is estimated based on historical and current rebate redemption and utilization rates contractually submitted by each state’s program administrator and assumptions regarding future government program utilization for each product sold, and accordingly recorded as a reduction of product sales. Medicaid rebates are typically billed up to 180 days after the product is shipped, but can be as much as 270 days after the quarter in which the product is dispensed to the Medicaid participant. In addition to the estimates mentioned above, our calculation also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. Periodically, we adjust the Medicaid rebate provision based on actual claims paid. Due to the delay in billing, adjustments to actual claims paid may incorporate revisions of this provision for several periods. Because Medicaid pricing programs involve particularly difficult interpretations of complex statutes and regulatory guidance, our estimates could differ from actual experience.

Government and managed care rebates were $3.4 million, or 6.5% as a percentage of gross product sales for the three months ended March 31, 2021.

Product Returns—Certain of our products are sold with the customer having the right to return the product within specified periods. Estimated return accruals are made at the time of sale based upon historical experience. Our return

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policy generally allows customers to receive credit for expired products within three months prior to expiration and within one year after expiration. Our provision for returns consists of our estimates for future product returns.

Historical factors such as one-time recall events as well as pending new developments such as comparable product approvals or significant pricing movement that may impact the expected level of returns are taken into account monthly to determine the appropriate accrued expense. As part of the evaluation of the liability required, we consider actual returns to date that are in process, the expected impact of any product recalls and the amount of wholesaler’s inventory to assess the magnitude of unconsumed product that may result in product returns to us in the future. The product returns level can be impacted by factors such as overall market demand and market competition and availability for substitute products which can increase or decrease the pull through for sales of our products and ultimately impact the level of product returns. In determining our estimates for returns and allowances, we are required to make certain assumptions regarding the timing of the introduction of new products. In addition, we make certain assumptions with respect to the extent and pattern of decline associated with generic competition. To make these assessments, we utilize market data for similar products as analogs for our estimations. We use our best judgment to formulate these assumptions based on past experience and information available to us at the time. We continually reassess and make the appropriate changes to our estimates and assumptions as new information becomes available to us. Product returns are fully reserved for at the time when sales revenues are recognized.

Our estimate for returns may be impacted by a number of factors, but the principal factor relates to the level of inventory in the distribution channel. When we are aware of an increase in the level of inventory of our products in the distribution channel, we consider the reasons for the increase to determine whether we believe the increase is temporary or other-than-temporary. Increases in inventory levels assessed as temporary will not result in an adjustment to our provision for returns. Some of the factors that may be an indication that an increase in inventory levels will be temporary include:

●

recently implemented or announced price increases for our products; and

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new product launches or expanded indications for our existing products.

Conversely, other-than-temporary increases in inventory levels may be an indication that future product returns could be higher than originally anticipated and, accordingly, we may need to adjust our provision for returns. Some of the factors that may be an indication that an increase in inventory levels will be other-than-temporary include:

●

declining sales trends based on prescription demand;

●

recent regulatory approvals to shorten the shelf life of our products, which could result in a period of higher returns;

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slow moving or obsolete product still in the distribution channel;

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introduction of new product(s) or generic competition;

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increasing price competition from generic competitors; and

●

changes to the National Drug Codes, or NDCs, of our products, which could result in a period of higher returns related to product with the old NDC, as our customers generally permit only one NDC per product for identification and tracking within their inventory systems.

We ensure that product returns are reasonable through inspection of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter product returns include: acquisitions and integration activities that consolidate dissimilar contract terms and could impact the return rate as typically we purchase smaller entities with less contracting power and integrate those product sales to our contracts; and consumer demand shifts by products, which

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could either increase or decrease the product returns depending on the product or products specifically demanded and ultimately returned.

Product returns were $0.9 million, or 1.88% as a percentage of gross product sales for the three months ended March 31, 2021.

Promotions and Co-Pay Discount Cards—From time to time we authorize various retailers to run in-store promotional sales of our products. We accrue an estimate of the dollar amount expected to be owed back to the retailer. Additionally, we provide consumer co-pay discount cards, administered through outside agents to provide discounted products when redeemed. Upon release of the cards into the market, we record an estimate of the dollar value of co-pay discounts expected to be utilized taking into consideration historical experience.

Advertising and promotions were $0.4 million, or 0.8% as a percentage of gross product sales for the three months ended March 31, 2021. Advertising and promotions as a percentage of gross product sales did not change materially during the periods presented.

Discounts and allowances were $1.1 million, or 2.1% as a percentage of gross product sales for the three months ended March 31, 2021. Discounts and allowances as a percentage of gross product sales did not change materially during the periods presented.

Valuation of long-lived assets

As of March 31, 2021, our combined long-lived assets balance, including property, plant and equipment and finite-lived intangible assets, is $55.2 million.

Long-lived assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Factors that we consider in deciding when to perform an impairment review include significant changes in our forecasted projections for the asset or asset group for reasons including, but not limited to, significant under-performance of a product in relation to expectations, significant changes or planned changes in our use of the assets, significant negative industry or economic trends, and new or competing products that enter the marketplace. The impairment test is based on a comparison of the undiscounted cash flows expected to be generated from the use of the asset group.

Our long-lived intangible assets, which consist of distribution rights, product rights, tradenames and developed technology, are initially recorded at fair value upon acquisition. To the extent they are deemed to have finite lives, they are then amortized over their estimated useful lives using either the straight-line method or based on the expected pattern of cash flows. Factors giving rise to our initial estimate of useful lives are subject to change. Significant changes to any of these factors may result in a reduction in the useful life of the asset and an acceleration of related amortization expense, which could cause our operating income, net income and net income per share to decrease.

Recoverability of an asset that will continue to be used in our operations is measured by comparing the carrying amount of the asset to the forecasted undiscounted future cash flows related to the asset. In the event the carrying amount of the asset exceeds its undiscounted future cash flows and the carrying amount is not considered recoverable, impairment may exist. 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.

Goodwill and indefinite-lived intangible assets

Goodwill and indefinite-lived intangible assets are assessed for impairment on an annual basis as of October 1st of each year or more frequently if events or changes in circumstances indicate that the asset might be impaired.

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Goodwill Impairment Assessment—We are organized in one reporting unit and evaluate goodwill for our company as a whole. Under the authoritative guidance issued by the Financial Accounting Standards Board, or FASB, we have the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the goodwill impairment test is performed. We perform our goodwill impairment tests by comparing the fair value and carrying amount of our reporting unit. Any goodwill impairment charges we recognize for our reporting unit are equal to the lesser of (i) the total goodwill allocated to that reporting unit and (ii) the amount by which that reporting unit’s carrying amount exceeds its fair value.

The goodwill impairment test requires us to estimate the fair value of the reporting unit and to compare the fair value of the reporting unit with its carrying amount. If the carrying value exceeds its fair value, an impairment charge is recorded for the difference. If the carrying value recorded is less than the fair value calculated then no impairment loss is recognized. The fair value of our reporting unit is determined using an income approach that utilizes a discounted cash flow model or, where appropriate, the market approach, or a combination thereof. The discounted cash flow models are dependent upon our estimates of future cash flows and other factors. Our estimates of future cash flows are based on a comprehensive product by product forecast over a five-year period and involve assumptions concerning (i) future operating performance, including future sales, long-term growth rates, operating margins, variations in the amounts, allocation and timing of cash flows and the probability of achieving the estimated cash flows and (ii) future economic conditions, all which may differ from actual future cash flows.

During the three months ended March 31, 2021 we assessed goodwill for indications of impairment and based on this assessment of indications performed, we determined that no additional evaluation was necessary and we did not recognize an impairment charge. A sustained decline in our market capitalization, even if due to macroeconomic or industry-wide factors, could put pressure on the carrying value of our goodwill and cause us to conduct additional impairment tests. A determination that all or a portion of our goodwill is impaired, although a non-cash charge to operations, could have a material adverse effect on our business, consolidated financial condition and results of operations.

Assumptions related to future operating performance are based on management’s annual and ongoing budgeting, forecasting and planning processes and represent our best estimate of the future results of our operations as of a point in time. These estimates are subject to many assumptions, such as the economic environments in which we operate, demand for the products and competitor actions. Estimated future cash flows are discounted to present value using a market participant, weighted average cost of capital. The financial and credit market volatility directly impacts certain inputs and assumptions used to develop the weighted average cost of capital such as the risk-free interest rate, industry beta, debt interest rate and our market capital structure. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The use of different inputs and assumptions could increase or decrease our estimated discounted future cash flows, the resulting estimated fair values and the amounts of related goodwill impairments, if any.

IPR&D Intangible Asset Impairment Assessment—IPR&D, which are indefinite-lived intangible assets representing the value assigned to acquired Research and Development, or R&D, projects that principally represent rights to develop and sell a product that we have acquired which has not yet been completed or approved. These assets are subject to impairment testing until completion or abandonment of each project. The fair value of our indefinite-lived intangible assets is determined using an income approach that utilizes a discounted cash flow model and requires the development of significant estimates and assumptions involving the determination of estimated net cash flows for each year for each project or product (including net revenues, cost of sales, R&D costs, selling and marketing costs and other costs which may be allocated), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, and competitive trends impacting each asset and related cash flow stream as well as other factors. The major risks and uncertainties associated with the timely and successful completion of the IPR&D projects include legal risk, market risk and regulatory risk. If applicable, upon abandonment of the IPR&D product, the assets are reduced to zero. Upon approval of the products in development for sale and placement into service, the associated IPR&D intangible assets are transferred

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to Product Rights amortizing intangible assets. The useful life of an amortizing asset generally is determined by identifying the period in which substantially all of the cash flows are expected to be generated.

If the fair value of the IPR&D is less than its carrying amount, an impairment loss is recognized for the difference. Beginning in 2018, we have been assessing for indications of impairment of IPR&D assets quarterly. Based on results of the assessment of impairment indications performed, we determined that no additional evaluation was required and we did not recognize impairment charges to IPR&D as of March 31, 2021.

Income Taxes

Income taxes are recorded under the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Deferred income tax assets are reduced, as is necessary, by a valuation allowance when we determine it is more-likely-than-not that some or all of the tax benefits will not be realizable in the future. Realization of the deferred tax assets is dependent on a variety of factors, some of which are subjective in nature, including the generation of future taxable income, the amount and timing of which are uncertain. In evaluating the ability to recover the deferred tax assets, we consider all available positive and negative evidence, including cumulative income in recent fiscal years, the forecast of future taxable income exclusive of certain reversing temporary differences and significant risks and uncertainties related to our business. In determining future taxable income, management is responsible for assumptions utilized including, but not limited to, the amount of U.S. federal, state and international pre-tax operating income, the reversal of certain temporary differences, carryforward periods available to us for tax reporting purposes, the implementation of feasible and prudent tax planning strategies and other relevant factors. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates that we are using to manage the underlying business. We assess the need for a valuation allowance each reporting period, and would record any material changes that may result from such assessment to income tax expense in that period.

We account for uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The evaluation of unrecognized tax benefits is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. We evaluate unrecognized tax benefits and adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. The liabilities for unrecognized tax benefits can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the more-likely-than-not threshold or the liability becomes effectively settled through the examination process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax provision (benefit).

The most significant tax jurisdictions are Ireland, the United States, Argentina and Hungary. Significant estimates are required in determining the provision for income taxes. Some of these estimates are based on management’s interpretations of jurisdiction-specific tax laws or regulations and the likelihood of settlement related to tax audit issues. Various internal and external factors may have favorable or unfavorable effects on the future effective income tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in estimates of prior years’ items, changes in the international organization, likelihood of settlement, and changes in overall levels of income before taxes.

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As of March 31, 2021, the Company had federal and state net operating loss carryover of $29.1 million and net operating loss carryovers in certain foreign tax jurisdictions of approximately $3.8 million which will begin to expire in 2022. At March 31, 2021, we had total tax credit carryovers of approximately $6.7 million, primarily consisting of Federal Orphan Drug Tax Credit carryovers. These credit carryovers are expected to be fully realized prior to their expiration, beginning in 2035.

We make an evaluation at the end of each reporting period as to whether or not some or all of the undistributed earnings of our subsidiaries are indefinitely reinvested. While we have concluded in the past that some of such undistributed earnings are indefinitely reinvested, facts and circumstances may change in the future. Changes in facts and circumstances may include a change in the estimated capital needs of our subsidiaries, or a change in our corporate liquidity requirements. Such changes could result in our management determining that some or all of such undistributed earnings are no longer indefinitely reinvested. In that event, we would be required to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely reinvested outside the relevant tax jurisdiction. Any future foreign withholding or income taxes associated with the undistributed earnings are not anticipated to be material.

Share-based Compensation

Prior to the consummation of our initial public offering, or IPO our employees were eligible to receive awards from the Osmotica Holdings S.C.Sp. 2016 Equity Incentive Plan. Prior to the completion of our IPO, the board of directors approved a new equity-based incentive compensation plan, which took effect prior to the completion of our initial public offering. Therefore, employees are now eligible to receive awards under our 2018 Equity Incentive Plan.

Our share-based compensation cost will be measured at the grant date based on the fair value of the award and will be recognized as expense over the requisite service period, which will generally represent the vesting period. We will use the Black Scholes valuation model for estimating the fair value on the date of grant of stock options. The fair value of stock option awards will be affected by our valuation assumptions, the volatility of equity comparables, the expected term of the options, the risk-free interest rate, expected dividends and other objective and subjective variables.

Recently Issued Accounting Standards

For a discussion of recent accounting pronouncements, please see Note 2, Basis of Presentation and Summary of Significant Accounting Policies to our condensed consolidated financial statements included elsewhere in this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to various market risks, which may result in potential losses arising from adverse changes in market rates, such as interest rates and foreign exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes and do not believe we are exposed to material market risk with respect to our cash and cash equivalents.

Through the operation of our subsidiaries based in Argentina and Hungary, we are exposed to foreign exchange rate risks. In addition to the operations of our foreign subsidiaries, we also contract with vendors that are located outside the United States, and in some cases make payments denominated in foreign currencies. We are subject to fluctuations in foreign currency rates in connection with these arrangements. We do not currently hedge our foreign currency exchange rate risk. As of March 31, 2021, our liabilities denominated in foreign currencies were not material.

We are exposed to fluctuations in interest rates on our senior secured credit facilities. An increase in interest rates could have a material impact on our cash flow. As of March 31, 2021, a 100 basis point increase in assumed interest rates for our variable interest credit facilities would have an annual impact of approximately $2.2 million on interest expense.

As of March 31, 2021, we had cash and cash equivalents of $109.2 million. We do not engage in any hedging activities against changes in interest rates. Because of the short-term maturities of our cash and cash equivalents, we do not believe

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that an immediate 10% increase in interest rates would have a significant impact on the realized value of our investments.

Inflation generally affects us by increasing our cost of labor, API and clinical trials. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the nine months ended March 31, 2021.

Item 4. Controls and Procedures

Our principal executive officer and our principal financial officer evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we are a party to various legal proceedings. In addition, we have in the past been, and may in the future be, subject to investigations by governmental and regulatory authorities, which exposes us to greater risks associated with litigation, regulatory or other proceedings, including significant fines or penalties. The outcome of litigation, regulatory or other proceedings cannot be predicted with certainty, and some lawsuits, claims, actions or proceedings may be disposed of unfavorably to us. In addition, intellectual property disputes often have a risk of injunctive relief which, if imposed against us, could materially and adversely affect our business, financial condition or results of operations.

On February 16, 2018, we received FDA approval for our amantadine extended release tablet product under the trade name Osmolex ER. On that same date we filed in the Federal District Court for the District of Delaware a Complaint for Declaratory Judgment of Noninfringement of certain patents owned by Adamas Pharmaceuticals, Inc. (Osmotica Pharmaceutical US LLC and Vertical Pharmaceuticals, LLC vs. Adamas Pharmaceuticals, Inc. and Adamas Pharma, LLC). Adamas was served with the complaint on February 21, 2018. Adamas filed an answer on April 13, 2018 denying the allegations in the complaint and reserving the ability to raise counterclaims as the litigation progresses. On September 20, 2018, Adamas filed an amended answer to our Complaint for Declaratory Judgment of Noninfringement, with counterclaims alleging infringement of certain patents included in our complaint and requesting that the court grant Adamas damages, injunctive relief and attorneys’ fees. On December 2, 2020, we entered into an agreement to settle the litigation with Adamas. Under the terms of the agreement, both parties agreed to drop their respective claims relating to the patent litigation, and Adamas agreed to acquire the global rights to Osmolex ER from us for $7.5 million. The sale of

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the global rights to Osmolex ER closed in January 2021. Additionally, in connection with the settlement and the sale of the global rights to Osmolex ER, the parties entered into a supply agreement pursuant to which we agreed to supply The sale of the global rights to Osmolex ER closed in January 2021and a gain of $5.6 million was recorded in the condensed consolidated statements of operations and comprehensive loss under gain on sale of product rights, net.

Adamas with amantadine extended release tablets for a six-year term, subject to possible two-year extensions and customary closing conditions.

On April 30, 2019, we were served with a complaint in an action entitled Leo Shumacher, et al., v. Osmotica Pharmaceuticals plc, et al., Superior Court of New Jersey, Somerset County No. SOM-L-000540-19. On May 10, 2019, a Complaint entitled Jeffrey Tello, et al., v. Osmotica Pharmaceuticals plc, et al., Superior Court of New Jersey, Somerset County No. SOM-L-000617-19 was filed in the same court as the Shumacher action. The complaints named us, certain of our directors and officers and the underwriters of our initial public offering as defendants in putative class actions alleging violations of Sections 11 and 15 of the Securities Act of 1933 related to the disclosures contained in the registration statement and prospectus used for our initial public offering of ordinary shares. On July 22, 2019, the plaintiffs filed an amended complaint consolidating the two actions, reiterating the previously pled allegations and adding an additional individual defendant. The parties participated in a mediation and reached an agreement in principle to settle the litigation on December 15, 2020. The agreement in principle calls for a payment by us of $5.25 million (a portion of which we expect would be covered by applicable insurance) and would fully resolve all claims asserted in the litigation against all defendants named in the litigation, including us. No party would admit any wrongdoing as part of the proposed settlement, which was reached to avoid the further cost and distraction of litigation. The agreement in principle contemplates the negotiation and execution of a final settlement agreement. The settlement is also subject to preliminary approval by the Superior Court of New Jersey, notice to the putative class, and subsequent final approval by the Superior Court of New Jersey.

In general, we intend to continue to vigorously prosecute and defend these proceedings, as appropriate; however, from time to time, we may settle or otherwise resolve these matters on terms and conditions that we believe are in our best interests. Resolution of any or all claims, investigations and legal proceedings, individually or in the aggregate, could have a material adverse effect on our business, results of operations and cash flows in any given accounting period or on our overall financial condition.

Item 1A. Risk Factors.

There have been no material changes from the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2020.

Table of Contents

Item 6. Exhibits.



EXHIBIT 31.1	-	Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a—14 and 15d—14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

EXHIBIT 31.2	-	Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a—14 and 15d—14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

EXHIBIT 32.1	-	Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EXHIBIT 32.2	-	Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EXHIBIT 101.INS	-	XBRL Instance Document.

EXHIBIT 101.SCH	-	XBRL Taxonomy Extension Schema Document.

EXHIBIT 101.CAL	-	XBRL Taxonomy Extension Calculation Linkbase Document.

EXHIBIT 101.DEF	-	XBRL Taxonomy Extension Definition Linkbase Document.

EXHIBIT 101.LAB	-	XBRL Taxonomy Extension Label Linkbase Document.

EXHIBIT 101.PRE	-	XBRL Taxonomy Extension Presentation Linkbase Document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Osmotica Pharmaceuticals plc

Dated: May 13, 2021	By:	/s/ Brian Markison
		Brian Markison
		Chief Executive Officer

Dated: May 13, 2021	By:	/s/ Andrew Einhorn
		Andrew Einhorn
		Chief Financial Officer

Osmotica Pharmaceuticals plc - FORM 10-Q - May 13, 2021

Attached files

Osmotica Pharmaceuticals plc Reports