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, 2020

☐ 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

Zyla Life Sciences

(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 10, 2020: 9,611,957

Table of Contents

TABLE OF CONTENTS

		Page

	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019	1
	Consolidated Statements of Operations unaudited for the three months ended March 31, 2020 (Successor), the Period February 1, 2019 through March 31, 2019 (Successor) and the Period January 1, 2019 through January 31, 2019 (Predecessor)	2
	Consolidated Statements of Comprehensive Loss unaudited for the three months ended March 31, 2020 (Successor), the Period February 1, 2019 through March 31, 2019 (Successor) and the Period January 1, 2019 through January 31, 2019 (Predecessor)	3
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2020 (Successor), the Period February 1, 2019 through March 31. 2019 (Successor) and the Period January 1, 2019 through January 31, 2019 (Predecessor)	4
	Consolidated Statements of Cash Flows unaudited for the three months ended March 31, 2020 (Successor), the Period February 1, 2019 through March 31, 2019 (Successor) and the Period January 1, 2019 to January 31, 2019 (Predecessor)	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	51
Item 6.	Exhibits	52

SIGNATURES		56

Unless otherwise indicated or the context otherwise requires, references to the “Company”, “we”, “us” and “our” refer to Zyla Life Sciences and its subsidiaries. The Zyla logo is our trademark and Zyla 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, 2020.

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS

Zyla Life Sciences and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)



	March 31, 2020		December 31, 2019
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	14,541	$	11,965
Accounts receivable, net		31,062		25,697
Inventory		10,281		9,049
Prepaid expenses and other current assets		3,445		4,102
Other receivables		878		815
Total current assets		60,207		51,628
Intangible assets, net		106,985		110,482
Restricted cash		400		400
Property and equipment, net		3,118		3,316
Right of use assets		2,479		2,672
Goodwill		53,917		58,747
Deposits and other assets		2,373		3,142
Total assets	$	229,479	$	230,387
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	23,101	$	12,752
Accrued expenses		55,310		50,357
Debt - current, net		7,797		8,177
Acquisition-related contingent consideration		5,825		3,500
Other current liabilities		1,008		985
Total current liabilities		93,041		75,771
Debt - non-current portion, net		91,346		91,710
Acquisition-related contingent consideration		14,475		14,400
Credit agreement		4,138		4,050
Other liabilities		1,783		2,065
Total liabilities		204,783		187,996

Stockholders’ equity:
Common stock--$0.001 par value; 100,000,000 shares authorized; 9,591,957 shares issued and outstanding at March 31, 2020: and 9,437,883 shares issued and outstanding at December 31, 2019		10		9
Additional paid-in capital		89,503		89,027
Accumulated other comprehensive income (loss)		62		(5)
Accumulated deficit		(64,879)		(46,640)
Total stockholders' equity		24,696		42,391
Total liabilities and stockholders’ equity	$	229,479	$	230,387

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

Zyla Life Sciences and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share data)



	Successor				Predecessor
			Period from		Period from
	Three momths		February 1, 2019		January 1, 2019
	ended		through		through
	March 31, 2020		March 31, 2019		January 31, 2019
Revenue
Net product sales	$	19,066	$	15,810	$	1,775
Total revenue		19,066		15,810		1,775

Costs and Expenses
Cost of sales (excluding amortization of product rights)		3,444		12,461		554
Amortization of product rights		3,497		2,332		171
General and administrative		7,474		3,365		5,413
Sales and marketing		9,972		5,131		2,773
Research and development		—		5		186
Restructuring and other charges		284		—		799
Change in fair value of contingent consideration payable		4,000		200		—
Impairment of goodwill		4,830		—		—
Total costs and expenses		33,501		23,494		9,896
Loss from operations		(14,435)		(7,684)		(8,121)

Other (income) expense:
Interest expense (income), net		3,808		2,193		(52)
Other gain, net		—		—		(140)
Loss on foreign currency exchange		(4)		—		—
Total other expense (income)		3,804		2,193		(192)
Reorganization items		—		606		(115,169)
Net (loss) income	$	(18,239)	$	(10,483)	$	107,240
Per share information:
Net (loss) income per share of common stock, basic and diluted	$	(1.26)	$	(0.73)	$	1.90
Weighted-average shares outstanding, basic and diluted		14,443,541		14,333,332		56,547,101

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

Zyla Life Sciences and Subsidiaries

Consolidated Statements of Comprehensive Loss (Unaudited)

(in thousands)



	Successor				Predecessor
			Period from		Period from
	Three months		February 1, 2019		January 1, 2019
	ended		through		through
	March 31, 2020		March 31, 2019		January 31, 2019
Net (loss) income	$	(18,239)	$	(10,483)	$	107,240
Other comprehensive (loss) income:
Unrealized loss on available for sale securities		—		(1)		—
Foreign currency translation adjustments		67		(8)		—
Comprehensive (loss) income	$	(18,172)	$	(10,492)	$	107,240

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

Zyla Life Sciences 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 (loss)		Total


Balance as of 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

Balance as of December 31, 2019 (Successor)	9,437,883	$	9	$	89,027	$	(46,640)	$	(5)	$	42,391
Stock-based compensation	—		—		476		—		—		476
Issuance of common stock	154,074		1		—		—		—		1
Foreign currency translation adjustment	—		—		—		—		67		67
Net loss	—		—		—		(18,239)		—		(18,239)
Balance as of March 31, 2020 (Successor)	9,591,957	$	10	$	89,503	$	(64,879)	$	62	$	24,696

Table of Contents

Zyla Life Sciences and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)



	Successor				Predecessor
			Period from		Period from
	Three months		February 1, 2019		January 1, 2019
	ended		through		through
	March 31, 2020		March 31, 2019		January 31, 2019
Operating activities:
Net (loss) income	$	(18,239)	$	(10,483)	$	107,240
Adjustment to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		3,698		2,470		204
Non-cash reorganization items		—		—		(121,144)
Stock-based compensation expense		566		60		4,125
Non-cash interest and amortization of debt discount		470		954		(9)
Accretion of discount on marketable securities		—		(3)		(5)
Change in right of use assets		193		109		—
Change in fair value of contingent consideration		4,000		200		—
Impairment of goodwill		4,830		—		—
Changes in assets and liabilities:
Accounts receivable		(5,365)		(35,802)		3,865
Inventory		(1,232)		10,562		340
Prepaid expenses		657		686		219
Other receivables		(64)		131		711
Deposits and other assets		768		(476)		1
Accounts payable		10,348		3,231		103
Accrued expenses		4,957		12,142		5,172
Other current liabilities		45		13		—
Other liabilities		(306)		(194)		—
Net cash provided by (used in) operating activities		5,326		(16,400)		822
Investing activities:
Payments for purchase of property and equipment		(3)		(6)		—
Sales of investments		—		2,497		—
Maturity of investments		—		2,500		—
Net cash (used in) provided by investing activities		(3)		4,991		—
Financing activities:
Payments of contingent consideration		(1,600)		—		—
Payments on borrowings		(1,125)		—		(19,104)
Payments of tax withholdings on restricted stock		(90)		—		—
Proceeds from credit agreement		—		4,775		—
Net cash (used in) provided by financing activities		(2,815)		4,775		(19,104)
Effect of foreign currency translation on cash and cash equivalents		69		(26)		6
Net increase (decrease) cash, cash equivalents and restricted cash		2,577		(6,660)		(18,276)
Cash, cash equivalents and restricted cash at beginning of period		12,365		17,447		35,723
Cash, cash equivalents and restricted cash at end of period	$	14,942	$	10,787	$	17,447

Supplemental disclosures of cash flow information:
Cash interest payments	$	120	$	—	$	—

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

Zyla Life Sciences and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

1. Organization and Description of the Business

Interim Financial Statements

The consolidated financial statements of Zyla Life Sciences and its subsidiaries (“Zyla” or the “Company”) as of March 31, 2020 (Successor), the three months ended March 31, 2020 (Successor) and for the periods from February 1, 2019 through March 31, 2019 (Successor), and January 1, 2019 through January 31, 2019 (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, 2019 (Successor) 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, 2019 (the “2019 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 2019 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 January 1, 2020 through March 31, 2020 (Successor) are not necessarily indicative of future financial results.

Organization and Business Overview

Zyla Life Sciences (the “Company”) is a commercial-stage life science company committed to bringing products to patients and healthcare providers and is focused on marketing its portfolio of medicines for pain and inflammation. Zyla’s portfolio includes six products: SPRIX® (ketorolac tromethamine) Nasal Spray, ZORVOLEX® (diclofenac), VIVLODEX® (meloxicam), INDOCIN® (indomethacin) suppositories, INDOCIN® oral suspension and OXAYDO® (oxycodone HCI, USP) tablets for oral use only —CII.

SPRIX Nasal Spray is a nonsteroidal anti-inflammatory drug indicated in adult patients for the short‑term (up to five days) management of moderate to moderately severe pain that requires analgesia at the opioid level. VIVLODEX and ZORVOLEX are SOLUMATRIX® Technology non-steroidal anti-inflammatory products. The Company acquired two forms of INDOCIN, an oral solution and a suppository, from Iroko Pharmaceuticals, Inc. and its subsidiaries (collectively, “Iroko”) in January 2019. Both products are approved for many indications including: moderate to severe rheumatoid arthritis including acute flares of chronic disease, moderate to severe ankylosing spondylitis, moderate to severe osteoarthritis, acute painful shoulder (bursitis and/or tendinitis) and acute gouty arthritis. OXAYDO is an immediate release (“IR”) oxycodone product designed to discourage abuse via snorting, indicated for the management of acute and chronic pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. To augment its current product portfolio, the Company is seeking to acquire additional product candidates or approved products to develop and/or market.

Merger Agreement

On March 16, 2020, the Company entered into an the Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Assertio Therapeutics, Inc. (“Assertio”), Alligator Zebra Holdings, Inc. (“Parent”), Zebra Merger Sub, Inc., a wholly-owned subsidiary of Parent (“Merger Sub”) and Alligator Merger Sub, Inc. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into us, with us continuing as the surviving corporation and a wholly-owned subsidiary of Parent. Pursuant to the terms of the Merger Agreement, at the time the merger is effective, each issued and outstanding share of common stock, par value $0.001 per share, of the Company (the “Common Stock”) (other than Excluded Shares (as defined below) and Dissenting Shares (as defined below)) will be converted into the right to receive 2.5 shares (the “Exchange Ratio”) of common stock, par value $0.0001 per share, of Parent (“Parent Common Stock”).

Table of Contents

Each share of Common Stock that is held by the Company as treasury stock or that is owned, directly or indirectly, by Parent, the Company, Merger Sub, or any subsidiary of the Company (collectively, “Excluded Shares”), immediately prior to the effective time of the Merger (the “Effective Time”) will cease to be outstanding and will be cancelled and retired and will cease to exist, and no consideration will be delivered in exchange therefor. “Dissenting Shares” are shares of the Common Stock (other than Excluded Shares) outstanding immediately prior to the Effective Time and held by a holder who is entitled to demand and has properly demanded appraisal for such shares of the Common Stock in accordance with Section 262 of the Delaware General Corporation Law. Consummation of the Merger is subject to certain conditions to closing, including, among others: (1) requisite approvals of Zyla’s and Assertio’s stockholders; (2) the absence of certain legal impediments to the consummation of the Merger; (3) the approval for listing on the Nasdaq Stock Market of the shares of Parent Common Stock to be issued as Merger consideration, (4) effectiveness of the registration statement on Form S-4 registering the shares of Parent Common Stock and other equity instruments to be issued in the Merger, (5) subject to certain exceptions, the accuracy of the representations, warranties and compliance with the covenants of each party to the Merger Agreement, and (6) Assertio, Parent and their respective Subsidiaries having minimum cash and cash equivalents equal to $25 million in the aggregate (as calculated pursuant to the Merger Agreement). The Company is working toward completing the Merger as quickly as possible and currently expects to consummate the merger in the second calendar quarter of 2020.

In March 2020, the World Health Organization (“WHO”) declared a global pandemic attributable to the outbreak and continued spread of COVID-19. In connection with the mitigation and containment procedures recommended by the WHO and imposed by federal, state, and local governmental authorities, the Company implemented measures designed to keep its employees safe and address business continuity issues at its distribution centers and other locations. The Company continues to evaluate and plan for the potential effects of a prolonged disruption and the related impacts on its revenue, results of operations, and cash flows. These items include, but are not limited to, the financial condition of its customers and the realization of accounts receivable, decreased availability and demand for its products and services, and delays related to current and future projects. While the Company’s operational and financial performance may be significantly impacted by COVID-19, it is not possible for the Company to predict the duration or magnitude of the outbreak and its effects on its business and whether such effects could have a material adverse impact on its financial position, results of operations, or cash flows. See Part II. Other Information-Item 1A. Risk Factors of this Quarterly Report on Form 10-Q for additional information.

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. 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 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 pursuant to the Purchase Agreement (the “Iroko Products Acquisition”), the Plan became effective. The Company divested assets related to TIVORBEX in November 2019.

Table of Contents

Liquidity and Substantial Doubt in Going Concern

Substantial Doubt Regarding Going Concern

The accompanying consolidated 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, 2020, the Company had an accumulated deficit of $64.9 million and a working capital deficit of $32.8 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 debt agreements. Refer to Note 8—Debt for additional details of these 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.

Effective January 1, 2020, financial assets measured at amortized cost are assessed for future expected credit losses in accordance with the provisions of Financial Accounting Standards Board (“FASB”) guidance within Accounting Standards Codification (“ASC”) 326, Financial Instruments – Credit Losses, to determine if application of an expected credit losses reserve is necessary. On a monthly basis, receivables that resulted from revenue transactions within the scope of ASC 606 are reviewed on a customer-level basis to analyze expectations of future collections based upon past history of collections, payment, aging of receivables and viability of the customer to continue payment, as well as estimates of future economic conditions. The Company has minimal instances of bad debts or uncollected receivables.

Upon emergence from bankruptcy, the Company adopted fresh start accounting in accordance with the provisions of ASC 852, Reorganizations, which resulted in the Company becoming a new entity for financial reporting purposes on February 1, 2019.

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.

Table of Contents

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This guidance applies to all entities and impacts how entities account for credit losses for financial assets measured at amortized cost and available for sale debt securities. ASU 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. For trade receivables, loans and held-to-maturity debt securities, entities will be required to estimate expected credit losses over the lifetime of the asset. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than an other-than-temporary impairment that reduces the cost basis of the investment. Further, an entity will recognize any improvements in estimated credit losses on its available-for-sale debt securities immediately in earnings.

Upon adoption, the Company assessed each financial asset measured at amortized cost for the impact of the guidance as of January 1, 2020 and noted an insignificant impact due to the minimal credit risk associated with its financial assets subject to ASC 326. As such, it was concluded that a reserve for credit losses was de minimis on the adoption date. Financial assets will continue to be assessed on a quarterly basis in future periods.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820)” which modifies the disclosure requirements of fair value measurements in Topic 820, Fair Value Measurement. For public companies the ASU removes disclosure requirements for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation process for Level 3 fair value measurements. The ASU modifies the disclosure requirements for investments in certain entities that calculate net asset value and clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds the disclosure requirement for changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019 including interim periods within that fiscal year. The Company adopted ASU 2018-13 as of January 1, 2020 as referenced in Note 11. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This guidance is effective for fiscal years beginning after December 15, 2020 and interim periods therein. Early adoption is permitted for any annual periods for which financial statements have not been issued and interim periods therein. The Company is currently analyzing the impact of ASU 2019-12 and does not anticipate the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

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.

Table of Contents

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 operations 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.

Table of Contents

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		—			—			4,141
Inventory		2,299		28,364	(b)		3,175	(h)		33,838
Prepaid expenses and other current assets		2,497		1,446	(b)		—			3,943
Other receivables		133		—			—			133
Total current assets		50,849		10,072			3,175			64,096
Intangible assets, net		4,109		90,106	(b)		29,091	(i)		123,306
Restricted cash		400		—			—			400
Property and equipment, net		1,027		3,047	(b)		—			4,074
Right of use asset, net		1,854		—			—			1,854
Goodwill		—		—			58,747	(j)		58,747
Deposits and other assets		1,676		—			—			1,676
Total assets	$	59,915	$	103,225		$	91,013		$	254,153
Liabilities and stockholders’ (deficit) equity
Current liabilities:
Accounts payable		9,839		(1,500)	(a)		—			8,339
Accrued expenses		26,617		20,183	(c)		—			46,800
Deferred revenue		52		—			(52)	(k)		—
Debt - current		—		1,492	(d)		—			1,492
Acquisition-related contingent consideration		—		1,200	(d)		—			1,200
Other current liabilities		1,030		—			—			1,030
Total current liabilities		37,538		21,375			(52)			58,861
Debt - non-current portion, net		—		93,371	(d)		—			93,371
Acquisition-related contingent consideration		—		13,600	(d)		—			13,600
Deferred income tax liabilities		24		—			—			24
Other liabilities		1,463		—			(103)	(k)		1,360
Total liabilities not subject to compromise		39,025		128,346			(155)			167,216

Liabilities subject to compromise		138,884		(138,884)	(e)		—			—

Stockholders’ (deficit) equity:
Common stock		55		(46)	(f)		—			9
Additional paid in capital		276,880		(189,952)	(f)		—			86,928
Other comprehensive income (loss)		866		—			(866)	(l)		—
Accumulated deficit		(395,795)		303,761	(g)		92,034	(l)		—
Total stockholders’ (deficit) equity		(117,994)		113,763			91,168			86,937
Total liabilities and shareholders’ (deficit) equity	$	59,915	$	103,225		$	91,013		$	254,153

Table of Contents

Effects of Plan Adjustments

Reflects cash distribution of $18.2 million and reimbursement to Iroko for transaction expenses incurred on the acquisition of $1.5 million.

Reflects purchase accounting for Iroko Products Acquisition which was treated as a business combination for accounting purposes. Assets acquired and liabilities assumed are recorded at fair value on the acquisition date.



Iroko Purchase Price Allocation	(in thousands)
Iroko Note	$	45,000
Iroko Equity Value in Reorganization		41,630
Fair Value of Contingent Consideration		14,800
Iroko Promissory Note		4,500
Total Iroko Purchase Price	$	105,930

Identifiable Assets / (Liabilities)
Inventory	$	28,364
Prepaid expenses		1,446
Fixed Assets		3,047
Intangible — Indocin		90,106
Product Liability		(17,033)
Total Iroko Purchase Price	$	105,930
Goodwill attributable to Iroko acquisition	$	—

Adjustments to accrued expense reflect i) $2.15 million success fees to be paid after the Effective Date upon the completion of the Iroko Products Acquisition and Chapter 11 proceedings, ii) $1.0 million transaction fees to be paid after the Effective Date for expenses Iroko incurred in connection with the acquisition, and iii) $17.03 million product related liabilities such as rebate, coupon payment, etc. assumed from Iroko.

Reflects obligations entered into upon emergence to finance transactions effectuated by the Plan: i) $90.3 million in 13% Notes, net of discount for interest-free period, and a royalty rights agreement giving the right to receive payment equal to 1.5% of net sales on all reorganized entity products, ii) $4.5 million pursuant to the Interim Promissory Note, and iii) $14.8 million in contingent consideration. Specifically, the contingent consideration represents the fair value of future royalty payments due to Iroko in the event Indocin net sales exceed $20.0 million in any fiscal year between the Effective Date and January 31, 2029 (“Indocin Royalty”). The current portion of the 13% Notes, Interim Promissory Note, and Indocin Royalty is $1.1 million, $0.4 million, and $1.2 million, respectively.

The adjustment to liabilities subject to compromise relates to the extinguishment of the former 13% Notes and associated royalty rights, the 5.50% and 6.50% Notes, and rejected contracts. The former 13% Notes were settled with $50.0 million in aggregate principal amount of the 13% Notes newly issued common stock of the Successor Company representing approximately 19.38% of the common stock then outstanding, and $20.0 million in cash equal to the sum of adequate protection payments of $1.8 million and cash distribution of $18.2 million. The 5.50% and 6.50% Notes were settled with newly issued common stock of the Successor Company representing approximately 31.62% of the common stock then outstanding. Contracts rejected in the Chapter 11 cases did not receive any consideration.

Pursuant to the Plan, the Company’s predecessor common stock was cancelled, and new common stock and warrants were issued. The adjustment eliminated the Predecessor Company’s common stock, additional paid-in capital and recorded the Successor Company’s new $0.001 par value common stock, warrants and additional paid-in capital. The Company issued 9,360,968 shares of new common stock and additional paid-in capital of $60.8 million and $26.1 million of warrants. The warrants were valued using the Black Scholes model. Significant assumptions used in determining the fair value of such warrants at issuance include an assumed share price volatility of 60%, a risk-free rate of return of 2.43% with a 5 year term, and marketability discount between 7% and 20% for the lock-up periods.

This adjustment reflects the net effect of the transaction related to the consummation of the Plan on Predecessor’s accumulated deficit. The table below provides a summary of the adjustments:

Table of Contents


Liabilities subject to compromise	(in thousands)
13% Senior Secured Debt	$	85,438
5.50% Convertible Notes		24,650
6.50% Convertible Notes		23,888
Accrued interest		2,464
Accrued royalty rights ("Existing Senior Secured Royalty Rights")		2,119
Accrued expenses		325
Liabilities subject to compromise	$	138,884

Consideration given pursuant to the Plan:
Issuance of warrants	$	(14,303)
Issuance of new common stock		(31,004)
Issuance of new Senior Secured Notes		(45,363)
Cash payment		(18,238)
Total consideration given pursuant to the Plan	$	(108,908)

Gain on extinguishment of prepetition liabilities		29,976

Other adjustments to accumulated deficit:
Success fees		(2,150)
Reimbursement to Iroko of acquisition expense		(1,000)
Cancellation of Predecessor stock-based compensation expense		(3,814)
Tax related expenses on gain on extinguishment of prepetition liabilities		—
Total other adjustments		(6,964)

Extinguishment of Predecessor Common Stock and Additional-paid-in-capital		280,749
Total adjustments to accumulated deficit:	$	303,761

Fresh Start Adjustments

A $3.2 million adjustment was recorded to adjust the Company’s legacy inventory, excluding inventory assumed from Iroko, to fair value. The Company obtained an independent third-party valuation specialist’s assistance in the determination of the fair values of inventory. The inventory valuation included an analysis of net realizable value of the work in progress inventory and finished goods. Finished goods are valued using the comparative sales method as a function of the estimated selling price less the sum of any cost to complete, costs of disposal, holding costs, and a reasonable profit allowance. Carrying value of raw materials and packaging is assumed to represent a reasonable proxy for fair value.

Reflects fresh start adjustments recorded to adjust intangible assets related to the Company’s legacy products, SPRIX and OXAYDO, to fair value. The Company obtained independent-third party valuation specialist’s assistance in determination of the fair values of intangibles. SPRIX and OXAYDO intellectual property values are valued using the multi period excess earnings method under the income approach. The multi-period excess earnings method measures economic benefit indirectly by calculating the income attributable to an asset after appropriate returns are paid to complementary assets used in conjunction with the subject asset to produce contributory asset charges. Key components of the excess earnings methods include revenue, adjusted operating margin, charges for use of other assets, and discount rate.

Adjustment to record the reorganization value of assets in excess of amounts allocated to identifiable tangible and intangible assets, also referred to as Successor Company goodwill. Estimated business enterprise value is

Table of Contents

developed for the combined company upon emergence from bankruptcy and therefore allocated to both identified tangible and intangible assets from the Predecessor Company and assumed from acquisition of Iroko.


	(in thousands)
Estimated business enterprise value	$	196,600
Add: Fair value of liabilities excluded from enterprise value		57,552
Less: Fair value of tangible assets		(72,099)
Less: Fair value of identified intangible assets		(123,306)
Reorganization value of assets in excess of amounts allocated to identified tangible and intangible assets (Successor company goodwill)	$	58,747

Total Successor Goodwill	$	58,747

Adjustments to eliminate deferred revenue and related product advance.

The Predecessor Company’s accumulated deficit and accumulated other comprehensive income was eliminated in conjunction with the adoption of fresh start accounting pursuant to ASC 852, Reorganization. The Predecessor Company recognized a $91.2 million gain related to the fresh start accounting adjustments related for revaluation of assets and liabilities as follows:


	(in thousands)
Establish Successor goodwill attributable to emergence from Chapter 11	$	58,747
Intangible fair value adjustments		29,091
Inventory fair value adjustments		3,175
Deferred revenue and product advance adjustments		155
Gain on fresh start adjustment for revaluation of assets and liabilities		91,168

Eliminate Predecessor Company Other comprehensive income		866
Total adjustment to stockholders' deficit	$	92,034

4. Revenue From Contracts with Customers

Revenue Recognition

Under ASC 606, revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. To recognize revenue pursuant to the provisions of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect substantially all the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses whether the goods or services promised within each contract are distinct to determine those that are performance obligations.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”). The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. To the extent that the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price to which the Company expects to be entitled after giving effect to returns, rebates, sales allowances and other variable elements with contracts between the Company and its customers. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance under the contract and all information (historical,

Table of Contents

current and forecasted) that is reasonably available. Sales taxes and other taxes collected on behalf of third parties are excluded from revenue.

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the significant financing practical expedient, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component during the period ended March 31, 2020.

The Company’s existing contracts with customers contain only a single performance obligation and, as such, the entire transaction price is allocated to the single performance obligation. Should future contracts contain multiple performance obligations, those would require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on observable prices or a cost-plus margin approach when one is not available.

The Company’s performance obligations are to provide pharmaceutical products to several wholesalers or a single specialty pharmaceutical distributor. All of the Company's performance obligations, and associated revenue, are generally transferred to customers at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring control of a promised good to a customer, which is typically upon delivery. Payments for invoices are generally due within 30 to 65 days of invoice date.

Disaggregation of Revenue

The following table reflects revenue by revenue source for the periods indicated:



	Successor				Predecessor
			Period from		Period from
	Three months		February 1, 2019		January 1, 2019
	ended		through		through
(in thousands)	March 31, 2020		March 31, 2019		January 31, 2019
Product lines
INDOCIN products	$	11,869	$	7,499	$	—
SPRIX Nasal Spray		5,687		3,830		1,354
SOLUMATRIX products		858		3,808		—
OXAYDO		652		673		421
Total	$	19,066	$	15,810	$	1,775

Reserves for Variable Consideration

Revenues from product sales are recorded at the transaction price, which includes estimates of variable consideration for which reserves are established and which result from returns, rebates and sales allowances that are offered within or impacted by contracts between the Company and its customers. Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as the Company’s historical experience, current contractual requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract as of the date of determination. The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.

Product Returns

Consistent with industry practice, the Company generally offers customers a limited right of return for its products. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company estimates

Table of Contents

product return liabilities using the expected value method based on its historical sales information and other factors that it believes could significantly impact its expected returns, including product discontinuations, product recalls and expirations, of which it becomes aware. These factors include its estimate of actual and historical return rates for non-conforming product and open return requests.

Specialty Pharmacy Fees

The Company pays certain specialty pharmaceutical distributor fees based on a contractually determined rate. The Company records the fees on shipment to the distributor and recognizes the fees as a reduction of revenue in the same period the related revenue is recognized.

Wholesaler and Title Fees

The Company pays certain pharmaceutical wholesalers and its third-party logistics provider fees based on a contractually determined rate. The Company accrues these fees on shipments to the respective wholesalers and recognizes the fees as a reduction of revenue in the same period the related revenue is recognized.

Prompt Pay Discount

The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. The Company estimates cash discounts using the mostly likely amount method by reducing accounts receivable by the prompt pay discount amount. The discount is recognized as a reduction of revenue in the same period as the related revenue.

Patient Discount Programs

The Company offers co-pay discount programs for each of its products to patients, in which patients receive a co-pay discount on their prescriptions. The Company utilizes data provided by independent third parties to determine the total amount that was redeemed and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.

Rebates and Chargebacks

Managed care rebates are payments to governmental agencies and third parties, primarily pharmacy benefit managers and other health insurance providers. The reserve for these rebates is based on a combination of actual utilization provided by the third party and an estimate of customer buying patterns and applicable contractual rebate rates to be earned over each period. The Company recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.

Table of Contents

The following table reflects activity in each of the net product sales allowance and reserve categories for the periods indicated:

Successor

Fees and

Zyla Life Sciences 10-Q