NOTE 12 – ASSET PURCHASE AGREEMENT WITH UPSHER-SMITH

On June 30, 2023, the Company completed the acquisition of certain assets from Upsher Smith related to Zembrace SymTouch (sumatriptan injection) 3 mg (“Zembrace”) and Tosymra (sumatriptan nasal spray) 10 mg (“Tosymra”) products (such businesses collectively, the “Business”) and certain inventory related to the Business for an aggregate purchase price of approximately $26.5 million, including certain deferred payments and subject to customary adjustments (such transaction, the “USL Acquisition”).

On June 30, 2023, in connection with the USL Acquisition, the Company and Upsher Smith entered into a Transition Services Agreement (the “Transition Services Agreement”), pursuant to which Upsher Smith will provide certain transition services to the Company for base fees equal to $100,000 per month for the first six months, and $150,000 per months for the seventh through ninth months, plus additional monthly fees for each service category totaling up to $150,000 per month. The Company has amended the transitional services agreement with Upsher Smith so that Upsher Smith can continue to provide administrative services.

The Company has assumed certain obligations of Seller, including the payment of quarterly earn-out payments on annual net sales from the Business in the U.S. as follows: for Tosymra, 4% for net sales of $0 to $30 million, 7% of net sales of $30 to $75 million; 9% for net sales of $75 to $100 million; 12% for net sales of $100 to $150 million; and 15% for net sales greater than $150 million. Earn-out payments with respect to Tosymra are payable until the expiration or termination of the product’s Orange Book listed patent(s) with respect to the United States or, outside the United States, the expiration of the last valid claim covering the product in the relevant country of the territory. For Zembrace, earn-out payments on annual net sales in the U.S. are 3% for net sales of $0 to $30 million, 6% of net sales of $30 to $75 million; 12% for net sales of $75 to $100 million; 16% for net sales of greater than $100 million. Such earn-out payments are payable until July 19, 2025. Upon the entry of a generic version of the relevant product, the applicable earn-out rates shall be reduced by 90% percent with respect to Zembrace, and by 66.7% percent for Tosymra. Prior to Purchaser or a licensee filing an application for marketing authorization for either of the products in a permitted country outside the U.S., the parties will negotiate in good faith the earn-out payment rates annual net sales tiers that will apply for such country, based on the market opportunity for the product in such country. If the parties fail to agree, then the earn-out payment rates and annual net sales tiers described above will apply. 

In addition, the Company has assumed the obligation to pay an additional 3% royalty on net sales of Tosymra, plus an additional 3% if a patent containing certain claims related to Tosymra issues in the U.S., for 15 years from the first commercial sale of Tosymra in the applicable country or for as long as the manufacture, use or sale of Tosymra in such country is covered by a valid claim of a licensed patent, and up to $15 million per Tosymra product on the achievement of sales milestones.

As consideration for acquisition of the Business and certain product-related inventories, the Company paid approximately $23.5 million in cash upfront. On the earlier of March 2024 and the completion of the transition services to be provided by Upsher Smith, as described above, the Company agreed to pay an additional deferred payment of $3.0 million in cash, which is included in Accrued expenses and other current liabilities on the accompanying balance sheet. The following table summarizes the components of the purchase consideration (in thousands):

The USL Acquisition was accounted for as a business combination using the acquisition method, in accordance with the provisions of ASC 805, Business Combinations and ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The tangible and intangible assets acquired were recorded at their estimated fair values on the acquisition date, and the difference between the fair value of these assets and the purchase price has been recorded as goodwill. The purchase price allocation is based upon preliminary valuations and estimates and assumptions which are subject to change. As the Company receives additional information about facts and circumstances that existed at the acquisition date, the fair values of the acquired inventory and intangible assets may be adjusted, with the offset recorded to goodwill.

The following table represents the allocation of the purchase price to the assets acquired by the Company in the USL Acquisition recognized in the Company’s consolidated balance sheets (in thousands):

The acquired inventory consists of Upsher Smith’s raw materials, semi-finished goods, and finished goods inventory as of the Closing date. The fair value was determined based on the estimated selling price of the inventory, less the estimated total costs to complete, disposal effort and holding costs.

The $1.0 million of goodwill arising from the USL Acquisition represents expected synergies from combining operations, intangible assets that do not qualify for separate recognition, and other factors, of which all is expected to be deductible for tax purposes, subject to any limitations.

Intangible assets eligible for recognition separate from goodwill were those that satisfied either the contractual or legal criterion or the separability criterion in the accounting guidance. The identifiable intangible assets acquired and their estimated useful lives for amortization are as follows (in thousands):

The developed technology intangible assets related to Zembrace and Tosymra includes the value associated with the acquired patents, customer relationships, and trademarks and trade names associated with the technology. The developed technology intangible assets were valued as composite assets under the premise that each asset is reliant on one another to generate cash flow, is not considered separable from the technology, and are assumed to have similar useful lives. The composite intangible assets were valued using a multi-period excess earnings method and are being amortized over their estimated useful lives using the straight-line method of amortization. The key assumptions used in estimating the fair values of intangible assets include forecasted financial information, the weighted average cost of capital, customer retention rates, and certain other assumptions.

The fair values assigned to the assets acquired are based on reasonable assumptions and estimates that market participants would use. Actual results may differ from these estimates and assumptions. 

Supplemental Pro Forma Information

The following unaudited pro forma consolidated financial information reflects the results of operations of the Company for the year ended December 31, 2023 and 2022 as if the USL Acquisition had occurred as of January 1, 2022 and gives effect to transactions that are directly attributable to the acquisition. These amounts are based on financial information of the acquired business and are not necessarily indicative of what the Company’s operating results would have been had the acquisition taken place on the date presented, nor is it indicative of the Company’s future operating results. The net loss of USL acquisition is included in the Company’s consolidated results since the date of acquisition. The revenue and net loss of the USL Acquisition business reflected in the consolidated statements the year ended December 31, 2023 would have been $7.6 million and $2.4 million, respectively.

The pro forma information for all periods presented include additional amortization expense related to the fair value of the acquired intangible assets as if such assets were acquired on January 1, 2022. The pro forma financial information for the year ended December 31, 2022 also reflects an increase in Cost of Sales related to the preliminary acquisition-date fair value adjustment to inventory.

As described above, in connection with the USL Acquisition, the Company and Upsher Smith entered into a Transition Services Agreement with the Seller related to providing ongoing services associated with the assets acquired, such as procuring and selling migraine therapy products, providing accounting and billing services and collecting accounts receivable and paying trade payables. The Seller collected and will continue to collect cash on behalf of Tonix for revenue generated by sales of the assets acquired from June 30, 2023 through the transition period and the Seller is obligated to transfer cash generated by such sales to the Buyer.

The amount due to Upsher Smith for reimbursement of services performed under the transition services agreement was $0.5 million as of December 31, 2023. The transition service fees were netted against the receivables collected of $5.1 million and liabilities paid of $4.4 million, including gross-to-net on behalf of the Company with the net amount due to the Company of $0.2 million recorded within prepaid expenses and other on the consolidated balance sheet as of December 31, 2023.