Summary of significant accounting policies

9 Months Ended

Sep. 30, 2023

Summary of significant accounting policies

Basis of presentation and consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Emergent and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on December 11, 2023.

In connection with the 2022 adjustments described in Note 18, “Adjustments to quarterly financial data”, there were immaterial adjustments, both individually and in the aggregate, that impacted the Company’s 2023 quarterly filings for the periods ended March 31, 2023 and June 30, 2023. All other adjustments contained in the accompanying unaudited condensed consolidated financial statements are of a normal recurring nature and are necessary to present fairly the financial position of the Company as of September 30, 2023. Interim results are not necessarily indicative of results that may be expected for any other interim period or for an entire year.

Going concern

As of September 30, 2023, there is $211.2 million outstanding on the Company's Revolving Credit Facility and $202.1 million on Term Loan Facility that matures in May 2025. The Company determined that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation considered the mitigating effect of management’s plans that have been implemented as of September 30, 2023. Management may evaluate the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. The Company's plans include (A) amending the agreement for the Senior Secured Credit Facilities, which occurred on May 15, 2023, with the Fourth Amendment to Amended and Restated Credit Agreement, Waiver and First Amendment to Amended and Restated Collateral Agreement (the “Credit Agreement Amendment”), and (B) the execution of the capital raise requirement prescribed in the Credit Agreement Amendment, as further described below.

While the Company executed the Credit Agreement Amendment and extended the maturity date on the Senior Secured Credit Facilities to May 15, 2025, the Credit Agreement Amendment also requires the Company maintain a minimum consolidated EBITDA through February 29, 2024 and to raise at least $75.0 million through the issuance of equity and/or unsecured indebtedness by April 30, 2024. As a result of these provisions, the Company has determined it is appropriate to continue to classify the debt as a current liability on the Condensed Consolidated Balance Sheets. Additional information on the nature and status of our debt covenant compliance is included below.

Debt Covenants

The Company has a senior secured credit facility that matures in May 2025 (the “Credit Facility”) which provides for (1) revolving credit commitments, (2) a term loan, and (3) the issuance of commercial letters of credit. As of September 30, 2023, we had $413.3 million outstanding under the Credit Facility. Under the Credit Facility, the Company is subject to a monthly minimum consolidated EBITDA covenant through February 29, 2024 and is also required to raise at least $75.0 million through the issuance of equity and/or unsecured indebtedness by April 30, 2024. As of September 30, 2023, we were in compliance with all of the covenants and restrictions associated with, and no events of default existed under, the Credit Facility. However, based on the timing of the USG procurement of the remaining 2023 order for CYFENDUSTM and a number of other product sales through the end of 2023, the Company anticipates that, absent a cure or waiver, it may be in breach of the minimum consolidated EBITDA covenant as early as the reporting date for the measurement period ending December 31, 2023. In the event the Company remains in compliance with the minimum consolidated EBITDA covenant through the measurement period ending December 31, 2023, the Company anticipates that, absent a cure or waiver of the minimum consolidated EBITDA covenant, it may be in breach of the minimum consolidated EBITDA covenant as early as the reporting date for the measurement period ending February 29, 2024. In addition, the Company is required to deliver audited annual financial statements without a “going concern” or like qualification or exception with respect to our financial statements for the year ended December 31, 2023 within 90- days of year end. The Credit Facility and the Company’s other debt facilities are described in more detail below in Note 10, “Debt” and in Note 9, “Debt” in Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

If the Company is not compliant with the covenants an event of default may occur under the Credit Facility and the agent and requisite lenders thereunder could take actions to exercise certain rights and remedies as described in the Credit Facility. Further, acceleration of the Credit Facility would result in a cross-default of the Company’s obligations under the 3.875% Senior Unsecured Notes due in 2028. If the Company would be unable to obtain a waiver or forbearance of such covenants or defaults, to successfully renegotiate the terms of the Credit Facility, or to cure the potential covenant breach or default, and the lenders enforced one or more of their rights upon default and/or the default resulted in a cross-default under certain other of the Company’s debt instruments, the Company would be unable to meet its obligations and could be forced into insolvency proceedings.

Based on the facts and circumstances described above, management cannot make the assumption that it is probable that these debt covenants will be met. As a result, the Company continues to evaluate a number of uncertain factors related to its assessment of its ability to satisfy the capital raise requirement, including its ability to comply with the terms and operating and financial covenants required by the Senior Secured Credit Facilities, other market conditions, economic conditions, particularly in the pharmaceutical and biotechnology industry, and disruptions or volatility caused by factors such as regional conflicts, inflation, and supply chain disruptions. The Company has engaged legal and financial advisors to assist with a comprehensive review of alternatives to enhance its capital structure, which may include taking steps to cure any potential defaults or seeking forbearance, waivers, further cost reductions or other alternatives to avoid an event of default.

The Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Revenue recognition

Beginning in the third quarter of 2023, the Company launched the over-the-counter NARCAN® (naloxone HCl) Nasal Spray, 4mg (“NARCAN® OTC”), which was approved by the FDA as an over-the-counter emergency treatment of opioid overdose, broadening our customer base and sales channels to retail pharmacies and digital commerce websites. Refer to Note 13, "Revenue recognition" for more information regarding revenue recognition accounting policies related to NARCAN® OTC product sales.

Pre-launch inventory

Within the Company's Products segment, costs relating to raw materials and production of inventory in preparation for product launch prior to regulatory approval are capitalized when the review process has progressed to a point where objective and persuasive evidence exists that regulatory approval is probable, the future economic benefit is expected to be realized, and the Company believes that material uncertainties related to the ultimate regulatory approval have been significantly reduced. Pre-launch inventory is recorded to research and development expense unless these criteria are met. For pre-launch inventory that is capitalized, the Company considers a number of specific facts and circumstances, including the product candidate’s current status in the drug development and regulatory approval process, results from related clinical trials, results from meetings with relevant regulatory agencies prior to the filing of regulatory applications, potential obstacles to the approval process, historical experience, viability of commercialization and market trends. This policy is not applicable to pre-launch inventory purchased to satisfy a performance obligation related to a CDMO contract as CDMO pre-launch inventory may be capitalized if it has future economic benefit based on the terms of the contract.

Significant accounting policies

With the exception of the policies on revenue recognition and pre-launch inventory discussed above, there have been no significant changes to the Company's summary of significant accounting policies during the nine months ended September 30, 2023, contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, that have materially impacted the presentation of the Company's financial statements.

Fair value measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, includes:


Level 1 —			Observable inputs for identical assets or liabilities such as quoted prices in active markets;
Level 2 —			Inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 —			Unobservable inputs in which little or no market data exists, which are therefore developed by the Company using estimates and assumptions that reflect those that a market participant would use.

On a recurring basis, the Company measures and records money market funds (Level 1), interest-rate swap arrangements and time deposits (Level 2) and contingent purchase consideration (Level 3) using fair value measurements in the accompanying financial statements. The carrying amounts of the Company's short-term financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to their short maturities. The carrying amounts of the Company’s long-term variable interest rate debt arrangements (Level 2) approximate their fair values.

New accounting standards

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board that the Company adopts as of the pronouncement's specified effective date. There were no new accounting pronouncements that were issued or became effective since the issuance of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 that had, or are expected to have, a material impact on its consolidated financial position, results of operations or cash flows.