Aytu Divestiture |
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| Discontinued Operations and Disposal Groups [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aytu Divestiture | Aytu Divestiture Overview of Sale of Pediatric Portfolio and Related Commercial Infrastructure to Aytu BioScience
On November 1, 2019, the Company closed on an asset purchase agreement to sell the Company’s rights, title and interest in the Pediatric Portfolio and the corresponding commercial infrastructure to Aytu. Aytu paid consideration of $4.5 million in cash and approximately 9.8 million shares of Aytu convertible preferred stock, and assumed certain of the Company’s liabilities, including the Company’s payment obligations to Deerfield CSF, LLC (“Deerfield”) and certain other liabilities primarily related to contingent consideration and sales returns. Steven Boyd, chief investment officer of Armistice Capital, LLC, a significant stockholder of the Company and a member of the Company’s Board of Directors, served on Aytu’s Board from March 2019 until August 30, 2021. The transactions and agreements between the Company and Aytu were approved in accordance with the Company’s related party transaction policy.
The Pediatric Portfolio met all conditions to be classified as discontinued operations on November 1, 2019. Therefore, the accompanying consolidated financial statements for the year ended December 31, 2021 and 2020 reflect the operations, net of taxes, and related assets and liabilities of the Pediatric Portfolio as discontinued operations. Refer to the “Discontinued Operations” section below for more information, including Avalo's continuing involvement, which the Company expects to end in the second quarter of 2022.
Deerfield Guarantee
As of the closing date of the Aytu Divestiture on November 1, 2019, Aytu assumed the Company’s debt obligation to Deerfield which included monthly payments of $0.1 million through January 2021, with a balloon payment of $15 million that was to be due in January 2021. Aytu also assumed the contingent consideration liability related to future royalties on Avadel Pharmaceuticals PLC’s (“Avadel”) pediatric products, which included minimum monthly payments of $0.1 million through February 2026. In conjunction with the closing of this transaction, the Company entered into a guarantee in favor of Deerfield, which guarantees the payment of the assumed liabilities to Deerfield, which included the debt obligation, the contingent consideration related to future royalties on Avadel’s pediatric products and certain quarterly fixed obligation payments (collectively referred to as the “Guarantee”).
Aytu publicly reported that it had paid the $15 million balloon payment to Deerfield before it came due in June 2020 and the fixed monthly payments to Deerfield ended in January 2021, thus satisfying the debt obligation. Aytu publicly reported that it had entered into a Waiver, Release and Consent in June 2021, pursuant to which it paid $2.8 million to Deerfield in early satisfaction of the remaining contingent consideration related to future royalties on Avadel’s pediatric products. Aytu also agreed to pay the remaining fixed obligation of $3 million in six equal quarterly payments of $0.5 million over the next six quarters commencing September 30, 2021.
Avalo is required to make a payment under the Guarantee upon demand by Deerfield if all or any part of the fixed payments are not paid by Aytu when due or upon breach of a covenant. The remaining minimum fixed obligation commitments payable (as most recently publicly reported by Aytu) was $3 million as of September 30, 2021, which represents Avalo’s maximum potential future payments under the Guarantee.
The fair value of the Guarantee, which relates to the Company's obligation to make future payments if Aytu defaults, was determined at the time of the Aytu Divestiture as the difference between (i) the estimated fair value of the assumed payments using Avalo's estimated cost of debt and (ii) the estimated fair value of the assumed payments using Aytu's estimated cost of debt. At each subsequent reporting period, the value of the Guarantee is determined based on the expected credit loss of the Guarantee with changes recorded in income from discontinued operations within the consolidated statements of operations and comprehensive loss. The Company concluded that the expected credit loss of the Guarantee was de minimis as of December 31, 2021 and 2020 based on considerations of Aytu’s ability to meet its financial commitments including recent financings, cash position, operating cash flows and trends.
Discontinued Operations
The following tables summarizes the liabilities of the discontinued operations as of December 31, 2021 and 2020 (in thousands):
Aytu assumed sales returns of the Pediatric Portfolio made after the transaction close date related to sales prior to November 1, 2019 only to the extent such post-Closing sales returns exceed $2 million and are less than $2.8 million (in other words, Aytu assumed a maximum of $0.8 million of such returns). Therefore, Avalo is liable for future sales returns of the Pediatric Portfolio sold prior to the transaction close date in excess of the $0.8 million assumed by Aytu. The Company estimated no future returns as of December 31, 2021 on sales made prior to the transaction close date.
Changes to the Company's estimate of sales returns related to the Pediatric Portfolio is included within discontinued operations on the statement of operations and comprehensive loss and is shown within product revenue, net in the table summarizing the results of discontinued operations below. In future periods, as additional information becomes available, the Company expects to recognize expense (or a benefit) related to actual sales returns of the Pediatric Portfolio in excess (or less than) the returns reserve recorded, which will be recognized within discontinued operations. The Company expects this involvement to continue until sales returns are no longer accepted on sales of the Pediatric Portfolio made prior to November 1, 2019. Returns on these products may be accepted through the second quarter of 2022 (in line with the products’ return policies).
The following table summarizes the results of discontinued operations for the year ended December 31, 2021 and 2020 (in thousands):
There were no non-cash operating items from discontinued operations for the year ended December 31, 2021 and no non-cash investing items from the discontinued operations for the year ended December 31, 2021 and 2020. The significant non-cash operating item from the discontinued operations for the year ended December 31, 2020 is contained below (in thousands):
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