Quarterly Report (10-q)

Date : 05/17/2019 @ 4:30PM
Source : Edgar (US Regulatory)
Stock : Egalet Corporation (ZCOR)
Quote : 2.5  0.1 (4.17%) @ 8:37PM

Quarterly Report (10-q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2019

 

Or

 

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

 

For the transition period from              to

 

Commission File Number 001-36295

 

Egalet Corporation

 

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

 

46-3575334
(I.R.S. Employer
Identification No.)

 

 

 

600 Lee Road
Suite 100
Wayne, PA
(Address of Principal Executive Offices)

 

19087
(Zip Code)

 

Registrant’s telephone number, including area code: (610) 833-4200

 

 

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

 

Large accelerated filer ☐

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐ 

 

Smaller reporting company ☒

 

 

 

Emerging growth company ☒

 

 

 

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

 

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

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act

of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No

 

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

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Par value $0.001

 

ZCOR

 

OTCQX

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

 

Common Stock, $0.001 par value                                 Shares outstanding as of May 15, 2019: 9,360,968

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.  

Financial Statements

 

 

Consolidated Balance Sheets as of March 31, 2019 (Successor) (unaudited) and December 31, 2018 (Predecessor)

1

 

Consolidated Statements of Operations unaudited for the Period February 1, 2019 through March 31, 2019 (Successor), the Period January 1, 2019 through January 31, 2019 (Predecessor) and the three months ended March 31, 2018 (Predecessor)

2

 

Consolidated Statements of Comprehensive Loss unaudited for the Period February 1, 2019 through March 31, 2019 (Successor), the Period January 1, 2019 through January 31, 2019 (Predecessor) and the three months ended March 31, 2018 (Predecessor)

3

 

4

 

Consolidated Statements of Cash Flows unaudited for the Period February 1, 2019 through March 31, 2019 (Successor), the Period January 1, 2019 to January 31, 2019 (Predecessor) and the three months ended March 31, 2018 (Predecessor)

5

 

Notes to Unaudited Consolidated Financial Statements

6

Item 2.  

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

37

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

45

Item 4.  

Controls and Procedures

45

 

PART II - OTHER INFORMATION

 

Item 1.  

Legal Proceedings

46

Item 1A.  

Risk Factors

46

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 3  

Defaults Upon Senior Securities

46

Item 4.  

Mine Safety Disclosures

46

Item 5.  

Other Information

46

Item 6.  

Exhibits

47

 

 

 

SIGNATURES  

53

 

Unless otherwise indicated or the context otherwise requires, references to the “Company”, “we”, “us” and “our” refer to Egalet Corporation and its subsidiaries. The Egalet logo is our trademark and Egalet is our registered trademark. All other trade names, trademarks and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. We have assumed that the reader understands that all such terms are source-indicating. Accordingly, such terms, when first mentioned in this Quarterly Report on Form 10-Q, appear with the trade name, trademark or service mark notice and then throughout the remainder of this Quarterly Report on Form 10-Q without the trade name, trademark or service mark notices for convenience only and should not be construed as being used in a descriptive or generic sense. Unless otherwise indicated, all statistical information provided about our business in this report is as of March 31, 2019.

 

 

i


 

PART I

 

ITEM 1.  FINANCIAL STATEMENTS

 

Egalet Corporation and Subsidiaries

 

Consolidated Balance Sheet s

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

    

March 31, 2019

  

   

December 31, 2018

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,387

 

 

$

35,323

Marketable securities, available for sale

 

 

 —

 

 

 

4,988

Accounts receivable, net

 

 

39,944

 

 

 

8,006

Inventory

 

 

23,276

 

 

 

2,639

Prepaid expenses and other current assets

 

 

3,258

 

 

 

2,715

Other receivables

 

 

 —

 

 

 

846

Total current assets

 

 

76,865

 

 

 

54,517

Intangible assets, net

 

 

120,974

 

 

 

4,281

Restricted cash

 

 

400

 

 

 

400

Property and equipment, net

 

 

3,941

 

 

 

1,059

Right of use asset, net

 

 

1,745

 

 

 

 —

Goodwill

 

 

58,747

 

 

 

 —

Deposits and other assets

 

 

2,151

 

 

 

1,676

Total assets

 

$

264,823

 

 

$

61,933

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

11,569

 

 

$

8,561

Accrued expenses

 

 

58,925

 

 

 

24,584

Debt - current, net

 

 

2,635

 

 

 

 —

Acquisition-related contingent consideration

 

 

1,200

 

 

 

 —

Other current liabilities

 

 

1,043

 

 

 

 —

Total current liabilities

 

 

75,372

 

 

 

33,145

Debt - non-current portion, net

 

 

92,957

 

 

 

 —

Acquisition-related contingent consideration

 

 

13,800

 

 

 

 —

Deferred income tax liability

 

 

24

 

 

 

24

Credit agreement

 

 

5,000

 

 

 

 —

Other liabilities

 

 

1,165

 

 

 

536

Total liabilities not subject to compromise

 

 

188,318

 

 

 

33,705

 

 

 

 

 

 

 

 

Liabilities subject to compromise

 

 

 —

 

 

 

139,588

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Predecessor common stock--$0.001 par value; 275,000,000 shares authorized; 56,547,101 shares issued and outstanding at December 31, 2018

 

 

 —

 

 

 

55

Successor common stock--$0.001 par value; 100,000,000 shares authorized; 9,360,968 shares issued and outstanding at March 31, 2019

 

 

 9

 

 

 

 —

Additional paid-in capital

 

 

86,988

 

 

 

276,569

Accumulated other comprehensive (loss) income

 

 

(9)

 

 

 

869

Accumulated deficit

 

 

(10,483)

 

 

 

(388,853)

Total stockholders' equity (deficit)

 

 

76,505

 

 

 

(111,360)

Total liabilities and stockholders’ equity (deficit)

 

$

264,823

 

 

$

61,933

 

See accompanying notes to unaudited consolidated financial statements.

 

1


 

Egalet Corporation and Subsidiaries

 

Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

Period from

 

 

Period from

 

 

 

 

 

 

 

February 1, 2019

 

 

January 1, 2019

 

Three months

 

 

 

 

through

 

 

through

 

ended

 

 

 

 

March 31, 2019

 

 

January 31, 2019

 

March 31, 2018

 

    

Revenue

    

 

 

    

    

 

 

 

 

 

    

 

Net product sales

 

$

15,810

 

 

$

1,775

    

$

6,261

 

 

Total revenue

 

 

15,810

 

 

 

1,775

 

 

6,261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (excluding amortization of product rights)

 

 

12,461

 

 

 

554

 

 

2,216

 

 

Amortization of product rights

 

 

2,332

 

 

 

171

 

 

537

 

 

General and administrative

 

 

3,365

 

 

 

5,413

 

 

7,073

 

 

Sales and marketing

 

 

5,131

 

 

 

2,773

 

 

9,055

 

 

Research and development

 

 

 5

 

 

 

186

 

 

1,303

 

 

Restructuring and other charges

 

 

 —

 

 

 

799

 

 

 —

 

 

Change in fair value of contingent consideration payable

 

 

200

 

 

 

 —

 

 

 —

 

 

Total costs and expenses

 

 

23,494

 

 

 

9,896

 

 

20,184

 

 

Loss from operations

 

 

(7,684)

 

 

 

(8,121)

 

 

(13,923)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of warrant and derivative liability

 

 

 —

 

 

 

 —

 

 

(5,125)

 

 

Interest expense, net

 

 

2,193

 

 

 

(52)

 

 

3,556

 

 

Other (gain) loss

 

 

 —

 

 

 

(140)

 

 

 —

 

 

Total other expense (income)

 

 

2,193

 

 

 

(192)

 

 

(1,569)

 

 

Reorganization items

 

 

606

 

 

 

(115,169)

 

 

 —

 

 

(Loss) income after reorganization charges and before provision (benefit) for income taxes

 

 

(10,483)

 

 

 

107,240

 

 

(12,354)

 

 

Provision (benefit) for income taxes

 

 

 —

 

 

 

 —

 

 

 —

 

 

Net (loss) income

 

$

(10,483)

 

 

$

107,240

 

$

(12,354)

 

 

Per share information:

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share of common stock, basic and diluted

 

$

(0.73)

 

 

$

1.90

 

$

(0.26)

 

 

Weighted-average shares outstanding, basic and diluted

 

 

14,333,332

 

 

 

56,547,101

 

 

47,303,659

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

2


 

Egalet Corporation and Subsidiaries

 

Consolidated Statements of Comprehensive Los s (Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

Period from

 

 

Period from

 

 

 

 

 

 

February 1, 2019

 

 

January 1, 2019

 

Three months

 

 

 

 

through

 

 

through

 

ended

 

 

 

 

March 31, 2019

    

    

January 31, 2019

 

March 31, 2018

    

    

Net (loss) income

    

$

(10,483)

 

 

$

107,240

    

$

(12,354)

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on available for sale securities

 

 

(1)

 

 

 

 —

 

 

(30)

 

 

Foreign currency translation adjustments

 

 

(8)

 

 

 

 —

 

 

124

 

 

Comprehensive (loss) income

 

$

(10,492)

 

 

$

107,240

 

$

(12,260)

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

3


 

Egalet Corporation and Subsidiaries

 

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

$0.001

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

Number of

 

Par

 

Paid-in

 

Accumulated

 

Comprehensive

 

 

 

 

 

    

Shares

    

Value

    

Capital

    

Deficit

    

Income

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

45,939,663

 

$

46

 

$

254,871

 

$

(295,300)

 

$

1,008

 

$

(39,375)

 

Cumulative adjustment - ASU 2014-09

 

 —

 

 

 —

 

 

 

 

 

1,901

 

 

 —

 

 

1,901

 

Restricted shares of common stock issued

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Deferred tax liability

 

 —

 

 

 —

 

 

(920)

 

 

 

 

 

 

 

 

(920)

 

Issuance of common stock, net of costs

 

5,941,538

 

 

 6

 

 

4,151

 

 

 —

 

 

 —

 

 

4,157

 

Exchange of convertible debt and issuance of warrants

 

1,000,000

 

 

 1

 

 

12,497

 

 

 

 

 

 

 

 

12,498

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

952

 

 

 —

 

 

 —

 

 

952

 

Unrealized loss on available for sale securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(30)

 

 

(30)

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

124

 

 

124

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(12,355)

 

 

 —

 

 

(12,355)

 

Balance,March 31, 2018

 

52,881,201

 

$

53

 

$

271,551

 

$

(305,754)

 

$

1,102

 

$

(33,048)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018 (Predecessor)

 

56,547,101

 

$

55

 

$

276,569

 

$

(388,853)

 

$

869

 

$

(111,360)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

4,125

 

 

 —

 

 

 —

 

 

4,125

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

107,240

 

 

 —

 

 

107,240

 

Cancellation of Predecessor common stock and stock-based compensation

 

(56,547,101)

 

 

(55)

 

 

(280,694)

 

 

 —

 

 

 —

 

 

(280,749)

 

Elimination of Predecessor accumulated deficit and accumulated other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

281,613

 

 

(869)

 

 

280,744

 

Common stock issued for settlement of predecessor debt

 

4,774,093

 

 

 5

 

 

31,000

 

 

 —

 

 

 —

 

 

31,005

 

Common stock issued for asset purchase

 

4,586,875

 

 

 4

 

 

29,784

 

 

 —

 

 

 —

 

 

29,788

 

Warrants issued for settlement of predecessor debt

 

 —

 

 

 —

 

 

14,303

 

 

 —

 

 

 —

 

 

14,303

 

Warrants issued for asset purchase

 

 —

 

 

 —

 

 

11,841

 

 

 —

 

 

 —

 

 

11,841

 

Balance as of January 31, 2019 (Predecessor)

 

9,360,968

 

$

 9

 

$

86,928

 

$

 —

 

$

 —

 

$

86,937

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of February 1, 2019 (Successor)

 

9,360,968

 

 

 9

 

 

86,928

 

 

 —

 

 

 —

 

 

86,937

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

60

 

 

 —

 

 

 —

 

 

60

 

Unrealized loss on available for sale securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1)

 

 

(1)

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8)

 

 

(8)

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(10,483)

 

 

 —

 

 

(10,483)

 

Balance as of March 31, 2019 (Successor)

 

9,360,968

 

$

 9

 

$

86,988

 

$

(10,483)

 

$

(9)

 

$

76,505

 

 

 

 

 

 

4


 

Egalet Corporation and Subsidiaries

 

Consolidated Statements of Cash Flow s (Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

Period from

 

 

Period from

 

 

 

 

 

 

 

February 1, 2019

 

 

January 1, 2019

 

Three months

 

 

 

 

through

 

 

through

 

ended

 

 

 

 

March 31, 2019

    

    

January 31, 2019

 

March 31, 2018

    

 

Operating activities:

    

 

    

 

 

 

 

    

 

    

 

 

Net (loss) income

 

$

(10,483)

 

 

$

107,240

 

$

(12,354)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,470

 

 

 

204

 

 

1,210

 

 

Non-cash reorganization items

 

 

 —

 

 

 

(121,144)

 

 

 —

 

 

Change in fair value of warrant and derivative liability

 

 

 —

 

 

 

 —

 

 

(5,125)

 

 

Stock-based compensation expense

 

 

60

 

 

 

4,125

 

 

952

 

 

Non-cash interest and amortization of debt discount

 

 

954

 

 

 

(9)

 

 

496

 

 

Accretion of discount on marketable securities

 

 

(3)

 

 

 

(5)

 

 

(97)

 

 

Change in fair value of contingent consideration

 

 

200

 

 

 

 —

 

 

 —

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(35,802)

 

 

 

3,865

 

 

(11,234)

 

 

Inventory

 

 

10,562

 

 

 

340

 

 

955

 

 

Prepaid expenses

 

 

686

 

 

 

219

 

 

439

 

 

Right of Use Assets

 

 

109

 

 

 

 —

 

 

 —

 

 

Other receivables

 

 

131

 

 

 

711

 

 

 2

 

 

Deposits and other assets

 

 

(476)

 

 

 

 1

 

 

164

 

 

Accounts payable

 

 

3,231

 

 

 

103

 

 

(19)

 

 

Accrued expenses

 

 

12,142

 

 

 

5,172

 

 

3,995

 

 

Other current liabilities

 

 

13

 

 

 

 —

 

 

 —

 

 

Other liabilities

 

 

(194)

 

 

 

 —

 

 

(44)

 

 

Net cash (used in) provided by operating activities

 

 

(16,400)

 

 

 

822

 

 

(20,660)

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Payments for purchase of property and equipment

 

 

(6)

 

 

 

 —

 

 

(3)

 

 

Purchases of investments

 

 

 —

 

 

 

 —

 

 

(4,265)

 

 

Sales of investments

 

 

2,497

 

 

 

 —

 

 

 —

 

 

Maturity of investments

 

 

2,500

 

 

 

 —

 

 

23,500

 

 

Net cash provided by (used in) investing activities

 

 

4,991

 

 

 

 —

 

 

19,232

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net proceeds from issuance of common stock

 

 

 —

 

 

 

 —

 

 

4,157

 

 

Payments on borrowings

 

 

 —

 

 

 

(19,104)

 

 

 —

 

 

Proceeds from credit agreement

 

 

4,775

 

 

 

 —

 

 

 —

 

 

Royalty payments in connection with the 13% Notes

 

 

 —

 

 

 

 —

 

 

(201)

 

 

Net cash provided by (used in) financing activities

 

 

4,775

 

 

 

(19,104)

 

 

3,956

 

 

Effect of foreign currency translation on cash and cash equivalents

 

 

(26)

 

 

 

 6

 

 

61

 

 

Net  (decrease) increase in cash, cash equivalents and restricted cash

 

 

(6,660)

 

 

 

(18,276)

 

 

2,589

 

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

17,447

 

 

 

35,723

 

 

31,490

 

 

Cash, cash equivalents and restricted cash at end of period

 

$

10,787

 

 

$

17,447

 

$

34,079

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

Cash interest payments

 

$

 —

 

 

$

 —

 

$

5,878

 

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification to additional paid-in capital of derivative liability

 

$

 —

 

 

$

 —

 

$

12,497

 

 

 

See accompanying notes to unaudited consolidated financial statements.

5


 

Egalet Corporation and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

 

1. Organization and Description of the Business

 

Interim Financial Statements

 

The consolidated financial statements of Egalet Corporation and its subsidiaries (“Egalet” or the “Company”) as of March 31, 2019 (Successor) and for the periods from February 1, 2019 through March 31, 2019 (Successor), January 1, 2019 through January 31, 2019 (Predecessor) and the three months ended March 31, 2018 (Predecessor) are unaudited and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The Company’s Consolidated Balance Sheet as of December 31, 2018 (Predecessor) has been derived from the audited financial statements as of that date contained in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report on Form 10-K”). The Company’s consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s 2018 Annual Report on Form 10-K, though, as described below, such prior financial statements will not be comparable to the interim financial statements due to the adoption of fresh start accounting on January 31, 2019. For additional information, see   Note 3- Fresh Start Accounting. The Company’s Consolidated Statements of Operations for the period from February 1, 2019 through March 31, 2019 (Successor) are not necessarily indicative of future financial results.

 

Emergence from Voluntary Reorganization Under Chapter 11 Proceedings

 

Chapter 11 Cases

 

On October 30, 2018, the Company entered into a definitive asset purchase agreement (The “Purchase Agreement”) to acquire the SOLUMATRIX® products and INDOCIN® products and one development product from Iroko Pharmaceuticals, Inc. and its subsidiaries (collectively, “Iroko”). To facilitate the transactions contemplated by the Purchase Agreement (the “Iroko Products Acquisition”) and to reorganize its financial structure, the Company and its wholly-owned subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) and a related Joint Plan of Reorganization ( “the Plan”) on October 30, 2018. The Iroko Products Acquisition was consummated, and the Plan became effective, on January 31, 2019.

 

The Company requested that the Chapter 11 cases (the “Chapter 11 Cases”) be jointly administered for procedural purposes only under the caption “In re Egalet Corporation, et al., Case No. 18-12439”. Upon filing, the Company continued to operate its business as a “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  The Company continued ordinary course operations substantially uninterrupted during the Chapter 11 Cases and sought approval from the Bankruptcy Court for relief under certain “first day” motions authorizing the Company to continue to conduct its business in the ordinary course. On January 14, 2019, the Bankruptcy Court entered the Confirmation Order confirming the Plan under Chapter 11 of the Bankruptcy Code. On January 31, 2019 (the “Effective Date”), and substantially concurrent with the consummation of the acquisition of the  Iroko products named below (the “Iroko Products Acquisition”), the Plan became effective.

 

Organization and Business Overview

 

The Company is a commercial-stage life sciences company focused on developing and marketing important treatments for patients and healthcare providers. Egalet currently has a portfolio of innovative treatments for different types of pain and inflammation. The Company has seven commercially available products: SPRIX ® (ketorolac tromethamine) Nasal Spray, ZORVOLEX ®   (diclofenac), VIVLODEX ®   (meloxicam), TIVORBEX ®   (indomethacin), INDOCIN ® (indomethacin) suppositories, INDOCIN® oral suspension and OXAYDO ® (oxycodone HCI, USP) tablets for oral use only —CII.  To augment its current product portfolio, the Company is seeking to acquire additional product

6


 

candidates or approved products to develop and/or market. The Company plans to grow its business through its commercial revenue and potential business development opportunities.

 

Liquidity and Substantial Doubt in Going Concern

 

Substantial Doubt Regarding Going Concern

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses since inception. As of March 31, 2019, the Company had an accumulated deficit of $10.5 million and working capital of $1.5 million. Even though the Company emerged from bankruptcy, it continues to have significant indebtedness and its ability to continue as a going concern is contingent upon the successful integration of the Iroko Products Acquisition, increasing its revenue, managing its expenses and complying with the terms of its new debt agreements. Refer to Note 9—Debt for additional details of debt agreements.

 

These factors, in combination with others described above, resulted in the conclusion that there is substantial doubt about the ability of the Company to continue as a going concern for the one-year period after the date that these financial statements are issued. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern .

 

2. Summary of Significant Accounting Policies and Basis of Accounting

 

Basis of Accounting

 

The unaudited consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Certain information and footnotes normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. The Company’s consolidation policy requires the consolidation of entities where a controlling financial interest is held. All intercompany balances and transactions have been eliminated in consolidation.

 

Upon emergence from bankruptcy, the Company adopted fresh start accounting in accordance with the provisions of Financial Accounting Standards Board (‘FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations , which resulted in the Company becoming a new entity for financial reporting purposes on February 1, 2019. As a result of the adoption of fresh start accounting, the Company’s unaudited consolidated financial statements subsequent to January 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019, any other interim periods or any future year or period . See  Note 3 – Fresh Start Accounting  for further details on the impact of fresh start accounting on the Company’s unaudited consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2018 filed on March 29, 2019 with the SEC.

 

References to "Successor" or "Successor Company" relate to the financial position and results of operations of the reorganized Company subsequent to January 31, 2019. References to "Predecessor" or "Predecessor Company" relate to the financial position and results of operations of the Company prior to, and including, January 31, 2019.

 

The Company’s significant accounting policies are described in Note 2 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K. Since the date of those financial statements, new accounting policies are noted below.

 

Goodwill

 

Goodwill is calculated as the excess of the reorganization equity value over the fair value of tangible and identifiable intangible assets pursuant to ASC 852 Reorganizations . Goodwill is not amortized but is tested for impairment

7


 

at the reporting unit level at least annually or when a triggering event occurs that could indicate a potential impairment by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that the fair value of net assets are below their carrying amounts. A reporting unit is the same as, or one level below, an operating segment. Our operations are currently comprised of a single, entity wide reporting unit.

 

The Company determined that no events have occurred or circumstances changed during the period from February 1, 2019 through March 31, 2019 (Successor) and the period from January 1, 2019 through January 31, 2019 (Predecessor) that would more likely than not reduce the fair value of any of the Company’s reporting units below their respective carrying amounts. However, if conditions deteriorate or there is a change in the business, it may be necessary to record impairment charges in the future.

 

Acquisition-related contingent consideration 

 

Pursuant to the Iroko Products Acquisition, the Company has obligations relating to contingent payment consideration for future royalty obligations to Iroko based upon annual INDOCIN product net sales over $20.0 million . The Company recorded the acquisition-date fair value of these contingent liabilities, based on the likelihood of contingent earn-out payments. The earn-out payments are subsequently remeasured to fair value each reporting date.  The fair value of the acquisition-related contingent consideration is remeasured each reporting period, with changes in fair value recorded in the Company’s Consolidated Statements of Operations. The royalty term commenced on the Effective Date and ends on the tenth anniversary of the Effective Date, January 31, 2029.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02 Leases (ASC 842). In July 2018, the FASB issued ASU No. 2018-10, "Codification Improvements to Topic 842, Leases" (ASU 2018-10), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU No. 2018-11, "Leases (Topic 842)-Targeted Improvements" (ASU 2018-11), which addressed implementation issues related to the new lease standard. These and certain other lease-related ASUs have generally been codified in ASC 842. ASC 842 supersedes the lease accounting requirements in Accounting Standards Codification Topic 840, Leases (ASC 840). ASC 842 establishes a right-of-use model that requires a lessee to record a right-of-use ("ROU") asset and a lease liability on the balance sheet for all leases. Under ASC 842, leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The standard also requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.

 

The Company adopted ASC 842 using the modified retrospective transition approach as of the effective date, which allows the Company to not adjust the comparative periods presented. The Company has elected to adopt the package of transition practical expedients and, therefore, has not reassessed whether existing or expired contracts contain a lease, the lease classification for existing or expired leases or the accounting for initial direct costs that were previously capitalized. The Company did not elect the practical expedient to use hindsight for leases existing at the adoption date. Further, the Company does not expect the amendments in ASU 2018-01: Land Easement Practical Expedient to have an effect on its financial position because it did not enter into land easement arrangements. The Company has elected, as an accounting policy, to not recognize ROU assets and lease liabilities for all short-term leases that have a lease term of 12 months or less.

 

Upon adoption, the Predecessor Company recorded a lease liability of $2.5 million with a corresponding ROU asset of $1.9 million for its operating leases.  The adoption of ASC 842 did not have a material impact on the Company’s Consolidated Statements of Operations or Consolidated Statements of Cash Flows.

 

8


 

3. Fresh Start Accounting

 

Upon emergence from bankruptcy, the Company adopted fresh start accounting as (i) the reorganization value of the assets of the Successor Company immediately before the date of confirmation of the Plan was less than the total of all post-petition liabilities and allowed claims and (ii) the holders of the Predecessor Company’s voting shares immediately before confirmation of the Plan received less than 50 percent of the voting shares of the emerging entity.

 

GAAP requires the adoption of fresh start accounting on the later of (i) the Plan confirmation date, or (ii) when all material conditions precedent to the Plan’s becoming effective are resolved, which occurred on January 31, 2019. Accordingly, the Company selected January 31, 2019 as the fresh start reporting date. Upon the application of fresh start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets is reported as goodwill.

 

The Bankruptcy Court confirmed the Plan based upon an estimated enterprise value of the Company between $162 million and $200 million, which was estimated using various valuation methods, including (i) comparable public company analysis, a method to estimate the value of a company relative to other publicly traded companies with similar operation and financial characteristics; (ii) discounted cash flow analysis, a calculation of the present value of the future cash flows to be generated by the asset or business based on its projection, and (iii) precedent transaction analysis, a method to estimate the value of a company by examining comparable public merger and acquisition transactions. Based upon a reevaluation of relevant factors used in determining the range of enterprise value and updated expected cash flow projections, the Company concluded the enterprise value, or fair value, was $196.6 million.

 

The basis of the discounted cash flow analysis used in developing the enterprise value was based on Company prepared projections that included a variety of estimates and assumptions. While the Company considers such estimates and assumptions reasonable, they are inherently subject to significant business, economic and competitive uncertainties, many of which are beyond the Company’s control and, therefore, may not be realized. Changes in these estimates and assumptions may have had a significant effect on the determination of the Company’s enterprise value. The assumptions used in the calculations for the discounted cash flow analysis, which had the most significant effect on our estimated enterprise value, included the following: forecasted revenue, costs and free cash flows through 2023, discount rate of 15.1 %. A terminal value of $217.3 million was established, which was determined using a perpetual long-term growth rate of 3%.

 

The four-column consolidated statement of financial position as of January 31, 2019, included herein, applies effects of the Plan and fresh start accounting to the carrying values and classifications of assets or liabilities. Upon adoption of fresh start accounting, the recorded amounts of assets and liabilities were adjusted to reflect their estimated fair values. Accordingly, the reported historical financial statements of the Predecessor Company prior to the adoption of fresh start accounting for periods ended on or prior to January 31, 2019 are not comparable to those of the Successor Company.

 

In applying fresh start accounting, the Company followed these principles:

 

·

The reorganization value, which represents the concluded enterprise value plus excess cash and cash equivalents and non-interesting bearing liabilities of the entity, was allocated to the entity’s reporting units in conformity with ASC 805, Business Combinations . The reorganization value exceeded the sum of the fair value assigned to assets and liabilities. This excess was recorded as Successor Company goodwill as of January 31, 2019.

·

Each asset and liability existing as of the fresh start accounting date, other than deferred taxes, has been stated at the fair value, and determined at appropriate risk adjusted interest rates.

·

Deferred taxes were reported in conformity with applicable income tax accounting standards, principally ASC 740, Income Taxes .

 

9


 

The following four-column consolidated statement of financial position table identifies the adjustments recorded to the Predecessor Company’s January 31, 2019 Consolidated Balance Sheets as a result of implementing the Plan and applying fresh start accounting:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Plan Effects

 

Fresh Start

 

 

 

 

(in thousands)

 

Predecessor

     

Adjustments

 

Adjustments

 

Successor

   

Assets

    

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,785

 

$

(19,738)

(a)

$

 —

 

$

17,047

 

Marketable securities, available for sale

 

 

4,994

 

 

 —

 

 

 —

 

 

4,994

 

Accounts receivable

 

 

4,141

 

 

 —

 

 

 —