Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1. Basis of Preparation and Significant
Accounting Policies
Basis of Preparation
These
unaudited interim condensed consolidated financial statements include the accounts of Innocoll Holdings plc and its subsidiaries
(herein referred to as “we,” “us,” “our,” “Innocoll” or the “Company”)
and have been prepared
in accordance with United States generally accepted accounting principles (“U.S. GAAP”)
pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include
all of the information and footnotes required by U.S. GAAP for complete financial statements.
These
statements reflect all adjustments, which in the opinion of management, are necessary for fair presentation of the information
contained
therein. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. These unaudited
interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and
accompanying notes included
i
n the Company’s Annual Report
on Form 10-K for the year ended December 31, 2016 (“2016 Annual Report”). There were no notable changes in our significant
accounting policies subsequent to our 2016 Annual Report. To facilitate comparison of information across periods, certain reclassifications
have been made to prior period amounts to conform to the current period's presentation. These reclassifications did not impact
our results of operations, financial condition or liquidity.
The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported in the unaudited interim condensed
consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Proposed Transaction
On April 4, 2017, Innocoll entered into an agreement
(the “Transaction Agreement”) on the terms of a recommended offer with Gurnet Point L.P., (“Gurnet
Point”) a Delaware limited partnership acting through its general partner Waypoint International GP LLC, and
Lough Ree Technologies Limited (“Gurnet Bidco”), an Irish private limited company and wholly-owned subsidiary
of Gurnet Point. Under the recommended offer Gurnet Bidco will acquire the entire issued ordinary shares of the
Company (the “Acquisition”) as of immediately prior to the effective date of the acquisition, subject to certain
conditions, including the receipt of the necessary approval from the Company’s shareholders and other customary closing
conditions. For each ordinary share of the Company, Gurnet Bidco will pay: (a) $1.75 in cash and (b) a contingent
value right (each, a “CVR”) to be issued by Gurnet Bidco on the terms and conditions set forth in a CVR agreement
to be entered into between Gurnet Bidco and an as of yet unidentified third party, as rights agent (the “Rights Agent”)
in connection with the completion of the acquisition (the “CVR Agreement”), which will represent the contractual right
to receive additional payments in cash up to a maximum aggregate amount of $4.90 per CVR, contingent upon the Company’s
achievement of certain milestones related to the approval of the Company’s drug candidate Xaracoll by the U.S. Food
and Drug Administration (“FDA”) and to the achievement of certain sales targets. The aggregate value of the
transaction is $209 million (including the maximum amount payable upon achievement of the CVR milestones).
In connection with the Acquisition, on May 9, 2017,
the Company (in its capacity as the Guarantor) and its wholly-owned subsidiary, Innocoll Pharmaceuticals Limited, an Irish
private limited company (the “Borrower”) entered into a Loan and Guaranty Agreement (the “GP Term Loan
Agreement”) with Gurnet Point. Pursuant to the GP Term Loan Agreement, upon the agreed upon drawdown date, Gurnet Point
or its Affiliate (the “Lender”) will loan the Borrower an aggregate principal amount of up to $10 million (the
“GP Term Loan”).
Upon entry into the GP Term Loan Agreement, the Company
granted to Gurnet Bidco a warrant (the “Warrant”) to subscribe for up to 5% of the outstanding share capital of Innocoll
as of December 31, 2017 for an exercise price of $0.01 per Company share. The Warrant will be exercisable if the GP Term Loan
is not repaid in full by December 31, 2017.
On May 5, 2017, in order to obtain the consent of The European
Investment Bank (“EIB”) to enter into the GP Term Loan Agreement (i) the Company, the Borrower and the EIB entered
into an Amendment and Waiver Agreement (the “Amendment Agreement”) to modify certain terms of the Finance Contract
(the “Finance Contract”) between the Borrower and the EIB and (ii) the Company, the Lender, the Borrower and the EIB
entered into an Intercreditor Deed (the “Intercreditor Deed”). The Amendment Agreement permits the entry into the
GP Term Loan Agreement and modifies certain terms of the Finance Contract, including the maturity date of the Finance Contract
under the occurrence of certain events.
Subject to the prior condition that the Company raises,
prior to December 15, 2017, at least $25 million through one or more equity financings, shareholder loans or from licensing revenue
and has at least $25 million in cash on hand at December 30, 2017 (referred to as the “Extension Conditions”), the
Intercreditor Deed provides that the Company may repay the GP Term Loan on December 30, 2017, prior to the repayment of the obligations
under the Finance Contract, without such repayment constituting an event of default under the Finance Contract. The Amendment
Agreement further provides that, if on December 31, 2017, the Acquisition has not been effected and the Extension Conditions have
not been achieved, the EIB has the right to demand repayment of all of the obligations outstanding under the Finance Contract
on or after December 31, 2017 instead of having to wait until the existing maturity on the outstanding obligations.
Other than transaction expenses associated with
the proposed transaction of $2.3 million for the three months ended March 31, 2017, the proposed transaction did not impact the
Company's unaudited interim condensed consolidated financial statements.
Accounting Pronouncements
Accounting Standard Update (“ASU”) 2014-09
,
“Revenue from Contracts with Customers.”
In May 2014, the Financial Accounting Standards Board (“FASB”)
issued guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most
existing industry-specific guidance. The guidance requires an entity to review contracts in five steps:
1) identify the contract;
2) identify performance obligations;
3) determine the transaction price;
4) allocate the transaction price; and
5) recognize revenue.
The ASU will result in enhanced disclosures regarding the nature,
amount, timing, and uncertainty of revenue arising from contracts with customers.
For public business entities, certain not-for-profit entities,
and certain employee benefit plans, the effective date for ASC 606 is annual reporting periods (including interim reporting periods
within those periods) beginning after December 15, 2017. Early application is permitted only as of annual reporting periods (including
interim reporting periods within those periods) beginning after December 15, 2016. The effective date for all other entities is
annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning
after December 15, 2019. All other entities may apply the ASU early, as of an annual reporting period beginning after December
15, 2016, including interim reporting periods within that reporting period. All other entities also may apply ASC 606 early as
of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods
beginning one year after the annual reporting period in which the entity first applies ASC 606. The company intends to adopt the
standard for annual periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning
after December 15, 2019.
The Company is currently establishing an implementation process
to complete an initial assessment as to the impact of the standard on its contract portfolio and to commence implementing the ASU.
The Company will select a representative sample of its contracts to review to identify the potential differences that would result
from applying the requirements of the new standard and base its initial assessment on this process. Once completed the Company
will complete a final assessment of the impact of the ASU and determine whether or not it will have a material impact on the Company’s
financial statements and select its method of adoption at that time. The ASU provides detailed disclosure requirements, which are
more detailed than under current U.S. GAAP. This will represent a significant change from current practice and significantly increase
the volume of disclosures required in the financial statements. The Company expects to complete its impact assessment over the
coming months and initiate efforts to redesign impacted processes, policies and controls.
ASU 2015-11
,
“Simplifying the Measurement
of Inventory.”
In July 2015 FASB issued this ASU in relation to Topic 330 “Inventory.” Under the amendment,
an entity should measure inventory within the scope of the ASU at the lower of cost and net realizable value. Net realizable value
is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. Subsequent measurement is unchanged for inventory measured using last in, first out (“LIFO”) or
the retail inventory method. The amendments in this ASU more closely align the measurement of inventory in U.S. GAAP with the measurement
of inventory in IFRS. The ASU is effective for public business entities for annual periods beginning after December 15, 2016, and
interim periods therein. For all other entities the amendments in this Update are effective for annual periods beginning after
December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. Prospective application is required.
The Company is currently assessing the impact of this ASU on its inventory balances and it is not expected to have a material impact
on the Company’s consolidated financial statements. The Company intends to adopt the standard for annual periods beginning
after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017.
ASU 2016-02, “
Leases
.”
In February 2016, the FASB issued ASU 2016-02. This ASU requires lessees to put most leases on their balance sheets but recognize
expenses in the income statement in a manner similar to current accounting treatment. This ASU changes the guidance on sale-leaseback
transactions, initial direct costs and lease execution costs, and, for lessors, modifies the classification criteria and the accounting
for sales-type and direct financing leases. This ASU is effective for public entities for annual periods beginning after December
15, 2018, and interim periods therein. For all other entities, the ASU will be effective for annual periods beginning after
December 15, 2019 (i.e., calendar periods beginning on January 1, 2020), and interim periods thereafter. Early adoption will be
permitted for all entities. Entities are required to use a modified retrospective approach for leases that exist or are entered
into after the beginning of the earliest comparative period in the financial statements. There are also some practical expedients
available. The Company is in the process of determining the effect that the adoption of this standard will have on its financial
statements and disclosures. The Company currently expects that most of its operating lease commitments will be subject to the new
standard and recognized as lease liabilities and right-of-use assets upon its adoption of ASU 2016-02. The Company intends to adopt
the standard for annual periods beginning after December 15, 2019 (i.e., calendar periods beginning on January 1, 2020), and interim
periods thereafter.
ASU 2016-09, “Improvements to Employee Share-Based
Payment Accounting.
” In March 2016, the FASB issued ASU 2016-09. This ASU simplifies several aspects of the accounting
for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. The ASU is effective for public entities for annual periods beginning
after December 15, 2016, although early adoption is permitted. For all other entities, the ASU is effective for annual reporting
periods beginning after December 15, 2017, and interim periods within annual reporting periods beginning after December 15, 2018.
The Company is currently evaluating the impact of this ASU on its financial statements and disclosures. The Company intends to
adopt the standard for annual periods beginning after December 15, 2017, and interim periods within annual reporting periods beginning after December 15, 2018.
ASU 2016-15, “Statement of Cash Flows
.” In
August 2016, the FASB issued ASU 2016-15. The amendments in the ASU provide guidance for several new and/or revised disclosures
pertaining to the classification of certain cash receipts and cash payments on the statement of cash flows, including contingent
consideration payments made after a business acquisition. This ASU is effective for public business entities for annual periods
beginning after December 15, 2017, and interim periods therein. For all other entities the amendments in this Update are effective
for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its financial statements but does not
anticipate a material impact. The Company intends to adopt the standard for annual periods beginning after December 15, 2018, and
interim periods within annual periods beginning after December 15, 2019.
ASU 2016-18
“Statement of Cash Flows
.” In
November 2016, the FASB issued ASU 2016-18. This amendment affects the cash flow statement and requires companies to include items
described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for public entities for annual periods
beginning after December 15, 2017, and interim periods within those annual periods. For all other entities the amendments in this
Update are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning
after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company currently shows movements
in restricted cash as an investing cash flow, however, as a result of this ASU it will be shown in the movement in cash and cash
equivalent. The Company intends to adopt the standard for annual periods beginning after December 15, 2018, and interim periods
within annual periods beginning after December 15, 2019.
The Company has reviewed all other recently issued, but not
yet adopted, accounting standards in order to determine their effects, if any, on its results of operation, financial position
and cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect
on its current or future earnings or operations.
The planned adoption dates for all standards not yet implemented
are based on the Company’s current classification as an Emerging Growth Company. Section 107 of the JOBS Act provides that
an emerging growth company can take advantage of the extended transition period as noted in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. If this classification changes, we will re-valuate our timeline for
implementing these standards.
Note 2. Research and development expenses
|
|
Three
Months Ended March 31,
|
|
Thousands of Dollars
|
|
2017
|
|
|
2016
|
|
Employee compensation
|
|
$
|
568
|
|
|
$
|
735
|
|
External clinical research costs
|
|
|
651
|
|
|
|
14,020
|
|
General operating costs
|
|
|
98
|
|
|
|
214
|
|
Total research and development expenses
|
|
$
|
1,317
|
|
|
$
|
14,969
|
|
Research and development expenses include labor, materials and
direct overheads associated with the various research programs.
Note 3. Other expense
|
|
Three
Months Ended March 31,
|
|
Thousands of Dollars
|
|
2017
|
|
|
2016
|
|
Warrant (expense)/income
|
|
$
|
(153
|
)
|
|
$
|
99
|
|
Foreign exchange loss
|
|
|
(547
|
)
|
|
|
(395
|
)
|
Other expense
|
|
|
-
|
|
|
|
(3
|
)
|
Total other expense
|
|
$
|
(700
|
)
|
|
$
|
(299
|
)
|
The warrant (expense)/income arises on the change in the fair
value of the liability of the warrants following re-measurement at each period end.
Note 4. Loss per share
The Company calculates basic EPS by dividing the net loss attributable
to ordinary shareholders for the period by the weighted average number of ordinary shares outstanding during the period. The Company
calculates diluted EPS by dividing the net loss attributable to ordinary shareholders for the period by the weighted average number
of ordinary shares and dilutive instruments outstanding during the period. The Company has RSUs and other stock awards which have
been granted to eligible employees. These awards may have a potential dilutive effect if exercised.
The weighted average number of ordinary shares have been adjusted
to reflect the effect of the merger in 2016. The impact of the merger in 2016 is further detailed in the 2016 Annual Report. The
below table presents the basic and diluted EPS:
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator - Thousands of Dollars:
|
|
|
|
|
|
|
|
|
Net loss - basic and diluted
|
|
$
|
(12,688
|
)
|
|
$
|
(23,054
|
)
|
|
|
|
|
|
|
|
|
|
Denominator - Number of shares:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic and diluted
|
|
|
29,758,894
|
|
|
|
23,661,908
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.43
|
)
|
|
$
|
(0.97
|
)
|
The basic loss per share was $0.43 in the first quarter of 2017
and $0.97 in the first quarter of 2016.
Options to purchase 2,771,369 ordinary shares were
outstanding at March 31, 2017 but were not included in the computation of diluted EPS because the options’ exercise
price was greater than the average market price of the ordinary shares. 1,329,000 restricted stock units were outstanding
at March 31, 2017 but were not included in the computation of diluted EPS as they are anti-dilutive due to the company
incurring losses.
Note 5. Trade and other receivables, net
Thousands of Dollars
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Trade receivables, net
|
|
$
|
636
|
|
|
$
|
320
|
|
Sales taxes receivable
|
|
|
503
|
|
|
|
1,030
|
|
Total trade and other receivables, net
|
|
$
|
1,139
|
|
|
$
|
1,350
|
|
Note 6. Inventories
Thousands of Dollars
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Raw materials
|
|
$
|
973
|
|
|
$
|
920
|
|
Work in progress
|
|
|
882
|
|
|
|
1,266
|
|
Finished goods
|
|
|
111
|
|
|
|
217
|
|
Total inventories
|
|
$
|
1,966
|
|
|
$
|
2,403
|
|
Note 7. Property, plant and equipment, net
Thousands of Dollars
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Leasehold improvements
|
|
$
|
11,074
|
|
|
$
|
10,752
|
|
Plant and machinery
|
|
|
17,204
|
|
|
|
16,558
|
|
Furniture and fittings
|
|
|
3,359
|
|
|
|
3,253
|
|
Property, plant and equipment, gross
|
|
|
31,637
|
|
|
|
30,563
|
|
Less: accumulated depreciation
|
|
|
(14,136
|
)
|
|
|
(13,865
|
)
|
Total property, plant and equipment, net
|
|
$
|
17,501
|
|
|
$
|
16,698
|
|
Included in property, plant and equipment, net as of December
31, 2016 are assets under construction, which relate to the manufacturing facility in Germany. Assets under construction are stated
at cost as of December 31, 2016. As of March 31, 2017 all assets previously under construction had been brought into use. No provision
for depreciation is made on these assets until such time as the relevant assets are completed and brought into use. The Company
did not incur and capitalize assets under construction during the three months ended March 31, 2017. During 2016, the Company
incurred and capitalized assets under construction of $10.3 million.
Note 8. Income Tax
The Company’s incomes taxes (expense)/benefit
was $(0.1) million and $0.2 million during the three months ended March 31, 2017 and 2016, respectively. The Company’s
effective tax rates for these periods differ from the Irish corporate tax rate of 12.5% due to the effect of income earned by
certain of the Company’s overseas entities being taxed at local statutory rates and the valuation allowance recognized in
relation to losses arising on operations in Ireland as noted below.
Deferred tax assets and liabilities
The following temporary differences which might give rise to
deferred taxes relate to:
Thousands of Dollars
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Deferred tax assets:
|
|
$
|
|
|
|
$
|
|
|
Tax credits and net operating losses
|
|
|
24,477
|
|
|
|
23,489
|
|
Valuation allowances
|
|
|
(24,350
|
)
|
|
|
(23,364
|
)
|
Total deferred tax assets
|
|
$
|
127
|
|
|
$
|
125
|
|
The recognized deferred tax assets of $0.1 million arises on
losses carried forward from operations in the U.S. The Company has recognized these deferred tax assets in the period as
management considers that the realization of these deferred tax balances in the near future is more likely than not.
All of the unrecognized deferred tax assets arise on operations
in Ireland. Losses arising on operations in Ireland can be carried forward indefinitely, but are limited to the same trade/trades.
The Company has not recognized any deferred tax assets in the period as management does not consider the realization of
these deferred tax balances in the near future to be more likely than not due to the significant costs the Company is likely
to incur in the short term in advancing its product pipeline.
Note 9. Interest-bearing loans and borrowings
Gross liabilities as of March 31, 2017:
Thousands of Dollars
|
|
Interest
Bearing
Loans
|
|
Balance as of December 31, 2016
|
|
$
|
28,948
|
|
Movements during the period
|
|
|
1,236
|
|
Balance as of March 31, 2017
|
|
$
|
30,184
|
|
Reconciliation of gross proceeds to carrying value:
Thousands of Dollars
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Gross Proceeds
|
|
$
|
27,571
|
|
|
$
|
27,571
|
|
Accrued interest
|
|
|
3,567
|
|
|
|
2,779
|
|
Foreign exchange fluctuations
|
|
|
(954
|
)
|
|
|
(1,402
|
)
|
|
|
$
|
30,184
|
|
|
$
|
28,948
|
|
On March 27, 2015, the Company approved the execution of
the Finance Contract (the “Finance Contract”) between Innocoll Pharmaceuticals Limited and the European Investment
Bank (“EIB”) for a loan of up to $27.6 million, pursuant to which amounts drawn were available to be used to finance
up to 50% of certain research and development and capital expenditures forecast to be made by the Company over a three year period
from 2015 through 2017.
Pursuant to the terms of the Finance Contract, the first
$16.3 million tranche of the loan commitment was available to be drawn at any time up to fifteen months from the date of the Finance
Contract, and the remaining $11.3 million tranche was available to be drawn at any time up to eighteen months from the date of
the Finance Contract subject to the delivery of clinical data, certified by the management board of Innocoll Holdings plc, confirming
to the satisfaction of EIB that the primary clinical endpoints for either Cogenzia or XaraColl Phase 3 trials had been achieved
and therefore it could be concluded that the Phase 3 clinical trial had successfully been completed.
On December 18, 2015, Innocoll Pharmaceuticals Limited drew
down the first tranche of $16.3 million.
On June 17, 2016, Innocoll Pharmaceuticals Limited drew
down the second and final tranche of $11.3 million.
The loan bears interest at a fixed rate of 12% per annum,
compounded annually. There are no cash payments of interest required during the term of the loan, interest on the outstanding
loan balance accrues daily, and is payable only on the maturity date or prepayment date of the loan, whichever is earlier. The
maturity date of each tranche is three to five years from the draw down date, as may be determined by the Company in each draw
down request. Principal of the loan is payable on the maturity date or the prepayment date, whichever is earlier. Where a prepayment
is made the Company will incur a prepayment indemnity of 1%, 0.75%, 0.5% or 0.25% of the principal amount to be repaid within
one year, two years, three years or four years from date of drawdown, respectively. There will be no prepayment indemnity for
prepayment after the fourth year.
The loan contains an expenditure covenant requiring the
Company to spend at least 75% of our forecast research and development, and capital expenditures during the period from 2015 to
2020 as set out in a business plan agreed with the EIB. If, upon completion of the “Project” (as defined in the Finance
Contract), it is determined that the total principal amount of the loan drawn by the Company exceeds 50% of the total cost of
the Project, EIB may cancel the undisbursed portion of the loan and demand prepayment of the loan up to the amount by which the
loan, excluding accrued interest, exceeds 50% of the total cost of the Project.
The security on the Finance Contract includes a guarantee
from the Company on 100% of the outstanding principal, interest, expense, commission, indemnity and other sum owed by Innocoll
Pharmaceuticals Limited, together with a fixed charge over all the shares in Innocoll Pharmaceuticals Limited and a floating charge
over all the assets of Innocoll Pharmaceuticals Limited. As of March 31, 2017, no violations of the covenants had occurred.
As of March 31, 2017, the carrying value of the loan equated
the fair value.
In connection with
the Acquisition, on May 9, 2017, the Company and Innocoll Pharmaceuticals Limited entered into the GP Term Loan Agreement.
Pursuant to the GP Term Loan Agreement, upon the agreed upon drawdown date, the Lender will loan the Borrower an aggregate
principal amount of up to $10 million.
On May 5, 2017, in order to
obtain the consent of EIB to enter into the GP Term Loan Agreement, (i) the Company, the Borrower and the EIB entered into
the Amendment Agreement and (ii) the Company, the Lender, the Borrower and the EIB entered into an Intercreditor Deed. The Amendment Agreement
permits the entry into the GP Term Loan Agreement and modifies certain terms of the Finance Contract, including the maturity
date of the Finance Contract under the occurrence of certain events. See Capital Resources and Liquidity for a more complete
description of the GP Term Loan and the modifications to the Finance Contract.
Note 10. Warrants
The below note includes detail on the warrants as of March 31,
2017 and December 31, 2016 respectively.
Number
|
|
Exercise
price
|
|
|
Contractual
life
(years)
|
|
|
March
31, 2017
|
|
|
December
31,
2016
|
|
Outstanding at beginning of period
|
|
€
|
83.25
|
|
|
|
2.45
|
|
|
|
196,912
|
|
|
|
196,912
|
|
Outstanding at end of period
|
|
€
|
83.25
|
|
|
|
2.21
|
|
|
|
196,912
|
|
|
|
196,912
|
|
Exercisable at end of period
|
|
€
|
83.25
|
|
|
|
2.21
|
|
|
|
196,912
|
|
|
|
196,912
|
|
All warrants have been classified as a liability due to certain
provisions pursuant to which the exercise price of the warrants may be reduced in the event that the Company issues or sells any
of its ordinary shares at a price per share less than the exercise price in effect immediately prior to such issue or sale. On
January 1, 2016, Innocoll AG transformed into an Irish incorporated entity Innocoll Holdings plc and pursuant to
the terms of an agreement entered into on March 16, 2016 Innocoll Holdings plc assumed all rights and obligations of Innocoll
AG, including the warrant liabilities. The fair value is calculated using a recognized valuation methodology for the valuation
of financial instruments (Monte Carlo simulation model).
The carrying value of warrants was as follows:
|
|
March 31,
|
|
|
December 31,
|
|
Thousands of Dollars
|
|
2017
|
|
|
2016
|
|
Liability
|
|
|
|
|
|
|
|
|
Fair value at beginning of period
|
|
$
|
854
|
|
|
$
|
11,498
|
|
Fair value movement on warrants in issue
|
|
|
153
|
|
|
|
(10,644
|
)
|
Fair value at end of period
|
|
$
|
1,007
|
|
|
$
|
854
|
|
The following input assumptions were used to fair value the
warrants:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Expected volatility
|
|
|
79.49
|
%
|
|
|
104.88
|
%
|
Risk free rate
|
|
|
-0.38
|
%
|
|
|
-0.53
|
%
|
Exercise price
|
|
€
|
83.25
|
|
|
€
|
83.25
|
|
Contractual life
|
|
|
2.21 years
|
|
|
|
2.45 years
|
|
Stock price on valuation date
|
|
$
|
14.84
|
|
|
$
|
9.14
|
|
Note 11. Financial instruments and fair value
measurements
Financial liabilities measured at fair value in the statement
of financial position are grouped into three levels of fair value hierarchy. This grouping is determined based on the lowest level
of significant inputs used in fair value measurement, as follows:
Level 1 -
quoted prices in active markets
for identical assets or liabilities.
Level 2 -
inputs other than quoted prices
included within Level 1 that are observable for the instrument, either directly (i.e. as prices) or indirectly (i.e., derived from
prices).
Level 3 -
inputs for instrument that are
not based on observable market data (unobservable inputs).
|
|
March
31,
2017
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing loans & borrowings
|
|
$
|
30,184
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30,184
|
|
Warrants
|
|
|
1,007
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,007
|
|
|
|
$
|
31,191
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
31,191
|
|
|
|
December 31,
2016
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing loans & borrowings
|
|
$
|
28,948
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
28,948
|
|
Warrants
|
|
|
854
|
|
|
|
-
|
|
|
|
-
|
|
|
|
854
|
|
|
|
$
|
29,802
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
29,802
|
|
There have been no transfers between Level 1, Level 2 and Level
3 during the period.
As of March 31, 2017 and December 31, 2016, our interest bearing
loans and borrowings are recorded at amortized cost with carrying value of $30.2 million and $28.9 million, respectively, and have
fair value of $30.2 million and $28.9 million, respectively. As of March 31, 2017, management considers amortized cost to approximate
fair value.
The fair value of warrants issued by the Company has been estimated
using a Monte Carlo simulation model and, in doing so, the Company’s management utilized a third-party valuation report.
The Monte Carlo simulation is a generally accepted statistical method used to generate a defined number of stock price paths in
order to develop a reasonable estimate of the range of the Company’s future expected stock prices and minimizes standard
error.
The estimated fair value of the liability classified warrants
is determined using Level 3 inputs. Inherent in the Monte Carlo valuation model are assumptions related to expected stock-price
volatility, the risk-free interest rate, exercise price and expected life of the warrants. The Company estimates the volatility
of its common stock based upon a weighted average combining the average implied volatility of its peers, the average most recent
4.45–year weekly volatility of its peer group and the Company’s most recent 1-year weekly historical volatility. A
change in any of the inputs included in the Monte Carlo valuation model could result in a variation in the fair value of the warrants
included in the financial statements.
The carrying amount of the Company’s cash and
cash equivalents, trade and other receivables, trade payables and accrued expenses approximate fair value due to the short term
maturities of these items.
Note 12. Commitments and Contingencies
Legal contingencies
We and certain of our officers are subject to two securities
class action lawsuits, which may require significant management and board time and attention and significant legal expenses and
may result in an unfavorable outcome, which could have a material adverse effect on our business, financial condition, results
of operations and cash flows.
Note 12. Commitments and Contingencies (Cont’d)
We and certain of our executive officers have been named as
defendants in a securities class action lawsuit initially filed in the United States District Court for the Eastern District of
Pennsylvania on January 24, 2017, captioned Anthony Pepicelli v. Innocoll Holdings Public Limited Company, Anthony P. Zook, Jose
Carmona and Lesley Russel, civil action no. 2:17-cv-00341-GEKP. We and certain of our executive officers also have been named as
defendants in a securities class action lawsuit initially filed in the United States District Court for the Eastern District of
Pennsylvania on February 16, 2017, captioned Jianmin Huang v. Innocoll Holdings Public Limited Company, Anthony P. Zook, Jose Carmona
and Lesley Russel, civil action no. 2:17-cv-00740-GEKP. The plaintiffs in Pepicelli requested that defendants waive service of
process pursuant to federal Rule 4, and defendants have done so. No attempt has been made to serve in Huang and no request
for waiver of service has been mailed. All plaintiffs have joined in an unopposed motion to consolidate the two actions and
to appoint lead plaintiffs. The motion has not yet been decided.
The allegations in both complaints are substantively identical.
The complaints in both actions allege that we and certain of our executive officers violated Section 10(b) of the Exchange Act
and Rule 10b-5 promulgated thereunder by making materially false or misleading statements and omissions relating to the development
of Xaracoll and/or related requests for regulatory approval. The complaints also allege that the defendant officers violated Section
20(a) of the Exchange Act. While we believe that we have substantial legal and factual defenses to the claims in the class actions
and intend to vigorously defend the case, these lawsuits could divert our management’s and board’s attention from other
business matters, the outcome of the pending litigation is difficult to predict and quantify, and the defense against the underlying
claims will likely be costly. The ultimate resolution of this matter could result in payments of monetary damages or other costs,
materially and adversely affect our business, financial condition, results of operations and cash flows, or adversely affect our
reputation, and consequently, could negatively impact the price of our ordinary shares.
We have insurance policies related to the risks associated with
our business, including directors’ and officers’ liability insurance policies. However, there is no assurance that
our insurance coverage will be sufficient or that our insurance carriers will cover all claims in that litigation. If we are not
successful in our defense of the claims asserted in the putative action and those claims are not covered by insurance or exceed
our insurance coverage, we may have to pay damage awards, indemnify our officers from damage awards that may be entered against
them and pay the costs and expenses incurred in defense of, or in any settlement of, such claims.
In addition, there is the potential
for additional shareholder litigation against us, and we could be materially and adversely affected by such matters
.
Note 13. Equity
Number
|
|
Mach
31, 2017
|
|
|
December
31,
2016
|
|
Authorized number of shares:
|
|
|
|
|
|
|
|
|
Ordinary shares at $0.01 nominal value
|
|
|
1,000,000,000
|
|
|
|
1,000,000,000
|
|
Deferred shares at $0.01 nominal value
|
|
|
25,000,000
|
|
|
|
25,000,000
|
|
Deferred shares at €1.00 nominal value
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
1,025,100,000
|
|
|
|
1,025,100,000
|
|
Issued, called up and fully paid number of shares:
|
|
|
|
|
|
|
|
|
Ordinary shares at $0.01 nominal value
|
|
|
29,789,934
|
|
|
|
29,748,239
|
|
Deferred shares at €1.00 nominal value
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
29,814,934
|
|
|
|
29,773,239
|
|
Note 14. Going Concern
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The Company generated net losses of $12.7 million and
$23.1 million in the three months ended March 31, 2017 and 2016, respectively. At March 31, 2017, the Company had
cash and cash equivalent of $7.2 million.
The Company anticipates that expenditures during the
next twelve months necessary to advance its current operations, including plans to conduct further studies to enable it to
submit a revised NDA for XaraColl and to develop and commercialize CollaGUARD, will be greater than the amount of its current
cash and cash equivalents. This assessment is based on current estimates and assumptions regarding clinical programs and
business needs. The Company’s working capital requirements could vary depending on a variety of
circumstances, including, for example, if it is required to conduct additional tests not currently contemplated. These
matters, among others, raise substantial doubt about its ability to continue as a going concern. Based on the foregoing, the
Company currently does not have sufficient working capital to meet its needs through the next twelve months, unless it can
successfully obtain additional funding through debt, equity or licensing transactions.
As discussed in Note 1, Gurnet Point entered into
the GP Term Loan with the Company pursuant to which Gurnet Point will provide the Company with a term loan in the aggregate
principal amount of up to $10 million which, in management’s opinion, will enable the Company to settle its obligations
as they become due and to pursue the submission of a revised NDA for Xaracoll.
The Company’s plans to continue as a going concern
are currently contingent on its ability to successfully close the Acquisition with Gurnet Point or an alternative transaction
with a third party. If the Company does not close the Acquisition or an alternative transaction with a third party on or before
December 31, 2017, the Company will be obligated to repay the GP Term Loan on December 31, 2017. In order to repay the GP Term
Loan, the Company will be required to first satisfy its obligations to the EIB under the Finance Contract (described in Note 9)
unless the Company is able to satisfy the Extension Conditions (described in Note 9), which require that the Company raises, prior
to December 15, 2017, at least $25 million through one or more equity financings, shareholder loans or from licensing revenue
and has at least $25 million in cash on hand at December 30, 2017. If the Extension Conditions are satisfied, the Company may
repay the GP Term Loan on December 30, 2017, prior to the repayment of the obligations under the Finance Contract (which obligations
would remain outstanding until their current maturity dates), without such repayment constituting an event of default under the
Finance Contract.
The Company believes that if it does not close the Acquisition
with Gurnet Point or an alternative transaction with a third party on or before December 31, 2017, but the Company is able to
achieve the Extension Conditions, the Company will be able to pay its obligations as they become due, and secure a cash runway
for XaraColl through its PDUFA date, which the Company expects would be in the latter part of 2018.
There is no guarantee that the Company
will be able to successfully consummate the Acquisition with Gurnet Point or satisfy the Extension Conditions and there is no
guarantee that the proceeds from the GP Term Loan or any funds raised though the satisfaction of the Extension Conditions will
enable the Company to satisfy its goals as set forth herein.
Our ability to successfully raise sufficient funds through
the sale of equity securities or the identification of strategic alliances, when needed, is subject to many risks and uncertainties
and even if we are successful, future equity issuances would result in dilution to our existing stockholders. In addition, to
the extent that we might seek to raise capital through the identification of strategic alliances, we may be required to license
or transfer rights to our technologies to other parties that we might otherwise desire to retain.
Innocoll received a Refusal to File (“RTF”) Letter
from the FDA in December 2016 pertaining to the Xaracoll NDA initially submitted on October 31, 2016. In the RTF letter, the FDA
indicated among other things, that Xaracoll should be characterized as a drug/device combination, which would require that the
Company submit additional information. During the Type A meeting, representatives of the FDA, after reviewing information provided
by Innocoll to address matters raised in the RTF letter, provided guidance which was confirmed in the formal FDA meeting minutes.
The minutes serve as the official record of the FDA response to the Company’s proposal to address certain issues raised in
the RTF by conducting an additional short-term pharmacokinetic study and several short-term non-clinical toxicology and biocompatibility
studies. Management believes, if adequately financed and successful, such studies may be completed in time for a resubmission of
the NDA at the end of 2017.
Note 15. Subsequent events
There have been no significant post balance sheet
events, except as discussed more fully in Note 1, with respect to the proposed transaction with Gurnet Point and
Gurnet Bidco, the GP Term Loan and EIB’s entry into the Intercreditor Deed.