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Acquisition

9 Months Ended

Sep. 30, 2024

Acquisition

4. Acquisition

On September 3, 2024, (the “Acquisition Date”), the Company closed its acquisition of Ironshore Therapeutics Inc. (“Ironshore”) (the “Ironshore Acquisition”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), with Ironshore surviving the Merger as a wholly owned subsidiary of the Company. Ironshore had developed and obtained commercial approval to market Jornay in the United States. The Ironshore Acquisition was completed to expand the Company’s business beyond pain management and establish a commercial presence in neurology via the attention deficit hyperactivity disorder (“ADHD”) market. The Company obtained control through the acquisition of shares in an all-cash transaction which closed on September 3, 2024 (the “Acquisition Date”).

The acquisition consideration includes payments for the Ironshore equity and assumption of certain of its debt. The Company deposited $25,000 into escrow at closing, to be released (i) in part, after, and subject to, determination of any adjustments related to finalization of working capital and cash at closing; and (ii) in part, and subject to, the lapse of certain indemnification obligations 12 months from the Acquisition Date. As of the Acquisition Date, and September 30, 2024, approximately $21,956 was due to the former Ironshore equity holders and $25,000 is recorded as restricted cash. In addition, the Company will pay approximately $7,000 to former Ironshore equity holders as the Company has the opportunity to recover certain deposits as specified in the Merger Agreement, which amount is due no later than 225 days from the Acquisition Date. The Company also agreed to pay a $25,000 contingent payment upon the achievement of a financial milestone based on net revenues of Jornay for the year ended December 31, 2025.

The fair value of the total consideration was approximately $309,940 consisting of the following (in thousands):


Fair Value of Purchase Price Consideration	Amount
Fair value of purchase price consideration paid at closing:
Initial cash consideration	$	276,888
Deferred payments and contingent consideration:
Cash held in escrow related to indemnification and other settlements		21,956
Other deferred consideration		7,000
Fair value of contingent consideration		4,096
Total purchase consideration	$	309,940

The Company has accounted for the Ironshore Acquisition as a business combination and, accordingly, has included the assets acquired, liabilities assumed and results of operations in its financial statements following the Acquisition Date.

The preliminary purchase price allocation is based on estimates, assumptions, valuations and other studies which have not yet been finalized. The Company is finalizing its valuation of intangible assets, tangible assets, liabilities and tax analyses, and anticipates finalizing the valuation of assets acquired and liabilities assumed as the information necessary to complete the analysis is obtained, but no later than one year after the Acquisition Date.

The following tables set forth the preliminary allocation of the Ironshore Acquisition purchase price to the estimated fair value of the net assets acquired at the Acquisition Date (in thousands):


		Amounts Recognized at the Acquisition Date
Assets Acquired
Cash and cash equivalents		$	9,350
Accounts receivable			44,411
Inventory			17,155
Prepaid expenses and other current assets			8,394
Property, plant and equipment, net			541
Intangible assets			635,000
Right-of-use assets			800
Deferred tax assets			29,592
Total assets		$	745,243
Liabilities Assumed
Accounts payable		$	6,675
Accrued liabilities			72,034
Accrued rebates, returns and discounts			79,103
Borrowings			8,954
Lease liabilities			800
Senior secured notes payable			151,500
Deferred royalty obligation			118,339
Deferred revenue			10,000
Total liabilities		$	447,405
Total identifiable net assets acquired			297,838
Goodwill			12,102
Total consideration transferred		$	309,940

The valuation of the acquired intangible assets and assumed deferred royalty obligations relies on significant unobservable inputs. The Company used an income approach to value the $635,000 for the acquired intangible asset. The valuation of the intangible asset was based on estimated projections of expected cash flows to be generated by the asset, discounted to the present value at an appropriate discount rate. The Company is amortizing the identifiable intangible asset on a straight-line basis over its useful life of 7.7 years (refer to Note 9, Goodwill and Intangible Assets). The acquired inventory was recorded at fair value, which includes an adjustment to record inventory from its historic cost to fair value of $10,700. The assumed senior secured notes payable and borrowings were settled immediately after the close of the acquisition, resulting in a loss in debt extinguishment of $4,145.

The excess of the purchase price over the fair value of identifiable net assets acquired represents goodwill. This goodwill is primarily attributable to synergies of merging operations. The acquired goodwill is not deductible for tax purposes.

Total revenues attributable to Ironshore from the Acquisition Date through September 30, 2024 were $7,961. Earnings attributable to Ironshore from the Acquisition Date through September 30, 2024, however, are not distinguishable due to the rapid integration of Ironshore’s core operations into the Company.

Unaudited Pro Forma Summary of Operations

The following table shows the unaudited pro forma summary of operations for the three and nine months ended September 30, 2024 and 2023, as if the Ironshore Acquisition had occurred on January 1, 2023. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of January 1, 2023, and is not indicative of what such results would be expected for any future period (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2024			2023			2024			2023
Total revenues	$	178,899		$	157,805		$	512,925		$	474,725
Net income	$	(5,390)		$	(11,567)		$	(35,969)		$	(102,849)

The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of the Company and Ironshore. The summary pro forma financial information primarily reflects the following pro forma adjustments:

●

Employee severance-related expense of $8,443 was reflected as of January 1, 2023;

●

The Company’s acquisition-related transaction costs of $8,439 were reflected as of January 1, 2023;

●

Additional amortization expense from the acquired intangibles;

●

Additional cost of product revenues related to the step-up basis in inventory to record inventory at fair value; and

●

Adjustments to the Company’s interest expense related to additional borrowings on the 2024 Term Loan as defined in Note 11, Term Notes Payable, and elimination of certain Ironshore debt.

In addition, all of the above adjustments were adjusted for the applicable tax impact.

Acquisition Related Expenses

In the three months ended September 30, 2024, the Company incurred $19,886 of acquisition related expenses as a result of the Ironshore Acquisition and the substantial majority were included in Selling, general, and administrative expense in the condensed consolidated statements of operations. These costs include transaction costs, which primarily consisted of financial advisory, banking, legal, and regulatory fees, and other consulting fees, incurred to complete the acquisition; employee-related expenses (severance cost and benefits) for terminated employees after the acquisition, Ironshore directors and officers insurance purchased at the closing of the Ironshore Acquisition, and miscellaneous other acquisition expenses incurred, including integration consulting costs and contract termination costs. The Company has accrued $1,501 related to employee severance costs incurred as of September 30, 2024 but not yet paid. Additional charges related to severance or retention payments are not expected to be material and the remaining employee termination costs are expected to be paid by March 31, 2025. The Company expects, however, to incur additional acquisition-related expenses relating to consulting fees, contract termination costs, and other integration-related expenses during the remainder of 2024.


	Three Months Ended September 30,
	2024
Employee-related expenses	$	8,443
Transaction costs		8,439
Ironshore directors and officers insurance		1,090
Other acquisition expenses		1,914
Total acquisition related expenses	$	19,886