Sale of Zohydro ER business

3 Months Ended

Mar. 31, 2015

Discontinued Operations and Disposal Groups [Abstract]

Sale of Zohydro ER business

Sale of Zohydro ER business

On March 10, 2015, the Company entered into an asset purchase agreement with Pernix Ireland Limited and Pernix Therapeutics Holdings, Inc., (Pernix Therapeutics, and, together with Pernix Ireland Limited, Pernix) whereby the Company agreed to sell its Zohydro ER business to Pernix, and on April 24, 2015, the Company completed the sale to Ferrimill, a subsidiary of Pernix, as a substitute purchaser. The Zohydro ER business divested included the registered patents and trademarks, certain contracts, the new drug application and other regulatory approvals, documentation and authorizations, the books and records, marketing materials and product data relating to Zohydro ER.

The Company received consideration of $80,000,000 in cash, $10,000,000 of which has been deposited in escrow to fund potential indemnification claims for a period of 12 months, and $11,900,000 in Pernix common stock. Further, Ferrimill purchased Zohydro ER inventory of $900,000. The Company has agreed to indemnify the purchaser for certain intellectual property matters up to an aggregate amount of $5,000,000.

In addition to the cash payment paid at closing, the Company is eligible to receive additional cash payments of up to $283,500,000 based on the achievement of pre-determined milestones, including a $12,500,000 payment upon approval by the U.S. Food and Drug Administration of an abuse-deterrent extended-release hydrocodone tablet (currently in development in collaboration with Altus Formulation Inc.) and up to $271,000,000 in potential sales milestones. The purchaser will assume responsibility for the Company's obligations under the purchased contracts and regulatory approvals, as well as other liabilities associated with the Zohydro ER business arising after the sale date. The Company will retain all liabilities associated with the Zohydro ER business arising prior to the sale.

On April 23, 2015, in connection with the sale of the Zohydro ER business, the Company, Oxford Finance LLC and Silicon Valley Bank entered into an amendment to the loan and security agreement dated December 30, 2014 which added an affirmative covenant requiring a liquidity ratio of 1.25 to 1 through the Company’s receipt of positive data from placebo-controlled trials in the United States and European Union of ZX008 and terminated all encumbrances on the Company's personal property related to its Zohydro ER business. The remaining obligations under the loan and security agreement remain substantially unchanged.

On April 24, 2015, the Company committed to a restructuring plan in conjunction with the sale of the Zohydro ER business in which approximately 100 employees transitioned employment to Pernix. The Company plans to reduce its workforce by an additional 16 employees as a result of the divestiture.

As a result of the Company's strategic decision to sell the Zohydro ER business and focus on clinical development of ZX008 and Relday, the consolidated statement of operations and comprehensive loss for the three months ended March 31, 2014 and the consolidated balance sheet as of December 31, 2014 have been retrospectively restated to reflect the financial results from the Zohydro ER business, and the related assets and liabilities, as discontinued operations. The results of operations from discontinued operations presented below include certain allocations that management believes fairly reflect the utilization of services provided to the Zohydro ER business. The allocations do not include amounts related to general corporate administrative expenses or interest expense. Therefore, the results of operations from the Zohydro ER business do not necessarily reflect what the results of operations would have been had the business operated as a stand-alone entity.

The following table summarizes the results of discontinued operations for the periods presented the consolidated statements of operations and comprehensive loss for the three months ended March 31, 2015 and 2014 (in thousands):

	Three Months Ended March 31,
Discontinued operations	2015			2014
Revenues:
Net product revenue	$	5,006		$	285
Operating expenses:
Cost of product sold	1,340			49
Royalty expense	418			96
Research and development	4,808			997
Selling, general and administrative	11,136			15,123
Total operating expenses	17,702			16,265
Loss from discontinued operations	$	(12,696	)	$	(15,980	)

The following table summarizes the assets and liabilities of discontinued operations as of March 31, 2015 and December 31, 2014 related to the Zohydro ER business (in thousands):

	March 31, 2015		December 31, 2014
ASSETS
Current assets
Trade accounts receivable	$	3,046	$	2,799
Inventory	787		1,995
Prepaid expenses	1,700		1,767
Other current assets	1,103		635
Total current assets of discontinued operations	6,636		7,196
Other assets	3,405		2,673
Total assets of discontinued operations	$	10,041	$	9,869
LIABILITIES
Current liabilities
Accounts payable	$	4,786	$	3,781
Accrued expenses	9,983		9,470
Accrued compensation	1,747		1,933
Deferred revenue	4,881		7,123
Total current liabilities of discontinued operations	21,397		22,307
Total liabilities of discontinued operations	$	21,397	$	22,307

Total stock-based compensation related to discontinued operations was $522,000 and $463,000 for the three months ended March 31, 2015 and 2014, respectively. Total amortization expense related to discontinued operations was $124,000 and $85,000 for the three months ended March 31, 2015 and 2014, respectively.

The Company will complete the accounting for this business divestiture, including recording any related gain on sale, during the second quarter of 2015.