FERRING ASSET PURCHASE AGREEMENT AND DISCONTINUED OPERATIONS

On March 8, 2017, the Company entered into the Ferring Asset Purchase Agreement, pursuant to which, and on the terms and subject to the conditions thereof, among other things, the Company agreed to sell to Ferring its assets and rights (the “Purchased Assets”) related to the business of developing, marketing, distributing, and commercializing, outside the United States, the Company’s products currently marketed or in development, intended for the topical treatment of sexual dysfunction (the “Product Business”), including products sold under the name Vitaros (the “Products”) for up to approximately $12.7 million. The Purchased Assets include, among other things, certain pending and registered patents and trademarks, contracts, manufacturing equipment and regulatory approvals relating to the Products outside of the United States. The Company retained the U.S. development and commercialization rights for Vitaros and a license from Ferring (the “Ferring License”) for intellectual property rights for Vitaros and other products which relate to development both within the United States and internationally.

Pursuant to the terms of the Ferring Asset Purchase Agreement, Ferring paid the Company $11.5 million in cash at closing and paid approximately $0.7 million for the value of inventory related to the Products in April 2017. The Company is eligible to receive two additional quarterly payments totaling $0.5 million for transition services, subject to certain limitations. The first payment of $0.25 million was recognized and earned during the second quarter of 2017 and paid in July 2017. The Company used a portion of the proceeds from the sale of the Purchased Assets to repay all amounts owed, including applicable termination fees, under the Credit Facility, which was approximately $6.6 million. The extinguishment of the Credit Facility was a stipulation of the Ferring Asset Purchase Agreement; however, since it was corporate debt, the loss on extinguishment was not offset against the gain on the sale of the Purchased Assets.

As of the transaction date, Ferring assumed responsibility for future obligations under the purchased contracts and regulatory approvals, as well as other liabilities associated with the Purchased Assets arising after the closing date, including $1.1 million under the termination agreement with Sandoz. The Company will retain all liabilities associated with the Purchased Assets arising prior to the closing date.

Under the Ferring Asset Purchase Agreement, the Company has also agreed to indemnify Ferring for, among other things, breaches of its representations, warranties and covenants, any liability for which it remains responsible and its failure to pay certain taxes or comply with certain laws, subject to a specified deductible in certain cases. The Company’s aggregate liability under such indemnification claims is generally limited to $2.0 million.

At the closing of the Ferring Asset Purchase Agreement, the Company entered into the Ferring License with respect to certain intellectual property rights necessary to or useful for its exploitation of the Purchased Assets within the United States and for its exploitation of the Purchased Assets in certain fields outside of sexual dysfunction, including for the treatment of Raynaud’s Phenomenon, outside the United States. The parties granted one another a royalty free, perpetual and non-exclusive license to product know-how in their respective fields and territories and Ferring granted the Company a royalty-free, perpetual and exclusive license to certain patents in the field of sexual dysfunction in the United States and in certain fields other than sexual dysfunction outside of the United States.

The total gain on sale of the Purchased Assets to Ferring consisted of the following:



Upfront payment received	$	11,500
Transition services payment earned in Q2 2017	250
Payment received for inventory	709
Total proceeds from sale	$	12,459
Carrying value of assets sold in sale	(1,578		)
Liabilities transferred upon sale	1,186
Total gain on sale of Purchased Assets	$	12,067

During the first quarter of 2017, the Company recorded a receivable of approximately $0.7 million for the amount to be received related to the inventory sold. The payment was received in April 2017. The Ferring Asset Purchase Agreement was treated as a sale of business and the total proceeds from the sale were allocated to the Purchased Assets.

During the second quarter of 2017, the Company earned $0.25 million in revenue related to the first transition services payment, which is included in the current assets of discontinued operations as of June 30, 2017. The payment was received in July 2017. The $0.25 million related to the future transition services payments will be presented as discontinued operations in the period in which it is recognized.

Discontinued Operations

The carrying amounts of the assets and liabilities of the Company’s discontinued operations as of June 30, 2017 and December 31, 2016 are as follows (in thousands):



	June 30, 2017		December 31, 2016
Accounts receivable	$	179	$	530
Inventories	—		764
Prepaid expenses and other current assets	327		76
Current assets of discontinued operations	506		1,370
Property and equipment, net	—		842
Total assets of discontinued operations	$	506	$	2,212

Accounts payable	100		274
Accrued expenses	231		1,834
Total liabilities of discontinued operations	$	331	$	2,108

The operating results of the Company’s discontinued operations are as follows (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Product sales	$	—		$	110		$	143		$	369
Royalty revenue	147			304			368			671
License fee revenue	—			50			—			50
Cost of goods sold	—			(93		)	(74		)	(326		)
Operating expenses	(149		)	(456		)	(748		)	(859		)
Other expense	—			—			(16		)	—
Gain on sale	250			—			12,067			—
Income (loss) from discontinued operations	$	248		$	(85	)	$	11,740		$	(95	)

Product sales, royalty revenue and cost of goods sold all relate to the sale of Vitaros product outside of the United States. Pursuant to the Ferring Asset Purchase Agreement, the Company sold all of its rights to these assets and recognized product sales during the first quarter of 2017 related to the sales from January 1, 2017 through the completion of the sale, on March 8, 2017. The Company recorded product sales of $0.1 million and related cost of goods sold of $0.1 million for this time period.

Historically, the Company relied on its former commercial partners to sell Vitaros in approved markets and received royalty revenue from its former commercial partners based upon the amount of those sales. Royalty revenues are computed and recognized on a quarterly basis, typically one quarter in arrears, and at the contractual royalty rate pursuant to the terms of each respective license agreement. The Company recorded $0.1 million and $0.4 million in royalty revenue during the three and six months ended June 30, 2017, respectively, related to sales of Vitaros during the fourth quarter of 2016 and the first quarter of 2017, respectively.

Operating expenses for the current period include primarily patent and legal fees and accounting expenses incurred in connection with the Ferring Asset Purchase Agreement.