Court File No. CV-17-584836-00CL ONTARIO SUPERIOR COURT OF JUSTICE COMMERCIAL LIST IN THE MATTER OF AN APPLICATION UNDER SECTION 192 OF THE CANADA BUSINESS CORPORATIONS ACT, R.S.C. 1985, c. C-44, AS AMENDED. AND RULES 14.05(2) AND 14.05(3) OF THE RULES OF CIVIL PROCEDURE AND IN THE MATTER OF A PROPOSED ARRANGEMENT OF CONCORDIA INTERNATIONAL CORP. AND CONCORDIA HEALTHCARE (CANADA) LIMITED AND INVOLVING CONCORDIA LABORATORIES INC., S.A.R.L., CONCORDIA PHARMACEUTICALS INC., S.A.R.L., CONCORDIA INVESTMENTS (JERSEY) LIMITED, CONCORDIA FINANCING (JERSEY) LIMITED, AMDIPHARM HOLDINGS S.A.R.L., AMDIPHARM AG, AMDIPHARM AMDIPHARM LIMITED, AMDIPHARM MERCURY HOLDCO UK LIMITED, AMDIPHARM MERCURY UK LTD., CONCORDIA HOLDINGS (JERSEY) LIMITED, AMDIPHARM MERCURY INTERNATIONAL LIMITED, CONCORDIA INVESTMENT HOLDINGS (UK) LIMITED, MERCURY PHARMA GROUP LIMITED, CONCORDIA INTERNATIONAL RX (UK) LIMITED, ABCUR AB, MERCURY PHARMACEUTICALS LIMITED, FOCUS PHARMA HOLDINGS LIMITED, FOCUS PHARMACEUTICALS LIMITED, MERCURY PHARMA (GENERICS) LIMITED, MERCURY PHARMACEUTICALS (IRELAND) LIMITED, AND MERCURY PHARMA INTERNATIONAL LIMITED CONCORDIA INTERNATIONAL CORP. AND CONCORDIA HEALTHCARE (CANADA) LIMITED Applicants MOTION RECORD VOLUME 2 OF 2 (Motion for Interim Order returnable May 2, 2018) GOODMANS LLP Barristers & Solicitors Bay Adelaide Centre — West Tower 333 Bay Street, Suite 3400 Toronto, Canada M5H 2S7 Robert J. Chadwick LSUC#: 35165K [email protected]Brendan O'Neill LSUC#: 433313 [email protected]Caroline Descours LSUC#: 58251A [email protected]Ryan Baulke LSUC#: 661890 [email protected]Tel: 416.979.2211 Fax: 416.979.1234 Lawyers for the Applicants
Transcript
Court File No. CV-17-584836-00CL
ONTARIOSUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
IN THE MATTER OF AN APPLICATION UNDER SECTION 192 OF THE CANADA
BUSINESS CORPORATIONS ACT, R.S.C. 1985, c. C-44, AS AMENDED. AND RULES
14.05(2) AND 14.05(3) OF THE RULES OF CIVIL PROCEDURE
AND IN THE MATTER OF A PROPOSED ARRANGEMENT OF CONCORDIAINTERNATIONAL CORP. AND CONCORDIA HEALTHCARE (CANADA) LIMITEDAND INVOLVING CONCORDIA LABORATORIES INC., S.A.R.L., CONCORDIAPHARMACEUTICALS INC., S.A.R.L., CONCORDIA INVESTMENTS (JERSEY)LIMITED, CONCORDIA FINANCING (JERSEY) LIMITED, AMDIPHARM HOLDINGS
D Affidavit of David Price, sworn October 19, 2017 (without exhibits)
E Press Release issued October 20, 2017
F Press Release issued December 15, 2017
G 2017 Fiscal Year-End Consolidated Audited Financial Statements of Concordia
International Corp. dated March 8, 2018
H Press Release issued November 14, 2017
I Press Release issued March 8, 2018
J Letter dated May 1 from the CBCA Director
5 Preliminary Interim Order issued October 20, 2017
Tab Document
6 Written reasons of the Honourable Regional Senior Justice Morawetz issued on October27, 2017 in connection with the Preliminary Interim Order
D
This is Exhibit "D" referred to in the Affida it of
DAVID PRICE, affirmed before me this day
of May, 2018.
A Co fissiorr for Taking AffidiPtits e
Court File No. CV-17-584836-00CL
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
IN THE MATTER OF AN APPLICATION UNDER SECTION 192 OF THECANADA BUSINESS CORPORATIONS ACT, R.S.C. 1985, c. C-44, ASAMENDED, AND RULES 14.05(2) AND 14.05(3) OF THE RULES OF CIVILPROCEDURE
AND IN THE MATTER OF A PROPOSED ARRANGEMENT OFCONCORDIA INTERNATIONAL CORP. AND CONCORDIA HEALTHCARE(CANADA) LIMITED AND INVOLVING CONCORDIA LABORATORIESINC., S.A.R.L., CONCORDIA PHARMACEUTICALS INC., S.A.R.L.,CONCORDIA INVESTMENTS (JERSEY) LIMITED, CONCORDIAFINANCING (JERSEY) LIMITED, AMDIPHARM HOLDINGS S.A.R.L.,AMDIPHARM AG, AMDIPHARM B.V., AMDIPHARM LIMITED,AMDIPHARM MERCURY HOLDCO UK LIMITED, AMDIPHARMMERCURY UK LTD., CONCORDIA HOLDINGS (JERSEY) LIMITED,AMDIPHARM MERCURY INTERNATIONAL LIMITED, CONCORDIAINVESTMENT HOLDINGS (UK) LIMITED, MERCURY PHARMA GROUPLIMITED, CONCORDIA INTERNATIONAL RX (UK) LIMITED, ABCUR AB,MERCURY PHARMACEUTICALS LIMITED, FOCUS PHARMA HOLDINGSLIMITED, FOCUS PHARMACEUTICALS LIMITED, MERCURY PHARMA(GENERICS) LIMITED, MERCURY PHARMACEUTICALS (IRELAND)LIMITED, AND MERCURY PHARMA INTERNATIONAL LIMITED
CONCORDIA INTERNATIONAL CORP. AND CONCORDIA HEALTHCARE(CANADA) LIMITED
Applicants
AFFIDAVIT OF DAVID PRICE(sworn October 19, 2017)
TABLE OF CONTENTS
I. OVERVIEW 3
II. BACKGROUND REGARDING THE COMPANY 7
(a) Corporate Structure 7
(b) History of the Company 8
(c) Overview of the Company's Business 11
(d) Business Challenges 17
(e) Capital Structure 21
(f) . Equity Incentive Plans 30
III. BACKGROUND TO THE ARRANGEMENT AND THE RECAPITALIZATIONTRANSACTION 32
(a) The 2016 Strategic Review 32
(b) 2017 Long-Term Growth Strategy 32
(c) Development of the Recapitalization Transaction 35
IV. REASONS FOR PROCEEDING BY WAY OF A CBCA PLAN OFARRANGEMENT 38
(a) CHCL is Solvent and, Following the Completion of the RecapitalizationTransaction, the Applicants will be Solvent 38
(b) It is Not Practicable to Proceed in Another Manner 39
V. THE PRELIMINARY INTERIM ORDER 39
(a) The Stay of Proceedings 39
(b) Notice to CBCA Director 41
VI. CONCLUSION 41
( )
Court File No.
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
IN THE MATTER OF AN APPLICATION UNDER SECTION 192 OF THECANADA BUSINESS CORPORATIONS ACT, R.S.C. 1985, c. C-44, ASAMENDED, AND RULES 14.05(2) AND 14.05(3) OF THE RULES OF CIVILPROCEDURE
AND IN THE MATTER OF A PROPOSED ARRANGEMENT OFCONCORDIA INTERNATIONAL CORP. AND CONCORDIA HEALTHCARE(CANADA) LIMITED AND INVOLVING CONCORDIA LABORATORIESINC., S.A.R.L., CONCORDIA PHARMACEUTICALS INC., S.A.R.L.,CONCORDIA INVESTMENTS (JERSEY) LIMITED, CONCORDIAFINANCING (JERSEY) LIMITED, AMDIPHARM HOLDINGS S.A.R.L.,AMDIPHARM AG, AMDIPHARM B.V., AMDIPHARM LIMITED,AMDIPHARM MERCURY HOLDCO UK LIMITED, AMDIPHARMMERCURY UK LTD., CONCORDIA HOLDINGS (JERSEY) LIMITED,AMDIPHARM MERCURY INTERNATIONAL LIMITED, CONCORDIAINVESTMENT HOLDINGS (UK) LIMITED, MERCURY PHARMA GROUPLIMITED, CONCORDIA INTERNATIONAL RX (UK) LIMITED, ABCUR AB,MERCURY PHARMACEUTICALS LIMITED, FOCUS PHARMA HOLDINGSLIMITED, FOCUS PHARMACEUTICALS LIMITED, MERCURY PHARMA(GENERICS) LIMITED, MERCURY PHARMACEUTICALS (IRELAND)LIMITED, AND MERCURY PHARMA INTERNATIONAL LIMITED
CONCORDIA INTERNATIONAL CORP. AND CONCORDIA HEALTHCARE(CANADA) LIMITED
Applicants
AFFIDAVIT OF DAVID PRICE(sworn October 19, 2017)
I, David Price of the city of Toronto, in the Province of Ontario, MAKE OATH AND SAY:
1. I am the Chief Financial Officer of Concordia International Corp. ("CIC") and a director
and the Chief Financial Officer and Secretary of Concordia Healthcare (Canada) Limited
("CHCL" and, together with CIC, the "Applicants"). I joined CIC as Chief Financial Officer on
2
May 15, 2017, and I have knowledge of the matters deposed to herein. Where I have relied upon
other sources of information, I have stated the source of that information and I believe such
information to be true. The Applicants do not, and do not intend to, waive privilege by any
statement herein.
2. I swear this affidavit in support of an application by the Applicants for a proposed
arrangement (the "Arrangement") pursuant to section 192 of the Canada Business Corporations
Act, R.S.C. 1985, c. C-44, as amended (the "CBCA") and for an order pursuant to section 192(4)
of the CBCA substantially in the form to be attached as Tab 3 to the Applicants' Motion Record
(the "Preliminary Interim Order"), which shall, among other things:
(a) provide a stay of proceedings in respect of the Applicants and the other entities
in the Concordia Group (as defined below) on the terms set out in the proposed
Preliminary Interim Order;
(b) deem service of the motion for the Preliminary Interim Order to be good and
sufficient;
(c) set out the persons entitled to notice of, and to appear and be heard in, the
Arrangement proceedings;
(d) provide for a comeback hearing permitting any interested party that wishes to
amend or vary the Preliminary Interim Order to bring a motion before the Court
on seven business days' notice to the Applicants and any other party or parties
likely to be affected by the order to be sought by such interested party; and
(e) such further and other relief as this Court deems just.
3
3. Unless otherwise stated, all monetary amounts contained herein are expressed in U.S.
dollars.
I. OVERVIEW
4. As described in further detail below, CIC, together with its subsidiaries (collectively, the
"Concordia Group" or the "Company"), is a diverse, international specialty pharmaceutical
company primarily focused on off-patent pharmaceutical products. The Concordia Group has an
international footprint with sales in more than 90 countries, and has a diversified portfolio of
more than 200 established, off-patent products. CIC's common shares (the "Common Shares")
are listed for trading on the Toronto Stock Exchange (the "TSX") under the symbol "CXR" and
the NASDAQ Global Select Market (the "NASDAQ") under the symbol "CXRX".
5. The purpose of the Arrangement is to give effect to a recapitalization transaction (the
"Recapitalization Transaction") involving the Secured Term Loans, the Secured Notes, the
Secured FX Swaps, the Unsecured Bridge Loans and the Unsecured Notes (each as defined
below, and collectively, the "Affected Debt" and the documents governing and/or related to the
Affected Debt, the "Affected Debt Instruments") and the Common Shares.
6. In addition to the Applicants, these proceedings also involve the entities listed on
Schedule "A" hereto (collectively, the "Subsidiary Guarantors"), each of which is a holly-
owned direct or indirect subsidiary of CIC. The Subsidiary Guarantors collectively own a
significant portion of the assets of the Company's business and are guarantors under the Affected
Debt Instruments.
4
7. In early 2017, the Company engaged in a process to develop a long-term growth strategy
to address certain business challenges facing the Company and improve its capital structure, with
debt reduction as a priority. This process led to the development of a five-year strategic plan
known as the DELIVER Strategy.
8. A key component of the DELIVER Strategy is the strengthening of the Company's
financial foundation by right-sizing its capital structure. In June of 2017, the Company engaged
Perella Weinberg Partners LP ("PWP") to provide the Company with financial advisory services
in connection with the development and execution of its long-term growth strategy. These
services include, but are not limited to, helping the Company explore and evaluate potential
transactional alternatives, including initiatives to optimize its capital structure.
9. In the summer of 2017, the Company and its advisors commenced discussions regarding
transactions to improve the Company's capital structure with (i) a committee comprised of
certain Secured Term Loan Lenders and certain Secured Noteholders (each as defined below)
(the "Secured Debtholders Committee"), (ii) a committee comprised of certain Unsecured
Noteholders (as defined below) (the "Unsecured Debtholders Committee and, together with
the Secured Debtholders Committee, the "Debtholder Committees"), and (iii) each of the
respective legal and financial advisors for the Secured Debtholders Committee (the "Secured
Debtholder Committee Advisors") and for the Unsecured Debtholders Committee (the
"Unsecured Debtholder Committee Advisors" and, together with the Secured Debtholder
Committee Advisors, the "Debtholder Committee Advisors").
10. Since the summer of 2017, the Company and its advisors have been engaged in
discussions with the Debtholder Committees and the Debtholder Committee Advisors in
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connection with the potential Recapitalization Transaction. The Company has entered into
confidentiality agreements with the Debtholder Committee Advisors. The Company has also
executed engagement letters with the legal advisors to the Secured Debtholders Committee and
the Unsecured Debtholders Committee in which it has agreed to pay the reasonable fees and
expenses of these advisors in connection with the potential Recapitalization Transaction.
11. The Company believes that it needs to reduce its debt obligations in order to have a
sustainable capital structure. The Company's view is that, based on the size and nature of its
existing capital structure, an arrangement is required to reduce its debt obligations. The
Company and its advisors are continuing to work to advance and finalize the terms of the
Recapitalization Transaction on a consensual basis with the Debtholder Committees and the
Debtholder Committee Advisors. It is the Company's expectation under the Recapitalization
Transaction to reduce the Company's outstanding indebtedness by more than $2 billion in the
aggregate, significantly reduce its annual interest costs, improve its capital structure and put the
Company on a strong financial footing in order to execute on its long-term growth strategy
moving forward.
12. As described in greater detail below, CIC did not make its October 7.00% Unsecured
Notes Payment (as defined below) due on October 16, 2017 and does not intend to make the
October Unsecured Bridge Loan Payments (as defined below) due on October 20 and 23, 2017 at
this time as the foregoing payments form part of the Affected Debt that is expected to be affected
under the Recapitalization Transaction.
13. The Company intends to continue to satisfy in the ordinary course its scheduled interest
and amortization payments, as applicable, under the Secured Debt and all of its trade and
6
employee obligations. As at September 30, 2017, the Company had approximately $342 million
of cash on hand, giving it sufficient liquidity to satisfy these obligations. With the exception of
the October Unsecured Debt Payments (as defined below), the Company is otherwise current on
its payment obligations under all of the Affected Debt and is not, other than in connection with
the commencement of these proceedings and the non-payment of the October Unsecured Debt
Payments, otherwise in default under any of the Affected Debt Instruments.
14. The Applicants require the Preliminary Interim Order and the stay of proceedings
contemplated therein (the "Stay of Proceedings") to maintain the overall stability for their
business and provide the Company and the Debtholder Committees with a meaningful
opportunity to continue to advance and finalize the terms of the Recapitalization Transaction.
With the benefit of the Stay of Proceedings, the Applicants will have the stability needed to
finalize and execute the Recapitalization Transaction, the Support Agreements (as defined
below) and all other documentation required to implement the Recapitalization and the
Arrangement.
15. The Applicants are continuing to negotiate the terms of the Recapitalization Transaction
and proposed Arrangement with the Debtholder Committees. Upon finalizing these terms, the
Applicants intend to bring forward a motion for an interim order for purposes of, among other
things, calling and holding meetings to vote on the proposed Arrangement (the "Interim
Order"). It is anticipated that, as part of the process to develop the Arrangement and the
Recapitalization Transaction contemplated thereby, the Applicants would enter into definitive
support agreements with the members of the Debtholder Committees (the "Support
Agreements") prior to returning to Court to seek the Interim Order.
7
IL BACKGROUND REGARDING THE COMPANY
(a) Corporate Structure
(i) CIC
16. CIC is the parent corporation of the Concordia Group. A corporate chart showing the
structure of the Company is attached as Exhibit A.
17. CIC is a corporation formed pursuant to the Ontario Business Corporations Act (the
"OBCA") having its registered and head office at 277 Lakeshore Rd. East, Suite 302, Oakville,
Ontario, L6J 1H9 and its records office at 333 Bay St., Suite 2400, Toronto, Ontario M56 2T6.
18. In connection with the Recapitalization Transaction, it is anticipated that CIC will
continue from the OBCA to the CBCA prior to the date that the Applicants seek a final order
approving the Arrangement pursuant to a plan of arrangement (the "Plan of Arrangement").
(ii) CHCL
19. CHCL is a corporation incorporated pursuant to the CBCA having its registered and head
office at 277 Lakeshore Rd. East, Suite 302, Oakville, Ontario, L6J 1H9.
20. CHCL is a direct wholly-owned subsidiary of CIC and does not carry on any operations
or have any liabilities.
(iii) The Subsidiary Guarantors and the Other Subsidiaries
21. The Company operates its global business through a number of direct and indirect
subsidiaries of CIC around the world. Each of the Subsidiary Guarantors is organized under the
8
laws of the jurisdiction set forth beside its name on Schedule "N' hereto. In addition to CHCL
and the Subsidiary Guarantors, CIC has a number of other subsidiaries around the world that are
not involved in these proceedings and are not guarantors under the Affected Debt Instruments.
(b) History of the Company
22. CIC was incorporated on January 20, 2010 as "Mercari Acquisition Corp." Mercari
Acquisition Corp. completed an initial public offering on May 6, 2010 and was listed on the TSX
Venture Exchange as a capital pool company. On December 18, 2013, Mercari Acquisition Corp.
changed its name to "Concordia Healthcare Corp." and, on December 20, 2013, completed a
qualifying transaction (the "Qualifying Transaction") by way of a reverse takeover by the
shareholders of Concordia Healthcare Inc. ("Concordia Private Co."). Prior to the Qualifying
Transaction, Mercari Acquisition Corp. did not own any assets other than cash and had not
conducted any active business operations. Following completion of the Qualifying Transaction,
the Common Shares began trading on the TSX and, subsequently, the NASDAQ.
23. On January 1, 2016, Concordia Private Co. amalgamated with Concordia Healthcare
Corp. The amalgamated entity's name remained Concordia Healthcare Corp. until June 27, 2016,
when it was changed to Concordia International Corp.
24. Since completing the Qualifying Transaction in 2013, the Company has established its
pharmaceutical product portfolio through a number of significant acquisitions. Certain of the
Company's material acquisitions are described below.
9
Legacy Products Acquisition
25. In May of 2013, Concordia Pharmaceuticals Inc., S.A.R.L. ("CPI"), one of the Subsidiary
Guarantors, acquired certain rights to certain legacy pharmaceutical products from Shionogi Inc.
("Shionogi"). The product rights acquired from Shionogi were comprised of three drugs
approved by the United States Food and Drug Administration (the "FDA"): (i) Kapvay®, which
is used to treat Attention Deficit Hyperactivity Disorder; (ii) Orapred ODT®, an anti-
inflammatory used in the treatment of certain pulmonary diseases such as asthma; and (iii)
Ulesfia®, which is a topical treatment for pediculosis (head lice). The consideration payable to
Shionogi for these legacy pharmaceutical product rights included cash on closing and certain
post-closing royalty payments by CPI.
(ii) Photofrin® Acquisition
26. In December of 2013, Concordia Private Co., through its subsidiaries, acquired 100% of
the shares of Pinnacle Biologics, Inc. and its affiliates (collectively, "Pinnacle"). Through this
acquisition, the Concordia Group acquired the rights to the drug Photofrin®, which is used to
treat certain forms of rare cancer and may have potential through further development to be used
to treat additional conditions. The consideration payable for the acquisition of Pinnacle included
cash consideration payable on closing, common shares of Concordia Private Co. and annual
fixed and contingent post-closing cash payments.
(iii) Donnatal® Acquisition
27. In May of 2014, CPI completed the acquisition of the drug Donnatal® from PBM
Pharmaceuticals Inc. Donnatal® is an adjunctive therapy in the treatment of irritable bowel
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syndrome and acute enterocolitis. The consideration payable for the acquisition of Donnatal®
was comprised of a combination of cash consideration and Common Shares.
(iv) Zonegran® Acquisition
28. In September of 2014, CPI acquired certain rights to market Zonegran® in the United
States from Eisai, Inc. for cash consideration. Zonegran® is an antiepileptic first approved by the
FDA in March 2000. The consideration payable for the acquisition of certain rights to market
Zonegran® in the United States was comprised of cash consideration.
(v) Covis Portfolio Acquisition
29. In April of 2015, CPI completed the acquisition of substantially all of the commercial
assets of Covis Pharma S.a.r.1 and Covis Injectables S.a.r.l. (collectively, "Covis") for $1.2
billion in cash (the "Covis Acquisition"). The drug portfolio acquired from Covis (the "Covis
Portfolio") consisted of branded products and authorized generic pharmaceutical contracts
which treat various medical conditions in various areas including cardiovascular, central nervous
system, oncology and acute care markets. The consideration payable for the acquisition of the
Covis Portfolio was comprised of cash consideration.
(vi) AMCo Acquisition
30. In October of 2015, the Company completed its acquisition (the "AMCo Acquisition")
of Amdipharm Mercury Limited ("AMCo") from Cinven Capital Management (V) General
Partner Limited and its associated limited partnerships (collectively, "Cinven") and certain other
vendors. The AMCo Acquisition provided the Company with entry into new areas such as
endocrinology, neurology, ophthalmology and urology. The purchase price for the AMCo
Acquisition was satisfied through a combination of cash consideration and Common Shares. In
addition, the AMCo Acquisition required the Company to make certain post-closing earn-out
payments to Cinven and the other vendors.
(c) Overview of the Company's Business
31. The Company is a diverse, international specialty pharmaceutical company primarily
focused on off-patent pharmaceutical products. The Company generates revenue through the sale
of a diversified portfolio of more than 200 established, off-patent products in more than 90
countries.
32. The Company specializes in the acquisition, licensing and development of off-patent
prescription medicine products, many of which are niche, hard to make products. The Company
operates through a business model that focuses on the registration and regulatory maintenance of
acquired and in-licensed products, with products being manufactured through an out-sourced
manufacturing network of contract manufacturing organizations ("CMOs"). This structure
allows the Company to avoid fixed research and development and manufacturing infrastructure
costs and provides the Company with an efficient and variable cost structure.
33. The Concordia Group is managed from its head office in Oakville, Ontario. Corporate-
level decision making for the Concordia Group is undertaken by the executive management of
CIC, which are located at the Oakville office. In addition, a substantial portion of the
administrative functions of the Company, including general accounting, financial reporting,
budgeting, legal, global tax planning, interacting with the TSX and NASDAQ, managing aspects
of human resources, and certain medical regulatory activities, are conducted out of the Oakville
office.
t
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34. The Company has two operating segments, in addition to its corporate cost centre in
Oakville, Ontario and its Centre of Excellence in Mumbai, India (described below): (i) the
Company's international pharmaceutical segment selling branded and generic prescription
products that are sold to wholesalers, hospitals and pharmacies in over 90 countries ("Concordia
International") and (ii) the Company's North American legacy pharmaceutical segment, which
also includes its orphan drugs business ("Concordia North America"). Concordia International
and Concordia North America receive additional business support from the Company's Centre of
Excellence located in Mumbai, India (the "Centre of Excellence"). Each of these segments and
the Centre of Excellence is discussed in detail below.
(ii) Concordia International
35. Concordia International is the Company's international specialty pharmaceutical
segment, owning or licensing a broad portfolio of branded and generic prescription products that
are sold to wholesalers, hospitals and pharmacies in over 90 countries around the world.
36. The Concordia International business segment focuses on products at the end of a typical
pharmaceutical product lifecycle. These products typically have lengthy prescription histories
which reduces the risk of any new undetected side-effects that could materially alter prescribing
habits. Concordia International's top products benefit from historically stable demand in most
circumstances, are complex to manufacture and register with applicable drug product regulatory
authorities, and face a lower risk of innovation due to the off-patent stage of their life cycle.
37. Concordia International's medicines are predominantly manufactured by a number of
CMOs located in Western Europe. For the vast majority of its products, Concordia International
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owns and controls the intellectual property giving it the ability to launch its products in various
geographies, to develop new formulations and to select CMOs of its choice.
38. Concordia International's products are sold and distributed through two models: the
direct presence (regional hubs) model and the distributor markets model. Concordia International
has a direct sales presence and commercial teams with full control over its sales and marketing
efforts in the United Kingdom, Ireland, Australia, Asia and the Nordic region. In markets where
Concordia International uses distributors for sales and distribution, Concordia International
utilizes area/country managers who manage distributors, train and monitor third-party sales
forces and identify portfolio optimization opportunities.
39. Concordia International's business represented approximately 72.83% of the Company's
total consolidated revenue for the first half of 2017 and 68.24% of the Company's total
consolidated revenue for the 2016 fiscal year.
40. Concordia International's operations are conducted through Concordia Investments
(Jersey) Limited ("CUL", which is one of the Subsidiary Guarantors) and certain other
subsidiaries. Concordia International's operations are managed by core management teams in
Ireland, Jersey and the United Kingdom and supported by commercial and regulatory teams in
certain international markets. In addition, the Centre of Excellence provides Concordia
International with support on key business functions ranging from regulatory, quality, supply
chain, medical marketing, customer service, human resources, information technology and
finance.
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(iii) Concordia North America
41. Concordia North America is the Company's North American pharmaceutical segment,
owning or licensing a portfolio of legacy pharmaceutical products consisting of branded and
authorized generic products, including Zonegran®, Donnatal®, Photofrin® and products in the
Covis Portfolio. Concordia North America's business is focused primarily on the United States
pharmaceutical market.
42. The Concordia North America business segment focuses on branded and authorized
generic products that are in the maturity or legacy stage of the pharmaceutical product lifecycle.
Similar to Concordia International's products, Concordia North America's products typically
have a well-established record of safety and efficacy.
43. Concordia North America's product offering also includes Photofrin®, a product for the
treatment of certain forms of rare cancer, which was previously part of the Company's "Orphan
Drugs" segment before being combined with the Concordia North America business segment.
44. Concordia North America's products are manufactured by CMOs in North America and
Western Europe.
45. Concordia North America's business represented approximately 27.17% of the
Company's total consolidated revenue for the first half of 2017 and 31.76% of the Company's
total consolidated revenue for the 2016 fiscal year.
46. Concordia North America's operations are conducted through CPI and Concordia
Laboratories Inc., S.A.R.L. ("CLI") (each of which are Subsidiary Guarantors) and certain other
subsidiaries. CPI has a portfolio of branded products and authorized generic contracts and CLI
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owns Photofrin®. Concordia North America's operations, including supplier relationships, are
managed from offices in Barbados and supported by the Centre of Excellence and by internal
and external advisors.
(iv) Centre of Excellence
47. The Company operates the Centre of Excellence in Mumbai, India. The Centre of
Excellence employs personnel with various backgrounds to provide a range of business support
to its European and North American based teams, including key business functions of finance,
human resources, information technology, supply chain and regulatory, quality and medical
affairs.
(v) Employees
48. As at October 19, 2017, the Company employed 443 employees worldwide, 165 of which
were employed in the Concordia International segment (other than Mumbai), 33 of which were
employed in the Concordia North America segment (including the United States and Barbados)
and 219 of which were employed at the Centre of Excellence.
49. The Company employs 26 employees at its headquarters in Oakville, Ontario. The
Company's Canadian employees include senior management and employees engaged in
management, financial, legal and administrative roles within the business.
50. None of the Company's employees are unionized.
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(vi) Competition
51. Competitors in the pharmaceutical market range from large multinational pharmaceutical
and development corporations to small, single product companies that may focus their business
activities on a specific therapeutic area, region or territory. The Company competes with a
variety of other pharmaceutical companies, and there are other products in the market that
compete with many of the products in the Company's portfolio. In recent years, the Company
has experienced an increase in competition as a result of new market entrants and new products
that compete directly with the Company's existing products.
0 Customers
52. As described above, Concordia International's products are sold and distributed through
two models: the direct presence (regional hubs) model in major markets and the distributor
markets model in other smaller markets. Customers in the United Kingdom account for a
significant portion of Concordia International's sales, with sales in over 90 other countries
accounting for the balance. Concordia International has a range of wholesale and retail customers
in the United Kingdom, with the primary customer in the United Kingdom being the National
Health Service.
53. Concordia North America sells substantially all of its products directly to three major
wholesalers in the United States, who account for approximately 90% of gross sales. Concordia
North America's other customers include smaller wholesalers and distributors as well as health
professionals, pharmacists, patients and third-party payors such as group purchasing
organizations and governmental health agencies.
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54. For certain of the Company's products, a significant portion of sales are made to a
relatively small number of customers.
(ii) Suppliers
55. The Company enters into long-term contracts for the supply and third-party manufacture
of its products. This business model allows the Company to maintain a variable cost structure
and avoid significant fixed costs typically associated with the production of pharmaceutical
products.
56. The Company outsources its product manufacturing services to a number of third-party
CMOs. The Company is partnered with a number of well-known, reputable CMOs such as Haupt
Pharma, Cenexi, B Braun Medical UK and Aesica, among others. The Company's
manufacturing partners are primarily located in Western Europe and, to a lesser extent, North
America.
(d) Business Challenges
57. The Company currently faces challenges posed by the decline in its operating
performance, high leverage and foreign exchange risks, in addition to business environment
challenges in both the North American and International markets.
N Increased Competition and Industry Changes
58. In recent years, the Company has faced increased pressure on its product pricing as a
result of increasing competition and new entrants into the market. In both the Concordia North
America and Concordia International business segments, the launch of directly competing
- 18 -
generic products, as well as new products that treat the same conditions as the Company's
existing products, have resulted in decreasing revenues.
59. Concordia North America's primary customer base is comprised of wholesalers and retail
drug chains who have undergone, and continue to undergo, significant consolidation. This
consolidation has led to additional purchasing leverage for these groups and pricing pressure on
Concordia North America.
(ii) Regulatory Matters
60. The Company has faced certain regulatory challenges in recent years, and is currently
subject to certain ongoing regulatory investigations being conducted by the United Kingdom
Competition and Markets Authority (the "CMA").
61. On October 25, 2016, the Company announced that the CMA had commenced an
investigation into various matters in relation to the United Kingdom pharmaceutical sector and
that Concordia International was part of the investigation (the "CMA Pricing Investigation").
The CMA Pricing Investigation includes matters that pre-date the AMCo Acquisition and the
Company's ownership of the Concordia International business segment and relate to the
Company's pricing of certain products. Since commencing the CMA Pricing Investigation, the
CMA has been in the process of information gathering and analysis and the Company has
cooperated with the investigation. The CMA has not reached a decision as to whether or not it
will proceed with a finding of infringement in the CMA Pricing Investigation.
62. On March 3, 2017, the Company announced that the CMA had issued a statement of
objections to Actavis UK Limited, Allergen plc, Cinven (Luxco 1) S.A., Cinven Capital
- 19 -
Management (V) General Partner Limited, Cinven Partners LLP, each third parties, and to CIC,
Amdipharm Limited, Concordia International (Rx) (UK) Limited and Concordia International
(Jersey) Limited (since dissolved), each, other than Concordia International (Jersey) Limited,
either a borrower/issuer or a Subsidiary Guarantor under the Affected Debt Instruments and part
of the Concordia International business segment, in relation to the supply of 10mg
hydrocortisone tablets in the United Kingdom between 2013 and 2016 (the "CMA
Hydrocortisone Investigation"). A statement of objections is a formal statement by the CMA
that it considers that a competition infringement may have occurred. The CMA Hydrocortisone
Investigation also involves matters that predate the AMCo Acquisition and the Company's
ownership of the Concordia International business segment, and alleges that the parties entered
into agreements under which AMCo (as defined in the statement of objection) was incentivized
not to enter the market with its own competing version of hydrocortisone tablets.
63. The Company responded to the statement of objections and attended an oral hearing to
present the key points of its response to the CMA Hydrocortisone Investigation to the CMA
decision panel. The Company is currently awaiting the CMA's decision as to whether it may
issue an infringement decision.
64. On October 11, 2017, the Company announced that the CMA commenced additional
investigations in relation to the United Kingdom pharmaceutical sector and that Concordia
International and certain of its products are part of that investigation (the "October 2017 CMA
Investigation" and, collectively with the CMA Pricing Investigation and the CMA
Hydrocortisone Investigation, the "CMA Investigations"). The October 2017 CMA
Investigation also involves matters that predate the AMCo Acquisition and the Company's
ownership of the Concordia International business segment. The October 2017 CMA
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Investigation is at an early information gathering stage and the CMA has confirmed that, at this
time, it has not reached a conclusion on whether competition law may have been infringed.
65. In addition to the CMA Investigations, on April 27, 2017, the United Kingdom Health
Service Medical Supplies (Cost) Act 2017 (the "HSMS Ace) received Royal Assent in the
United Kingdom. The HSMS Act introduces provisions in connection with controlling the cost
of health service medicines and other medical supplies in the United Kingdom. The HSMS Act
also regulates the provision of pricing and other information by manufacturers, distributors and
suppliers of those medicines and medical supplies. It is anticipated that the Department of Health
will issue new regulations under the HSMS Act in early 2018. The Company continues to
monitor the implementation of the HSMS Act to understand how it will affect the Company's
business and the pricing of its current products.
(iii) Leverage
66. The Company has expanded significantly since the completion of the Qualifying
Transaction through the acquisitions of companies and portfolios of pharmaceutical products that
resulted in the accumulation of approximately $3.7 billion of long-term debt.
67. Although the majority of the Company's long-term debt does not mature until 2021 to
2023, the servicing of the long-term debt obligations requires significant cash and the
Company's high leverage and declining EBITDA have restricted debt and equity funding options
available to the Company, hindering its ability to execute on its long-term growth strategy.
-21 -
68. In addition, the Company has been affected by negative foreign exchange movement
between the USD and GBP attributed in large part to the vote by the United Kingdom to leave
the European Union.
(e) Capital Structure
69. CIC's capital structure consists primarily of the Common Shares, the Secured Term
Loans, the Secured Notes, the Secured FX Swaps, the Unsecured Bridge Loans and the
Unsecured Notes, all as further discussed below.
70. As at September 30, 2017, the Company had cash on hand in the amount of
approximately $342 million.
(i) Equity
71. The authorized capital of CIC consists of an unlimited number of Common Shares. As at
October 19, 2017, there were 51,282,901 Common Shares issued and outstanding. As discussed
above, the Common Shares are listed on the TSX and the NASDAQ. Cinven is CIC's largest
shareholder, holding approximately 14% of the issued and outstanding Common Shares as a
result of the Common Shares issued to Cinven as part of the AMCo Acquisition.
(ii) Secured Term Loans
72. CIC is the borrower under a credit agreement dated October 21, 2015 among CIC, as
borrower, the Subsidiary Guarantors, as guarantors, Goldman Sachs Bank USA, as
administrative agent and collateral agent (the "Secured Term Loan Agent"), the lenders party
thereto (the "Secured Term Loan Lenders") and the other arrangers, bookrunners and agents
party thereto (as amended, restated and supplemented from time to time, the "Secured Term
- 22 -
Loan Credit Agreement"). Pursuant to the Secured Term Loan Credit Agreement, the Secured
Term Loan Lenders agreed to provide secured term loans to CIC in aggregate amounts of $1.1
billion in one tranche (the "USD Secured Term Loan") and £500 million in another tranche (the
"GBP Secured Term Loan" and, together with the USD Secured Term Loan, the "Secured
Term Loans"), and made available to CIC a secured revolving loan in the aggregate principal
amount of up to $200 million (the "Revolving Loan"). The proceeds of the Secured Term Loans
were used to pay a portion of the purchase price of, and costs related to, the AMCo Acquisition
and to refinance certain of the Company's indebtedness and certain indebtedness held by AMCo
as at the closing date of the AMCo Acquisition. A copy of the Secured Term Loan Credit
Agreement is attached hereto as Exhibit B.
73. The Secured Term Loans mature on October 21, 2021 and require fixed quarterly
principal amortization payments equal to a percentage of the original principal amount of the
Secured Term Loans (such percentage subject to certain adjustments over time) as well as
mandatory repayments based on CIC's excess cash flow. Mandatory fixed amortization
payments on the Secured Term Loans of approximately $27.5 million and £12.5 million are due
over the next twelve months. Interest rates on the Secured Term Loans are variable and are
calculated based on LIBOR plus applicable margins, with a LIBOR floor of 1%. Interest on the
Secured Term Loans is payable on the last business day of each of March, June, September and
December for each Base Rate Loan or Canadian Prime Rate Loan (as defined in the Secured
Term Loan Credit Agreement), and on the last day of the applicable one, two, three, six or 12
The versions of the various Affected Debt Instruments attached as exhibits to this affidavit are the versions thathave been previously publicly filed by the Company, with any applicable redactions for certain sensitiveinformation.
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month interest period as agreed to by the Secured Term Lenders in respect of Eurocurrenc y Rate
Loans (as defined in the Secured Term Loan Credit Agreement).
74. All obligations under the Secured Te Loans and the Revolving Loan are guaranteed by
the Subsidiary Guarantors and are secured by first priority security interests in the assets of CIC
and the Subsidiary Guarantors, with the exception of certain Excluded Property (as defined in the
Secured Term Loan Credit Agreement).
75. As at October 19, 2017, there was approximately $1.068 billion of principal amount
outstanding under the USD Secured Term Loan, plus accrued and unpaid interest, and
approximately £485.63 million of principal amount outstanding under the GBP Secured Term
Loan, plus accrued and unpaid interest, with no amounts drawn and certain letters of credit
issued under the Revolving Loan.
(iii) Secured Notes
76. CIC is the issuer under a senior secured first lien notes indenture dated October 13, 2016
(as amended, restated and supplemented from time to time, the "Secured Notes Indenture)
among CIC, as issuer, the Subsidiary Guarantors, as guarantors, and U.S. Bank National
Association, as trustee and collateral agent (the "Secured Notes Trustee) pursuant to which
CIC issued $350 million of 9.00% senior secured first lien notes due April 1, 2022 (the "Secured
Notes"). A copy of the Secured Notes Indenture is attached hereto as Exhibit C.
77. Interest on the Secured Notes is payable semi-annually in arrears on October 1, and April
1 of each year at a rate of 9.00% per annum. The Secured Notes are guaranteed by the Subsidiary
Guarantors and are secured by the same first priority security interests in the same or
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substantially the same assets of CIC and the Subsidiary Guarantors that secure the Secured Term
Loans.
78. The Secured Notes were issued in connection with the Company's 2016 Strategic Review
(as defined below). Proceeds from the Secured Notes issuance were, and continue to be, used for
general corporate purposes.
79. CIC, the Subsidiary Guarantors, the Secured Term Loan Agent and the Secured Notes
Trustee are party to an intercreditor agreement dated October 13, 2016 (the "Intercreditor
Agreement"). The Intercreditor Agreement provides that the Secured Term Loan Lenders and
the holders of the Secured Notes (the "Secured Noteholders") will share rateably on any
proceeds generated from the collateral securing the Secured Term Loans and the Secured Notes.
Pursuant to the Intercreditor Agreement, notwithstanding the equal priority of the liens securing
the Secured Term Loans and the Secured Notes, only the Applicable Authorized Representative
(as defined in the Intercreditor Agreement) will have the right to act or refrain from acting with
respect to any collateral securing the Secured Term Loans and Secured Notes. The Applicable
Authorized Representative will be the Secured Term Loan Agent until the Secured Term Loans
have been repaid and discharged or until the expiration of a specified period after an event of
default under the Secured Notes during which period the Secured Term Loan Agent has not
taken and pursued enforcement action.
(iv) Secured FX Swaps
80. The majority of the Company's long-term debt obligations are denominated in USD other
than the GBP Secured Term Loan. On August 17, 2016, CIJL entered into a cross-currency swap
(the "August 2016 Swap") under the 2002 Master ISDA Agreement dated August 15, 2016 (the
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"ISDA Agreement") between Goldman Sachs International (the "Swap Lender") and CIJL in
order to reduce the Company's exposure to exchange rate fluctuations between GBP and USD on
certain repayments of its long-term debt agreements. The August 2016 Swap has a principal
amount of $382 million and a maturity date of April 15, 2023. The Swap Lender, the Secured
Term Loan Lenders and the Secured Noteholders are collectively referred to herein as the
"Secured Debtholders". The Secured Debtholders and the Unsecured Debtholders (as defined
below) are collectively referred to herein as the "Debtholders".
81. On November 3, 2016, CIJL entered into a cross-currency swap (the "November 2016
Swap" and, together with the August 2016 Swap, the "Secured FX Swaps", and collectively
with the Secured Term Loans and the Secured Notes, the "Secured Debt") under the ISDA
Agreement in order to reduce the Company's exposure to exchange rate fluctuations associated
with the Secured Notes. The November 2016 Swap has a principal amount of $350 million and a
maturity date of April 1, 2022, being the same as the maturity on the Secured Notes.
82. The Secured FX Swaps are guaranteed by the Subsidiary Guarantors and secured by the
same first priority security interests in the assets of CIC and the Subsidiary Guarantors that
secure the Secured Term Loans.
(v) Unsecured Bridge Loans
83. On October 21, 2015, concurrent with the closing of the AMCo Acquisition, CIC, as
borrower, entered into: (i) an Extended Equity Bridge Credit and Guaranty Agreement with the
Subsidiary Guarantors, as guarantors, Goldman Sachs Bank USA, as administrative agent, the
lenders party thereto (the "Extended Unsecured Bridge Loan Lenders") and the other
arrangers, bookrunners and agents party thereto (as amended, restated and supplemented from
- 26 -
time to time, the "Extended Unsecured Bridge Loan Agreement") pursuant to which the
Extended Unsecured Bridge Loan Lenders made available to CIC a senior unsecured extended
equity bridge loan facility in the principal amount of $135 million (the "Extended Unsecured
Bridge Loan"); and (ii) a Two Year Equity Bridge Credit and Guaranty Agreement with the
Subsidiary Guarantors, as guarantors, Goldman Sachs Bank USA, as administrative agent, the
lenders party thereto (the "Equity Unsecured Bridge Loan Lenders") and the other arrangers,
bookrunners and agents party thereto (the "Equity Unsecured Bridge Loan Agreement" and,
together with the Extended Unsecured Bridge Loan Agreement, the "Unsecured Bridge Loan
Agreements") pursuant to which the Equity Unsecured Bridge Loan Lenders made available to
CIC a senior unsecured equity bridge loan facility in the principal amount of $45 million (the
"Equity Unsecured Bridge Loan" and, together with the Extended Unsecured Bridge Loan, the
"Unsecured Bridge Loans"). Copies of the Extended Unsecured Bridge Loan Agreement and
the Equity Unsecured Bridge Loan Agreement are attached hereto as Exhibit "D" and Exhibit
"E", respectively. Goldman Sachs Bank USA has advised the Company that it is resigning from
its position as administrative agent under each of the Unsecured Bridge Loans and the Company
is in the process of transitioning to a new administrative agent for the Unsecured Bridge Loans.
84. The Extended Unsecured Bridge Loan matures on October 21, 2022. Interest on the
Extended Unsecured Bridge Loan is 9.50% per annum for the first two years from issuance (i.e.
October 21, 2017), payable quarterly in arrears. If the Extended Unsecured Bridge Loan is not
repaid on or prior to October 21, 2017, the interest rate will increase to 11.5% per annum. On or
after October 21, 2017, until October 21, 2018, lenders holding the Extended Unsecured Bridge
Loan may make a proposal for an offering of new securities ("Refinancing Securities") which
Refinancing Securities may carry a weighted average effective yield that is up to 150 basis points
- 27 -
greater than 11.5% per annum. On or after October 21, 2018 the Extended Unsecured Bridge
Loan Lenders may request the exchange of the Extended Unsecured Bridge Loan into bonds with
a maturity date of October 21, 2022 and bearing interest of 11.5%.
85. The Equity Unsecured Bridge Loan matures on October 20, 2017. Interest on the Equity
Unsecured Bridge Loan is 9.50% per annum, payable quarterly in arrears.
86. The Unsecured Bridge Loans are unsecured obligations of CIC and the Subsidiary
Guarantors and are effectively pari passu with the Unsecured Notes. The proceeds of the
Unsecured Bridge Loans were used to pay a portion of the purchase price of, and costs related to,
the AMCo Acquisition.
87. The Unsecured Bridge Loans permit voluntary prepayments of the borrowings
thereunder. On December 18, 2015, CIC repaid $11.25 million of the Equity Unsecured Bridge
Loan and $33.75 million of the Extended Unsecured Bridge Loan. As at October 19, 2017, there
was approximately $33.61 million outstanding under the Equity Unsecured Bridge Loan, plus
accrued and unpaid interest, and approximately $100.83 million outstanding under the Extended
Unsecured Bridge Loan, plus accrued and unpaid interest.
88. On October 20, 2017, approximately $0.81 million of interest and approximately $33.61
million of principal are due and payable in respect of the maturity of the Equity Unsecured
Bridge Loan (the "October Equity Unsecured Bridge Loan Payments"), and on October 23,
2017, approximately $2.5 million in interest is due and payable under the Extended Unsecured
Bridge Loan (the "October Extended Unsecured Bridge Loan Payment", together with the
October Equity Unsecured Bridge Loan Payments, the "October Unsecured Bridge Loan
Payments"). As discussed herein, the Company does not intend to make these payments at this
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time as it is expected that the Unsecured Bridge Loans will form part of the Arrangement. There
have been certain limited discussions with the Equity Unsecured Bridge Loan Lender and its
advisor in advance of the maturity under the Equity Unsecured Bridge Loan.
(vi) Unsecured Notes
(A) 7.00% Unsecured Notes Indenture
89. CIC is the issuer under the senior unsecured notes indenture dated April 21, 2015 (as
amended, restated and supplemented from time to time, the "7.00% Unsecured Notes
Indenture") among CIC, as issuer, the Subsidiary Guarantors, as guarantors, and U.S. Bank
National Association, as trustee, pursuant to which CIC issued $735 million of senior unsecured
notes due April 15, 2023 (the "7.00% Unsecured Notes"). A copy of the 7.00% Unsecured
Notes Indenture is attached hereto as Exhibit F.
90. Interest on the 7.00% Unsecured Notes is payable semi-annually in arrears on April 15
and October 15 of each year at a rate of 7.00% per annum. The 7.00% Unsecured Notes are
guaranteed by the Subsidiary Guarantors and are unsecured obligations that rank senior in right
of payment to all of CIC's and the Subsidiary Guarantors' subordinated indebtedness (which
subordinated indebtedness, for clarity, does not include the Unsecured Bridge Loans which rank
part passu with the Unsecured Notes). The proceeds of the 7.00% Unsecured Notes were used to
pay a portion of the purchase price of, and costs related to, the Covis Acquisition.
91. On October 16, 2017 (the first business day following October 15, 2017), approximately
$25.73 million of interest became due and payable under the 7.00% Unsecured Notes (the
"October 7.00% Unsecured Notes Payment" and, together with the October Unsecured Bridge
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Loan Payments, the "October Unsecured Debt Payments"). The Company did not pay the
October 7.00% Unsecured Notes Payment as, similar to the Unsecured Bridge Loans, it is
expected that the 7.00% Unsecured Notes will form part of the Arrangement. The non-payment
of the October 7.00% Unsecured Notes Payment does not result in an Event of Default under the
7.00% Unsecured Notes Indenture until the expiry of the 30-day grace period. CIC issued a press
release on October 16, 2017, announcing that in connection with ongoing discussions with its
lenders it determined to defer making the October 7.00% Unsecured Notes Payment and would
continue its discussions with its lenders with the goal of reaching a consensual agreement that
would significantly reduce the Company's debt and interest payments to create a financial
foundation able to support the Company's long-term growth. A copy of the October 16, 2017
press release is attached as Exhibit "G" hereto.
(B) 9.50% Unsecured Notes Indenture
92. CIC is the issuer under the senior unsecured notes indenture dated as of October 21, 2015
(as amended, restated and supplemented from time to time, the "9.50% Unsecured Notes
Indenture" and, together with the 7.00% Unsecured Notes, the "Unsecured Notes", and the
Unsecured Notes collectively with the Unsecured Bridge Loans, the "Unsecured Debt") among
CIC, as issuer, the Subsidiary Guarantors, as guarantors, and U.S. Bank National Association, as
trustee, pursuant to which CIC issued $790 million of 9.50% senior unsecured notes due October
21, 2022 (the "9.50% Unsecured Notes"). A copy of the 9.50% Unsecured Notes Indenture is
attached hereto as Exhibit H. The holders of the Unsecured Notes are referred to collectively
as the "Unsecured Noteholders", and collectively with the Extended Unsecured Bridge Loan
Lenders and the Equity Unsecured Bridge Loan Lenders, the "Unsecured Debtholders".
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93. Interest on the 9.50% Unsecured Notes is payable semi-annually in arrears on June 15
and December 15 of each year at a rate of 9.50% per annum. The 9.50% Unsecured Notes are
guaranteed by the Subsidiary Guarantors and are unsecured obligations that rank senior in right
of payment to all of CIC's and the Subsidiary Guarantors' subordinated indebtedness. The
proceeds of the 9.50% Unsecured Notes were used to pay a portion of the purchase price of, and
costs related to, the AMCo Acquisition.
94. On December 15, 2017, approximately $38 million in interest is due and payable under
the 9.50% Unsecured Notes.
(f) Equity Incentive Plans
95. CIC has a stock option plan (the "Stock Option Plan") and a Long Term Incentive Plan
(the "LTIP") pursuant to which additional equity securities are issued to officers, directors,
employees or consultants of the Company as a form of compensation. Under the Stock Option
Plan and the LTIP, the maximum number of Common Shares which may be reserved and set
aside for issue shall not exceed 10% of the Common Shares issued and outstanding from time to
time.
(i) Stock Option Plan
96. The purpose of the Stock Option Plan is to allow employees and directors of the
Company to participate, through share ownership, in the growth of the business of the Company
and to enhance the Company's ability to attract, retain and motivate key personnel and reward
significant performance achievements. The issued options entitle the holder to acquire one
Common Share at an exercise price of not less than the value of the Common Shares on the date
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of the grant, which is the lesser of the volume-weighted average trading price of the Common
Shares on the TSX for the five trading days immediately preceding the issuance of the applicable
options and the closing trading price of the Common Shares on the TSX on the date of issuance
of the applicable options. The vesting schedule of the options is determined by the Board of
Directors of CIC at the time of the grant.
97. As at October 19, 2017, there were 1,812,185 options to purchase 1,812,185 Common
Shares under the Stock Option Plan. As at October 19, 2017, all issued and outstanding options
have an exercise price that is above the market price of the Common Shares (in other words, the
options are "out-of-the-money").
LTIP
98. The purpose of the LTIP is to advance the interests of the Company through the
motivation, attraction and retention of key employees and directors, align the interests of
participants in the LTIP with the interests of shareholders and further incentivize participants in
their efforts on behalf of the Company. Under the terms of the LTIP, participants may be granted
either restricted share units ("RSUs") or deferred share units ("DSUs").
99. Officers, directors, employees and consultants of the Company are eligible to receive
RSUs under the LTIP. RSUs are settled for cash or Common Shares or a combination of cash
and Common Shares, at CIC's election. Unless otherwise approved by the Board of Directors of
CIC, the RSUs will vest as to 1/3 on each of the first, second and third anniversary dates of the
grant date. From time to time RSUs which vest based upon achievement of various performance
metrics may also be granted. As at October 19, 2017, there were 2,434,745 issued and unvested
RSUs.
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100. Directors of CIC are eligible to receive DSUs under the LTIP. DSUs are settled for cash
or Common Shares or a combination of cash and Common Shares, at CIC's election. All DSUs
awarded to a DSU participant will vest on the date on which the participant ceases to be a
director of CIC. As at October 19, 2017, there were 30,033 issued and unvested DSUs.
III. BACKGROUND TO THE ARRANGEMENT AND THE RECAPITALIZATIONTRANSACTION
101. Since early 2016, the Company has been focused on improving its business and
operations to achieve its objectives and has explored and reviewed various alternatives to
improve its capital structure.
(a) The 2016 Strategic Review
102. On April 21, 2016, the Company announced the formation of a special committee of
independent members of the Board of Directors of CIC to consider various strategic alternatives
potentially available to the Company (the "2016 Strategic Review"). The 2016 Strategic Review
considered various options, including equity investments, sale transactions, and the issuance of
new debt.
103. The 2016 Strategic Review ultimately concluded in the issuance of the Secured Notes,
providing the Company with additional liquidity and enabling it to continue to execute its
business plan.
(b) 2017 Long-Term Growth Strategy
104. Following below-expected performance results in 2016, in 2017 the Company announced
that it was focused on developing a comprehensive long-term growth strategy. In response to the
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financial challenges facing the Company, in May of 2017, the Company obtained proposals from
and met with several investment banking firms, including firms the Company had already been
working with, to select a financing advisor to assist the Company in evaluating various
alternatives. The Company ultimately engaged PWP to provide the Company with financial
advisory services in connection with the development and execution of its long-term growth
strategy, as announced by the Company in a press release on June 21, 2017. These services
include, but are not limited to, helping the Company explore and evaluate potential transactional
alternatives, including initiatives to optimize its capital structure.
105. The process to develop a long-term strategy that commenced in 2017 led to the
development of a five-year strategic plan known as the DELIVER Strategy. On August 30, 2017,
the Company announced its intention to disclose the details of the DELIVER Strategy on
September 6, 2017. On September 6, 2017, the Company publicly disclosed details of the
DELIVER Strategy, including by posting a management presentation and fact sheet describing
the DELIVER Strategy on its website, copies of which are attached as Exhibit I.
106. The DELIVER Strategy seeks to position the Company as a leading European specialty
"off-patent" medicines player. The acronym DELIVER stands for:
(a) Drive Growth in the United Kingdom: the Company intends to expand and build
its United Kingdom business with further product additions, and utilize the
United Kingdom platform to create a broader pan-European business. The
Company will work to introduce more hard-to-make speciality generic products
and established brands in the United Kingdom.
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(b) Expand into Key European Markets: the Company intends to make acquisitions
that build on its current capabilities while also providing local expertise. The
Company is able to leverage its United Kingdom products and expertise in the
broader European market. The Company will accelerate its growth in the
European market through focused investments in its portfolio, infrastructure and
local talent in key European Markets, with an initial focus on specific markets
such as Germany, France and the Nordics.
(c) Level-set the U.S. Business: the Company will continue to focus on cost
reduction, creation of efficiencies and other ways to continue to stabilize its
business in the immediate term. In the longer term, the Company may also
choose to evaluate strategic asset swaps or sales in the U.S. to further focus the
Concordia North America business.
(d) Increase the Product Pipeline: the Company's current product pipeline comprises
more than 50 products with future revenue potential at various development and
approval stages. The Company intends to focus on those products where they see
the greatest competitive advantages and patient needs and continue to evaluate
opportunities to further increase the size of its product pipeline through in-
licensing and development with partners.
(e) Vary Our Approach to Non-Core Markets: to ensure the efficient and effective
maximization of its non-core business, the Company intends to focus on
partnering out Photofrin®, re-assess certain non-core global markets and
eliminate certain unprofitable products.
- 35 -
(f)
(g)
Extend Our Lean Operating Model and Further Build Our Talent: the Company
will seek to further optimize its supply chain and operational structure, with a
focus on efficiency, accountability and collaboration, and through developing
deeper, more strategic relationships with selected CMOs and improvement of
product inventory.
Realign the Capital Structure: the Company is seeking to realign its capital
structure in order to provide the Company with increased flexibility to execute
on the balance of the DELIVER strategy and continue to grow the business. The
first step in the Company's process to realign its capital structure was the
retention of PWP and the engagement with the Company's significant
stakeholders, described below.
107. The Recapitalization Transaction is anticipated to be a key component of the DELIVER
Strategy and will permit the Company to realign its capital structure by significantly reducing its
debt and putting it on a stronger financial footing to achieve its long-term objectives.
(c) Development of the Recapitalization Transaction
108. Following the Company's announcement that it had engaged with PWP, the Company
began the process of engaging with its stakeholders and their advisors.
109. On or around August 31, 2017, the Company entered into confidentiality agreements with
the Debtholder Committee Advisors. Following the execution of the applicable confidentiality
agreements, the Debtholder Committee Advisors were provided with access to a data room
containing detailed information regarding the Company.
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110. On September 6, 2017, the Company and its advisors held in person meetings with the
Unsecured Debtholders Committee on a public information basis and with the Unsecured
Debtholder Committee Advisors who were subject to confidentiality agreements on a
confidential information basis. On September 7, 2017, the Company and its advisors held in
person meetings with the Secured Debtholders Committee on a public information basis and
with the Secured Debtholder Committee Advisors who were subject to confidentiality
agreements on a confidential information basis. The purpose of these meetings (the
"Commencement Meetings") was to present to the Debtholder Committees and the Debtholder
Committee Advisors the Company's DELIVER Strategy and to formally commence the process
of developing the Recapitalization Transaction.
111. Since the date of the Commencement Meetings, the Company and its advisors have been
working closely with the Debtholder Committees and the Debtholder Committee Advisors to
provide detailed information, advance due diligence matters and advance the terms of a potential
transaction. During this time, the parties have engaged in active discussions regarding the best
avenue to advance the Recapitalization Transaction on a consensual basis, with the overall goal
of enhancing the Company's capital structure and enabling the Company to implement its
growth strategy moving forward. The Company and its advisors believe that the commencement
of these CBCA proceedings and the relief sought in the Preliminary Interim Order is appropriate
under the current circumstances in order to achieve these objectives, while maintaining stability
and protecting the business and operations of the Concordia Group for the benefit of all
stakeholders.
112. As noted above, the Company believes that it needs to reduce its debt obligations in order
to have a sustainable capital structure. The Company's view is that, based on the size and nature
- 37 -
of its existing capital structure, an arrangement is required to reduce its debt obligations. It is
anticipated that the proposed Recapitalization Transaction will involve, among other things, the
exchange of the Affected Debt Instruments for new debt instruments issued by CIC, other equity
securities of CIC or a combination thereof, resulting in a reduction of the Company's overall
debt obligations by more than $2 billion. The existing Common Shares may be diluted as part of
the Recapitalization Transaction (with an associated impact on the value of such Common
Shares and other equity interests in CIC). The extent of such dilution, although unknown at this
time, may be sizable. It is anticipated that all other obligations of the Company, including trade
debt and employee obligations, will be left unaffected by the Recapitalization Transaction.
113. The Applicants believe that the Recapitalization Transaction serves as the best
opportunity to significantly reduce the Company's outstanding indebtedness and annual interest
costs, improve its capital structure and position it to execute on its long-term growth strategy
moving forward.
114. The Applicants are continuing to negotiate the terms of the Recapitalization Transaction.
It is anticipated that the Applicants would enter into Support Agreements with the members of
the Debtholder Committees prior to returning to Court to seek the Interim Order.
115. In the event the Company cannot achieve a consensual transaction with its Debtholders in
a reasonable period of time, the Applicants intend to consider their alternative options, including,
without limitation, pursuing a recapitalization transaction pursuant to proceedings under the
Companies' Creditors Arrangement Act, chapter 11 of the United States Bankruptcy Code, or
their equivalents in other jurisdictions.
- 38 -
IV. REASONS FOR PROCEEDING BY WAY OF A CBCA PLAN OFARRANGEMENT
116. The purpose of the Arrangement is to effect the Recapitalization Transaction, which is
anticipated to significantly reduce the Company's outstanding indebtedness and annual interest
costs, and improve its capital structure.
(a) CHCL is Solvent and, Following the Completion of the RecapitalizationTransaction, the Applicants will be Solvent
117. CHCL has no liabilities and is solvent.
118. As shown in CIC's most recent consolidated audited financial statements for the year
ended December 31, 2016, a copy of which is attached hereto as Exhibit ".r, CIC had total assets
of approximately $3.732 billion and total liabilities of approximately $4.109 billion as at
December 31, 2016, and as shown in CIC's most recent consolidated unaudited financial
statements for the three and six months ended June 30, 2017, a copy of which is attached hereto
as Exhibit "K", CIC had total assets of approximately $2.611 billion and total liabilities of
approximately $4.022 billion as at June 30, 2017.
119. Notwithstanding that the book value of CIC's assets as at June 30, 2017 is less than the
book value of its liabilities, the Recapitalization Transaction is expected to reduce the Company's
outstanding indebtedness by more than $2 billion and significantly reduce annual interest costs.
120. Following completion of the Recapitalization Transaction, it is expected that the realizable
value of the Applicants' assets will not be less than the aggregate value of its liabilities and stated
capital, and that the Applicants will not be unable to meet their obligations as they become due.
- 39 -
(b) It is Not Practicable to Proceed in Another Manner
121. It is expected that the Arrangement would be effected in accordance with numerous steps
to be set out in the Plan of Arrangement, and in a manner that is advantageous to the Company
and its stakeholders.
122. The Applicants would proceed by way of a statutory plan of arrangement under section
192 of the CBCA as the most efficient and practicable means of completing the Recapitalization
Transaction.
123. It is anticipated that the Recapitalization Transaction will involve the exchange of the
Affected Debt for new debt and/or equity interests of CIC. Under certain of the Affected Debt
Instruments such an exchange could not be completed without 100% of the lenders or holders of
such Affected Debt outside of a CBCA arrangement.
124. The Plan of Arrangement structure will facilitate the step by step implementation of a
series of transactions comprising the Arrangement. It is anticipated that any alternative to the
Arrangement would increase the complexity of the Recapitalization Transaction, the time
required to complete it and the costs involved, and may increase the risk of non-completion of
the Recapitalization Transaction. Proceeding by way of Arrangement increases the efficiency of
the Recapitalization Transaction and the likelihood that it will be completed.
V. THE PRELIMINARY INTERIM ORDER
(a) The Stay of Proceedings
125. The Applicants seek the Preliminary Interim Order and the Stay of Proceedings.
-40-
126. As described above, CIC did not make the October 7.00% Unsecured Notes Payment and
does not intend to make the October Unsecured Bridge Loan Payments as the Affected Debt
Instruments pursuant to which such payments are required are anticipated to be exchanged as
part of the Recapitalization Transaction. The failure to make such payments (and the expiry of
any grace period, where applicable) will constitute defaults under the Affected Debt Instruments
pursuant to which they are payable.
127. With the exception of the October Unsecured Debt Payments, the Company is otherwise
current on its payment obligations under all of the Affected Debt and is not, other than in
connection with the commencement of these proceedings and the non-payment of the October
Unsecured Debt Payments, otherwise in default under any of the Affected Debt Instruments.
128. The Applicants require the Stay of Proceedings in order to maintain the overall stability
for their business and provide the Company and the Debtholder Committees with a meaningful
opportunity to pursue the Recapitalization Transaction. With the benefit of the Stay of
Proceedings, the Applicants will have the stability required to advance and finalize the terms of
the Recapitalization Transaction, the Support Agreements and all other documentation required
to implement the Recapitalization Transaction and the Arrangement.
129. The Company intends to continue to satisfy in the ordinary course its scheduled interest
and amortization payments, as applicable, under the Secured Debt and all of its trade and
employee obligations. As described above, the Company has sufficient liquidity to satisfy these
obligations.
- 41 -
(b) Notice to CBCA Director
130. I am advised by Robert J. Chadwick of Goodmans LLP, counsel to the Company, and I
believe, that staff of the CBCA Director was provided with notice that Applicants would be
seeking advice and directions from the Court by way of the proposed Preliminary Interim Order,
and was provided with draft copies of the Notice of Application, Notice of Motion, proposed
Preliminary Interim Order and this affidavit. The CBCA Director has confirmed in writing that
"the staff of the Director has determined that the Director does not have standing to review or
take a position on this application as there is no arrangement to be reviewed at this time." A copy
of the letter from the CBCA Director is attached as Exhibit L.
VI. CONCLUSION
131. Accordingly, I swear this affidavit in support of the Applicants' application and motion
for approval of a Preliminary Interim Order and for such other matters as may be appropriate in
the circumstances which the Court may grant.
SWORN before me at the City ofToronto, on October 19, 2017
A Commissioner for taking affidaViiSCc-A(-0111v_ i_accoawS-Uši A-
22. Mercury Pharma International Limited — Ireland
E
This is Exhibit "E" referred to in the Affidavit of
DAVID PRICE, affirmed before me thist-2-<- day
of May, 2018.
I' 'for TaA Co Affi:Iris, etc.
CONCOlplAINTERNATIONAL CORP CXR (TSX) 0.71 l Volume 0
CXRX (NASDAQ) 0.55 l Volume 0
CONCORDIA INTERNATIONAL CORP) '1WKE„'")7 1,(TLEIPTO REALIGN ['Ts CAPITAL STRUCTUR[E,COMMENCING PROCEEDINGS UNDER rcr, cANATIABUSiNIT5' CORPORATIONS ACT
• Concordia is seeking to reduce its existing secured and unsecured debt obligations by more than $2 billion,
while significantly reducing its annual interest expense (the "Proposed Recapitalization Transaction")
• Canada Business Corporations Act (the "CBCA") is a Canadian corporate statute allowing Canadian
corporations to restructure certain debt obligations. The CBCA is not a bankruptcy or insolvency statute
• Company intends to continue operating its business as usual during the CBCA proceedings while honouring its
obligations to employees, suppliers and customers
OAKVILLE, ON, Oct. 20, 2017 /CNW/ - Concordia International Corp. ("Concordia" and together with
its subsidiaries, the "Company) (NASDAQ: CXRX) (TSX: CXR), an international specialty
pharmaceutical company focused on becoming a leader in European specialty, off-patent medicines,
today announced that it has taken a further step in its previously announced efforts to realign its
capital structure by commencing a court proceeding under the Canada Business Corporations Act
(the "CBCA").
Today's disclosure follows an announcement on October 16, 2017, that the Company decided to use
a 30-day grace period to defer the payment of approximately $26 million of interest on its $735 million
unsecured notes.
The CBCA is a Canadian corporate statute that, among other things, allows Canadian corporations to
restructure certain debt obligations. In most cases, a corporation working through a CBCA process
will be able to complete a recapitalization transaction in a more efficient manner based on time, cost
and other key factors. The CBCA is not a bankruptcy or insolvency statute.
Under the CBCA process, Concordia's management will continue to lead day-to-day operations and
operate its business as usual, while meeting its commitments to employees, suppliers and customers.
"The decision to use the CBCA process to achieve our financial goals was a strategic one that we
believe will protect our business, preserve our cash, and give ueextra time to negotiate with lenders
to ensure we achieve the best possible transaction for our Company, employees, suppliers,
customers and other business partners," said Allan Oberman, Chief Executive Officer of Concordia.
"We appreciate the ongoing cooperation of our lenders throughout this process and remain optimistic
that we can reach a consensual transaction with them that we believe will allow us to move forward
with all of the pillars of our DELIVER strategy in order to maximize the potential of Concordia."
Concordia chose to initiate this process to support its Proposed Recapitalization Transaction that is
expected to significantly reduce its outstanding debt and annual interest costs and position the
business for longer-term growth.
The Proposed Recapitalization Transaction, which Concordia intends to implement through a
corporate plan of arrangement under the CBCA (the "Plan of Arrangement"), would seek to reduce
the Company's existing secured and unsecured debt obligations by more than $2 billion. As a result,
the Company's annual interest expense also would be significantly reduced.
The Proposed Recapitalization Transaction may result in dilution of the outstanding common shares
of the Company (with an associated impact on the value of such shares). The extent of such dilution,
although unknown at this time, may be sizable. Concordia is continuing discussions with its lenders
and their respective advisors to finalize the terms of the Proposed Recapitalization Transaction.
The Company had approximately $340 million of cash on hand as of September 30, 2017, and has
sufficient liquidity in the near term to operate its business and meet its ordinary course financial
commitments, including without limitation, to its employees, suppliers and customers, while it works to
achieve its financial objectives.
In connection with the actions announced today, the following payments owed to unsecured lenders
will not be paid as scheduled, and are instead expected to be addressed as part of the Proposed
Recapitalization Transaction: approximately $26 million interest payment due on October 16, 2017
under Concordia's 7.00% unsecured senior notes, as was previously announced; approximately $34
million of principal and accrued interest due on October 20, 2017 under the Company's unsecured,
two-year equity bridge facility; and approximately $2.5 million under Concordia's unsecured, extended
bridge facility due on October 23, 2017. Concordia does intend to continue to make scheduled,
ordinary course interest and amortization payments under its secured debt instruments, as
applicable.
Concordia has obtained a preliminary( interim order from the Ontario Superior Court of Justice (the
"Court") which, among other things, grants an interim stay of proceedings in favour of Concordia and
certain of its subsidiaries to protect them against any defaults and related steps or actions that may
result from Concordia's decision to initiateCBCA proceedings and any defaults under its debt
documents.
Concordia intends to host the CBCA RecaPitalizkon documents on its website in the Investors
section.:
Completion of the Proposed Recapitalization Transaction will be subject to, among other things,
approval of the Plan of Arrangement by the applicable security holders of Concordia; other approvals
that may be required by the Court, NASDAQ and/or the Toronto Stock Exchange; Court approval; and
the receipt of all necessary regulatory* approvals.' Once approved, the Plan of Arrangement is binding
for all holders of secured debt, unsecured debt and shares of Concordia.
Further information about the Proposed Recapitalization Transaction will be made available on
SEDAR (www.sedar.com (http://wvvvv.Sedar.com/)), EDGAR (www.sec.gov/edgar.shtml
(http://www.sec.gov/edgar.shtml)) and Concordia's website (www.concordiarx.com
(http://www.concordiarx.com/)). Additibnal information and key dates in connection with the ProposedRecapitalization Transaction, including with respect to the proceedings under the CBCA, will be made
publicly available by Concordia.
This press release is not an offer of securities for sale in the United States. Securities may not be
offered or sold in the United States absent an exemption from registration under the Securities Act of
1933.
About Concordia
Concordia is an international specialty pharmaceutical company with a diversified portfolio of more
than 200 patented and off-patent products, and sales in more than 90 countries. Going forward, the
Company is focused on becoming a leader in European specialty, off-patent medicines.
Concordia operates out of facilities in Oakville, Ontario and, through its subsidiaries, operates out of
facilities in Bridgetown, Barbados; London, England and Mumbai, India.
Notice regarding forward-looking statements and information:
This news release includes forward-looking statements within the meaning of the United States
Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of
Canadian securities laws, regarding Concordia and its business,, which may include, but are not
limited to, statements with respect to the Company's ability to operate in the ordinary course,
discussions with Concordia's lenders and their advisors with respect the proposed recapitalization
transaction, a proposed recapitalization transaction, the completion of a proposed recapitalization
transaction including obtaining any necessary approvals and the expected timing thereof, reducing
the Company's existing debt and interest expense (including thelamounts thereof), positioning the
Company for long-term growth, executing the Company's DELIVER strategy, the Company's available
liquidity to operate its business and meet its financial commitments (including commitments to
employees, customers, suppliers and business partners), the benefits of the CBCA process,
proceedings under the CBCA including with respect to CBCA proceedings compared to proceedings
under bankruptcy and insolvency statutes, the ability of the CBCA process to protect the Company's
business, preserve Concordia's cash and/or giv,e Concordia additional time to negotiate with its
lenders, optimism about the ability to reach a consensual transaction with the Company's lenders that
would enable Concordia to move forward with all of the pillars of, the Company's DELIVER strategy in
order to maximize the potential of Concordia, Concordia's intention to make scheduled interest and
amortization payments, Concordia's management continuing to lead day-to-day operations, achieving
the best possible recapitalization transaction, reaching a consensual transaction with holders of the
Company's debt, maximizing Concordia's potential, implementing a Plan of Arrangement, issuing new
equity, the allocation of any new equity and the dilution of the Company's outstanding common
shares, the expected value of the Company's existing equity following the completion of a
recapitalization transaction, addressing certain payments as part of a proposed recapitalization
transaction, protection for the Company and its subsidiaries against defaults and any related steps or
actions under CBCA proceedings and the focus on becoming a leader in European specialty, off-
patent medicines. The forward-looking events and circumstances discussed in this news release may
not occur by certain dates or at all and could differ materially as a result of known and unknown risk
factors and uncertainties affecting Concordia, including risks associated with a proposed
recapitalization transaction including the inability to complete a proposed recapitalization transaction
or complete a proposed recapitalization transaction in a timely or efficient manner, the inability to
reduce the Company's debt and/or interest payments, the inability to position the Company for long-
term growth, the inability to execute the DELIVER strategy, the Company's available liquidity being
insufficient to operate its business and meet its financial commitments (including commitments to
employees, customers, suppliers and business partners), proceedings under the CBCA, Concordia's
management no longer leading day-to-day operations, the inability to achieve the best possible
recapitalization transaction, the inability to reach a consensual transaction with holders of the
Company's debt, the inability to maximize Concordia's potential, Concordia's failure to make
scheduled interest and amortization payments (which could result in a loss of the protections afforded
by the CBCA process (including the stay of proceedings thereunder), the inability to negotiate with
Concordia's lenders, the CBCA process not providing the protection sought by Concordia, the inability
of the CBCA process to preserve Concordia's cash, the inability to implement a Plan of Arrangement,
the risks associated with issuing and allocating new equity including the possible dilution of the
Company's outstanding common shares, the value of existing equity following the completion of a
recapitalization being limited or having no value, the inability to address certain payments as part of a
proposed recapitalization, the inability of CBCA proceedings to protect the Company and its
subsidiaries against defaults and any related steps or actions, Concordia defaulting on its obligations
(including under its debt agreements) which could result in Concordia having to file for bankruptcy or
insolvency, Concordia being put into an insolvency or bankruptcy proceeding as a result of not
making the payments described herein, the Company's inability to become a leader in European
specialty, off-patent medicines, Concordia's securities, increased indebtedness and leverage,
Concordia's growth, risks associated with the use of Concordia's products, the inability to generate
cash flows, revenues and/or stable margins, the inability to repay debt and/or satisfy future
obligations, risks associated with Concordia's outstanding debt, risks associated with the geographic
markets in which Concordia operates and/or distributes its products, risks associated with distribution
agreements, the pharmaceutical industry and the regulation thereof, regulatory investigations, the
failure to comply with applicable laws, legislative changes (including, without limitation, the U.K.
Health Service Medical Supplies (Costs) Act), economic factors, market conditions, risks associated
with growth and competition, the failure to obtain regulatory approvals, the equity and debt markets
generally, general economic and stock market conditions, risks associated with fluctuations in
exchange rates (including, without limitation, fluctuations in currencies), political risks (including
changes to political conditions), risks associated with the United Kingdom's exit from the European
Union (including, without limitation, risks associated with legislative changes, regulatory changes in
the pharmaceutical industry, changes in cross-border tariff and cost structures and the loss of access
to the European Union global trade markets), risks related to patent infringement actions, the loss of
intellectual property rights, risks and uncertainties detailed from time to time in Concordia's filings with
the Securities and Exchange Commission, and the Canadian Securities Administrators, and many
other factors beyond the control of Concordia. Although Concordia has attempted to identify important
factors that could cause actual actions, events or results to differ materially from those described in
forward-looking statements and information, there may be other factors that cause actions, events or
results to differ from those anticipated, estimated or intended. No forward-looking statement or
information can be guaranteed. Except as required by applicable securities laws, forward-looking
statements and information speak only as of the date on which they are made and Concordia
undertakes no obligation to publicly update or revise any forward-looking statement or information,
whether as a result of new information, future events, or otherwise.
SOURCE Concordia International Corp.
F
This is Exhibit "F" referred to in the Affidavbt of
DAVID PRICE, affirmed before me this 2-'')̀ day
of May, 2018.
AC r for aking Affidavits, etc.
CON coupukINTERNATIONAL CORP CXR (TSX) 0.71 I Volume 0
CXRX (NASDAQ) 0.55 I Volume 0
\lc° rig r) /L\ [IA N t-)NA Acomm 0[rd';01N11 RAD .1'.1(:G AC-Pili
OAKVILLE, ON, Dec. 15, 2017 /CNW/ - Concordia International Corp. ("Concordia" or the
"Company") (NASDAQ: CXRX) (TSX: CXR), an international specialty pharmaceutical company
focused on becoming a leader in European specialty, off-patent medicines, today announced that at
the request of the Investment Industry Regulatory Organization of Canada ("IIROC"), the Company is
confirming that it is unaware at this time of any material change in its operations that would account
for the recent increase in market activity.
CONGO IPINTERN ATIONAL COI P
Capital Structure Realignment Update
As previously announced, the Company commenced proceedings under the Canada Business
Corporations Act (the "CBCA") in an effort to realign its capital structure. The Company continues to
advance ongoing discussions with its debtholders in this effort, and is focused on realigning its capital
structure on a consensual basis.
In connection with the Company's efforts to advance a potential recapitalization transaction, the
Company has determined to defer the payment of the approximately $37.5 million of interest due
today on its 9.5% senior unsecured notes. Such deferral of the interest payment does not result in an
Event of Default until the expiry of the 30-day grace period, and any default or Event of Default in
respect of the non-payment of the foregoing interest amount is subject to the stay of proceedings
granted in the Company's CBCA proceedings. It is expected that the foregoing interest payment will
be addressed as part of any recapitalization transaction that may be completed by the Company.
About Concordia
Concordia is an international specialty pharmaceutical company with a diversified portfolio of more
than 200 patented and off-patent products, and sales in more than 90 countries. Going forward, the
Company is focused on becoming a leader in European specialty, off-patent medicines.
Concordia operates out of facilities in Oakville, Ontario and, through its subsidiaries, operates out of
facilities in Bridgetown, Barbados; London, England and Mumbai, India.
Notice regarding forward-looking statements and information
This press release includes forward-looking statements within the meaning of the United States
Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of
Canadian securities laws, regarding Concordia and its business,, which may include, but are not
limited to statements relating to Concordia's focus on realigning its capital structure on a consensual
basis, discussions with Concordia's lenders and their advisors with respect the proposed
recapitalization transaction, a proposed recapitalization transaction, the completion of a proposed
recapitalization transaction including obtaining any necessary approvals and the expected timing
thereof, protection for the Company and its subsidiaries against defaults and any related steps or
actions under CBCA proceedings, the deferred interest payment being addressed as part of any
recapitalization transaction that may be completed by Concordia and Concordia becoming a leader in
European specialty, off-patent medicines. Often, but not always, forward-looking statements and
forward-looking information can be identified by the use of words such as "plans", "is expected",
"expects", "scheduled", "intends", "contemplates", "anticipates", "believes", "proposes" or variations
(including negative and grammatical variations) of such words and phrases, or state that certain
actions, events or results may, "could", "would", "might" or "will" be taken, occur or be achieved.
Such statements are based on the current expectations of Concordia's management, and are based
on assumptions and subject to risks and uncertainties. Although Concordia's management believes
that the assumptions underlying these statements are reasonable, they may prove to be incorrect.
The forward-looking events and circumstances discussed in this press release may not occur by
certain specified dates or at all and could differ materially as a result of known and unknown risk
factors and uncertainties affecting Concordia, including risks associated with Concordia's securities,
the inability to negotiate with Concordia's lenders, risks associated with a proposed recapitalization
transaction including the inability to complete a proposed recapitalization transaction or complete a
proposed recapitalization transaction in a timely or efficient manner, the inability to reach a
consensual transaction with holders of the Company's debt, the CBCA process not providing the
protection sought by Concordia, third parties not complying with the CBCA order and taking steps
against Concordia and its subsidiarieS, the inability to address deferred payments as part of any
recapitalization transaction, risks associated with developing new product indications, increased
indebtedness and leverage, the inability to generate cash flows, revenues and/or stable margins, the
inability to grow organically, the inability to repay debt and/or satisfy future obligations, risks
associated with Concordia's outstanding debt, risks associated with the geographic markets in which
Concordia operates and/or distributes its products, risks associated with fluctuations in exchange
rates (including, without limitation, fluctuations in currencies), risks associated with the use of
Concordia's products to treat certain diseases, the pharmaceutical industry and the regulation thereof,
regulatory investigations, the failure to comply with applicable laws, risks relating to distribution
arrangements, possible failure to realize the anticipated benefits of acquisitions and/or product
launches, risks associated with the integration of assets and businesses into Concordia's business,
product launches, the inability to launch products, the fact that historical and projected financial
information may not be representative of Concordia's future results, the failure to obtain regulatory
approvals, economic factors, market conditions, acquisition opportunities, risks associated with the
enrolment into clinical trials, the equity and debt markets generally, risks associated with growth and
competition (including, without limitation, with respect to Concordia's niche, hard-to-make products),
general economic and stock market conditions, risks associated with the United Kingdom's exit from
the European Union (including, without limitation, risks associated with regulatory changes in the
pharmaceutical industry, changes in dross-border tariff and cost structures and the loss of access to
the European Union global trade markets), risks related to patent infringement actions, the loss of
intellectual property rights, risks and uncertainties detailed from time to time in Concordia's filings with
the Securities and Exchange CommiSsion and the Canadian Securities Administrators and many
other factors beyond the control of Concordia. Although Concordia has attempted to identify
important factors that could cause actual actions, events or results to differ materially from those
described in forward-looking statements and forward-looking information, there may be other factors
that cause actions, events or results to differ from those anticipated, estimated or intended. No
forward-looking statement or forward-looking information can be guaranteed. Except as required by
applicable securities laws, forward-looking statements and forward-looking information speak only as
of the date on which they are made and Concordia undertakes no obligation to publicly update or
revise any forward-looking statement or forward-looking information, whether as a result of new
information, future events, or otherwise.
SOURCE Concordia International Corp.
G
This is Exhibit "G" referred to in the Affidavit of
DAVID PRICE, affirmed before me this q_5- day
of May, 2018.
A Co r ssis • for Taking Affidavits,
Consolidated Financial Statements of
Concordia International Corp.
December 31, 2017, 2016 and 2015
[F-1]
Table of Contents
Management's Report on Internal Control over Financial Reporting F-3
Report of Independent Registered Public Accounting Firm F-4 - F-5
Consolidated Balance Sheets F-6
Consolidated Statements of Loss F-7
Consolidated Statements of Comprehensive Loss F-8
Consolidated Statements of Changes in (Deficit) Equity F-9 - F-10
Consolidated Statements of Cash Flows F-11
Notes to Consolidated Financial Statements F-12 - F-67
[F-2]
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Concordia International Corp. ("Concordia", or the "Company") is responsible for establishingand maintaining adequate internal control over• financial reporting. Concordia's management assessed the effectivenessof the Company's internal control over• financial reporting as at December 31, 2017. Concordia's management usedcriteria established in the Internal Control — Integrated Framework (2013) issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) to evaluate the effectiveness of Concordia's internal control overfinancial reporting. Based on management's assessment, management concluded that Concordia's internal control overfinancial reporting was effective as at December 31, 2017.
The effectiveness of the Company's internal control over financial reporting as at December 31, 2017 has been auditedby Pr•icewaterhouseCoopers LLP, an Indbpendent Registered Public Accounting Firm, as stated in their report whichappears herein.
March 8, 2018
[F-31
pwc
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Concordia International Corp.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Concordia International Corp. and its subsidiaries(together, the Company) as of December 31, 2017 and 2016, and the related consolidated statements of loss,comprehensive loss, changes in (deficit) equity and cash flows for each of the three years in the period ended December31, 2017, including the related notes (collectively referred to as the "consolidated fmancial statements"). We also haveaudited the Company's internal control over financial reporting as of December 31, 2017, based on criteria establishedin Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financialposition of the Company as of December 31, 2017 and 2016 and its financial performance and cash flows for each ofthe three years in the period ended December 31, 2017 in conformity with International Financial Reporting Standardsas issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control - Integrated Framework (2013) issued by the COSO.
Substantial doubt about the Company's ability to continue as a going concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue asa going concern. As discussed in Note 2 to the consolidated financial statements, the Company has commenced a courtproceeding under the Canada Business Corporation Act (CBCA) to restructure certain debt obligations. Thecommencement of the CBCA proceedings has resulted in events of default under certain of the Company's creditfacilities and a termination event under the cross currency swap agreement, which defaults are subject to the stay ofproceedings granted by the court. These events raise substantial doubt about the Company's ability to continue as agoing concern. Management's plans in regards to these matters are also described in Note 2. The consolidated financialstatements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for opinionsThe Company's management is responsible for these consolidated financial statements, for maintaining effective internalcontrol over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibilityis to express opinions on the Company's consolidated financial statements and on the Company's internal control overfmancial reporting based on our audits. We are a public accounting firm registered with the Public Company AccountingOversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordancewith the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commissionand the PCAOB.
"PwC" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
_1111pwc
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the consolidated financial statements are free ofmaterialmisstatement, whether due to error or fraud, and whether effective internal control over financial reporting wasmaintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of materialmisstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures thatrespond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts anddisclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles usedand significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding ofinternal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on the assessed risk. Our audits also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonablebasis for our opinions.
Definition and Limitations of Internal Control over Financial ReportingA company's internal control over financial reporting is a process designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company's internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made only in accordance with authorizationsof management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect onthe financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliance with the policies or procedures maydeteriorate.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, CanadaMarch 8, 2018
We have served as the Company's auditor since 2015.
[F-5]
Concordia International Corp.Consolidated Balance Sheets(Stated in thousands of U.S. Dollars, except where otherwise stated)
Operating expenses (Note 25)General and administrative 50,690 56,455 29,697Selling and marketing 38,266 51,133 23,486Research and development 31,482 40,637 14,992Acquisition related, restructuring and other 46,778 35,968 57,207Share-based compensation (Note 17) 8,711 30,753 16,198Initial exchange listing expenses 1,051Amortization of intangible assets (Note 8) 226,425 182,819 75,810Impairments (Notes 8 & 9) 1,194,765 1,132,243 -Depreciation expense 1,962 1,939 477Fair value (gain) lossLitigation settlements (Note 19)
1,406-
(8,929)14,246
561
Total operating expenses 1,600,485 1,537,264 219,479
Operating income (loss) from continuing operations (1,164,948) (942,307) 80,451
Other income and expenseInterest and accretion expense (Note 14) 506,794 300,690 129,195Interest income (Note 13) (61,302) (21,671) (311)Fair value (gain) loss on derivative financial instruments (Note13) 109,580 2,620
Gain on debt settlement (Note 14) • (21,188)Foreign exchange (gain) loss 1,551 (3,626) 4,056Unrealized foreign exchange (gain) loss (Note 13) (72,891) 128,574
Loss from continuing operations before tax (1,627,492) (1,348,894) (52,489)
Income taxes (Note 12)CurrentDeferred
18,491(55,248)
36,846(71,647)
8,858(3 1,922)
Net loss from continuing operations (1,590,735) (1,314,093) (29,425)
Net loss from discontinued operations (Note 26) (1,601) (2,143)Net loss for the year (1,590,735) (1,315,694) (31,568)
Loss per share, from continuing operations (Note 16)
Basic loss per share (31.10) (25.76) (0.81)Diluted loss per share (31.10) (25.76) (0.81)
Loss per share, including discontinuing operations (Note 16)Basic loss per share (31.10) (25.79) (0.87)Diluted loss per share (31.10) (25.79) (0.87)
The accompanying notes are an integral part of these consolidated financial statements.
[F-7]
Concordia International Corp.Consolidated Statements of Comprehensive Loss(Stated in thousands of U.S. Dollars, except where otherwise stated)
For the year ended
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Loss for the year (1,590,735) (1,315,694) (31,568)
Net investment hedge of GBP denominated loans (net of taxes of$(8,126) (2016 - $15,955; 2015 - $4,796)) (50,196) 105,559 32,454
Derivative financial instruments (net of taxes) (Note 13) 1,561 (1,561)
Other comprehensive income (loss) for the year, net of tax 49,079 (239,531) (104,019)
Total comprehensive loss for the year (1,541,656) (1,555,225) (135,587)
The accompanying notes are an integral part of these consolidated financial statements.
[F-8]
Concordia International Corp.Consolidated Statements of Changes in (Deficit) Equity(Stated in thousands of U.S. Dollars, except where otherwise stated)
Share Capital
Number ofShares Amount
ContributedSurplus
AccumulatedOther
ComprehensiveLoss
RetainedEarnings/(Deficit)
TotalShareholders'
Equity/(Deficit)
Balances, January 1, 2015 28,861,239 247,035 5,028 (274) 5,761 257,550
Issuance of Common Stock 20,896,708 1,015,234 1,015,234
Dividends (Note 15) (11,720) (11,720)
Exercise of share based compensation 1,236,450 12,203 (6,563) 5,640
Share based compensation expense (Note 17) 16,248 16,248
Taxes for share based compensation 8,843 8,843
Net loss for the year (31,568) (31,568)
Net investment hedge of GBP denominated loans (netof taxes of $4,796) 32,454 32,454
Balances, December 31, 2015 50,994,397 1,274,472 23,556 (104,293) (37,527) 1,156,208
Dividends (Note 15) (7,652) (7,652)
Exercise of share based compensation 95,159 2,703 (2,619) 84
Share based compensation expense (Note 17) 30,753 30,753
Taxes for share based compensation (1,741) (1,741)
Net loss for the year (1,315,694) (1,315,694)
Net investment hedge of GBP denominated loans (netof taxes of $15,955) 105,559 105,559
Derivative financial instruments (net of taxes) (Note13)
Cumulative translation adjustment
(1,561)
(343,529)
(1,561)
(343,529)
Balances, December 31, 2016 51,089,556 1,277,175 49,949 (343,824) (1,360,873) (377,573)
[F-9]
Concordia International Corp.Consolidated Statements of Changes in (Deficit) Equity(Stated in thousands of U.S. Dollars, except where otherwise stated)
Share Capital
Number ofShares Amount
ContributedSurplus
AccumulatedOther
ComprehensiveLoss
RetainedEarnings/(Deficit)
TotalShareholders'
Equity/(Deficit)
Exercise of share based compensation 193,345 5,908 (5,908)
Share based compensation expense (Note 17) 8,716 8,716
Net loss for the year (1,590,735) (1,590,735)
Net investment hedge of GBP denominated loans (netof taxes of ($8,126)) (50,196) (50,196)
Derivative financial instruments (net of taxes) (Note13) 1,561 1,561
Cumulative translation adjustment 97,714 97,714
Balances, December 31, 2017 51,282,901 1,283,083 52,757 (294,745) (2,951,608) (1,910,513)
The accompanying notes are an integral part of these consolidated financial statements.
[F-10]
Concordia International Corp.Consolidated Statements of Cash Flows(Stated in thousands of U.S. Dollars, except where otherwise stated)
For the year ended
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015Cash flows from operating activities
Net loss from continuing operations (1,590,735) (1,314,093) (29,425)
Adjustments to reconcile net loss to net cash flows from operatingactivities:
Interest and accretion expense (Notes 14) 506,794 300,690 129,195Interest income (Note 13) (61,302) (21,671) (311)Depreciation and amortization (Note 8) 228,387 184,758 76,287Share based compensation expense (Note 17) 8,711Non-cash inventory fair value adjustments (Note 7) 311Fair value (gain) loss (Note 21) 1,406
30,753
21,412
(8,929)
16,198
33,932
(99)Impairments (Notes 8 & 9) 1,194,765 1,132,243Income tax expense (recovery) (Note 12) (36,757) (34,801) (23,064)Realized loss on foreign exchange forward contract 5,126Fair value (gain) loss on derivative financial instruments (Note 13) 109,580 2,620Gain on debt settlement (Note 14) (21,188)Unrealized foreign exchange (gain) loss (72,891) 128,574Contingent consideration paid (Note 21) (10,348) (4,037)Income taxes paid (23,116) (20,283) (16,220)Income tax refunds 4,933Other non-cash items 2,169 1,177 338
Changes in non-cash working capital (Note 27) 42,440 6,088 (67,535)Cash flows from operating activities - continuing operations 283,159 404,501 124,422Cash flows from operating activities - discontinued operations 3,789 (2,417)Net cash flows from operating activities 283,159 408,290 122,005Cash flows used in investing activities
Purchase consideration paid (30,677) (3,807,160)Purchase of fixed assets and development costs (2,469) (1,881) (2,048;Proceeds from sale of assets 1,108 10,000Interest earned 824 966
Net cash flows used in investing activities (537) (31,592) (3,799,208)
Cash flows (used in) from financing activities
Proceeds from credit facilities (Note 14) 350,000 4,154,500Deferred financing costs paid (20,275) (203,032)Proceeds from exercise of options 84 6,233Repayment of long-term debt (Note 14) (57,279) (18,193) (880,104)Proceeds from issuance of common sharesEquity issuance costs paid
Net cash flows (used in) from financing activities (372,380) (94,765) 3,799,310
Net change in cash and cash equivalents (89,758) 281,933 122,107Effects of exchange rate changes on cash and cash equivalents 18,871 (39,464) (9,429)Cash and cash equivalents, beginning of year 397,917 155,448 42,770
Cash and cash equivalents, end of year 327,030 397,917 155,448
The accompanying notes are an integral part of these consolidated financial statements.
[F-11]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
1. Description of Business and General Information
Concordia International Corp. (the "Company", "Concordia", and together with its subsidiaries, the "Group")
is an international specialty pharmaceutical company, owning or licending, through its subsidiaries, a diversifiedportfolio of branded and generic prescription products. Concordia changed the composition of its businesssegments during the period ended March 31, 2017 from three to two reportable segments, which currently consistof Concordia North America and Concordia International, as well as a Corporate cost centre.
The Concordia North America segment has a diversified product portfolio that focuses primarily on the UnitedStates pharmaceutical market. During the period ended March 31, 2017, the Company aggregated its segments
to include Orphan Drugs and Concordia North America into one reportable segment also named Concordia NorthAmerica. Concordia North America operations are conducted through Concordia Pharmaceuticals Inc., S.a R.L.("CPI") and Concordia Laboratories Inc., S.a R.L. ("CLI"). CPI has a portfolio of branded products andauthorized generic contracts. CLI owns Photofrin®, for the treatment of certain forms of rare cancer. CLI iscurrently focusing on the use of Photofrin® for the treatment of lung cancer in line with its approved indications.
The Concordia International segment operations are conducted through Concordia Investments (Jersey) Limited
and certain of its subsidiaries ("Concordia International"). COncordia International is an international specialtypharmaceutical business, owning or licensing a diversified portfolio of branded and generic prescription products,which are sold to wholesalers, hospitals• and pharmacies in over 90 countries.
Both the Concordia North America and Concordia International segments have products manufactured and soldthrough an outsourced production and distribution network and marketed internationally through a combinationof direct sales and local partnerships, except for Photofrin® distribution in the United States, which is completedby an affiliate of the Company. Manufacturing is outsourced to a network of contract manufacturers.
The Corporate cost centre consists of centralized costs incurred by the Company, as ultimate parent companyof the Group.
Concordia's business does not experience a significant amount of seasonal variation in demand.
The Company's shares are listed for trading on the Toronto Stock Exchange ("TSX") under the symbol "CXR"and are listed for trading on the NASDAQ Global Select Market® under the symbol "CXRX".
The registered and head office of the Company is located at 277 Lakeshore Rd. East, Suite 302, Oakville, Ontario,L6J 1H9.
These consolidated financial statements include trademarks that are protected under applicable intellectualproperty laws and are the property of Concordia or its affiliates or its licensors. Solely for convenience, thetrademarks of Concordia, its affiliates and/or its licensors referred to in these financial statements may appearwith or without the ® or TM symbol, but such references or the absence thereof are not intended to indicate, inany way, that the Company or its affiliates or licensors will not assert, to the fullest extent under applicable law,their respective rights to these trademarks. Any other trademarks used in these consolidated financial statementsare the property of their respective owners.
[F-12]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
2. Realignment of Capital Structure and Going Concern
During the 2017 fiscal year, the Company announced as part of its long-term strategy an objective to realign itscapital structure, which includes an intention to significantly reduce the Company's existing secured andunsecured debt obligations. On October 20, 2017, as part of the Company's efforts to realign its capital structure,the Company and one of its wholly-owned direct subsidiaries commenced a court proceeding under the CanadaBusiness Corporation Act ("CBCA"). The CBCA is a Canadian corporate statute that includes provisions thatallow Canadian corporations to restructure certain debt obligations, and is not a bankruptcy or insolvency statute.The preliminary interim order issued by the Ontario Superior Court of Justice (the "Court") provides a stay ofproceedings against any third partji that is party to, or a beneficiary of, any loan, note, commitment, contract orother agreement with the Company or any of its subsidiaries, including the Company's debtholders, fromexercising any rights or remedy or any proceeding, including, without limitation, terminating, demanding,accelerating, setting-off, amending, declaring in default or taking any other action under or in connection withany loan, note, commitment, contract, or other agreement of the Company and its subsidiaries on the terms setout in the Court order.
In connection with the Company's efforts to realign its capital structure and as contemplated by the CBCAproceedings, the Company has elected to not make scheduled payments on the following debt obligations:payments under its 7% unsecuredisenior notes'(Note 14 (d)); payments under its 9.5% unsecured senior notes(Note 14 (c)); and payments under its unsecured extended equity bridge facility (Note 14 (b)). In addition, aspart of the CBCA proceedings, the Company has terminated the $200 million revolving facility under theConcordia International Credit Agreement (as defined herein), that was not drawn at the time of thecommencement of the CBCA prodeedings. During the CBCA proceedings, the Company has been, and intendsto; continue to make scheduled ordinary course interest and principal payments under its secured debt facilities(Note 14 (a) and (e)), as applicable. Refer to Note 14 for additional details associated with events of defaultapplicable under certain of the Caripany's credit facilities. On November 9, 2017, the Company entered into anagreement to settle its $34 million equity bridge facility at a discounted amount (Note 14 (b)).
The commencement of the CB CA,proceedings resulted in an event of default under the Concordia InternationalCredit Agreement, the indentures governing the Company's 9% senior secured notes and 9.5% unsecured notesand the cross currency swap agreements ("Currency Swaps"), which defaults are subject to the stay ofproceedings granted by the Court. As a result of the foregoing events of default, a cross default was triggeredunder the indenture governing the 7% unsecured senior notes and the extended bridge facility, however anydemand for payment of this debt has been stayed by the preliminary interim order granted by the Court in theCBCA proceedings. As a result of these events all debt arrangements are presented as current liabilities. OnOctober 20, 2017, the Company was notified by the counterparty to the Currency Swaps that one or more eventsof default occurred under the swap agreements as a result of the Company obtaining a preliminary interim orderfrom the Court pursuant to the arrangement provisions of the CBCA. As a result of the foregoing, the counterpartyto the Currency Swaps designated October 23, 2017 as the early termination date with respect to all transactionsunder the Currency Swaps. During the CBCA proceedings, the Company has been and intends to continue tomake interest payments on the termination amount ofthe Currency Swaps, pursuant to the terms of the terminationagreement between the Company and the counterparty.
Future liquidity and operations of ,the Company are dependent on the ability of the Company to restructure itsdebt obligations and to generate sufficient operating cash flows to fund its on-going operations. If the Companydoes not complete the realignment of its capital structure through the CBCA process described above, it will benecessary to pursue other restructuring strategies, which may include, among other alternatives, proceedingsunder the Companies Creditors Arrangement Act and / or .a filing under the United States Bankruptcy Code. TheCompany may not be able to restructure and reduce its debt obligations and this results in a material uncertaintythat may cast significant doubt upbn the Company's ability to continue as a going concern.
These financial statements have been prepared on a going concern basis, which asserts the Company has theability in the near term to continuelto realize its .assets and discharge its liabilities and commitments in a plannedmanner giving consideration to the above and 'expected possible outcomes. Conversely, if the going concernassumption is not appropriate, adjustments to the carrying amounts of the Company's assets, liabilities, revenues,expenses and balance sheet classifications may be necessary, and these adjustments could be material.
[F-13]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share, amounts and where otherwise stated)
As of December 31, 2017, the Group's liquidity primarily consisted of approximately $327 million (2016 - $398million) of cash and cash equivalents. During the CBCA process, the Company intends to continue to operateits business and satisfy its obligations to its service providers, suppliers, contractors and employees in the ordinarycourse of business.
3. Significant Accounting Policies
(a) Basis of Presentation
These consolidated financial statements have been prepared in accordance with International FinancialReporting Standards as issued by the International Accounting Standards Board ("IFRS"). The consolidatedfinancial statements have been prepared under the historical cost convention, except for certain financialinstruments that are measured at fair value, as described in (n) and (p) below. The accounting policies havebeen consistently applied throughout the year unless otherwise stated.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accountingestimates. It also requires management to exercise its judgment in the process of applying the Company'saccounting policies. The areas involving a higher degree of judgment or complexity, or areas whereassumptions and estimates are significant to the consolidated fmancial statements are disclosed in Note 4.
The consolidated financial statements are prepared on a going concern basis and have been presented inU.S. dollars, which is also the Company's functional currency.
(b) Basis of Consolidation
(c)
The wholly owned subsidiaries of the Company are consolidated to produce the financial results for theconsolidated corporation. A11 intercompany transactions, balances, income and expenses on transactionsbetween the subsidiaries are fully eliminated. Profits and losses resulting from intercompany transactionsthat were recognized are also fully eliminated.
These consolidated financial statements include the following wholly owned material subsidiaries of theCompany: CLI, CPI, Concordia Financing (Jersey) Limited, Concordia Investments (Jersey) Limited,Amdipharm Holdings S.a R.L., Amdipharm AG, Amdipharm BV, Amdipharm Limited, AmdipharmMercury Holdco UK Ltd., Amdipharm Mercury UK Ltd., Concordia Holdings (Jersey) Limited, AmdipharmMercury International Limited, Concordia Investment Holdings (UK) Limited, Mercury Pharma GroupLtd., Abcur AB, Concordia International Rx (UK) Limited, Focus Pharma Holdings Limited, FocusPharmaceuticals Limited, Mercury Pharma (Generics) Ltd., Mercury Pharmaceuticals (Ireland) Ltd.,Mercury Pharma International Ltd., and Mercury Pharmaceuticals Ltd.
When necessary, adjustments are made to the financial statements of subsidiaries to bring their accountingpolicies in line with those followed by other members of the Company.
Comparative Financial Information
Certain prior period balances have been re-classified to conform with the current period financial statementpresentation.
(d) Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chiefoperating decision maker.
The chief operating decision maker ("CODM"), who is responsible for allocating resources and assessingperformance of the operating segments, has been identified as the Chief Executive Officer of the Company.
[F-14]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
(e) Business Combinations
(f)
Acquisitions have been accounted for as business combinations using the acquisition method. Theconsideration transferred in a business combination is measured at fair value at the date of acquisition.Acquisition-related transaction costs are recognized in income and comprehensive income as incurred. Atthe acquisition date, the identifiable assets acquired and the liabilities assumed are initially recognized attheir fair value.
Goodwill is measured as the excess of the sum of the consideration transferred and the fair value of theacquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amountsof the identifiable assets acquired and liabilities assumed.
When the consideration transferred by the Group in a business combination includes assets or liabilitiesresulting from a contingent consideration arrangement, the contingent consideration is measured at itsacquisition-date fair value and included as part of the consideration transferred in a business combination.Changes in the fair value of the contingent consideration that qualify as measurement period adjustmentsare adjusted retrospectively, with corresponding adjustments against goodwill. Changes in fair value thatare not considered measurement adjustments are recognized through the consolidated statement of loss.Measurement period adjustments are adjustments that arise from additional information obtained duringthe 'measurement period' (which cannot exceed one year from the acquisition date) about facts andcircumstances that existed at the acquisition date.
Contingent consideration that is classified as a financial asset or a financial liability is remeasured atsubsequent reporting dates, with the corresponding gain or loss being recognized in the consolidatedstatement of loss.
Foreign Currency Translation
The Company's consolidated financial statements are presented in U.S. dollars, which is the Company'sfunctional currency. Each entity in the Group determines its own functional currency, and items includedin the financial statements of each entity are measured using that functional currency. A11 of the Company'ssignificant subsidiaries report in U. S dollars with the exception of Concordia International and its sub si diarieswhich report primarily in Great British Pounds and certain others in Indian Rupees, Euros, South AfricanRand, United Arab Emirates Dirham, Hong Kong Dollars, Australian Dollars and Swedish Krona.Transactions in foreign currencies are initially recorded at the functional currency rate of exchange prevailingat the date of each transaction. Monetary assets and liabilities denominated in foreign currencies areretranslated at the functional currency spot rate of exchange prevailing at the balance sheet dates. Alldifferences are taken to the consolidated statements of loss. Non-monetary items measured at historic al costin a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates in effectat the date when the fair value was determined.
The assets and liabilities of foreign operations are translated into U.S. dollars at the rate of exchangeprevailing at the balance sheet dates, and their consolidated statements of loss are translated at exchangerates prevailing at the average exchange rate for the period. The exchange differences arising on thetranslation are taken directly to a separate component of equity (accumulated other comprehensive income(loss)). On disposal or dissolution of a foreign operation, the deferred cumulative amount recognized inequity relating to the particular foreign operation is recognized in the consolidated statements of loss.
[F- 1 5]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
(g) Cash and cash equivalents
Cash and cash equivalents includes cash on hand, deposits held with financial institutions and other short-term, highly liquid investments with maturities of three months or less that are readily convertible to cashand which are subject to an insignificant risk of changes in value;
Cash equivalents as at December 31, 2017 includes deposits held with major financial institutions of $73,712(2016 - $305,980).
(h) Inventory
(i)
Inventories consist of raw materials, work-in-progress and finished goods. Inventory, other than inventoryacquired through a business combination, is valued at the lower of cost based on weighted average cost andnet realizable value. Net realizable value is the estimated selling prices less applicable selling expenses andcosts to complete the sale. If the carrying value exceeds the net realizable value, a write-down is recognized.A reserve is taken on inventory for quantities not expected to be consumed. This reserve offsets the inventorybalance. Inventories acquired through business combinations are, initially recognized at fair value.
Intangible assets
Intangible assets are, measured at cost less accumulated amortization and accumulated impairment losses.The assets are amortized using the straight line method over their estimated useful life, or using a decliningbalance approach if more appropriate based on the pattern in which the assets future economic benefits areexpected to be consumed by the Company. The declining balance rate used by the Company for certainacquired product rights ranges between 10% and 50% annually. Amortization recorded on all otherintangibles applied on a straight line basis is as follows:
Acquired product rights and manufacturing processes
Intellectual property
Customer list
Supplier contracts
Distribution contracts
Software and other intangibles
7-35 years
20 years
4 years
5 years
5 years
3-5 years
The estimated useful life is reviewed at the end of each reporting period with the effect of any changes inestimate being accounted for on a prospective basis:
In-process research & development ("IPR&D") acquired in a business combination is capitalized as anindefinite-lived intangible asset and accordingly is not amortized, but is tested for impairment on an annualbasis or more frequently if there are indications that IPR&D maybe impaired. When IPR&D is completed,the asset will be assigned a useful life and amortized, or when abandoned, written off as an impairment.Indefinite life intangible assets, including IPR&D, are measured M cost less accumulated impairment losses.
Costs incurred on development projects are recognized as intangible assets when technical feasibility hasbeen met, management resources and intention to develop are committed, expenditures can be measuredreliably and there is an expectation of future economic benefits. Other development expenditures arerecognized as an expense as incurred. Development costs previously recognized as an expense are notrecognized as an asset in a subsequent period.
Intellectual property acquired in a business combination is recognized separately as an intangible asset if itmeets the definition of an intangible asset in accordance with IAS 38 and its fair value can be measuredreliably.
[F-16]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
(i)
All development costs with a finite useful life that have been capitalized are amortized from thecommencement of the commercial production of the product on a straight-line basis over the period of itsexpected benefit.
Goodwill
Goodwill represents the excess fair value of consideration transferred over the fair value of the Underlyingnet assets in a business combination, and is measured at cost less accumulated impairment losses. Goodwillis not amortized, but is tested for impairment on an annual basis or more frequently if there are indicationsthat goodwill may be impaired. For the purposes of impairment testing, goodwill is allocated to each of theCompany's cash generating units ("CGU") or group of CGU"s, that are expected to benefit from the synergiesof the acquisitions. If the recoverable amount of the CGU or group of CGU's is less than the =Tying amount,the impairment loss is allocated first to reduce the carrying amount of any goodwill and then to other assetsof the CGU or group of CGU's.
(k) Impairment of Non-Financial'Assets
(1)
The Company reviews assets 'such as property and equipment and intangible assets with finite useful livesfor impairment whenever events or changes in circumstances indicate that the carrying amount may not berecoverable.
Intangible assets with indefinite lives are tested for impairment annually or more frequently if events orchanges in circumstances indicate that they may be impaired.
For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which thereare separately identifiable cash flows. Recoverable amount is the higher of an asset's fair value less the costof disposal and value in use, (being the present value of the expected future cash flows of the relevant assetor CGU), as determined by management.
Any impairment losses are recognized immediately in the consolidated statement of loss and comprehensiveloss. Non-financial assets caer than goodwill that suffered impairment are reviewed for possible reversalof the impairment at each repOrting date.
Provisions
Provisions are recognized when present (legal or constructive) obligations as a result of a past event willlead to a probable outflow of economic resources and amounts can be estimated reliably. Provisions aremeasured at management's best estimate of the expenditure required to settle the present obligation, basedon the most reliable evidence available at the reporting date, including the risks and uncertainties associatedwith the present obligation. Provisions are more prevalent within the Concordia North America segmentwhen compared to the Concotdia International segment. The provision level is also subject to factors suchas product mix and customer mix which may result in higher levels of gross to net adjustment. Refer toNote 4, which provides further detail regarding the estimates involved in making provisions.
The Company performs evaluations to identify onerous contracts and, where applicable, records provisionsfor such contracts. All provisions are reviewed at each reporting date and adjusted to reflect the current bestestimate. In those cases where the possible outflow of economic resources as a result of present obligationsis considered remote, no liability has been recognized.
(m) Net Investment Hedge
The Company has designated its Great British Pounds ("Gl3P" or "i") denoininated term loan (refer to Note14) as a net investment hedge with its investment in Concordia International as this loan was entered into
[F-17]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
at the time of the acquisition of the Concordia International segment and formed part of the considerationtransferred. This term loan is carried at amortized cost, however foreign currency translation adjustmentsof the financial liability are recorded in other comprehensive loss at each reporting period on a net of taxbasis, along with the associated cumulative translation adjustment associated with the hedged investment.There have been no amounts recorded in the consolidated statement of loss with respect to ineffectiveportions of the hedge or subsequent changes from the initial designation of the net investment hedge.
(n) Derivative Financial Instruments
The Company's derivative financial instruments related to Currency Swaps that were terminated effectiveOctober 23, 2017 (refer to Note 13). Prior to termination the Currency Swaps were carried at fair value. TheCompany does not hold derivative financial instruments for trading or speculative purposes. The Companyhad designated certain cross currency swap agreements as qualifying hedging instruments and accountedfor them as cash flow hedges pursuant to IAS 39, "Financial Instruments: Recognition and Measurement."These instruments subsequently became ineffective and therefore the Company no longer applied hedgeaccounting. The Company also had cross currency swap agreements where hedge accounting had not beenapplied.
Changes in the fair value of derivative financial instruments are reported in the consolidated statement ofloss, except for foreign currency cash flow hedges that meet the conditions for hedge accounting. The portionof the gain or loss on the hedging instruments that are determined to be an effective hedge are recognizeddirectly in other comprehensive loss, and the ineffective portion in the consolidated statement ()floss. Gainsor losses recognized in other comprehensive income are subseqtiently recognized in the statement of lossin the same period in which the hedged underlying transaction or firm commitment is recognized in theconsolidated statement of loss.
In order to qualify for hedge accounting, the Company is required to document, at the inception of the hedge,the relationship between the item being hedged and the hedging instrument. The Company is also requiredto document and demonstrate an assessment of the relationship between the hedged item and the hedginginstrument, which shows that the hedge will be highly effective on an ongoing basis. This effectivenesstesting is performed at the end of each reporting period to ensure that the hedge remains highly effective.
(o) Income Taxes
Income taxes are comprised of current and deferred taxes. These taxes are accounted for using the liabilitymethod.
Current tax is recognized in connection with income for tax purposes, unrealized tax benefits, excludinginterest in respect thereof, and the recovery of tax paid in a prior period. The determination of income fortax purposes requires interpretation of the relevant rules and judgment, therefore an unrealized tax benefitmay arise in connection with taxation years that have not yet been reviewed by the relevant tax authority.If appropriate, an unrealized tax benefit will be realized in the reporting period in which the Companydetermines that realization is not in doubt. Current tax is measured at the tax rate applicable to the taxationperiod during which the income for tax purposes arose.
Deferred tax is recognized on the difference between the carrying amount of an asset or a liability, as reflectedin the financial statements, and the corresponding tax base, used in the computation of income for taxpurposes ("temporary difference). A deferred tax liability is generally recognized for any temporarydifference in respect of an asset where the carrying amount exceeds the tax base and in respect of a liabilitywhere the tax base exceeds the carrying amount. A deferred tax asset is generally recognized for anytemporary difference in respect of an asset where the tax base exceeds the carrying amount, in respect of aliability where the carrying amount exceeds the tax base and to the extent that it is probable that income fortax purposes will be available from which the temporary difference can be deducted. Deferred tax is notrecognized if a temporary difference arises in connection with goodwill or the initial recognition (other than
[F-18]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
(p)
in a business combination) of an asset or liability in a transaction that affects neither income for tax purposesnor income for accounting purposes.
The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and reduced tothe extent that it is no longer probable that sufficient income for tax purposes will be available from whichthe temporary difference can be deducted. Deferred taxes are measured at the tax rates that are expected toapply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws)that are enacted or substantively enacted during the reporting period and reflects the tax consequences thatwould follow from the manner in which the Company expects, at the end of the reporting period, to realizethe asset or settle the liability that gave rise to the temporary difference.
Income taxes are recognized in the consolidated statement of loss, except when they relate to an item thatis recognized in other comprehensive loss or directly in equity, in which case, the taxes are also recognizedin other comprehensive loss br directly in equity, respectively. Where income taxes arise from the initialaccounting for a business combination, these are included in the accounting for the business combination.
The Company classifies all financial instruments as held-to-maturity, available-for-sale, fair value throughprofit or loss ("FVTPL"), loans and receivables or other liabilities. Financial assets held-to maturity, loansand receivables and financial, liabilities other than those classified as FVTPL, are measured at amortizedcost using the effective interest method. Available-for-sale instruments are measured at fair value withunrealized gains and losses recognized in other comprehensive income (loss). Financial liabilities areclassified as either FVTPL or other financial liabilities. Financial liabilities are classified as FVTPL whenthe liability is either classified as held-for-trading or it is designated as FVTPL. A financial liability maybe designated at FVTPL upon initial recognition if it forms part of a contract containing one or moreembedded derivatives. Instrurnents classified as FVTPL are measured at fair value with unrealized gainsand losses recognized in net income (loss). Other financial liabilities are subsequently measured at amortizedcost using the effective interest method.
Financial Instruments
Transaction costs associated With FVTPL financial assets are expensed as incurred, while transaction costsassociated with all other financial liabilities are included in the initial carrying amount of the asset.
Financial assets and financial liabilities are recognized on the consolidated balance sheet when the Companybecomes a party to the contractual provisions of the financial instrument. Financial assets are derecognizedwhen the Company transfers substantially all risks and rewards of ownership or the contractual rights to thecash flows expire. Financial liabilities are derecognized when the obligation is discharged, cancelled orexpired.
[F-19]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
The following table illustrates the classification and measurement of the Company's financial instruments:
Financial Instruments
OtherLoans and financialreceivables liabilities at
at amortized amortizedcost cost FVTPL
Derivativesused for
hedging -FVTPL
As at Dec31, 2017
Cash and cash equivalents 327,030 327,030
Accounts receivable 146,028 146,028
Accounts payable and accruedliabilities — (201,913) (201,913)
Fair value is the price that would be received to sell an asset or, paid to transfer a liability in an orderlytransaction between market participants at the measurement date. The fair value measurement is based onthe presumption that the transaction to sell the asset or transfer the liability takes place either:
• in the principal market for the asset or liability, or• in the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Company.
The fair value of an asset or a liability is measured using the assumptions that market participants woulduse when pricing the asset or liability, assuming that market participants act in their economic best interest.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficientdata are available to measure fair value, maximizing the use of relevant observable inputs and minimizingthe use of unobservable inputs.
[F-20]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
(q)
All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statementsare categorized within the fair value hierarchy, described, as follows, based on the lowest-level input thatis significant to the fair value,measurement as a whole:
Level 1: Valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: Valuations based on directly or indirectly observable inputs in active markets for similar assets orliabilities, other than Level 1 prices, such as quoted interest or currency exchange rates; and
Level 3: Valuations based on significant inputs that are not derived from observable market data, such asdiscounted cash flow methodologies based on internal cash flow forecasts.
Derivative contract liabilities: are considered as Level 2 financial instruments in the hierarchy. Purchaseconsideration payables are considered as Level 2 and Level 3 financial instruments in the hierarchy.
Share-based Compensation
The Company has a stock option plan as described in Note 17 that allows for the issuance of stock optionsto employees, directors, officers, and others as determined by the Company's board of directors (the "Boardof Directors"). Under IFRS, each option installment is treated as a separate option grant with graded-vestingfeatures, forfeitures are estimated at the time of grant and revised if actual forfeitures are likely to differfrom previous estimates, and options granted to parties other than employees are measured at their fair valueon the date goods or services are received. Over the vesting period of the option grants, the fair value isrecognized as compensation expense and a related credit is recorded as reserve for share-based compensation.The reserve for share-based compensation is reduced as options are exercised through a credit to sharecapital. The consideration paid by option holders is credited to share capital when the options are exercised.
The Company has a long term incentive plan as described in Note 17. For each Restricted Share Unit("RSU"), Deferred Share Unit ("DSU") or Performance Based RSU ("Performance Based RSU") grantedunder the long-term incentive plan, the Company recognizes an expense equal to the market value of aConcordia common share at the date of grant based on the number of RSUs, DSUs and Performance BasedRSUs expected to vest, recognized over the term of the vesting period, with a corresponding credit to reservefor share based compensation anticipated to be equity settled or a corresponding credit to a liability for thoseanticipated to be cash settled. Additional RSUs, DSUs or Performance Based RSUs are issued to reflectdividends declared on the common shares. Certain Performance Based RSUs are subject to market basedvesting conditions and have been valued using a Monte Carlo valuation model. Compensation expense isadjusted for subsequent changes in management's estimate of the number of RSUs, DSUs or PerformanceBased RSUs that are expected to vest and, for RSUs, DSUs or Performance Based RSUs anticipated to becash settled, changes in the market value of Concordia common shares. The effect of these changes isrecognized in the period of the change. Vested RSUs, DSUs and Performance Based RSUs are settled eitherin Concordia common shares or in cash or a combination thereof at the discretion of the Company.
(r) Earnings (Loss) Per Share
(s)
Basic earnings (loss) per share is calculated by dividing the net income by the weighted average number ofcommon shares outstanding during the year.. Diluted earnings (loss) per share is calculated by dividing theapplicable net earnings by the sum of the weighted average number of shares outstanding during the yearand all additional common shares that would have been outstanding if potentially dilutive common shareshad been issued during the year.
Revenue Recognition
Revenue is recognized in the consolidated statement of loss when goods are delivered and title has passed,at which time all the following conditions are satisfied:
[F-21]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
• the Company has transferred to the buyer the significant risks and rewards of ownership of thegoods;
• the Company retains neither continuing managerial involvement to the degree usually associatedwith ownership nor effective control over the goods sold;
• the amount of revenue can be measured reliably;• it is probable that the economic benefits associated with the transaction will flow to the Company;
andthe costs incurred or to be incurred in respect of the transaction can be measured reliably.
Revenue represents the amounts receivable after the deduction of discounts, harmonized sales tax, value-added tax, other sales taxes, allowances given, provisions for chargebacks, other price adjustments andaccruals for estimated future rebates and returns.
The Company operates in a number of different geographical segments, with different markets. Furtherdetail by segment related to revenue recognition is described below:
Concordia North America segment.
Revenue within the Concordia North America segment is primarily derived from two customer groups,those being wholesalers and Authorized Generic Partners ("AG Partners"). Revenue is recognized at thetime of sale to the wholesaler and AG Partners as the following revenue recognition criteria have been met;1) the wholesalers and AG Partners are responsible for setting their sales price to the final customer andcollecting on their receivables; 2) the Company can reliably measure the amount of revenue to be recognized(this includes the impact of gross to net adjustments, including expected returns, wholesaler and retailinventory levels, prescription data, current market trends, competitor activity and historical experience); 3)the wholesalers and AG Partners are responsible for managing their customers; and 4) costs associated withthe sale have been incurred at the time the product is sold to the wholesaler and the AG Partner. Revenuerelated to Photofrin® is concentrated primarily within the United States and operates through distributors.The point of revenue recognition is at the time the, distributors receive the product. Revenue is recognizedat this time as the distributor has no right of return, except for expired product (at which point they areentitled only to a replacement product), and full risk of ownership of the product has been transferred.
The Company also earns revenue from licensing and profit-sharing arrangements. Under these arrangementsrevenue is recognized on an accrual basis in accordance with the substance of the relevant agreement.Arrangements determined on a time basis are recognized on a straight-line basis over the period of theagreement. Arrangements that are based on production, sales and other measures are recognized by referenceto the underlying arrangement.
Royalty income is recognized on an accrual basis in accordance with royalty agreements.
Concordia International segment
The Concordia International segment is similar to the Concordia North America segment, as revenue isrecognized at the time of sale to the wholesalers, hospitals and pharmacies. The Concordia Internationalsegment is not subject to significant levels of gross to net adjustments. Revenue is recognized on eithershipment or receipt by the customer depending on the contractual terms of the sales agreement.
(t) Recent Accounting Pronouncements
The following pronouncements were issued by the International Accounting Standards Board ("IASB") orthe IFRS Interpretations Committee. Those pronouncements that are not applicable or do not have asignificant impact to the Company have been excluded from the summary below.
[F-22]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
(i) Recent accounting pronouncements not yet adopted
The following pronouncements have not yet been adopted by the Company and are being evaluated todetermine the resultant impact, as summarized below.
Revenue Recognition
IFRS 15, "Revenue from Contracts with Customers" ("IFRS 15"), provides a comprehensive five-steprevenue recognition model fOr all contracts with customers. IFRS 15 will replace IAS 18 which coverscontracts for goods and services and IAS 11 which covers construction contracts. The IFRS 15 revenuerecognition model requires management to exercise significant judgment and make estimates that affectrevenue recognition. The new standard is based on the principle that revenue is recognized when control ofa good or service transfers to a customer. The standard permits either a full retrospective or a modifiedretrospective approach for the adoption. IFRS 15 is effective for annual periods beginning on or after January1, 2018, with earlier application peimitted.
Management has assessed the effects of applying the new standard on the Company's financial statementsand has identified the following areas that will be affected:
Accounting for variable consideration - IFRS 15 requires that the Company recognize revenueas performance obligations are satisfied to the extent there will not be a significant reversal in thefuture when the uncertainty surrounding any compOnents of variable consideration is subsequentlyresolved. This has the potential to impact revenue recognition associated with the chargebacks,returns, rebates, prompt pay and other price adjustments components of contracts with theCompany's customers. However, based on the analysis to date, it is assessed that variableconsideration will hot have a significant impact on the revenue recognition or measurementcompared to current practice.
• Accounting for sales to distributors - The Company currently recognizes certain revenuearrangements associated with sales to distributors using a`sell-through' approach. Under the sell-through approach, revenue is not recognized until the product is sold to the end customer. eitherbecause inventory is on consignment at the distributor, or because the final selling price is notdeterminable until the product is sold to the end customer. Under IFRS 15, revenue is recognizedupon the transfer of control to the customer, which requires the Company to apply judgment whendetermining at what point control has passed to the customer based on the indicators provided inthe standard, which 'could impact the timing of revenue recognition. Based on the policies Currentlyin place for revenue'recognition and assessments undertaken to date, the Company has determinedthat there will not 1?e a significant impact on the timing of revenue recognition for sell-througharrangements compared to current practice.
The new standard also introduces expanded disclosure requirements. These are expected to change the natureand extent of the Company's disclosures about its contracts with customers and associated revenuerecognition upon adoption of the new standard.
The Company will be adopting this standard using the modified retrospective approach.t.
[F-23]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Financial Instruments
The final version of IFRS 9, "Financial Instruments" ("IFRS 9"),was issued by the IASB in July 2014 andwill replace IAS 39, "Financial Instruments: Recognition and Measurement". IFRS 9 introduces a modelfor classification and measurement, a single, forward-looking "expected loss" impairment model and asubstantially reformed approach to hedge accounting. The new single, principle-based approach fordetermining the classification of financial assets is driven by cash flow characteristics and the businessmodel in which an asset is held. The new model also results in a single impairment model being applied toall financial instruments, which will require more timely recognition of expected credit losses. It also includeschanges in respect of own credit risk in measuring liabilities elected to be measured at fair value, so thatgains caused by the deterioration of an entity's own credit risk on such liabilities are no longer recognizedin profit or loss. IFRS 9 is effective for annual periods beginning on or after January 1, 2018.
The Company has reviewed its financial assets and financial liabilities with respect to new guidance underIFRS 9. Accordingly, the Company has determined the new guidance will not affect the classification andmeasurement of its financial assets. Additionally, the Company does not expect significant impact on theaccounting for its fmancial liabilities, as the new requirements only affect the accounting for financialliabilities that are designated at fair value through profit or loss and which are subject to fair value changesas a result of entity's own credit risk. Presently, the Company has purchase consideration payable that isdesignated at fair value through profit and loss, however these financial liabilities are not subject to significantentity's own credit risk. Under IFRS 9 guidance, fair value changes attributable to entity's own credit riskwould require recognition in other comprehensive income.
The new impairment model requires the recognition of impairment provisions based on expected creditlosses rather than only incurred credit losses as is the case under IAS 39. It applies to financial assetsclassified at amortised cost, debt instruments measured at fair value through other comprehensive income,contract assets under IFRS 15, lease receivables, loan,commitments and certain financial guarantee contracts.Based on the assessments undertaken to date, the Company does not expect a significant increase in the lossallowance for trade debtors.
The new standard also introduces expanded disclosure requirements and changes in presentation. These areexpected to change the nature and extent of the Company's disclosures about its financial instruments,particularly in the year of the adoption of the new standard.
The Company will adopt the standard on the effective date of January 1, 2018. The standard will beimplemented following the specific transitional requirements listed in the standard related to classificationand measurement, impairments and hedge accounting. This results in prospective application.
Financial Instruments Disclosures
IFRS 7, "Financial Instruments: Disclosures" ("IFRS r), has been amended by the IASB to requireadditional disclosures on transition from IAS 39 to IFRS 9. The amendment to IFRS 7 is effective for periodsbeginning on or after January 1, 2018. The Company is currently evaluating the impact of adopting thisstandard on the consolidated financial statements.
Leases
IFRS 16, "Leases" ("IFRS 16"), sets out the principles for the recognition, measurement and disclosure ofleases. IFRS 16 provides revised guidance on identifying a lease and for separating lease and non-leasecomponents of a contract. IFRS 16 introduces a single accounting model for all lessees and requires a lesseeto recognize right-of-use assets and lease liabilities for leases with terms of more than 12-months, unlessthe underlying asset is of low value. Under IFRS 16, lessor accounting for operating and finance leases willremain substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January 1,
[F-24]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
2019, with earlier application permitted for entities that apply IFRS 15. The Company is currently evaluatingthe impact of adopting this standard on the consolidated financial statements, however it does not expectthe standard to have a significant impact due to the limited volume and magnitude of leases entered into bythe Company.
Uncertainty over Income Tax Treatments
On June 7, 2017, the IASB issued IFRIC 23, Uncertainty over Income Tax Treatments ("IFRIC 23"). IFRIC23 clarifies the application of recognition and measurement requirements in IAS 12, Income Taxes, whenthere is uncertainty over income tax treatments. The IFRIC 23 interpretation specifically addresses whetheran entity considers uncertain tax treatments separately; the assumptions an entity makes about theexamination of tax treatments by taxation authorities; how an entity determines taxable profit (tax loss), taxbases, unused tax losses, unused tax credits and tax rates; and how an entity considers changes in facts andcircumstances. IFRIC 23 is effective for annual periods beginning on or after January 1, 2019, with earlierapplication permitted. The Company is currently evaluating the impact of adopting this standard on theconsolidated financial statements.
(ii) Recent accounting pronouncements adopted
The Company continues to monitor changes to IFRS, including the amendments to IAS 1, "Presentation ofFinancial Statements", and has implemented applicable IASB changes to standards, new interpretations andannual improvements.
4. Critical Accounting Estimates and Judgments and Key Sources of Estimation Uncertainty
The preparation of the consolidated financial statements requires management to make a number of judgments,estimates and assumptions regarding recognition and measurement of assets, liabilities, income and expenses.Actual results may differ from these estimates.
Information about the judgments, estimates and assumptions that have the most significant effect on therecognition and measurement of assets, liabilities, income and expenses are discussed below.
Revenue Recognition
i. Cha rgebacks
The provision for chargebacks is a significant and complex estimate used in the recognition of revenue. Inthe United States, the Company sells its products directly to wholesale distributors. The wholesaledistributors sell directly to independent pharmacies, managed care organizations, hospitals and grouppurchasing organizations ("indirect customers"). The difference between what price the Company sells tothe wholesaler and what price the wholesaler sells to the indirect customer is called a chargeback. Theprovision for chargebacks is based on the historical sales mix of the wholesalers for their government andretail customers. As sales are: made to large wholesale customers, the Company continually monitors theprovision for chargebacks and makes adjustments when it believes that actual chargebacks may differ fromestimated provisions.
ii. Returns
The provision for returns is a significant and complex estimate used in the recognition of revenue. TheCompany has a returns policy that allows wholesalers to return the product within a specified period priorto and subsequent to the expiration date. Provisions for returns are recognized in the period in which theunderlying sales are recognized, as a reduction of sales revenue. The Company estimates provisions forreturns based upon historical experience, representing management's best estimate. While such experiencehas allowed for reasonable estimations in the past, history may not always be an accurate indicator'of future
[F-25]
Concordia International Corp.Notes to Consolidated Financial Statements.(Stated in thousands of U.S. Dollars, except per share amounts ,and where otherwise stated)
returns. The Company continually monitors provisions for returns and makes adjustments when it believesthat actual product returns may differ from established reserves. ,
iii. Rebates
The provision for rebates is a significant and complex estimate used in the recognition of revenue. Rebatesare granted to healthcare authorities and under contractual arrangements with certain customers. Productssold in the United States are covered by various programs (such as Medicaid and Medicare) under whichproducts are sold at a discount. The Company estimates its provisions for rebates based on current contractualterms and conditions as well as the historical experience, changes to business practices and credit terms.While such experience has allowed for reasonable estimations in the past, history may not always be anaccurate indicator of future rebate liabilities. The Company continually monitors the provision for rebatesand makes adjustments when it believes that actual rebates may differ from established provisions. Allrebates are recogniied in the period in which the underlying sales are recognized as a reduction of salesrevenue.
iv. Other price adjustments
The provision for other price adjustments is a significant and complex estimate used in the recognition ofrevenue. Other price adjustments are credits issued by the wholesaler to reflect various decreases in theselling price. The price that the Company sells to the wholesaler is called the Wholesale Acquisition Cost(or "WAC"). Decreases to WAC are discretionary decisions made by the wholesalers to reflect competitivemarket conditions. Amounts recorded for other price adjustments are based upon estimated decline in marketprices. The Company regularly monitors these and other factors and re-evaluates the provision as additionalinformation becomes available.
v. Prompt pay
The provision for prompt pay is an estimate used in the recognition of revenue. Prompt pay are discountsoffered to customers for making early payments oh their invoices within a defined period of time, prior tothe payment due date under the Company's normal payment terms. The Company estimates provisions forprompt pay based upon historical experience, representing management's best estimate. The Companycontinually monitors provisions for prompt pay and makes adjustments when it believes that actual promptpay discounts may differ from established reserves.
Share-based payments and compensation
The compensation expense related to share-based payments is determined using the Black-Scholes and MonteCarlo option pricing models. The assumptions used in the model are weighted average share price at the grantdate, exercise price, volatility, dividend yield, expected option life, forfeiture rate and risk free interest rate.
Impairment of non-financial assets
The Company reviews amortized non-financial assets for impairment whenever events or changes incircumstances indicate that the carrying amount of the assets may be impaired. It also reviews annually non-financial assets with indefinite life for impairment. If the recoverable amount of the respective non-financialasset is less than its carrying amount, it is considered to be impaired. In the process of measuring the recoverableamount, management makes assumptions about future events and circumstances. The actual results may varyand may cause significant adjustments.
Amortization of intangible and other assets
The amortization expense related to intangible and other assets is determined using estimates relating to theuseful life of the related assets.
[F-26]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Change in estimate
During the first quarter of 2017, the Company assessed the use ofthe straight line amortization method for certainintangible assets within the Concordia North America segment and determined that, based on recent developmentsand historical patterns of economic consumption, these assets should be amortized based on a declining balancemodel. Specifically, the Company determined that this method of amortization better reflects the pattern inwhich the assets future economic benefits are expected to be consumed by the Company, and that based on recenthistorical experience and knowledge about its intangible assets, this pattern can be determined reliably.
Within the Concordia International segment management reassesses the useful lives of the product 'rights thatare impaired to align with the remaining economic life of those product rights.
Both of these changes in estimates resulted in an increase in amortization expense for the year ended December 31,2017 of $95,192 (2016 - $nil).
Income taxes
The Company is subject to income taxes in numerous jurisdictions. The integrated nature of the Company'sglobal operations gives rise to many transactions in the ordinary course of business in respect of which thedetermination of income for tax purposes may be uncertain. The Company uses judgment to determine its incomefor tax purposes which may impact the recognized amount of assets or liabilities, the disclosure of contingentliabilities or the reported amount of revenue or expense, during the reporting period. The Company evaluatesthese judgments based upon historIcal experience, current and expected future outcomes, third-party evaluationsand various other assumptions believed to be reasonable in the circumstances.
The evaluation by the Company may result in an unrealized tax benefit in connection with taxation years thathave not yet been reviewed by the relevant tax authority. The Company believes that the amount of unrealizedtax benefits appropriately reflects the uncertainty of items that are or may in the future be under discussion,audit, dispute or appeal with a tax authority or which may otherwise result in uncertainty in the determinationof income for tax purposes. The unrealized tax benefit is determined based on the Company's estimate of thepotential outcomes and is reviewed during each reporting period. If appropriate, an unrealized tax benefit willbe realized in the reporting period in which the Company determines that realization is not in doubt. Where thefinally determined outcome is different from the Company's estimate, such difference will impact the Company'sincome taxes in the reporting period during which such determination is made.
A deferred tax asset is generally recognized for any temporary difference in respect of an asset where the taxbase exceeds the carrying amount and to the extent that it is probable that income for tax purposes will beavailable from which the temporaty difference can be deducted and in respect of a liability where the carryingamount exceeds the tax base. The amount of the deferred tax asset recognized could be reduced if income ortemporary differences from which the asset can be deducted do not materialize, which might occur due to variousfactors, including adverse business conditions. The carrying amount of a deferred tax asset is reviewed at theend of each reporting period and reduced to the extent that it is no longer probable that sufficient income for taxpurposes will be available from which the temporary difference can be deducted. The magnitude of any reductionof the amount of any temporary difference recognized is significantly influenced by the Company's forecast ofincome for tax purposes.
[F-27]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Accounting for acquisitions
The Company assesses whether an acquisition should be accounted for as an asset acquisition or a businesscombination under IFRS 3, "Business Combinations" ("IFRS 3"). This assessment requires management tomake judgments on whether the assets acquired and liabilities assumed constitute a business as defined in IFRS3 and if the integrated set of activities, including inputs and processes acquired, is capable of being conductedand managed as a business and the Company obtains control of the business. The Company's acquisitions havebeen accounted for as business combinations.
Other areas of estimation include the determination and fair value measurement of the purchase price contingentconsideration on business combinations, which includes the Company developing its best estimates under IFRS13, "Fair Value Measurement" ("IFRS 13"), of projected earnings targets, the probability of the contingencybeing achieved, and the discount rate. Management is also required to make estimates of the fair value of assetsacquired and liabilities assumed in business combinations.
Going Concern
The assessment of material uncertainties related to events and circumstances that may cast significant doubt onthe Company's ability to continue as a going concern involves significant judgment. In making this assessment,management considers all relevant information, as described in Note 2 "Realignment of Capital Structure andGoing Concern".
5. Acquisitions
Products Acquisition
On June 1, 2016, the Company, through wholly owned subsidiaries, completed the acquisition of four genericproducts and their associated global rights (the "Products Acquisition"). The products acquired included SodiumFeredetate oral solution for the treatment of anemia, Trazadone oral 'solution for the treatment of depression,and antihistamine Alimemazine oral solution and tablets. The Company paid £21 million, funded through cashon hand on closing of the Products Acquisition. In addition, £7 million in earn-out payments based on certainperformance and supply targets were paid on February 6, 2017.
The purchase price allocation for the Products Acquisition, including the Company's valuation of intangibleassets, was finalized during the second quarter of 2017. There was no final adjustment during the second quarterof 2017 to the valuation of intangible assets at the date of acquisition.
As a result of certain competitive market factors that arose subsequent to the date of acquisition impacting certainproducts acquired pursuant to the Products Acquisition, the Company recorded impairments totaling $17,515during the second and fourth quarters of 2017. Refer to Note 8 for further details of these impairments.
Fair Value of Consideration Transferred
Cash purchase consideration paid 30,677
Purchase consideration payable 9,691
Total Consideration 40,368
[F-28]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Assets Acquired
The transaction has been accounted for as a business combination under the acquisition method of accounting.The following table summarizes the estimated fair values of the assets acquired as of the acquisition date.
AmountsRecognizedas of the
AcquisitionDate
AmountsMeasurement Recognized
period as of Jun 30,adjustments (c) 2017
Acquired product rights (a) 37,011 73 37,084
Inventory (b) 3,357 (73) 3,284
Total fair value of consideration transferred 40,368 40,368
(a) Acquired product rights have expected useful lives of 7 years.
(b) Includes a non cash fair value increase to inventory of $3,080, of which $2,769 has been recorded in cost ofsales during the year ended December 31, 2016 and $311 was recorded in cost of sales during the year endedDecember 31, 2017.
(c) The measurement period adjustments were made to reflect facts and circumstances existing as of theacquisition date, and did not result from intervening events subsequent to the acquisition date. During themeasurement period, the Company recorded certain adjustments to the purchase price allocation including anincrease to intangible assets of $73 and a decrease to acquired inventory of $73.
6. Accounts Receivable
As at Dec 31, 2017 Dec 31, 2016
Accounts receivable 148,805 185,414
Allowance for doubtful accounts (2,777) (2,922)
Total 146,028 182,492
Bad debt write-offs of $2,202 were recorded during the year ended December 31, 2017 (2016$1,610).
An aging of accounts receivable balances past due but not impaired is as follows:
- $621; 2015 -
As at Dec 31, 2017 Dec 31, 2016
Amounts past due (net of provision)
Past due 1 - 30 days 6,280 8,288
Past due 31 - 60 days 2,642 2,413
Past due 61 - 120 days 3,070 3,175
Past due more than 120 days 3,344 1,712
Total 15,336 15,588
Amounts past due represent accounts receivable past due based on the customer's contractual terms. The netamounts past due of approximately $15 million, which is equivalent to 11% of the net accounts receivable balanceas at December 31, 2017, has been assessed for recoverability by the Company. The majority of this balancerelates to customers with a long trading history with the Company, whereby no issues of collection are expected.
[F-29]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
7. Inventory
As at Dec 31, 2017 Dec 31, 2016
Finished goods 65,852 73,325
Raw materials 23,842 30,776
Work in process 9,511 9,292
Obsolescence reserve (22,489) (20,586)
Total 76,716 92,807
Inventory costs charged to cost of sales during the year ended December 31, 2017 were $151,125 (2016 -$159,381; 2015 - $83,306), which includes $311 (2016 - $21,412; 2015 - $33,932) of non-cash fair valueadjustments related to inventories acquired through business acquisitions. The Company increased its reservefor obsolete inventory by $1,903 during the year ended December 31, 2017.
Concordia International Corp•Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Impairment of intangible assets
In accordance with the Company's accounting policy, IPR&D is tested for impairment annually, and also whenthere is an indicator of impairment. The remaining intangible assets are tested for impairment when events orchanges in business circumstances indicate that the carrying amount may not be recoverable.
Summary of impairments
For the year ended December 31, 2017 the Company recorded total impairment losses of $625,694 (2016 -$1,070,711; 2015 - $nil) with respect to acquired product rights and manufacturing processes and $59,593 withrespect to IPR&D (2016 - $58,470; 2015 - $nil). Details of significant impairments are described below.
There have been no reversals of impairment losses or any previous impairments recorded with respect to acquiredproduct rights and manufacturing processes intangible assets.
Impairments
Concordia North America
Fourth quarter of 2017
In the fourth quarter of 2017, management determined that certain triggering events had occurred with respectto Nilandron®, requiring management to perform a test for impairment. The triggering events included theimpact of market conditions associated with the brand and the generic market and the resulting impact to theCompany's forecasts. The Company recorded a $44,312 impairment with respect to Nilandron® using a fairvalue less costs of disposal model in the consolidated statement of loss. The carrying value of Nilandron®recorded as acquired product rights intangible assets was written down to $9,824 as at December 31, 2017.
The calculation of the recoverable amount was determined using discounted cash flow projections based onfinancial forecasts approved by management (level 3 of fair value hierarchy).
Key assumptions used are as follows:
• Discount Rate: 13%• Estimated future product cash flows, including price and volume assumptions based on historical trends
Sensitivity analysis
An increase/decrease in the discount rate by 0.5% would increase/decrease the total impairment by $277 and$295, respectively.
A 0.5% increase/decrease to the terminal revenue growth assumptions would have the impact to decrease/increasethe total impairment to by $132 and $124, respectively.
Second quarter of 2017
In the second quarter of 2017, management determined that certain triggering events had occurred with respectto Donnatal®, requiring management to perform a test for impairment. The triggering events included the launchof an additional competitive product in the market (refer to Note 19), as well as continued market share erosionfrom existing competition (refer to Note 19). The Company recorded a $106,887 impairment with respect toDonnatalC using a fair value less' costs of disposal model in the consolidated statement of loss. The carryingvalue of Donnatal® recorded as acquired product rights intangible assets was written down to $162,836 as atJune 30, 2017.
The calculation of the recoverable amount was determined using discounted cash flow projections based onfinancial forecasts approved by management (level 3 of fair value hierarchy).
Key assumptions used are as follows:
• Discount Rate: 13%
[F-31]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
• Estimated future product cash flows, including price and volume assumptions based on historical trends
Sensitivity analysis
An increase/decrease in the discount rate by 0.5% would increase/decrease the total impairment by $3,910 and$4,145, respectively.
A 0.5% increase/decrease to the terminal revenue growth assumptions viliould have the impactto decrease/increasethe total impairment to by $1,808 and $1,705, respectiVely.
Fourth quarter of 2016
In the fourth quarter of 2016, management determined that certain triggering events had occurred with respectto seven North America segment products, Donnatal®, Plaquenil®, Uroxatral®, Dyrenium®, Dibenzyline®,Ulesifa® and Parnate® requiring management to perform a test for impairment. The triggering events includedpricing pressure and increased competition resulting in a decreased forecast of future net cash inflows fromprevious budgets as well as notifications from the Company's AG Partner on certain market competitive pressures.
In relation to Donnatal®, based on key assumptions including market competitive pressures reducing revenuein future periods and an 11% discount rate, no impairment was required to the carrying value of the associatedintangible asset.
For the remaining products the Company recorded impairments using a fair value less costs of disposal modelin the statement of loss for the year ended December 31, 2016. The impairments recorded during the fourthquarter of 2016 and the resulting carrying values subsequent to the impairments were as follows:
Impairment
RemainingCarryingValue as atDec 31, 2016
Plaquenil® 219,354 47,089
Uroxatral® 38,544 20,567
Dyrenium® 23,056 19,621
Dibenzyline® 10,518 33,342
Parnate® 8,009 7,225
Ulesfia® 7,457
Key assumptions of the models are as follows:
• Discount rate: 11%• Estimated product cash flows, including price and volume assumptions based on historical trends
[F-32]
Concordia Internationg Coq).Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
The following table presents a sensitivity analysis to show the impact on the impairments for changes in certainassumptions:
Discount rate+1% -1%
Terminal revenuegrowth assumption+1% -1%
Plaquenil® 1,537 (1,660) (1,803) 1,946
Uroxatral® 588 (552) (684) 641
Dyrenium® 697 (776) (1,228) 1,350
Dibenzyline® 1,390 (1,529) (1,290) 1,420
Parnate® 253 (234) (280) 305
Ulesfia
Second quarter of 2016
In the second quarter of 2016, management determined that certain triggering events had occurred with respectto two North America segment prOducts, Nilandrono and Plaquenil®, requiring management to perform testsfor impairment on these products. The triggering events included the July 2016 launch of a generic competitiveproduct for Nilandron® and notification from the Company's AG Partner regarding market competitive pressureassociated with sales volumes and pricing with respect to Plaquenil® AG.
The Company recorded a $306,149 impairment with respect to Nilandron® and a $260,887 impairment withrespect to Plaquenil® in the statement of loss for the year ended December 31, 2016. The carrying value ofNilandron® and Plaquenil® recorded as acquired product rights intangible assets were written down to $60,654and $271,263, respectively as at June 30, 2016.
Key assumptions used are as follciws:
• Discount Rate: 10.4% to 11.4% .• Estimated product cash flows, including price and volume assumptions based on historical trends
Sensitivity analysis
An increase/decrease in the discount rate by 1% would have the impact to increase/decrease the total impairmentto Nilandron® by $5,135 and $6,195, respectively, and Plaquenil® by $27,101 and $33,181, respectively.
A 1% increase/decrease to the terminal revenue growth assumptions would have the impact to decrease/increasethe total impairment to Nilandron® by $5,435 and $4,510, respectively, and Plaquenil® by $31,373 and $25,819,respectively.
Concordia International
Fourth quarter of 2017
In the fourth quarter of 2017, management determined that certain triggering events had occurred with respectto certain products within the Concordia International segment. These triggering events required managementto perform tests for impairment. The triggering events included market pricing pressures, sustained issuesexperienced with respect to product supply, and/or increased prOduct competition resulting in a decrease to future forecasts. The Company recorded impairments using a fair value less costs of disposal model in the consolidatedstatement of loss: The calculatioh of the recoverable amount was determined using discounted cash flowprojections based on financial forecasts approved by management (level 3 of fair value hierarchy).
[F-33]'
Concordia International Corp.Notes,to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
The total impairment recorded on acquired product rights during the fourth quarter of 2017 was $124,899. Detailsof significant impairments were as follows:
Impairment
RemainingCarryingValue as atDec 31, 2017
Erythromycin 17,249 23,888
Cyclizine Hcl 17,084 41,634
Prednisolone 11,141 4,934
Trazodone 7,271 3,771
Ergotamine + Caffeine 6,084 7,037
Dipipanone + Cyclizine 4,373 12,603
Hydralazine Hcl 4,094 8,974
Key assumptions of the models are as follows:
• Discount rate: 13.5%• Estimated future product cash flows, including price and
The following table presents a sensitivity analysis to showin certain assumptions:
volume assumptions based on historical trends
the impact on significant impairments for changes
Discount rate
+0.5% -0.5%
Terminal revenuegrowth assumption
+0.5% -0.5%
Erythromycin 443 (462) (128) 123
Cyclizine Hcl 1,004 (1,060) (402) 381
Prednisolone 55 (57) (12) 12
Trazodone 72 (76) (27) 26
Ergotamine + Caffeine 175 (185) (70) 67
Dipipanone + Cyclizine 306 (323) (121) 115
Hydralazine Hcl 209 (220) (82) 78
The Company also impaired other intangibles associated with manufacturing processes by $10,440 during thefourth quarter of 2017 primarily as a result of the revenue declines from the impaired products, including theproducts described above.
Second quarter of 2017
In the second quarter of 2017, management determined, that certain triggering events had occurred with respectto certain products within the Concordia International segment. These triggering events required managementto perform tests for impairment. The triggering events included continued pricing pressure, supply chainchallenges, and/or increased competition on a number of products (including the anticipated launch of acompetitive product to Liothyronine Sodium) resulting in a decreased forecast of future net cash inflows comparedto previous forecasts. The Company recorded impairments using a fair value less costs of disposal model as abasis for determining the recoverable amount during the quarter ended June 30, 2017. The calculation of therecoverable amount was determined using discounted cash flow projections based on financial forecasts approvedby management (level 3 of fair value hierarchy).
[F-34]
Conconlia. Interrramtftonall Corm.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
The total impairment recorded on acquired product rights within the Concordia International segment duringthe second quarter of 2017 was $301,538. Details of significant impairments were as follows:
Impairment
RemainingCarryingValue as atJun 30, 2017
Liothyronine Sodium 128,191 53,969
Fusidic Acid 83,263 64,956
Prednisolone 41,679 16,554
Nefopam 17,353 3,944
Alimemazine Tartrate 11,185 8,026
Prochlorperazine Mesilate 7,217 5,164
Dicycloverine 5,060 10,687
Key assumptions of the models are as follows:
• Discount rate: 13.5%• Estimated future product cash flows, including price and volume assumptions based on historical trends
The following table presents a sensitivity analysis to show the impact on the significant impairments for changesin certain assumptions:
Discount rate
+0.5% -0.5%
Terminal revenuegrowth assumption
+0.5% -0.5%
Liothyronine Sodium 958 (1,009) (364) 345
Fusidic Acid 1,696 (1,793) (719) 681
Prednisolone 301 (317) (116) 110
Nefopam 88 (93) (37) 35
Dicycloverine 260 (274) (107) 101
Prochlorperazine Mesilate 101 (106) (39) 37
Alimemazine Tartrate 89 (91)
The Company also impaired other intangible assets associated with manufacturing processes by $37,618 duringthe second quarter of 2017 primarily as a result of the revenue declines from the impaired products, includingthe products described above.
[F-35]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Fourth quarter of 2016
In the fourth quarter of 2016, management determined that certain triggering events had occurred with respect
to certain products within the Concordia International segment. These triggering events required management
to perform a test for impairment. The triggering events included pricing pressure and increased competition
resulting in a decreased forecast of future net cash inflows from previous budgets. The Company recorded
impairments using a fair value less costs of disposal model, in the statement of loss for the year ended December
31, 2016. The total impairment on acquired product rights recorded within the Concordia International segment
during the fourth quarter, of 2016 was $188,028. Details of significant impairments were as follows:
Impairment
RemainingCarryingValue as atDec 31, 2016
Levothyroxine Sodium
Prednisolone
61,594
43,521
90,159
58,738
Hydrocortisone 26,129 8,042
Carbimazole 12,088 63,471
Tranylcypromine Sulphate 13,379 13,537
Dicycloverine 11,835 15,883
Dipipanone Cyclizine 9,904 17,696
Nefopam 8,306 21,479
Key assumptions of the models are as follows:
• Discount rate: 11%• Estimated product cash flows, including price and volume assumptions based on historical trends
The Company also impaired other intangibles associated with manufacturing processes by $8,669 during the
fourth quarter of 2016 as a result of the revenue declines within certain products as described above.
The following table presents a sensitivity analysis to show the impact on the significant impairments for changesin certain assumptions:
Discount rate
+1% -1%
Terminal revenuegrowth assumption
+1% -1%
Levothyroxine Sodium 4,783 (5,417) (8,852) 7,810
Prednisolone 3,089 (3,499) (5,328) 4,701
Hydrocortisone 355 (401) (648) 571
Carbimazole 3,450 (3,909) (5,957) 5,256
Tranylcypromine Sulphate 698 (790) (1,156) 1,020
Dicycloverine 836 (947) (1,281) 1,130
Dipipanone Cyclizine 1,022 (1,160) (581) 513
Nefopam 1,151 (1,303) (1,842) 1,626
IPR&D
Fourth quarter of 2017
The Company completed its annual impairment testing on IPR&D during the fourth quarter of 2017.
[F-36]
Concordia International Col?.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
In the fourth quarter of 2017, it was determined that an impairment on certain lPR&D assets was required in theamount of $28,011. The impairment relates to projects that have been abandoned, or certain IPR&D projectswith lower present day future forecasts compared with those at the time of the acquisition of the ConcordiaInternational segment. The calculation of the recoverable amount of IPR&D was determined using discountedcash flow projections based on financial forecasts. As a result of the abandonment of these rPR&D projects,there are no future cash flow projections associated with these projects, therefore the impairments represent thetotal prior carrying value of these projects.
Second quarter of 2017
In the second quarter of 2017, it was determined that an impairment on certain IPR&D assets was required inthe amount of $31,582. The impairment relates to projects that have been abandoned, or certain lPR&D projectswith lower present day future forecasts compared with those at the time of the acquisition of the ConcordiaInternational segment. The calculation of the recoverable amount of IPR&D was determined using discountedcash flow projections based on financial forecasts. As a result of the abandonment of these IPR&D projects,there are no future cash flow projections associated with these projects, therefore the impairments represent thetotal prior carrying value of these projects.
Fourth quarter of 2016
The Company completed its annual impairment testing on IPR&D during the fourth quarter of 2016.
As part of the Company's annual 'impairment test on IPR&D it was determined that an impairment on theseassets was required in the amount bf $58,470. The impairment relates to projects that have been abandoned, orcertain IPR&D projects with lower present day future forecasts compared with those at the time of the acquisitionof the Concordia International segment. The calculation of the recoverable amount of IPR&D was determinedusing discounted cash flow projections based on financial budgets approved by management (level 3 of fairvalue hierarchy) and a terminal growth assumption of -5%. The key assumptions and estimates used indetermining the value were related to revenue growth assumptions, and the discount rate of 13.2% applied tothe cash flow projections.
An increase/decrease in the discount rate by 1% would have the impact to increase/decrease the total impairmentby $2,661 and $3,052, respectively.
A 1% increase/decrease to the terminal revenue growth assumptions would have the impact to decrease/increasethe total total impairment by $1,118 and $1,246, respectively.
9. Goodwill
As at Dec 31, 2017 Dec 31, 2016
Opening balance 707,930 824,529
Measurement period adjustment 23,427
Impairment (509,478) (3,062)
Impact of foreign exchange 46,505 (136,964)
Total 244,957 707,930
A segment-level summary of the goodwill allocation is presented within Note 23.
In accordance with the Company'slaccounting policy, the carrying value of goodwill is assessed annually as wellassessed for impairment triggers et each reporting date to determine whether there exists any indicators ofimpairment.
When there is an indicator of impairment of non-current assets within a CGU or group of CGUs containinggoodwill, the Company tests the npn-current assets for impairment first and recognizes any impairment loss ongoodwill before applying any remaining impairment loss against the non-current assets within the CGU.
[F-37]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Summary of Impairments
For the year ended December 31, 2017, the Company recorded goodwill impairment losses of $509,478 (2016- $nil; 2015 - $nil) associated with the Concordia International segment and $nil (2016 - $3,062; 2015 - $nil)associated with the Concordia North America segment.
Second quarter of 2017
During the second quarter of 2017, the Company identified a triggering event requiring the Company to performgoodwill impairment testing within the Concordia International segment. The triggering event was primarily theresult of events and conditions that triggered impairments on intangible assets, including acquired product rightsand IPR&D, and associated revised forecasts on products as a result of on-going market competitive pressures.As a result of the impairment testing performed, the Company recorded an impairment loss of $509,478 ongoodwill associated with the Concordia International segment.
The Company recorded an impairment charge using a fair value less costs of disposal model, in the statementof loss for the second quarter of 2017. The calculation of recoverable amount of the Concordia Internationalgroup of CGUs was determined using discounted cash flow projections based on financial forecasts approvedby management (level 3 of fair value hierarchy) and a terminal growth assumption of 1.5%. The key assumptionsand estimates used in determining the fair value are related to revenue and gross margin assumptions, which arebased on the financial forecasts, estimated revenue growth rates, working capital assumptions and a discountrate of 13%. As a result of the impairment testing performed, it was determined that the recoverable amount ofthe Concordia International group is $1,391,428.
The recoverable amount would decrease by $54,345 if the discount rate were to increase by 0.5%, and wouldincrease by $59,303 if the discount rate were to decrease by 0.5%. The recoverable amount would have increasedby $37,571 if the terminal growth rate were increased by 0.5%, and would have decreased by $34,423 if theterminal growth rate were decreased by 0.5%.
Third quarter of 2016
During the third quarter of 2016, the Company identified a triggering event requiring the Company to performgoodwill impairment testing. The triggering event was mainly the result of the decline of the Company's shareprice through to September 30, 2016, which was reflective of the reduced earnings in the Concordia NorthAmerica segment. As a result of the impairment testing performed, the Company recorded an impairment lossof $3,062 during the third quarter of 2016, representing the entire remaining amount of goodwill associated withCPI.
Annual Impairment Test
The Company completed its annual goodwill impairment testing on the goodwill remaining in the ConcordiaInternational group of CGUs and the Orphan Drugs group of CGUs, which have goodwill carrying values of$216,991 and $27,966, respectively. The recoverable amount of the Concordia International group of CGUswas calculated using fair value less costs of disposal ("FVLCD"), and the Orphan Drugs group of CGUsrecoverable amount was calculated based on value in use ("VIU").
[F-38]
Concordia Internaltionar Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Concordia International
The calculation of recoverable amount of the Concordia International group of CGUs was determined usingdiscounted cash flow projections based on financial forecasts approved by management covering a five-yearperiod (level 3 of fair value hierarchy) and a terminal growth assumption of 1.5%. The key assumptions andestimates used in determining the FVLCD are related to revenue and gross margin assumptions, which are basedon the most recently approved financial forecasts and assumed growth rates, working capital assumptions, theeffective tax rate of 13% and the discount rate of 13% applied to the cash flow projections. As a result of theimpairment testing performed, it was determined that the recoverable amount of the Concordia Internationalgroup of CGUs of $1,437,317 exceeded the carrying value of the Concordia International group of CGUs of$1,397,928.
The recoverable amount would decrease by $58,333 if the discount rate were to increase by 0.5%, and wouldincrease by $63,729 if the discourit rate were to decrease by 0.5%. If the terminal growth rate were to increaseor decrease by 0.5%, the recoverable amount would increase by $41,705, or decrease by $38,169, respectively.
Orphan Drugs
The calculation of recoverable ambunt of the Orphan Drugs group of CGUs (which forms part of the ConcordiaNorth America segment) was determined using discounted cash flow projections based on financial budgetsapproved by management covering a five-year period (level 3 of fair value hierarchy). The key assumptions andestimates used in determining the VIU are related to revenue and gross margin assumptions, which are basedon the financial forecast and assumed growth rates, and the discount rate of 20% applied to the cash flowprojections. As a result of the impairment testing performed, it was determined that the recoverable amount ofthe Orphan Drugs group of CGUs of $72,097 exceeded the Orphan Drugs group of CGUs carrying value of$54,894.
The recoverable amount of the Orphan Drugs group of CGUs would decrease by $2,315 if the discount ratewere to increase by 0.5%, and would increase by $2,445 if the discount rate were to decrease by 0.5%. If theterminal growth rate were to increase or decrease by 0.5%, the recoverable amount would increase by $1,042,or decrease by $992, respectively.
10. Accounts payable and accrued liabilities
As at Dec 31, 2017 Dec 31, 2016
Trade payables 26,351 35,021
Accrued liabilities 68,994 69,855
Interest payable on long-term debt 106,568 44,280
Interest payable on Currency Swaps (Note 13) 20,337
Total 201,913 169,493
11. Provisions
Provisions are made and recorded as reductions to revenue in order to estimate the liabilities arising fromchargebacks, rebates, returns and other price adjustments, as explained in Note 4.
[F-39]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
The following table describes movements in the Company's provisions balance by nature of provision:
Chargebacks/Rebates/Co-pay
InventoryReturns management Prompt pay Total
Balance, January 1, 2016 20,880 7,538 3,495 816 32,729
Balance, December 31, 2017 16,595 11,066 5,883 552 34,096
Invoices received for such charges and estimates are shown in the accounts payable when received. The provision
is for the uninvoiced portion of the charges and estimates. Payments are expected within 12 months from the
balance sheet date.
12. Income Taxes
Significant components of the current and deferred income tax reflected in the consolidated statements of loss
are as follows:
2017 2016 2015
Current income tax expense 18,491 36,846 8,858
Deferred income tax expense (recovery) in respect of:
Origination & reversal of temporary differences (55,248) (64,271) (8,633)
Change in tax rates during the period (7,376) (23,289)
(55,248) (71,647) (31,922)
Provision for (recovery of) income taxes (36,757) (34,801) (23,064)
Income taxes that are required to be reflected in equity, instead of in the consolidated statements of loss, are
included in the consolidated statements of changes in (deficit) equity.
Current and deferred income tax referred to above is recognized based on management's best estimate of the
tax rates expected to apply to the income, loss or temporary difference.
The Company is subject to income tax in various jurisdictions with varying tax rates. The United States legislateda reduction of their corporate tax rate to 21% (announced during the year, applicable after• December 31, 2017)which does not have a significant impact on the Company's provision for (recovery of) income taxes. There were
no material changes to the statutory tax rates in the taxing jurisdictions where the majority of the Company's
income for tax purposes was earned or where its material temporary differences or losses are expected to be
realized or settled.
Although statutory tax rates may not have changed materially, the impact of commercial decisions and market
forces have resulted in changes to the distribution of income for tax purposes amongst taxing jurisdictions and
therefore result in a change in the tax rate applicable to such item of income or temporary difference.
[F-40]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
The Company continues to believe the amount of unrealized tax benefits appropriately reflects the uncertaintyof items that are or may in the future be under discussion, audit, dispute or appeal with a tax authority or which
otherwise result in uncertainty in the determination of income for tax purposes. If appropriate, an unrealized taxbenefit will be realized in the reporting period in which the Company determines that realization is not in doubt.Where the final determined outcome is different from the Company's estimate, such difference will impact theCompany's income taxes in the reporting period during which such determination is made.
A reconciliation of the amount of income taxes reflected above compared to the amount of income taxes thatwould result by multiplying income (loss) before income taxes by the legislated tax rate applicable to the Companyin Canada is as follows:
2017 2016 2015
Loss from continuing operations before tax (1,627,492) (1,348,894) (52,489)
Expected expense / (recovery) at the Company's Canadian taxrate 26.5% (431,285) (357,205) (13,909)
Effect of tax rates outside of Canada 279,213 261,981 (15,952)
Change in tax rates during the period (7,376) (23,289)
Non-deductible and non-taxable items 12,241 23,193 4,742
Capitalized expenditures 178 9,279
Change in deferred income tax assets not recognized 99,297 42,511 13,800
Other items 3,777 1,917 2,265
Provision for (recovery of) income taxes (36,757) (34,801) (23,064)
Significant components of the deferred income tax assets and liabilities reflected in the consolidated balancesheets are as follows:
2017 2016
Deferred income tax assets (liabilities) in respect of:
Losses and credits 1,198 987
Intangible assets (130,523) (179,028)
Other items (3,328) (2,218)
Deferred income tax assets (liabilities), net (132,653) (180,259)
Deferred income tax assets 2,466 979
Deferred income tax liabilities (135,119) (181,238)
Deferred income tax assets (liabilities), net (132,653) (180,259)
A deferred income tax asset has not been recognized for certain temporary differences that may be available toreduce income subject to tax in a taxation period subsequent to the period covered by these financial statements.The amount of such temporary differences, that is the amount before applying the relevant tax rate, which is notrecognized in the consolidated balance sheets or consolidated statements of loss, is as follows:
2017 2016
Losses and credits 774,864 505,660
Other items 1,620 51
Total unrecognized temporary differences 776,484 505,711
[F-41]
Concordia International Corp.Notes to Consolidated Financial Statements'(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
The deferred income tax assets in connection with the Company's losses and credits that may be available toreduce income subject to tax in a taxation period subsequent to the period covered by these financial statements,is as follows:
2017 2016
Expiring within 15 years 756 1,608
Expiring between 15 and 20 years 154,281 90,967
No expiration 50,631 46,925
Total deferred income tax asset in respect of losses and credits 205,668 139,500
Total in North America 155,241 92,433
Total in Europe 48,696 44,426
Total in other jurisdictions 1,731 2,641
Total deferred income tax asset in respect of losses and credits 205,668 139,500
The integrated nature of the Company's global operations gives rise to many transactions in the ordinary courseof business in respect of which the determination of income for tax purposes may be uncertain. Transactionsthat arise between multiple taxing jurisdictions are subject to review by these jurisdictions, where a decision ofone taxing authority may not agree with the decision of another. The Company is committed to mitigatinguncertainty that may arise in connection with such transactions and to'this end has prepared documentation thatcomplies with local legislation and is in accordance with international guidelines, such as those of theOrganization of Economic Co-operation and Development. Itefer to the Income taxes section of the CriticalAccounting Estimates and Judgments and Key Sources of Estimation Uncertainty of these notes to theconsolidated financial statements for additional information regarding the Company's judgment and use ofestimates relevant to income taxes.
The Company's global operations requires a corporate structure that includes affiliated legal entities that arecollectively subject to the authority of numerous taxing jurisdictions. Certain transactions may arise which createa temporary difference in connection with an affiliated legal entity. The realization of this temporary differencemay result in income tax. As at December 31, 2017, the Company has recognized $3,017 (2016 - $2,103) deferredincome tax liability in connection with the realization of a temporary difference for certain affiliated legal entitieson the basis that it is probable that such a temporary difference will be realized in the foreseeable future.
13. Derivative Financial Instruments
The Company entered into the Currency Swaps as economic !ledges of certain cash flows from its ConcordiaInternational segment denominated in GBP and long-term debt repayments denominated mainly in USD. TheCompany determines for each derivative contract entered into whether hedge accounting will be applied atinception, which is based on the facts and circumstances of each contract.
Payments and contractual obligations under the Currency Swaps were with the same counterparty, however aresettled on a gross basis. Therefore, the fair value of the pay and receive portions along with interest payable andreceivable have been presented on a gross basis within the consolidated statement of loss and comprehensiveloss and balance sheet.
On October 20, 2017, the Company was notified by the counterparty-to the Currency Swaps that one or moreevents of default occurred under the Currency Swaps as a result of the Company obtaining a preliminary interimorder from the Ontario Superior Court of Justice pursuant to the arrangement provisions of the CBCA. As aresult of the foregoing, the counterparty to the Currency Swaps designated October 23, 2017 as the earlytermination date with respect to all transactions under the Currency Swaps. The amount due on the date oftermination on the Currency Swaps as asserted by the counterparty was $114,431 (the "Cross Currency SwapLiability"). The Cross Currency Swap Liability bears interest at a rate equal to the rate of interest due on theUSD Term Loan and is payable with the same frequency and on the same date as such payments are made on
[F-42]
Concordia liaternationall Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
.
the USD Term Loan, pursuant to the Concordia International Credit Agreement, subject to the terms of thetermination agreement between the Company and the counterparty to the Currency Swaps. The Company hasand continues to pay the foregoing interest associated with the Cross Currency Swap Liability pursuant to suchtermination agreement.
During the year ended December 31, 2017, the Company incurred and recorded interest expense of $1,143 (2016- $nil; 2015 - $nil) related to the, outstanding Cross Currency Swap Liability. Upon early termination of theCurrency Swaps, the derivative financial instruments .were reclassified to cross currency swap liability andpresented within current liabilities in the consolidated balance sheet, and a loss of $38,985 (2016 - $nil; 2015 -$nil) was reflected in fair value (gain) loss on derivative financial instruments in the consolidated statements ofloss. As a result of the early termination of the Currency Swaps, the remaining fair value loss of $1,360 (2016- $1,561) cumulatively reflected in other comprehensive income as at October 23, 2017, as part of the initialhedge relationship, has been recycled to the consolidated statements of loss within fair value (gain) loss onderivative financial instruments. The Cross Currency Swap Liability is guaranteed, and secured by liens createdby the collateral documents under the Concordia International Credit Agreement (as defined herein).
The original terms and amounts recorded related to the Currency Swaps were as follows:
ImplicitRate ofForeign
Derivative Principal Interest Principal Interest ExchangeFinancial Effective Maturity Amount Rate Amount Rate (USD perInstrument Date Date Receivable Receivable Payable Payable GBP)
August 2016 Currency Swap $ 20,681 £ 15,538 Oct 13, 2020
November 2016 Currency Swap 15,750 £ 14,257 Oct 1, 2020
Interest and accretion expense and interest income
Payments and receipts associated with the Currency Swaps have been reflected in the consolidated statementof loss within interest and accretion expense and interest income, as follows:
Statements of Loss Classification 2017 2016 2015
August 2016 CurrencySwap Interest and accretion expense 32,148 14,607
November 2016Currency Swap Interest and accretion expense 29,682 5,730
Total 61,830 20,337
[F-43]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Statements of Loss Classification 2017 2016 2015
August 2016 CurrencySwap Interest income (33,450) (15,369)
November 2016Currency Swap Interest income (25,638) (5,075)
Total (59,088) (20,444)
Settlement of interest
During the year ended December 31, 2017, the counterparty to the Currency Swaps settled interest receivableof $76,616 (2016 - $nil; 2015 - $nil). The Company also settled interest payable of $81,583 (2016 - $nil; 2015- $nil) with the counterparty to the Currency Swaps during the year ended December 31, 2017.
Fair values of derivative financial instruments
The fair values of the Currency Swaps and their classification in the consolidated balance sheet were as follows:
As at Balance Sheet Classification Dec 31, 2017 Dec 31, 2016
August 2016 Currency SwapDerivative financial instrumentsasset (liability) 23,555
November 2016 Currency SwapDerivative financial instrumentsasset (liability) (27,854)
Total derivatives (4,299)
Cash flow hedge gains (losses) in accumulated other comprehensive loss
August 2016Currency Swap
Balance, January 1, 2016
Effective portion of change in fair value of hedging instruments (1,623)
Transfers to (income) loss:
Discontinuation of hedge accounting due to hedge ineffectiveness 62
Balance, December 31, 2016 (1,561)
Transfers to (income) loss:
Discontinuation of hedge accounting due to hedge ineffectiveness 201
Early termination of derivative contracts 1,360
Balance, December 31, 2017
(Gains) losses recognized on derivative financial instruments in the consolidated statements of loss
Statements of Loss Classification 2017 2016 2015
August 2016 Currency Fair value (gain) loss on derivativeSwap financial instruments 43,010 24,861
November 2016 Fair value (gain) loss on derivativeCurrency Swap financial instruments 27,755 (27,481)
Total 70,765 (2,620)
[F-44]
Concord} =nterrrr>lational Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Unrealized foreign exchange (gain) loss
Unrealized foreign exchange gain, for the year ended December 31, 2017 was $72,891 (2016 - $128,574 loss;2015 - $nil). The primary component of the unrealized foreign exchange (gain) loss is the recognition ofaccumulated unrealized foreign exchange gains on certain inter-company loans associated with the Company'sinvestment in the Concordia International segment. Prior to entering into the Currency Swaps, foreign exchangetranslation gains and losses on these inter-company loans were not included in the statement of loss given theloans formed part of the permanent investment in those subsidiaries. In entering into the Currency Swaps, certaininter-company loans became designated as hedged items, an4 subject to on-going repayment. Accordingly, theinter-company loans were no longer considered to be permanent investments in the related subsidiaries andchanges in foreign exchange result in unrealized foreign exchange gains and losses recorded in the consolidatedstatement of loss. All such loans are eliminated on consolidation.
14. Long-term Debt
As at Dec 31, 2017 Dec 31, 2016
Term Loan Facilities (a)
- USD term loan 1,061,500 1,089,000
- GBP term loan 651,086 609,099
- Revolver
Bridge Facilities (b) 100,832 134,444
9.5% Senior Notes (a) 790,000 790,000
7% Senior Notes (d) 735,000 735,000
9% Senior Secured Notes (e) 350,000 350,000
Balance outstanding 3,688,418 3,707,543
Less: deferred financing costs — (161,766)
Total long-term debt 3,688,418 3,545,777
Less: current portion (3,688,418) (76,492)
Long-term portion — 3,469,285
The commencement of the CBCA proceedings resulted in an event of default under the Concordia InternationalCredit Agreement which includes the term loan facilities, the indentures governing the Company's 9% seniorsecured notes and 9.5% unsecured senior notes and the Currency Swaps. As a result of the foregoing events ofdefault, a cross default was triggered under the indenture governing the 7% unsecured senior notes and theextended bridge facility, however any demand for payment ofthis debt has been stayed by the preliminary interimorder granted by the Court in the CBCA proceedings. The Company has accelerated the accretion of the deferredfinancing fees associated with all of the Company's lending arrangements during the fourth quarter of 2017. Aspart of the CBCA proceedings the Company has terminated the $200 million revolving facility under theConcordia International Credit Agreement, which was undrawn at the time of termination.
As discussed in Note 2, during the CBCA proceedings the Company has been and intends to continue to makescheduled, ordinary course interest and principal payments under its secured debt facilities, described in (a) and(e) below, and the Currency Swaps, as applicable. Conversely, during the CBCA proceedings, the Company hasnot made scheduled payments on its unsecured debt facilities, described in (b), (c) and (d) below. See Note 2for a discussion on the stay of proceedings applicable to the Company's debt agreements.
(a) On October 21, 2015 (the "Closing Date") the Company, through a wholly owned subsidiary, completedthe acquisition of 100% of the outstanding shares of Amdipharm Mercury Limited (the "ConcordiaInternational Acquisition") from Cinven, a European private equity firm, and certain other sellers(collectively the "Vendors"). To finance the Concordia International Acquisition, the Company entered intoa credit agreement (the "Concordia International Credit Agreement") on October 21, 2015 pursuant to
[F-45]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share, amounts and where otherwise stated)
which a syndicate of lenders made available secured term :loans iv the aggregate amounts of $1.1 billion in
one tranche (the "USD Term Loan") and £500 million in, a separate tranche (the "GBP Term Loan", and
together with the USD Term Loan: the "Term Loans"). , In addition, the Concordia International Credit
Agreement provided for a secured revolving loan Of up to $200 million which commitment was terminated
during the fourth quarter of 2017 as part of the Company's CBCA proceedings. All obligations of the
Company under the Term Loans are guaranteed by all current and foture material subsidiaries of the Company
and include security of first priority, interests in the assets Of the COmpany and its material subsidiaries. The
Term Loans contain'a maturity date of October 21, 2021, have variable interest rates and require quarterly
principal repayments. During 2017, the Company made principal:payments of $27,500 and £12,500 on the
USD Term Loan and GBP Term Loan, respectively. In addition commencing in 2017, the Term Loans may
require certain principal repayments calculated by reference to the Company's excess cash flow as defined
in the Concordia International Credit Agreement, calculated annually in respect of the prior, year. No
payments calculated by reference to the Company's excess cash flow were required to be made during 2017with respect to 2016 and none are expected to be made in 2018 with respect to 2017. In addition, any
payments that would be due as a result of the excess cash flow calculation would be stayed by the CBCA
preliminary interim order. Interest rates on the Term Loans are calculated based on LIBOR plus applicable
margins, with a LIBOR floor of 1%. Interest expense on the Term Loans for the year ended December 31,
2017 was $104,024 (2016 - $99,713; 2015 - $24,486). Commencing in 2017 the quarterly principal
repayments on the Term Loans increased from a rate of 0.25% to, 0.625%, and in 2019 increase to 1.25%.
(b) On the Closing Date a syndicate of lenders also provided the Company with a senior unsecured equity bridge
term loan facility of $135 million (the "Extended Bridge Loans") and a senior unsecured equity bridge
term loan facility of $45 million (the "Equity Bridge Loans" and together with the Extended Bridge Loans,
the "Bridge Facilities"). All obligations of the Company under the Bridge Facilities, subject to certain
customary exceptions, are guaranteed by all material subsidiaries of the Company. The Extended Bridge
Loans have a seven year term to maturity and an interest rate of 9.5% for two years. As the Extended Bridge
Loans were not repaid on October 21, 2017, the interest rate increased to 11.5%. Through to October 21,
2018, lenders holding the Extended Bridge Loans may make a proposal for an offering of new securities
("Refinancing Securities") which Refinancing Securities may carry a weighted average effective yield that
is up to 150 basis points greater than 11.5%. On or after October 21, 2018 the lenders holding the Extended
Bridge Loans may request the exchange of the Extended Bridge Loans into bonds ("Exchange Notes") with
a maturity date of October 21, 2022 and bearing interest of 11.5%. The Equity Bridge Loans had a two year
term to maturity and an interest rate of 9.5%. The Bridge Facilities can be repaid in full or in part at any
time. In December 2015 the Company made a principal payment of $45,000 on the Bridge Facilities which
was allocated pro rata between the outstanding principal of the Bridge Facilities. Interest expense on theBridge Facilities was $13,158 for the year ended December 31, 2017 (2016 - $12,991; 2015 - $4,551).
During the fourth quarter of 2017, the Company agreed to settle,the $34 million of principal and accrued
interest due under the Equity Bridge Loans for $13 million. As a result of the settlement and extinguishment
of the remaining debt, a gain of $21 million was reflected in gain on debt settlement in the consolidatedstatements of loss.
(c) On the Closing Date, the Company issued at par $790 million 9.5% senior unsecured notes due October 21,2022 (the "October 2015 Notes"). The October 2015 Notes require no payment of principal throughouttheir term. Interest on the October 2015 Notes is payable semi-annually on June 15th and December 15th
of each year. Interest expense on the October 2015, Notes was $75,207 for the year ended December 31,
2017 (2016 - $75,050; 2015 - $15,472).
(d) In connection with the acquisition of a portfolio of products from Covis Pharma S .A.R.L. and Covis InjectablesS AR.L. on April 21, 2015 (the "Covis Acquisition"), the Company issued at par $735 million 7.00% senior
unsecured notes due April 21, 2023 (the "Covis Notes"). The Covis Notes require no payment of principal
throughout their term. Interest on the Covis Notes is payable semi-annually on April 15th and October 15thof each year. Interest expense on the Covis Notes was $51,831 for the year ended December 31, 2017 (2016
- $51,450; 2015 - $37,609).
[F-46]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
(e) On October 13, 2016, the Company issued at par $350 million 9.00% senior secured first lien notes dueApril 1, 2022 (the "Secured Notes"). The Secured. Notes require no payment of principal throughout theirterin. Interest on the Secured Notes is payable semi-annually on April 1st and October 1st of each year.Interest expense on the Secured Notes was $31,500 for the year ended December 31, 2017 (2016 - $7,000;2015 - $nil).
The fair value of long-term debt as at December 31, 2017 was $1.9 billion (2016 - $2.2 billion).
The following table describes movements in the Company's long-term debt balance:
Balance, January 1, 2017 3,545,777
Repayments (57,279)
Accretion of deferred financing fees 161,766
Principal portion of gain on debt settlement (20,168)
Impact of foreign exchange 58,322
Balance, December 31, 2017 3,688,418
Interest expense
2017 2016 2015
Interest expense paid or payable in cash 275,720 246,204 91,228
Interest expense on Currency Swaps (Note 13) 62,973 20,337
Non-cash items:
Accretion of deferred financing fees 26,503 30,064 8,086
Accelerated accretion of defert'ed financing fees 137,588 26,323
Other non-cash interest 4,010 4,085 3,558
Interest and accretion expense 506,794 300,690 • 129,195
15. Share Capital
The Company is authorized to issue an unlimited number of common shares.
Number ofCommon
Shares
Balances, January 1, 2016 50,994,397 1,274,472
Exercise of stock options 12,500 173
Vesting of RSUs 82,659 2,530
Balances, December 31, 2016 ' 51,089,556 1,277,175
Vesting of RSUs 193,345 5,908
Balances, December 31, 2017 51,282,901 1,283,083
The Company did not declare any dividends during the year ended December 31, 2017 (2016 - $7,652; 2015 -$11,720). On August 12, 2016, the Company announced the suspension of its quarterly dividend payments.
[F-47]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
16. Loss Per Share
2017 2016 2015
Net loss from continuing operations for the period attributable toshareholders (1,590,735) (1,314,093) (29,425)
Weighted average number of common shares in issue 51,156,787 51,022,748 36,184,480
Weighted average number of fully diluted shares 53,447,217 51,798,382 37,457,561
Loss per share, from continuing operations
Basic loss per share (31.10) (25.76) (0.81)
Diluted loss per share (31.10) (25.76) (0.81)
Loss per share, including discontinuing operations
Basic loss per share
Diluted loss per share
(31.10)
(31.10)
(25.79)
(25.79)
(0.87)
(0.87)
For the periods noted above, the computation of diluted loss per share is equal to the basic loss per share dueto the anti-dilutive effect of the stock options and unvested shares.
17. Share Based Compensation
Employee Stock Option Plan
The Company has an incentive stock option plan that permits it to grant options to acquire common shares toits directors, officers, employees and others. The maximum number of common shares which may be reservedfor issuance under the stock option plan cannot exceed 10% of the issued and outstanding common shares ofthe Company on a non-diluted basis (which maximum number is inclusive of any common shares reserved forissuance pursuant to the Company's LTIP (as defined below)). The exercise price at which any option may beexercised to acquire a common share of the Company must be not less than the lesser of (i) the closing tradingprice of the common shares on the date of grant and (ii) the volume-weighted average price of the commonshares on the TSX for the five trading days immediately preceding the date of grant.
As at December 31, 2017, 607,951 stock options (2016 — 728,266) were available for grant under the stockoption plan. During the three months ended March 31, 2017, the Company reallocated 700,000 of its sharereserve from the stock option plan to the LTIP.
[F-48]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Information with respect to stock option transactions for the year ended December 31, 2017 and December 31,2016 is as follows:
Number ofStock
Options
WeightedAverageExercise
Price
Balance, January 1, 2016 2,403,985 $ 37.07
Granted during the year 185,000 21.02
Forfeited during the year (241,800) 39.00
Cancelled during the year (200,000) 67.90
Exercised during the year (12,500) 10.32
Balance, December 31, 2016 2,134,685 $ 32.73
Weighted-average exercise price of optionsexerciseable as at December 31, 2016 $ 23.79
Balance, January 1, 2017 2,134,685 $ 32.73
Forfeited during the year (360,500) 38.03
Cancelled during the year (219,185) 20.21
Balance, December 31, 2017 1,555,000 $ 33.27
Weighted-average exercise price of optionsexerciseable as at December 31, 2017 27.84
A11 the stock options issued have different vesting terms ranging from immediate vesting to vesting over a periodof 3 years. Contract terms of options issued range and have a life of 7-10 years.
For the year ended December 31, 2017, the total compensation charged against income with respect to all stockoptions granted was $4,280 (2016 — $20,268; 2015 - $9,688).
As at December 31, 2017 outstanding stock options were as follows:
Year of ExpiryExercise
Price
Number ofStock
Options Exercisable
2022 35.66 881,000 587,333
2023 2.02 - 26.43 277,500 167,500
2024 5.88 - 31.50 221,500 221,500
2025 32.99 - 78.36 175,000 121,665
1,555,000 1,097,998
[F-49]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Long-Term Incentive Plan
The Company has a long-term incentive plan ("LTIP" ). Under the terms of the LTIP, the Board of Directorsmay grant units ("Units"), which may be either RSUs or DSUs to officers, directors, employees or consultantsof the Company. Each Unit represents the right to receive one common share in accordance with the terms ofthe LTIP.
During the year ended December 31, 2017 the Company authorized for issuance under the LTIP a total of1,471,047 RSUs with market prices between $1.46 and $1.89 with vesting terms over 3 years.
For the year ended December 31, 2017, the Company recorded share based compensation expense of $4,434(2016 - $10,485; 2015 - $6,510) related to the RSUs and DSUs accounted for• on the basis that they will beequity-settled, with a corresponding credit to shareholders' equity. The compensation expense recorded duringthe year ended December 31, 2017 and 2016 includes the impact of the accelerated vesting of RSUs held by aformer officer of the Company.
Certain performance based RSUs are subject to non-market based performance conditions. As at December 31,2017 the Company assessed the actual and forecasted performance underlying these outstanding performancebased RSUs, and based on that assessment, no vesting or• expense has been recorded with respect to theseperformance based RSUs during the year.
The Company's outstanding RSUs are as follows:
Number ofRSUs
Balance, January 1, 2016 220,162
Issued during the year 2,204,899
Cancelled during the year (1,022,117)
Vested during the year (138,782)
Balance, December 31, 2016 1,264,162
Balance, January 1, 2017 1,264,162
Issued during the year 1,471,047
Cancelled during the year (166,448)
Vested during the year (194,364)
Balance, December 31, 2017 2,374,397
18. Related Party Transactions
The Company had the following related party transactions during the years ended December 31, 2017, 2016 and2015:
2017 2016 2015
Legal fees paid or payable to a firm affiliated with a director 30 53
Total 30 53
Legal fees include professional services for advice relating to intellectual property matters. As at February 9,2016, the firm affiliated with the director ceased providing legal services to the Company, apart from clericaland administrative work related to the transfer of files.
[F-50]
Concordia . nternationail Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Certain current employees of the Concordia International segment had an equity interest in the ConcordiaInternational segment at the time of its sale to the Company. As a result, pursuant to the share purchase agreemententered into by the Company in connection with the Concordia International Acquisition, these employeesreceived a portion of the consideration paid by the Company to the Vendors, of the Concordia Internationalsegment (including the earnout consideration paid in December 2016 and February 2017, respectively).
19. Commitments and Contingencies
Lease Commitments
The Company has operating leases relating to rental commitments for its international office locations, an aircraftlease and computer and electronic equipment leases. The leases typically run for a period of a number of monthsup to five years.
The below table sets forth the Company's obligations under operating leases:
MinimumLease
Payments
2018 4,010
2019 3,177
2020 1,556
2021 770
2022 166
Thereafter 156
9,835
On October 13, 2017, two subsidiaries of the Company, Concordia Pharmaceuticals (US), Inc. and PinnacleBiologics, Inc. entered into an agreement with the Company's Chief Executive Officer to guaranty paymentsdue under the officer's employment agreement.
Guarantees
A11 directors and officers of the Company are indemnified by the Company for various items including, but notlimited to, all costs to defend lawsuits or actions due to their association with the Company, subject to certainrestrictions. The Company holds directors' and officers' liability insurance to mitigate the cost of any potentialfuture lawsuits or actions. A guarantee of the obligations under the employment agreement for one of theCompany's officers has been provided by certain subsidiaries of the Company.
In the normal course of business, the Company has entered into agreements that include indemnities in favourof third parties, such as purchase and sale agreements, confidentiality agreements, engagement letters withadvisors and consultants, leasing contracts, license agreements, supply agreements, distribution agreements,information technology agreements and various product, service, data hosting and network access agreements.These indemnification arrangements may require the applicable Company entity to compensate counterpartiesfor losses incurred by the counterparties as a result of breaches in representations, covenants and warrantiesprovided by the particular Company entity or as a result of litigation or other third party claims or statutorysanctions that may be suffered by the counterparties as a consequence of the relevant transaction.
In connection with the acquisition of Zonegran®, the Company guaranteed the payment, performance anddischarge of the purchaser's payment and indemnification obligations under the asset purchase agreement andeach ancillary agreement entered, into by the purchaser in connection therewith that contained payment orindemnification obligations. Pursuant to the asset purchase agreement entered into in connection with the CovisAcquisition (the "Covis Purchase Agreement") the Company guaranteed the purchaser's obligations under theCovis Purchase Agreement. Pursuant to the share purchase agreement entered into by the Company in connection
[F-51]
Concordia International Corp.Notes to Consolidated Financial Statements.(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
with the Concordia International Acquisition, the Company guaranteed the obligations of the purchaser under
the share purchase agreement and related transaction documents.
Litigation and Arbitration
From time to time, the Company becomes involved in various legal and administrative proceedings, which
include product liability, intellectual property, commercial, antitrust, government and regulatory investigations,
related private litigation and ordinary course employment-related issues. From time to time, the Company also
initiates actions or files counterclaims. The Company could be subject to counterclaims or other suits in response
to actions it may initiate. The Company believes that the prosecution of these actions and counterclaims is
important to preserve and protect the Company, its reputation and its assets. Certain of these proceedings and
actions are described below.
Unless otherwise indicated the Company cannot reasonably predict the outcome of these legal proceedings, nor
can it currently estimate the amount of loss, or range of loss, if any, that may result from these proceedings. An
adverse outcome in certain of these proceedings could have a material adverse effect on the Company's business,
financial condition and results of operations, and could cause the market value of its common shares and/or debt
securities to decline.
The Company and certain of its former executive officers are the subject of various class action complaints
relating to the Company's August 12, 2016 press release, whereby the Company revised its 2016 guidance. The
complaints allege that the Company issued false and misleading statements to investors and/or failed to disclose
that: the Company was experiencing a substantial increase in market competition against its drug Donnatal®,
and other products; as a result, Concordia's financial results would suffer, and Concordia would be forced to
suspend its dividend; and as a result Concordia's statements about its business, operations and prospects were
materially false and misleading and/or lacked a reasonable basis at all, relevant times. The class action lawsuits
have been consolidated into a single case and a motion to dismiss this action was filed by the Company on
February 20, 2017. On March 21, 2017, the plaintiffs .in this action filed a response to the motion to dismiss,
and on April 5, 2017 the Company filed a reply to plaintiffs' response. Qn July 28, 2017, the United States District
Court, Southern District of New York denied the motion to dismiss in part and granted it in part. On February
7, 2018, the plaintiffs filed a notice of motion for class certification.
The Company and certain of its former executive officers were also subject to a class action complaint alleging
that the Company made false and/or misleading statements, as well as, failed to disclose material adverse facts
about the Company's business operations and prospects, in the Company's Registration Statement, Prospectus
and Supplemental Prospectus issued in connection with the Company's secondary offering completed on
September 30, 2015. Specifically, the claim alleged that the statements were false and/or misleading and/or failed
to disclose that: (i) the Company was experiencing a substantial increase in market competition againstDonnatal®, and other products; (ii) consequently the Company's fmancial results would suffer and the Company
would be forced to suspend its dividends; and (iii) as a result of the foregoing, the defendant's statements about
the Company's business operations and prospects were false and misleading and/or lacked a reasonable basis.
On June 27, 2017, the plaintiff in this action voluntarily dismissed the complaint on a without prejudice basis.
The Company and certain of its former executive officers and a former director are subject to a securities class
action filed in Quebec, Canada. The amended statement of claim alleges that the Company failed to disclose
adverse material facts relating to, and misrepresented, among other things, the Company's business model, growth
platforms, proforma revenues and dividend payments in certain disclosures from March 23, 2016 to August 11,
2016. This class action has not yet been certified nor has leave to bring a statutory claim under securities legislation
yet been granted. On June 15, 2017, the plaintiff in the action discontinued their claim against the Company's
Board of Directors (other than the one former director) and certain of its former executive officers.
On October 19, 2017, a statement of claim was filed in Ontario, Canada against the Company and certain of its
former executive officers on behalf of all persons and entities, other than persons resident in Quebec, Canada,
[F-52]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts andwhere otherwise stated)
which alleges substantially the same claims as the Quebec action described above. This class action has not yetbeen certified nor has leave to bring a statutory claim under securities legislation yet been granted.
On October 25, 2016, the Company announced that the UK Competition and Markets Authority ( CMA)commenced an investigation into various, issues in relation to the UK pharmaceutical sector, and that theConcordia International segment was part of the inquiry. The CMA's investigation includes matters th at pre-date Concordia's ownership of the Concordia International segment and relates to the Company's pricing ofthree products. On May 31, 2017, the Company announced that the CMA notified the Company that it wascontinuing its investigation after an initial stop/go decision. On November 21, 2017, the Company announcedthat the CMA issued a statement of objections to the Company, and the former owners of the ConcordiaInternational segment, Hg Capital and Cinven, in relation to the pricing of one of the three products, liothyronine,in the United Kingdom between November 2007 and July 2017. A statement of objections is a formal statementby the CMA that it considers that a competition infringement may have occurred. On February 15, 2018, theCompany announced that the CMA notified the Company that it was closing its investigation related to FusidicAcid, also one of the three products under investigation.
On March 3, 2017, the Company announced that the CMA issued a statement of objections to a third party andthe Company in relation to the supply of 10mg hydrocortisone tablets in the UK between 2013 and 2016. OnMay 26, 2017, the Company responded in detail to the statement of objections and on July 20, 2017 the Companyattended an oral hearing to present the key points of its response to the CMA decision panel. This investigationincludes matters that pre-date the Company's ownership of the Concordia International segment.
On October 11, 2017, the Company announced that the CMA commenced additional investigations in relationto the UK pharmaceutical sector, and that the Concordia International segment and certain of its products arepart of the inquiry. These investigations are at an early information gathering stage and the CMA has confirmedthat, at this time, it has not reacthed a conclusion on .whether competition law has been infringed. Theseinvestigations include matters that predate the Company's ownership of the Concordia International segment.
During the first quarter of 2016, the Company became aware that a third party had notified wholesalers; throughlisting services, of its intent to distribute and sell in certain US regions a non-FDA approved copy ofDonnatal®. On January 6, 2016, the Company commenced a lawsuit against the third party and its principalowner claiming damages from such conduct, and on April 29, 2016 and May 3, 2016 commenced proceedingsagainst two listing services for the continued listing of the products in their database. In May 2016, the Companybecame aware that this non-FDA approved product was introduced into certain US regions. On October 4, 2016and November 16, 2016, the Company dismissed its claims against the listing services on a without prejudicebasis, respectively. On March 15;2017, the Court ruled on the third party's motion to dismiss the Company'sclaim, denying such motion in part and granting it in part. On March 29, 2017, the third party filed its answerand counter claim in response to the Company's claim. On August 16, 2017, this third party filed a motion toamend its counterclaim to add factual allegations detailing the scope of the Company's campaign to disparageits products and interfere with its contractual and business relationships. On November 8, 2017, the court grantedthe Company's motion for leave to file its second amended complaint, permitting the Company to include itsdirect false advertising claim. The Company continues to pursue this lawsuit vigorously. In a similar lawsuitcommenced against Method Pharrhaceuticals, LLC ("Method") and its principal owner, the Company receiveda favorable jury verdict on April 21, 2016 and was awarded damages in the amount of approximately $733. OnMarch 2, 2017, the United States 1istrict Court - Western District of Virginia, Charlottesville Division, grantedthe Company's motion for enhanced damages in part, to amend the judgment against Method and its principalowner to reflect an award of damages in the total amount of approximately $2:2 million. On March 30, 2017,Method filed a motion to reconsider the Order on enhanced damages. On April 13, 2017, the Company filed anopposition to Method's motion to reconsider. On July 19,2017, the court denied Method's motion to reconsiderand further awarded the Company an additional $15 in costs. On August 30, 2017, Method filed a notice• ofappearance with the United States Court ofAppeals for the Fourth Circuit to appeal the enhanced damages award.On February 1, 2018, Method and its principal owner and the Company settled the enhanced damageS award.
[F-53]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
During the second quarter of 2017, the Company became aware that an additional third party had launched acompetitor product to Donnatal®. The Company continues to assess Its legal rights against such third party.
The Company was subject to a class action proceeding in relation to one of its third party distributors purportedlyfaxing unsolicited advertisements to market Ulesfia® in violation of the Telephone Consumer Protection Act.On April 9, 2017, the court in this action dismissed the Company's motion to dismiss and on June 8, 2017 thecourt denied the Company's motion for reconsideration. On November 6, 2017, the court issued an order re-evaluating its previous fmding of personal jurisdiction, which order required the plaintiffs in this action to makea new submission rebutting the evidence submitted by defendants showing that there is no personal jurisdiction.On December 1, 2017, the court dismissed this claim against the Company for lack of personal jurisdiction.
During the second quarter of 2016, the Company agreed to settle a previously disclosed arbitration proceedingcommenced by a former financial advisor to the Company, whereby the financial advisor had claimed it wasowed approximately $12.3 million in connection with the Covis Acquisition and $26 million in connection withthe Concordia International Acquisition, plus accrued interest on such amounts. As part of the settlement, thefinancial advisor released all claims against the Company and the Company agreed to pay a settlement amountof $12.5 million, which has been recorded in litigation settlement along with $0.96 million associated legal costs.
On September 16, 2016, the Company announced the introduction of a bill into the U.K. House of Commonsto amend and extend existing provisions of the National Health Service Act 2006 to enable the Secretary of Stateto help manage the cost of health service medicines. On April 27 2017, the U.K. government accorded RoyalAssent to the Act. The Act introduces provisions in connection with controlling the cost of health servicemedicines and other medical supplies. The Act also introduces provisions in connection with the provision ofpricing and other information by manufacturers, distributors and suppliers of those medicines and medicalsupplies. The Company continues to monitor the implementation of the Act. While the effects of the Act areunknown at this time, the Act could impose certain risks and uncertainties on the Company's operations and cashflows.
20. Financial Risk Management
The Company's activities expose it to certain financial risks, including currency risk, interest rate risk, creditrisk and liquidity risk.
Currency Risk
The Company is exposed to currency risk related to the fluctuation Of foreign exchange rates. The Companyoperates primarily in USD, GBP and European Euro ("EUR"). Foreign exchange risk arises from futurecommercial transactions, recognized assets and liabilities and net investments in foreign operations.
A portion of the Company's business is with customers in continental Europe and other foreign markets withtransactions completed in foreign currencies. The Company's policy, where considered appropriate, is tominimize all currency exposures on any balance not expected to mature within 60 days of its arising.
The Company does not believe it is exposed to currency risk on its net assets denominated in Barbados dollarsas the currency is fixed to the U.S. dollar. The Company, however, is exposed to currency risk through its netassets denominated in Canadian dollars, the effect of which is insignificant.
The table below shows the extent to which the Company has net monetary assets (liabilities) in currencies otherthan the functional currency of the Company.
[F-54]
Conconna Intenfationalt CoirpoNotes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
As at
(Amounts in USD)
Dec 31, 2017 Dec 31, 2016
GBP 114,865 95,943
Euro 11,403 13,024
Indian Rupees 14,866 9,600
Swedish Krona 8,040 10,505
Australian Dollars 4,038 4,392
South African Rand 4,781 2,509
Papua New Guinea Kina 3,179 3,073
Canadian Dollars 447 (465)
Other 10,856 10,104
Total 172,475 148,685
The Company's derivative financial instruments consisted of the Currency Swaps entered into to reduce theCompany's exposure to exchange rate fluctuations between GBP and USD, which have been terminated effectiveOctober 23, 2017. Refer to Note 13 for further details.
Interest Rate Risk
Interest rate risk is the risk that the'fair value or future cash flows of a financial instrument will fluctuate becauseof changes in market interest rates. The long-term debt which bears interest at floating rates is subject to interestrate cash flow risk resulting from market fluctuations in interest rates. Contingent consideration payable andcertain long-term debt bear interest at a fixed rate of interest, and as such are subject to interest rate price riskresulting from changes in fair value from market fluctuations in interest rates. A 1% appreciation (depreciation)in the interest rate would result in the following:
2017 2016 2015
Impact of a 1% increase in interest rates for contingentpurchase consideration payable on net loss 134 (166) (1,665)
Impact of a 1% decrease in interest rates for contingentpurchase consideration payable on net loss (131) 177 1,760
Impact of a 1% increase in interest rates above LIBOR floorfor long-term debt on net loss (3,971) (18,009) (6,331)
Credit Risk
Credit risk is the risk of a financial loss to the Company if a customer or counterparty to a financial instrumentfails to meet its contractual obligation. Financial instruments that potentially expose the Company to significantconcentrations of credit risk consist of cash and cash equivalents, accounts receivables, other receivables andfavourable derivative financial instruments. The Company's investment policies are designed to mitigate thepossibility of deterioration of principal, enhance the Company's ability to meet its liquidity needs and providehigh returns within those parameters. Management monitors the collectability of accounts receivable andestimates an allowance for doubtful accounts. As at December 31, 2017, the allowance for doubtful accountswas $2,777 (2016 — $2,922).
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk primarilyconsist of accounts receivable.
[F-55]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
The Company evaluates the recoverability of its accounts receivable on an on-going basis. As of December 31,2017, the Company's three largest U.S. wholesale customers account for approximately 30% or $44 million ofnet trade receivables and 22% or $136 :million of total revenue. The Company does not consider there to beadditional concentration risk within the• Concordia International segment.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulties in meeting its financial liability obligationsas they become due. The Company has a planning and budgeting process in place to determine funds requiredto support the Company's normal operating requirements on an ongoing basis. Since inception, the Companyhas financed its cash requirements primarily through issuances of securities, short-term borrowings and issuancesof long-term debt. The Company manages liquidity risk through working capital, cash flows and the availabilityand sourcing of financing.
Refer to Note 2 for a further discussion on the Company's realignment of its capital structure and related liquidityconsiderations.
The following tables summarize the • Company's significant contractual undiscounted cash flows as atDecember 31, 2017 and December 31, 2016:
As at Dec 31, 2017
Financial Instruments<3
months3 to 6
months6 months.to 1 year
1 to 2years
2 to 5years Thereafter Total
Accounts payable and accruedliabilities 95,345 95,345
(a) Long-term debt cash flows include an estimate of the minimum required annual excess cash flow sweep(refer to Note 14 (a)). No payments of excess cash flow were required to be made in 2017 and none are expectedto be made in 2018. In addition, any payments that would be due as a result of the excess cash flow calculationwould be stayed by the CBCA preliminary interim order. Refer to Notes 2 and 14 for details on long-term debtclassification as at December 31, 2017 and the CBCA proceedings.
[F-56]
Concordia Internationai Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
(b) The contractual interest amount as at December 31, 2017 reflects the accrued interest payable on long-termdebt.(c) Derivative financial instruments reflect the interest income, interest expense and principal amounts payableto and receivable from the counterparty under the contracts.
21. Financial Instruments — Fair Value Estimation1
Accounting classifications and fair values
The fair value of a financial asset or liability is the amount at which the instrument could be exchanged in acurrent transaction between willink parties, other than in a forced or liquidation sale. For the financial assets andliabilities of the Company, the fah' values have been estimated as described below:
Cash and cash equivalents
Long-term debt
Receivables and payables
- approximates to the carrying amount;
- mainly approximates to the carrying amount in the case offloating interest rate debt;
- approximates to the carrying amount
The following table presents the fair value of financial assets and financial liabilities, including their levels inthe fair value hierarchy:
As at Dec 31, 2017
Level 1 Level 2 Level 3 Total
Financial liabilities measured at fairvalue through profit or loss
Purchase consideration 4,471 3,913 8,384
4,471 3,913 8,384
As at Dec 31, 2016
Level 1 Level 2 Level 3 Total
Financial assets measured at fairvalue through profit or loss
Derivative financial instrument 23,555 23,555
23,555 23,555
Financial liabilities measured at fairvalue through profit or loss
Purchase consideration 92,182 19,362 111,544
Derivative financial instrument 27,854 27,854
120,036 19,362 139,398
The current portion of purchase consideration as at December 31, 2017 is $1,835 (2016 - $104,039).
[F-57]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Pinnacle annual payments (b) Present value Level 2 19% 4,471
Total purchase consideration 8,384
Less: current portion (1,835)
Long-term portion 6,549
The valuation techniques used in measuring Level 2 andLevel 3 fair values associated with purchase considerationand derivative financial instruments, as well as the significant unobservable inputs used are outlined below.
(a) As part of the consideration for the acquisition of Pinnacle Biologics Inc. ("Pinnacle"), the Companyrecorded a contingent consideration liability for its obligation to make additional payments to the formerowners of Pinnacle. The liability represents the fair value of earn-out payments calculated as 15% ofworldwide sales of Photofrin® in excess of $25,000 over the 10 calendar years following the Company'sacquisition of Pinnacle. The expected payment is determined by considering the possible scenarios of salesthresholds and the amount to be paid under each scenario and the probability of each scenario. The estimatedfair value of the contingent consideration would decrease if the annual gross profit growth rates were lowerand would also decrease if the market representative interest rate was lower.
(b) As part of the consideration for the acquisition of Pinnacle, the Company is obligated to make ten annualpayments of $1,000, with the first payment made on December 31, 2014. The obligation is subordinatedand is not subject to interest. The obligation has been recorded at the present value of required payments.The estimated fair value would decrease if the market representative interest rate was higher. The Companyand the vendors of Pinnacle agreed to defer payment of the December 31, 2017 amount until March 31,2018 as a result of the CBCA proceedings described in Note 2.
[F-58]
Concordia Haternatftonall Corcp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Reconciliation of Level 3 fair values
The following table presents movement from the opening balance to the closing balances for Level 3 fairvalues:
Purchaseconsideration
Balance, January 1, 2015 25,108
Acquisition of the Concordia International segment 206,490
Assumed on acquisition of the Concordia International segment 68,984
Paid during the year (3,557)
Write-off during the year (2,452)
Recognized in consolidated statement of loss (1,631)
Balance, December 31, 2015 292,942
Balance, January 1, 2016 292,942
Transfer to Level 2 (92,182)
Paid during the year (147,207)
Additional purchase consideration during the year (Note 5) 8,691
Recognized in consolidated statement of loss (8,407)
Impact of foreign exchange (34,475)
Balance, December 31, 2016 19,362
Balance, January 1, 2017 19,362
Paid during the year (a) (15,730)
Recognized in consolidated statement of loss 269
Impact of foreign exchange 12
Balance, December 31, 2017 3,913
(a) The amount paid during the period does not include the final earn-out payment of $92,038 paid to theVendors of the Concordia International segment on February 1, 2017 as this fair value measurement wastransferred to Level 2 in the fourth quarter of 2016. The total purchase consideration payments made,including the amount paid to the Vendors of the Concordia International segment, amounted to $107,768during the year ended December 31, 2017.
Transfers between Level 3 and Level 2 occur when valuation techniques change from using unobservable inputsto observable inputs.
As part of the consideration for the October 21, 2015 acquisition of the Concordia International segment, theCompany was obligated to pay the Vendors of the Concordia International segment a maximum cash earn-outof £144 million based on the Concordia International segment's gross profit over the 12 month period fromOctober 1, 2015 to September 30; 2016. As at and prior to September 30, 2016, cash earn-out payments werevalued based on internal cash flow forecasts for future gross profit during this 12 month period. This resultedin a Level 3 fair value due to the use of unobservable inputs. However, upon the completion of the 12 monthperiod of October 1, 2015 to September 30, 2016, an agreement was reached with the Vendors of the ConcordiaInternational segment as to the filial cash earn-out amount owed by the Company and therefore the amount isno longer contingent. The revised valuation technique uses observable inputs. Accordingly, the fair valuemeasurement was reclassified to Level 2.
[F-59]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Other than described above, there were no changes in valuation techniques.
22. Capital Management
The Company's capital management objectives are to safeguard its ability to provide returns for shareholdersand benefits for other stakeholders, by ensuring it has sufficient cash resources to fund its activities, to pursue
its commercialization efforts and to maintain its ongoing operations. The Company includes long-term debt and
shareholders' equity (deficit) in the definition of capital.
The below table sets forth the Company's capital structure:
During the first quarter of 2017 the Company changed the composition of its reportable segments, as furtherdescribed in Note 1. The Company now has two reportable segments: Concordia North America and ConcordiaInternational, as well as a Corporate cost centre. The Company has reflected this change to its segment reportingretrospectively to the comparative period of 2016 presented below. A brief description of each is as follows:
Concordia North America
The Concordia North America segment has a diversified product portfolio that focuses primarily on the UnitedStates pharmaceutical market. These products include, but are not limited to, Donnatal® for the treatment ofirritable bowel syndrome; Zonegran® for the treatment of partial seizures in adults with epilepsy; Nilandron®for the treatment of metastatic prostate cancer; Lanoxin® for the treatment of mild to moderate heart failure andatrial fibrillation; Plaquenil® for the treatment of lupus and rheumatoid arthritis; and Photofrin® for the treatmentof certain types of cancer. Concordia North America's product portfolio consists of branded products andauthorized generic contracts. The segment's products are manufactured through an out-sourced productionnetwork and sold primarily through a third party distribution network in the United States.
Concordia International
The Concordia International segment consists of a diversified portfolio of branded and generic products that aresold to wholesalers, hospitals and pharmacies in over 90 countries. The Concordia International segmentspecializes in the acquisition, licensing and development of off-patent prescription medicines, which may beniche, hard to make products. The segment's over 200 products are manufactured and sold through an out-sourced manufacturing network and marketed internationally through a combination of direct sales and localdistribution relationships. The Concordia International segment operates primarily outside of the North Americanmarketplace.
Corporate
The Corporate cost centre represents certain centralized costs including costs associated with the Company'shead office and senior management located in Canada and costs associated with being a public reporting entity.
The following tables set forth operating income (loss), goodwill, total assets and total liabilities by reportableoperating segment for the years ended December 31, 2017, 2016 and 2015.
[F-60]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
ConcordiaNorth Concordia
America International CorporateYear ended Dec 31,
2017
Revenue 160,769 465,400 626,169
Cost of sales 33,046 157,586 190,632
Gross profit 127,723 307,814 435,537
Operating expenses
General and administrative 6,874 23,150 20,666 50,690
Amortization of intangible assets 98,354 128,024 47 226,425
Impairments 151,199 1,043,566 1,194,765
Depreciation expense 92 1,619 251 1,962
Fair value (gain) loss 547 263 596 1,406
Total operating expenses 276,246 1,258,809 65,430 1,600,485
Operating income (loss) fromcontinuing operations (148,523) (950,995) (65,430) (1,164,948)
[F-61]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
ConcordiaNorth
AmericaConcordia
International CorporateYear ended Dec 31,
2016
Revenue 258,645 557,514 816,159
Cost of sales 39,963 181,239 221,202
Gross profit 218,682 376,275 594,957
Operating expenses
General and administrative 10,279 26,356 19,820 56,455
Amortization of intangible assets 52,496 130,306 17 182,819
Impairments 877,076 255,167 1,132,243
Depreciation expense 66 1,671 202 1,939
Fair value (gain) loss (21,289) 866 11,494 (8,929)
Litigation settlements 14,246 14,246
Total operating expenses 978,715 479,702 78,847 1,537,264
Operating income (loss) fromcontinuing operations (760,033) (103,427) (78,847) (942,307)
[F-62]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
ConcordiaNorth
AmericaConcordia
International CorporateYear ended Dec 31,
2015
Revenue 278,503 115,721 394,224
Cost of sales 36,345 57,949 94,294
Gross profit 242,158 57,772 299,930
Operating expenses
General and administrative 10,408 5,812 13,477 29,697
Amortization of intangible assets 49,853 25,957 75,810
Depreciation expense 64 334 79 477
Fair value (gain) loss 7,390 (6,829) 561
Total operating expenses 102,783 47,202 69,494 219,479
Operating income (loss) fromcontinuing operations 139,375 10,570 (69,494) 80,451
Income (loss) from continuing operations before tax includes the total operating income (loss) from continuingoperations above plus other income and expense which do not form part of any reportable operating segment.
Total assets, continuing operations 827,758 2,585,654 318,162 3,731,574
Total liabilities, continuing operations 57,015 454,394 3,597,738 4,109,147
[F-63];
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
Geographic Information
The Company has major operations in Barbados, Canada, Ireland, Jersey, the United States and the United
Kingdom. The following table sets forth revenue by geographic location based on contracted entity
Authorized Generics and other 30,909 64,170 38,173
Total 160,769 258,645 278,503
Concordia International
2017 2016 2015
Branded 201,496 192,995 43,241
Generics 263,904 364,519 72,480
Total 465,400 557,514 115,721
[F-64]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollat•s, except per share amounts and where otherwise stated)
The following table sets forth assets and liabilities by geographic location (excluding inter-company balancesand inveshnents in subsidiaries):
As at Dec 31, 2017
Barbados CanadaUnitedStates
UnitedKingdom& Jersey
A11 otherIreland countries (1) Total
Current assets 86,342 108,021 10,323 213,441 105,320 44,161 567,608
Total liabilities,continuing operations 54,722 3,597,738 2,293 363,130 31,651 59,613 4,109,147
Notes: (1) All other countries is comprised primarily of Australia, India, Netherlands and Sweden.
24. Directors and key management compensation
Compensation, consisting of salaries, performance and retention bonuses, other benefits, severance and directorfees to key management personnel and directors for the year ended December 31, 2017 amounted to $10,721(2016 -$7,928; 2015 - $7,549). The compensation for the period includes severance payable to the former ChiefOperating Officer and the former Chief Financial Officer.
Share based compensation expense recorded for key management and directors, for the year ended December 31,2017 amounted to $4,804 (2016 - $11,465; 2015 - $8,842). The stock based compensation for the year includesthe accelerated vesting of stock options and RSUs held by a former officer of the Company.
[F-65]
Concordia International Corp.Notes to Consolidated. Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
25. Nature of expenses .
The nature of expenses included in cost of sales and operating expenses are as follows:
2017 2016 2015
Production, manufacturing and distribution costs 190,632 221,202 94,294
Salaries, bonus and benefits 46,462 46,302 27,766
Sales and marketing expenses 24,996 39,006 9,418
Research and development expenses 21,962 34,411 14,992
Share-based compensation 8,711 30,753 16,198
Amortization and depreciation 228,387 184,758 76,287
Impairments 1,194,765 1,132,243
Fair value (gain) loss 1,406 (8,929) 561
Professional fees including acquisition and restructuring 51,441 41,899 57,207
Travel expenses 2,953 8,272 4,551
Rent and facilities 2,764 2,709 1,014
Litigation settlements 14,246
Other expenses 16,638 11,594 11,485
Total 1,791,117 1,758,466 313,773
26. Discontinued operations
In December 2015, the Company decided to wind down operations of its former Specialty Healthcare DistributionDivision and its subsidiary Complete Medical Hoinecare, Inc. ("CMH") which distributed diabetes testingsupplies and other healthcare products. C1V1H was legally terminated on December 16, 2016, and consequentlythe wind up of CMH was completed in December 2016.
Net loss from the discontinued operation includes:
2017 2016 2015
Revenue 23 7,756
Expenses 522 10,667
Pre-tax loss from discontinued operations (499) (2,911)
Income tax expense (recovery) 1,102 (768)
Net loss from discontinued operations (1,601) (2,143)
[F-66]
Concordia International Corp.Notes to Consolidated Financial Statements(Stated in thousands of U.S. Dollars, except per share amounts and where otherwise stated)
27. Non-cash working capital
Changes in non-cash working capital is comprised of:
2017 2016 2015
Accounts receivable 29,547 12,392 (55,458)
Inventory 15,437 (9,893) (6,370)
Prepaid expenses and other current assets 981 10,801 (14,738)
Accounts payable and accrued liabilities (9,483) (1,380) (2,054)
Provisions 5,988 (5,637) 10,930
Other liabilities (30) (195) 155
Changes in non-cash working capital 42,440 6,088 (67,535)
[F-67]
H
This is Exhibit "H" referred to in the Affidavit of
DAVID PRICE, affirmed before me this V(' day
of May, 2018.
CONCOVIAINTERNATIONAL CORP CXR (TSX) 0.71 l Volume 0
CXRX (NASDAQ) 0.55 l Volume 0
CONCORDIA INTERNATIONAL CORP. ANNOUNCESTHIRD QUARTER 2017 RESULTS
• Reported third quarter revenue of $154.6 million
• Reported third quarter adjusted EBITDA1 of $78.6 million
• Generated cash flow from operations of $227.4 million in the first nine months of 2017
• Concluded the third quarter with a cash balance of $341.3 million
OAKVILLE, ON, Nov. 14, 2017 /CNVIff - Concordia International Corp. ("Concordia" or the
"Company") (NASDAQ: CXRX) (TSX; CXR), an international specialty pharmaceutical company
focused on becoming a leader in European specialty, off-patent medicines, today announced its
financial and operational results for the three and nine months ended September 30, 2017. All
financial references are in U.S. dollars (USD) unless otherwise noted.
"During the quarter, we launched our long-term growth strategy, DELIVER, and we generated
financial results that were in line with our forecasts," said Allan Oberman, Chief Executive Officer of
Concordia. "Both represent important,progress for Concordia as we continue to focus on the
realignment of our capital structure."
Consolidated Third Quarter 2017 Financial and Operational Results and Recent Events
• Reported revenue of $154.6 million, compared to $185.5 million for the same period in 2016 and $160.8 million
for the second quarter of 2017.
• Reported third quarter adjusted EBITDA1 of $78.6 million, compared to $104.4 million for the same period in
2016, and $81.8 million in the second quarter of 2017.
• Generated cash flows from operating activities of $227.4 million in the first nine months of 2017, compared to
$313.1 million for the same period in 2016.
• As of September 30, 2017, the Company's liquidity consisted of $341.3 million of cash and cash equivalents.
• Subsequent to quarter end, on October 20, 2017, Concordia announced its intention to realign its capital
structure by commencing a court proceeding under the Canada Business Corporations Act (the "CBCA"). The
CBCA is a Canadian corporate statute that contains provisions allowing Canadian corporations to restructure
certain debt obligations. The CBCA is not a bankruptcy or insolvency statute. Under the CBCA process,
Concordia's management continues to lead day-to-day operations and operate its business as usual, while
meeting its commitments to employees, suppliers and customers.
• The commencement of the CBCA proceedings resulted in an event of default under the Company's credit
agreement dated October 21, 2015, the indenture governing the Company's 9.00% senior secured notes, and
the Company's currency swaps, which defaults are subject to the stay of proceedings issued by the Ontario
Superior Court of Justice.
• As contemplated by the CBCA order, the following payments owed to unsecured lenders were not paid as
scheduled, and are instead expected to be addressed (or have been settled) as part of the proposed
recapitalization transaction under the CBCA proceeding: approximately $26 million of interest due on October
16, 2017 under Concordia's 7.00% unsecured senior notes; approximately $2.5 million of interest under
Concordia's unsecured, extended bridge facility due on October 23, 2017; and approximately $34 million of
principal and accrued interest due on October 20, 2017 under the Company's unsecured, two-year equity bridge
facility. Subsequent to quarter end, the Company agreed to settle the principal amount and accrued interest due
on the two-year equity bridge at a significant discount to par.
• On October 20, 2017, the counterparty to the Company's currency swaps, which Concordia entered into in
August and November of 2016, notified the Company that it would be terminating the currency swaps effective
October 23, 2017 due to the commencement of the CBCA proceedings. In addition, as part of the CBCA
process, the Company agreed to terminate the revolving commitments under its credit agreement.
Third Quarter 2017 Segment Results
North America segment revenue of $36.9 million for three months ended September 30, 2017
decreased by $11.1 million or 23%, compared to the corresponding period in 2016. The decrease
was primarily due to a $6.3 million decrease from Lanoxin® authorized generic, a $1.5 million
decrease from Nilandron®, and a $3.0 million decrease from Donnatal®, as a result of additional
competitive pressures that have resulted in a loss of market share.
In the third quarter of 2017, Donnatal® continued to face pressure from a non-FDA approved product
being distributed by a competitor, and an additional competitive product that was launched in the
second quarter of 2017. These decreases were partially offset by a $7.3 million increase in revenue
from Plaquenil® authorized generic when compared to the comparative period in 2016, which lower
revenue in the comparative period of 2016 was due to the launch of an additional generic competitor
late in the second quarter of 2016.
Third quarter 2017 revenue for the North America segment was 19% lower than second quarter 2017
revenue of $45.5 million, due to declines in revenue from branded and authorized generic products.
International segment revenue of $117.7 million for the three months ended September 30, 2017,
decreased by $19.8 million or 14 per cent, compared to the corresponding period in 2016. The
primary drivers of the decrease were a $5.9 million decrease from Fusidic Acid; a $4.5 million
decrease from Liothyronine Sodium; a $3.6 million decrease from Prednisolone; and a $3.3 million
decrease from Levothyroxine Sodium.
These lower product revenues are primarily due to ongoing competitive market pressures, and were
partially offset by a $3.5 million increase from Nitrofurantoin, and a $2.9 million increase from
Acetylsalicylic Acid.
Third quarter 2017 revenue for the Concordia International segment increased by $2.4 million
compared to second quarter 2017 revenue of $115.3 million primarily due to the impact of $2.3 million
higher revenue from Nitrofurantoin and $1.9 million higher revenue from Flurbiprofen, partially offset
by $2.2 million lower revenue from Fusidic Acid as a result of competitive market pressures.
Pipeline Update
During the third quarter of 2017, the Company launched two new products into markets that have a
current IMS-estimated value of $21 million.
Concordia also has 13 products that have already been approved or are awaiting approval. These
products, if launched, are expected to compete in markets that have a current IMS-estimated value in
excess of $94 million.
In addition, the Company currently has 27 products (compared to 26 products in the second quarter
of 2017) under development that are anticipated to launch in the next three to five years. These
products, if launched, are expected to compete in markets that have a current 1MS-estimated value in
excess of $1.5 billion.
Concordia believes that these products include several first-to-market or early-to-market opportunities
for difficult-to-make products.
In addition, the Company has 16 products identified for potential development that, if launched, are
expected to compete in markets that have a current IMS-estimated value in excess of $600 million.
In total, Concordia's pipeline is comprised of more than 50 products that, if launched, could compete
in markets that have a current IMS-estimated value in excess of $2 billion.
To the extent any forward-looking statements or forward-looking information in this press release or
made during the earnings conference call constitutes future-oriented financial information or financial
outlooks within the meaning of securities laws, such information is being provided to demonstrate the
potential financial performance of Concordia and its business and readers are cautioned that thisinformation may not be appropriate for any other purpose and that they should not place undue
reliance on such future-oriented finanbial information and financial outlooks. Future-oriented financial
information and financial outlooks, as with forward-looking statements and forward-looking
information generally, are, without limitation, based on the assumptions and subject to the risks set
out below under "Notice regarding forWard-looking statements".
Notice regarding forward-looking statements:
This press release includes, and statements made during the earnings conference call may include,
forward-looking statements within the meaning of the United States Private Securities Litigation
Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws,
regarding Concordia and its business; which may include, but are not limited to, statements with
respect to Concordia's long-term growth strategy (including the components of the DELIVER
strategy), Concordia's focus on realigning its capital structure, the Company's ability to operate in the
ordinary course, discussions with Concordia's lenders and their advisors with respect the proposed
recapitalization transaction, a proposed recapitalization transaction, the completion of a proposed
recapitalization transaction including obtaining any necessary approvals and the expected timing
thereof, reducing the Company's existing debt and interest expense (including the amounts thereof),
positioning the Company for long-term growth, the Company's available liquidity to operate its
business and meet its financial commitments (including commitments to employees, customers,
suppliers and business partners), the benefits of the CBCA process, proceedings under the CBCA
including with respect to CBCA proceedings compared to proceedings under bankruptcy and
insolvency statutes, the ability of the CBCA process to protect the Company's business, preserve
Concordia's cash and/or give Concordia additional time to negotiate with its lenders, optimism about
the ability to reach a consensual transaction with the Company's lenders that would enable Concordia
to move forward with all of the pillars of the Company's DELIVER strategy in order to maximize the
potential of Concordia, Concordia's intention to make scheduled interest and amortization payments,
Concordia's management continuing to lead day-to-day operations, achieving the best possible
recapitalization transaction, reaching a consensual transaction with holders of the Company's debt,
maximizing Concordia's potential, implementing a Plan of Arrangement, addressing certain payments
as part of a proposed recapitalization transaction, protection for the Company and its subsidiaries
against defaults and any related steps or actions under CBCA proceedings, the focus on becoming a
leader in European specialty, off-patent medicines, Concordia's 2017 objectives and priorities, the
implementation of Concordia's long term growth strategy (and the timing thereof), the stabilization of
Concordia's business, the execution, timing and impact of Concordia's business stabilization
objectives, Concordia's liquidity, the improvement of working capital and liquidity based on near term
initiatives and efficiencies launched by the Company, Concordia's financial performance (including the
performance of its operating segments), the ability of Concordia to execute and deliver on business
plans and growth strategies, the ability to drive long-term shareholder value, the implementation of
actions to manage competitive challenges, the Company taking actions to rebuild value for
stakeholders (and the ability of Concordia to rebuild value for its stakeholders), optimism about
Concordia's future, the growth of Concordia and the rate of revenue growth, the sources of revenue
growth, the stability of Concordia's business (including, without limitation, with respect to its business
in certain jurisdictions), the diversification of the. Company's geographic and therapeutic platform,
product lines and/or sales channels, Concordia's ability to expand globally, Concordia's pipeline of
products, the intention to launch products, the number of potential product launches, the development
and/or approval of new products, the timing of product launches, success of product launches, the
size and/or estimated value of the markets in which Concordia has launched or intends to launch
products, Concordia's ability to launch first-to-market, early-to-market or difficult-to-make products,
potential product launches including first-to-market or early-to-market opportunities for difficult-to-
make products, Concordia's network of partners, Concordia's revenue by geography, expected debt
levels and leverage, free cash flows, Concordia's debt structure, expected sources of funds (including
expected levels of cash on hand), future growth of the Company (including, without limitation, the
Company's expansion globally), the ability to pay certain obligations of Concordia, the ability to use
the Company's expected cash flow and cash on hand to pay certain future obligations, the
Company's cash on hand and cash flows being sufficient to meet the Company's liquidity needs,
concentration of Concordia's business, cash on hand after satisfying obligations during 2017, the
performance of Concordia's products 'and segments, the revenue-generating capabilities and/or
potential of Concordia's assets, Concordia's financial strength, the continued and/or expected
profitability of Concordia's products and/or services, the sales and/or demand for Concordia's
products, the deployment of cash towards value creating initiatives (including to fund future
acquisitions and the launch of pipeline products, and settle other obligations as they become due),
the expansion into new indications and new markets for Concordia's existing and/or future products,
Concordia's ability to evaluate growth opportunities on a global scale (and the availability of such
opportunities), the ability to expand existing sales of Concordia's products in certain markets, market
opportunities for Concordia's products, Concordia's ability to provide patients with safe and
efficacious medicines, the safety and efficacy of Concordia's products, the ability to obtain necessary
approvals, enrollment of patients into clinical trials, the outcomes and success of clinical trials,
Concordia's ability to reduce operating costs across the business and other factors. Often, but not
always, forward-looking statements and forward-looking information can be identified by the use of
words such as "plans", "is expected", ̀"expects", "scheduled", "intends", "contemplates", "anticipates",
"believes", "proposes" or variations (including negative and grammatical variations) of such words
and phrases, or state that certain actions, events or results "may", "could", "would", "might" or "will"
be taken, occur or be achieved. Such statements are based on the current expectations of
Concordia's management, and are based on assumptions and subject to risks and uncertainties.
Although Concordia's management believes that the assumptions underlying these statements are
reasonable, they may prove to be incorrect. The forward-looking events and circumstances discussed
in this press release may not occur b4 certain specified dates or at all and could differ materially as a
result of known and unknown risk factors and uncertainties affecting Concordia, including risks
associated with a proposed recapitalization transaction including the inability to complete a proposed
recapitalization transaction or complete a proposed recapitalization transaction in a timely or efficient
manner, the inability to reduce the Cdrnpany's debt and/or interest payments, the inability to position
the Company for long-term growth, the inability to execute the DELIVER strategy, the Company's
available liquidity being insufficient to 'operate its. business and meet its financial commitments
(including commitments to employeeS, customers, suppliers and, business partners), proceedings
under the CBCA, Concordia's management no longer leading day-to-day operations, the inability to
achieve the best possible recapitalization transaction, the inability to reach a consensual transaction
with holders of the Company's debt, the inability to maximize Concordia's potential, Concordia's
failure to make scheduled interest and amortization payments (which could result in a loss of the
protections afforded by the CBCA process (including the stay of proceedings thereunder), the inability
to negotiate with Concordia's lenders, the CBCA process not providing the protection sought by
Concordia, third parties not complying with the CBCA order and taking steps against Concordia and
its subsidiaries, the inability of the CBCA process to preserve Concordia's cash, the inability to
implement a Plan of Arrangement, the risks associated with issuing and allocating new equity
including the possible dilution of the Company's outstanding common shares, the value of existing
equity following the completion of a recapitalization being limited or having no value, the inability to
address certain payments as part of a proposed recapitalization, the inability of CBCA proceedings to
protect the Company and its subsidiaries against defaults and any related steps or actions, Concordia
defaulting on its obligations (including under its debt agreements) which could result in Concordia
having to file for bankruptcy or insolvency, Concordia being put into an insolvency or bankruptcy
proceeding as a result of not making the payments described herein, the Company's inability to
become a leader in European specialty, off-patent medicines, Concordia's inability to stabilize its
business, Concordia's inability to implement its long term strategic plan or being delayed in
implementing such plan, the inability of Concordia to accelerate growth by maximizing its existing
assets and future market opportunities, the inability of Concordia to expand its product portfolio
(including, without limitation, the inability of Concordia to launch products due to regulatory
impediments or competitive market changes), the inability of Concordia to optimize its operating
platform, changes in laws, including tax laws, that could result in Concordia's operating platform being
adversely affected, Concordia's inability to strengthen its financial foundation, cash on hand and cash
flows from operations being insufficient to meet Concordia's liquidity needs, the inability to implement
Concordia's objectives and priorities for 2017, which could result, in financial strain on the Company
and continued pressure on the Company's business, Concordia's securities, risks associated with
developing new product indications, increased indebtedness and leverage, the inability to generate
cash flows, revenues and/or stable margins, the inability to grow organically, the inability to repay
levels of cash on hand), future growth of the CompanY(including, without limitation, the Company's
expansion globally), the ability to paytertain obligations of Concordia, the ability to use the
Company's expected cash flow and cash on hand to pay certain future obligations, the Company's
cash on hand and cash flows being sufficient to meet the Company's liquidity needs, concentration of
Concordia's business, cash on hand 6fter satisfying obligations during 2018, the performance of
Concordia's products and segments, the revenue-generating capabilities and/or potential of
Concordia's assets, Concordia's financial strength, the continued and/or expected profitability of
Concordia's products and/or services, the sales and/or demand for Concordia's products, the
deployment of cash towards value creating initiatives (including to fund future acquisitions and the
launch of pipeline products, and settle other obligations as they become due), the expansion into new
indications and new markets for Concordia's existing and/or futu're products, Concordia's ability to
evaluate growth opportunities on a global scale (and the availability of such opportunities), the ability
to expand existing sales of Concordia's products in certain markets, market opportunities for
Concordia's products, Concordia's ability to provide patients with safe and efficacious medicines, the
safety and efficacy of Concordia's products, the ability to obtain necessary approvals, enrollment of
patients into clinical trials, the outcomes and success of clinical trials, Concordia's intention to reduce
operating costs across the business end other factors. Often, but not always, forward-looking
statements and forward-looking information can be identified by the use of words such as "plans", "is
expected", "expects", "scheduled", "intends", "contemplates", "anticipates", "believes", "proposes" or
variations (including negative and grammatical variations) of such words and phrases, or state that
certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be
achieved. Such statements are based on the current expectations of Concordia's management, and
are based on assumptions and subject to risks and uncertainties. Although Concordia's management
believes that the assumptions underlying these statements are reasonable, they may prove to be
incorrect. The forward-looking eventsland circumstances discussed in this press release may not
occur by certain specified dates or at all and could differ materially as a result of known and unknown
risk factors and uncertainties affecting Concordia, including risks associated with a proposed
recapitalization transaction including the inability to complete a proposed recapitalization transaction
or complete a proposed recapitalization transaction in a timely or efficient manner, the inability to
reduce the Company's debt and/or interest payments, the inability to position the Company for long-
term growth, the inability to execute the DELIVER strategy,, risks associated with Concordia's
organizational structure, including the ability to retain qualified staff and executives, the inability of
Concordia's current organizational structure to support Concordia's business, the inability of the
Company's global teams to leverage the Company's diverse portfolio of medicines, global sales
platform, and product pipeline in order to support the Company's long-term growth, the Company's
available liquidity being insufficient to operate its business and meet its financial commitments
(including commitments to employees, customers, suppliers and, business partners), risks associated
with proceedings under the CBCA, Concordia's management no longer leading day-to-day
operations, the inability to achieve the best possible recapitalization transaction, the inability to reach
a consensual transaction with holders of the Company's debt, the inability to maximize Concordia's
potential, Concordia's failure to make scheduled interest and amortization payments (which could
result in a loss of the protections afforded by the CBCA process (including the stay of proceedings
thereunder), the inability to negotiate with Concordia's lenders, the CBCA process not providing the
protection sought by Concordia, third parties not complying with the CBCA order and taking steps
against Concordia and its subsidiaries, the inability of the CBCA process to preserve Concordia's
cash, the inability to implement a Plan of Arrangement, the risks,associated with issuing and
allocating new equity including the possible dilution of the Company's outstanding common shares,
the value of existing equity following the completion of a recapitalization being limited or having no
value, the inability to address certain payments as part of a proposed recapitalization, the inability of
CBCA proceedings to protect the Company and its subsidiaries against defaults and any related
steps or actions, Concordia defaulting on its obligations (including under its debt agreements) which
could result in Concordia having to file for bankruptcy or insolvency, Concordia being put into an
insolvency or bankruptcy proceeding as a result of not making in connection with the commencement
of the CBCA proceedings, the Company's inability to become a leader in European specialty, off-
patent medicines, Concordia's inability to stabilize its business, Concordia's inability to implement its
long term strategic plan or being delayed in implementing such plan, the inability of Concordia to
accelerate growth by maximizing its existing assets and future market opportunities, the inability of
Concordia to expand its product portfolio (including, without limitation, the inability of Concordia to
launch products due to regulatory impediments or competitive market changes), the inability of
Concordia to add additional products to its pipeline of products, the inability of Concordia to optimize
its operating platform„ changes in laws, including tax laws, that could result in Concordia's operating
platform being adversely affected, Concordia's inability to strengthen its financial foundation, cash on
hand and cash flows from operations being insufficient to meet Concordia's liquidity needs, the
inability to implement Concordia's objectives and priorities, which could result in financial strain on the
Company and continued pressure on the Company's business, Concordia's securities, risks
associated with developing new product indications, increased indebtedness and leverage, the
inability to generate cash flows, revenues and/or stable margins, the inability to grow organically, the
inability to repay debt and/or satisfy future obligations, risks associated with Concordia's outstanding
debt, risks associated with the geographic markets in which Concordia operates and/or distributes its
products, risks associated with fluctuations in exchange rates (including, without limitation,
fluctuations in currencies), risks associated with the use of Concordia's products to treat certain
diseases, the pharmaceutical industry and the regulation thereof, the failure to comply with applicable
laws, risks relating to distribution arrangements, possible failure'to realize the anticipated benefits of
acquisitions and/or product launches (including the product launches described herein), risks
associated with the integration of assets and businesses into Concordia's business, product launches(including, without limitation, unsuccessful product launches), the inability to develop and/or obtain
approvals for new products, the inability to launch products or the delay in launching products,
regulatory delays in product approvals, the inability to launch first-to-market, early-to-market or
difficult-to-make products, the inability to capture a share of any market in which Concordia has
launched or intends to launch its products, the .fct that historical and projected financial information
may not be representative of Concordia's future results, the failure to obtain regulatory approvals
(including, without limitation, with respect to Photofrin® as a new treatment for certain forms of cancer
or with respect to the product launches described herein), the FDA permitting unapproved products to
remain on the market and compete with Concordia's products (including, without limitation,
Donnatal®), economic factors, market conditions, acquisition opportunities, risks associated with the
acquisition and/or launch of pharmaceutical products (including, without limitation, the product
launches described herein), risks regarding clinical trials and/or patient enrollment into clinical trials,
the equity and debt markets generally, risks associated with growth and competition (including,
without limitation, with respect to Conbordia's niche, hard-to-make products and Concordia's key
products in its International and North America segments (including the competitive pressures on
some of the products described herein)), general economic and stock market conditions, risks
associated with the United Kingdom exit from the European Union (including, without limitation, risks
associated with regulatory changes id the pharmaceutical industry, changes in cross-border tariff and
cost structures and the loss of access to the European Union global trade markets), risks associated
with regulatory investigations (including the current investigations being undertaken by competition
authorities with respect to the Compahy's operations), risks related to the introduction of new
legislation, or amendments to existing legislation, in the jurisdictions in which Concordia carries on
business (including, without limitation, the U.K. Health Service Medical Supplies (Costs) Act), risks
related to patent infringement actions, the loss of intellectual property rights, risks associated with
class action litigation, risks associated with Concordia's inability to defend itself in certain legal actions
or being found to have violated certain laws (including, without limitation, the regulatory investigations
and class actions which Concordia is currently subject to), which, may require Concordia to make
certain payments in respect of such legal matters or which may result in certain fines being levied
against Concordia, Concordia's inability to reduce operating costs across the business and risks and
uncertainties detailed from time to time in Concordia's filings with the Securities and Exchange
Commission and the Canadian Securities Administrators and many other factors beyond the control
of Concordia. Although Concordia has attempted to identify important factors that could cause actual
actions, events or results to differ materially from those described in forward-looking statements and
forward-looking information, there may be other factors that cause actions, events or results to differ
from those anticipated, estimated or intended. No forward-looking statement or forward-looking
information can be guaranteed. Except as required by applicable securities laws, forward-looking
statements and forward-looking information speak only as of the date on which they are made and
Concordia undertakes no obligation to publicly update or revise any forward-looking statement or
forward-looking information, whether as a result of new information, future events, or otherwise.
1 Management uses non-IFRS measures such as EBITDA, Adjusted EBITDA, adjusted net income,
adjusted gross profit, and Adjusted EPS to provide a supplemental measure of operating
performance. Please refer to the "Non-IFRS Measures" section of this press release for further
information.
SOURCE Concordia International Corp.
J
This is Exhibit "J" referred to in the Affidavit of
DAVID PRICE, affirmed before me this -2--19 day
of May, 2018.
A
Commis.. IrrTaking Affidavits, etc
Innovation, Science andEconomic Development Canada
Corporations CanadaEdifice C.D. HoweTour ouest, etage235, rue QueenOttawa (Ontario) KI A OHS
BY EMAIL
RE: CONCORDIA INTERNATIONAL CORP. AND CONCORDIAHEALTHCARE (CANADA) LIMITEDProposed Arrangement Pursuant to s. 192 of the Canada BusinessCorporations Act ("CBCA").
We acknowledge receipt of the email sent on April 25, 2018 enclosing, amongothers, the following documents:
1. Interim Order, in draft form;2. Affidavit of David Price, in draft form;3. Plan of Arrangement, in draft form; and4. Notice of Meetings of Holders of Certain Secured Debt and Certain
Unsecured Debt of Concordia International Corp. and Notice of Annualand Special Meeting of Shareholders of Concordia International Corp. andManagement Information Circular, in draft form.
Based on the foregoing information filed in support of the interim hearing, please
be informed that the staff of the Director has determined that the Director does notneed to appear or be heard on the application.
We note that the requested interim relief imposes a stay of proceedings on certainparties whose interests are not being arranged and who will have no vote. Withouttaking a position, we note the unusualness of seeking such a stay of proceedings
in an arrangement application. We believe the relevant provisions of the Canada
Business Corporations Act are intended to affect only the rights of securityholders.
Also, please note that we are not commenting or taking a position on elements ofthe Arrangement that may be performed pursuant to the Business CorporationsAct (Ontario).
Please provide a copy of the interim order and any documentation filed with thecourt on the application for final order to the Director for review prior to thehearing for final order.
Sincerely,
Genevieve GobeilArrangements and Exemptions OfficerCompliance and Policy DirectorateCorporations CanadaTel: 343-291-3990Fax: [email protected]
CanadA
IN THE MATTER OF AN APPLICATION UNDER SECTION 192 OF THL CANADABUSINESS CORPORATIONS ACT, R.S.C. 1985, C. C-44, AS AMENDED, AND RULES14.05(2) AND 14.05(3) OF TH F, RULES OF CIVIL PROCEDURE
AND IN THE MATTER OF A PROPOSED ARRANGEMENT OF CONCORDIAINTERNATIONAL CORP. AND CONCORDIA HEALTHCARE (CANADA) LIMITED
Applicants
Court File No. CV-17-584836-00CL
GOODMANS\6753184
ONTARIOSUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
Proceeding commenced at Toronto
AFFIDAVIT OF DAVID PRICE(sworn May 1, 2018)
GOODMANS LLPBarristers & Solicitors333 Bay Street, Suite 3400Toronto, Canada M5H 2S7
IN THE MATTER OF AN APPLICATION UNDER SECTION 192 OF THE CANADABUSINESS CORPORATIONS ACT, R.S.C. 1985, C. C-44, AS AMENDED, AND RULES14.05(2) AND 14.05(3) OF THE RULES OF CIVIL PROCEDURE
AND IN THE MATTER OF A PROPOSED ARRANGEMENT OF CONCORDIAINTERNATIONAL CORP. AND CONCORDIA HEALTHCARE (CANADA) LIMITEDAND INVOLVING CONCORDIA LABORATORIES INC., S.A.R.L., CONCORDIAPHARMACEUTICALS INC., S.A.R.L., CONCORDIA INVESTMENTS (JERSEY)LIMITED, CONCORDIA FINANCING (JERSEY) LIMITED, AMDIPHARMHOLDINGS S.A.R.L., AMDIPHARM AG, AMDIPHARM B.V., AMDIPHARMLIMITED, AMDIPHARM MERCURY HOLDCO UK LIMITED, AMDIPHARMMERCURY UK LTD., CONCORDIA HOLDINGS (JERSEY) LIMITED,AMDIPHARM MERCURY INTERNATIONAL LIMITED, CONCORDIAINVESTMENT HOLDINGS (UK) LIMITED, MERCURY PHARMA GROUPLIMITED, CONCORDIA INTERNATIONAL RX (UK) LIMITED, ABCUR AB,MERCURY PHARMACEUTICALS LIMITED, FOCUS PHARMA HOLDINGSLIMITED, FOCUS PHARMACEUTICALS• LIMITED, MERCURY PHARMA(GENERICS) LIMITED, MERCURY PHARMACEUTICALS (IRELAND) LIMITED,AND MERCURY PHARMA INTERNATIONAL LIMITED
PRELIMINARY INTERIM ORDER
THIS MOTION made by Concordia International Corp. ("CIC") and Concordia
Healthcare (Canada) Limited (together with CIC, the "Applicants"), for a preliminary interim
order in connection with an arrangement (the "Arrangement") pursuant to section 192 of the
Canada Business Corporations. Act, R.S..C. 1985, c. C-44, as amended, (the "CBCA"),
2
including a stay of proceedings, was heard this day at 330 University Avenue, Toronto,
Ontario.
ON READING the Notice of Motion, the Notice of Application issued on October 20,
2017, and the affidavit of David Price sworn October 19, 2017, together with the exhibits
attached thereto, and on hearing the submissions of counsel for the Applicants. ,
Definitions
1. THIS COURT ORDERS that for the purposes of this Order capitalized terms used
herein but not defined have the meanings set forth in Schedule A.
Stay of Proceedings
2. THIS COURT ORDERS that, subject to paragraph 3 of this Order, from 12:01 a.m.
(Toronto time) on the date of this Order and until further order Of the Court, no right, remedy or
proceeding, including, without limitation, any right to terminate, demand, accelerate, set off,
amend, declare in default or take any other action under or in connection with any loan, note,
corrunitment, contract or other agreement, at law or under contract, may be exercised,
commenced or proceeded with by: (i) any of the Secured Debtholders; (ii) any of the
Unsecured Debtholders; (iii) any administrative agent, collateral agent, indenture trustee or
similar person in respect of the Secured Debt and/or Unsecured Debt; or (iv) any person that is
party to or a beneficiary of any other loan, note, conunitment, contract or other agreement with
one or more of the Concordia Entities, against or in respect of any of the Concordia Entities, or
any of the present or future property, assets, rights or undertakings of any of the Concordia
Entities, of any nature in any location, whether held directly or indirectly by any of the
Concordia Entities, by reason or as a result of:
any of the Applicants having made an application to this Court pursuant to
Section 192 of the CBCA;
b) any of the Applicants or Subsidiary Guarantors being a party to or involved in
these proceedings or the Arrangement;
c) any of the Applicants or Subsidiary Guarantors taking any step contemplated by
or related to these proceedings or the Arrangement;
d) the non-payment of principal, interest and any other amounts due and payable in
respect of any of the Unsecured Debt, or the expiry of any applicable grace
periods in respect of any of the Unsecured Debt; or
e) any default or cross-default under any of the Secured Debt (except in respect of
any non-payment of scheduled payments of interest (at non-default rates) or
amortization, as applicable, under the Secured Debt, for certainty, without
giving effect to any acceleration under the Secured Debt) or the Unsecured
Debt,
in each case except with the prior consent of the Applicants or leave of this Court.
3. THIS COURT ORDERS that, notwithstanding any other provision of this Order, no
person shall be prohibited f!•om taking any actions on the same basis as is permitter] under
section 34(8) of the CCAA.
4
Notice of Proceedings
4. THIS COURT ORDERS that, subject to further order of this Court, the only persons
entitled to notice of and to appear and be heard at subsequent motions within these proceedings
shall be:
a) the Applicants and the other Concordia Entities and their counsel;
b) counsel to each of the Secured Debtholder Committee and the Unsecured
Debtholder Committee;
c) the Agent and the Trustee and their respective legal counsel;
d) the CBCA Director; and
e) any interested person who has served and filed a Notice of Appearance in
accordance with this Order and the Rules of Civil Procedures.
5. THIS COURT ORDERS that any Notice of Appearance served in these proceedings
shall be served on the solicitors for the Applicants as soon as reasonably practicable at the
following address:
Goodmans LLP333 Bay Street, Suite 3400Toronto, ON M5H 2S7
11. THIS COURT SEEKS AND REQUESTS the aid and recognition of any court or any
judicial, regulatory or administrative body in any province of Canada and any judicial,
regulatory or administrative tribunal or other court constituted pursuant to the Parliament of
Canada or the legislature of any province and any court or any judicial, regulatory or
administrative body of the United States or other country to act in aid of and to assist this Court
in carrying out the terms of this Order and any other orders entered in connection with these
proceedings.
12. THIS COURT ORDERS that, notwithstanding anything to the contrary herein, neither
the terms of this Order nor the Applicants being a party to Or the Subsidiary Guarantors being
involved in these proceedings shall prejudice or preclude the Applicants and any of the
Subsidiary Guarantors from commencing cases under the CCAA, chapter 11 of the United
States Bankruptcy Code, 11. U.S.C. §§ 101 et seq., or their equivalents in other jurisdictions.
IENTF:RED AT INSCRIT A TORONTO
ON / BOOK NO:LE / DANS LE REGISTRE NO:
OCT 2 0 2017
01:11 / PAR:
1
Schedule A
Additional Defined Terms
a) "Agent" means Goldman Sachs Bank USA, in its capacity as Administrative
Agent and/or Collateral Agent under any of the Secured Debt .or Unsecured
Debt, as applicable, and any permitted successors and assigns;
b) "CCAA" means the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-
36, as amended;
c) "Concordia Entities" means, collectively, CIC and all of its direct and indirect
subsidiaries;
d) "Secured Debt" Means, collectively, the debt outstanding under: (i) the Credit
and Guaranty Agreement dated October 21, 2015 by and among, ,inter
Concordia International Corp. (f/k/a Concordia Healthcare Corp.), the
guarantors party thereto, Goldman Sachs Bank USA, as Administrative Agent
and Collateral Agent, and the lenders party thereto; (ii) the Indenture for 9.000%
First Lien Senior Secured Notes Due 2022 dated October 13, 2016 by and
among Concordia International Corp., the guarantors party thereto, and U.S.
Bank National Association, as Trustee and as Collateral Agent; (iii) the
International Swaps and Derivatives Association 2002 Master Agreement dated
as of August 15, ,2016, between Goldman Sachs International and Concordia
Investments (Jersey) Limited (the "ISDA"); (iv) the Swap Confirmation entered
into as of August 17, 2016 and November 8, 2016 between Goldman Sachs
2
International and Concordia Investments (Jersey) Limited in accordance with
the ISDA; and (v) all related documentation, including, without limitation, all
guarantee and security documentation, related to the foregoing;
e) "Secured Debtholder Committee means the ad hoc committee of debtholders
comprised of certain holders of Secured Debt represented by the Secured
Debtholder Committee Representatives;
"Secured Debtholder Committee Representatives" means Osier, Hoskin &
Harcourt LLP and White & Case LLP;
g) "Secured Debtholders" means, collectively, the holders of the Secured Debt;
h) "Subsidiary Guarantors" means, collectively, all of the Concordia Entities that
are guarantors in respect of the Secured Debt and/or Unsecured Debt;
i) "Trustee means U.S. Bank National Association, in its capacity as Trustee .
under any of the Secured Debt or Unsecured Debt, as applicable, and any
permitted successors and assigns;
i) "Unsecured Debt" means, collectively, the debt outstanding under: (i) the
Indenture for 7.000% Senior Unsecured Notes Due 2023 dated April 21, 2015
by and among Concordia International Corp. (f/k/a Concordia Healthcare
Corp.), the guarantors party thereto, and U.S. Bank National Association, as
Trustee; (ii) the Indenture for 9.500% Senior Unsecured Notes Due 2022 dated
October 21, 2015 by and among Concordia International Corp. (f/k/a Concordia
Healthcare Corp.), the guarantors party thereto, and U.S. Bank National
3
Association, as Trustee; (iii) the Two Year Equity Bridge Credit and Guaranty
Agreement dated October 21, 2015 by and among, inter alia, Concordia
International Corp. (f/k/a Concordia Healthcare Corp.), the guarantors party
thereto, Goldman Sachs Bank USA, as Administrative Agent, and the lenders
from time to time party thereto; (iv) the Extended Equity Bridge Credit and
Guaranty Agreement dated October 21, 2015 by and among, inter alia,
Concordia International Corp. (f/k/a Concordia Healthcare Corp.), the
guarantors party thereto, Goldman Sachs Bank USA, as Administrative Agent,
and the lenders party thereto; and (v) all related documentation, including,
without limitation all guarantee documentation, related to the foregoing;
k) "Unsecured Debtholder Committee" means the ad hoc committee of
debtholders comprised of certain holders of Unsecured Debt represented by the
Unsecured Debtholder Committee Representatives;
1) "Unsecured Debtholder Committee Representatives" means Bennett Jones
LLP, Paul, Weiss,Rifkind, Wharton & Garrison LLP, and Ashurst LLP; and
m) "Unsecured Debtholders" means, collectively, the holders of the Unsecured
Debt.
IN THE MATTER OF AN APPLICATION UNDER SECTION 192 OF 111E CANADABUSINESS CORPORATIONS ACT, R.S.C. 1985, C. C-44, AS AMENDED, AND RULES14.05(2) AND 14.05(3) OF TM RULES OF CIVIL PROCEDURE
AND IN THE MATTER OF A PROPOSED ARRANGEMENT. OF CONCORDIAINTERNATIONAL CORP. AND CONCORDIA HEALTHCARE (CANADA) LIMITED
Court File No:
CV-17 - arcock.
ONTARIOSUPERIOR COURT OF JUSTICE-
COMMERCIAL LIST
Proceeding commenced at Toronto
PRELIMINARY INTERIM ORDER
Go ODIVIANS LLPBarristers & Solicitors333 Bay Street, Suite 3400Toronto, Canada M5H 2S7
RE: IN THE MATTER OF AN APPLICATION UNDER SECTION 192 OF THE CANADABUSINESS CORPORATIONS ACT, R.S.C. 1985, c. C-44, AS AMENDED, ANDRULES 14.05(2) AND 14.05(3) OF THE RULES OF CIVIL PROCEDURE
AND IN THE MATTER OF A PROPOSED ARRANGEMENT OF CONCORDIAINTERNATIONAL CORP. AND CONCORDIA HEALTHCARE (CANADA)
CONCORDIA INTERNATIONAL CORP. AND CONCORDIA HEALTHCARE
(CANADA) LIMITED
Applicants
BEFORE: REGIONAL SENIOR JUSTICE G.B. MORAWETZ
COUNSEL: Robert J Chadwick, Brendan O'Neill and Caroline Descours for the Applicants
Marc Wasserman and. Michael De Lellis, for Ad Hoc Group of Secured Holders
Kevin Zych, for Ad Hoc' Group of Crossover Holders
HEARD andDETERMINED: October 20, 2017
REASONS: October 27, 2017
ENDORSEMENT
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[1] On October 20, 2017, this. motion was granted with reasons to follow. These are the.reasons.
[2] This motion was brought by Concordia International Corp. ("CIC") and ConcordiaHealthcare (Canada) Limited ("CHCL" and, together with CIC, the "Applicants") on an ex partebasis for a preliminary interim order pursuant to section 192(4) of the Canada BusinessCorporations Act ("CB CA").
[3] Although the motion was brought on an ex parte basis, counsel for the Ad Hoc Group ofH iSecured Holders and for the Ad Hoc Group of Crossover Holders were n attendance.
Overview
[4] CIC, together with its subsidiaries (the "Concordia Group" or the "Company"), is adiverse, international specialty pharmaceutical company primarily focused on off-patentpharmaceutical products. The Concordia Group carries on business with sales in more thanninety countries and has a portfolio of more than 200 established, off-patent products,
[5] The Applicants are commencing these proceedings for the ultimate purpose of givingeffect to a recapitalization transaction (the "Recapitalization Transaction") involving the SecuredTerm Loans, the Secured Notes, the Secured FX Swaps, the Unsecured Bridge Loans and theUnsecured Notes (collectively, the "Affected Debt"), and the documents governing and/orrelated to the Affected Debt (the "Affected Debt Instruments") and the common shares of CIC(the "Common Shares"), to be implemented pursuant to an arrangement (the "Arrangement")pursuant to section 192 of the CBCA,
[6] In addition to the Applicants, these proceedings also involve the entities listed onSchedule "A" (collectively, the "Subsidiary Guarantors"), each of which is a wholly-owneddirect or indirect subsidiary of CIC. The Subsidiary Guarantors collectively own a significantportion of the assets of the Company's business and are guarantors under the Affected DebtInstruments.
[7] The evidence in support of this motion is set out in the Affidavit of David Price sworn.October 19, 2017.
[8] In the summer of 2017, the Company and its advisors commenced discussions regarding-transactions to improve the Company's capital structure with certain of its .stakeholders,including (i) the -Secured Debtholders- Committee, being a Committee of the. SecuredDebtholders; (ii) the Unsecured Debtholders .Committee (together with the Secured Debtholders.Committee, the "Debtholder Committees"), being a Committee of the Unsecured Debtholders;and (iii) each of the Secured Debtholder Committee's and Unsecured Debtholders Committee'srespective financial and legal advisors (the "Debtholder Committee Advisors").
[9] The Company believes that it needs -to reduce its debt obligations in. order to. have asustainable capital structure. . The Company and its advisors are working to advance and finalizethe terms of the Recapitalization Transaction on, a consensual basis with the DebtholderCommittees and the Debtholder Committee Advisors,
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[10] It is the 'Company's expectation that under the Recapitalization Transaction theCompany's outstanding indebtedness will be reduced by more than $2 billion.
[11] CIC did not make its October 7,00% interest Unsecured Notes Payment, due on October16, 2017 and it does not intend to make the October Unsecured Bridge Loan Payments at thistime AS the foregoing payments form part of the Affected Debt. that is expected to be affectedunder the Recapitalization Transaction,
[12] The Company does .intend to continue to Satisfy, in the ordinary course, its scheduledinterest and amortization payments, as applicable, under the Senior Debt and all of its trade andemployee obligations. As of September 30, 201.7, the Company has approximately $342 millionof cash on hand, giving it sufficient liquidity to satisfy these obligations.
[13] Part of the relief requested is a very broad stay of proceedings, which the Companybelieves is necessary to maintain the overall stability for their business and provide the Companyand the Debtholder Committees with .a meaningful opportunity to continue 'to advance andfinalize the 'terms of the.Recapitalization Transaction.
Summary of Facts
[14] CIC is the parent corporation of the 'Concordia Group.. It was formed pursuant to theOntario Business Corporations Act and has its registered and head office .in Oakville, Ontarioand its records office in Toronto, Ontario.
[1.5] In connection with the Recapitalization Transaction, it is anticipated that CIC willcontinue from the OBCA to the CBCA prior to the date that the Applicants seek a final orderapproving the Arrangement pursuant to a plan of arrangement (the "Plan of Arrangement").
[16] CHCL is a corporation incorporated pursuant to the CBCA and has its head office inOakville, Ontario. CHCL is a direct, wholly-owned subsidiary of CIC and does not carry on anyoperations or have any liabilities.
[17] The Company does operate through a number of direct and. indirect subsidiaries of CICaround the world. Each of these Subsidiary Guarantors is organized under the laws of thejurisdiction set forth beside its name on Schedule A. In addition to CHCL and the SubsidiaryGuarantors, CIC has a number of other subsidiaries around the world that are not involved inthese proceedings and are not.guarantors under the Affected Debt Instruments
[18] As at. October 19, 2017, the Company employed 443 employees worldwide, 165 of whichwere. employed in the Concordia International segment (other than Mumbai), 33 of which were
employed in the Concordia North American segment and 219 of which were employed at the
Centre of Excellence. None of the Company's employees are unionized. The Companyemployees 26 employees at its headquarters in Oakville, Ontario.
[19] The Company currently faces challenges posed by the decline in its operating
performance, high leverage and foreign exchange risks, The Company has also faced certain
regulatory challenges in recent years, and is currently subject to certain ongoing regulatory
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investigations being conducted by the United Kingdom Competition and. Markets Authority (the."CMA").
[20] CIC's capital structure consists primarily of the Common Shares, the Secured TermNotes, the :Secured Notes, the Secured FX Swaps, the Unsecured Bridge: Loans and theUnsecured..Notes.
[21] Since early 2016, the Company has been foeusing on. improving its buSiness andoperations and reviewed various alternatives to improve its capital structure.
[22] The Company believes that it needs to reduce its debt obligations in order to have asustainable capital structure. The Company is of the view that, based on the size and nature of itsexisting capital structure, an arrangement is required to reduce its debt obligations. It isanticipated that the proposed Recapitalization Transaction will involve, among other things, theexchange of the Affected Debt Instruments for new debt instruments issued by CIC, other equitysecurities of CIC or a combination thereof, resulting in a reduction of the -Company's overall.debt obligations by more than $2 billion. The existing Common Shares may be diluted as part ofthe Recapitalization Transaction. The extent of such dilution may be sizeable. It is alsoanticipated that all other obligations of the Company, -including trade debt and employee.obligations, will be left unaffected by the Recapitalization Transaction.
Analysis
[23] The present Arrangement proceedings have been commenced under section 192 of the.CBCA. On the Application for Approval of the Arrangement under section 192 of the CBCA,the Applicants must satisfy the Court that:
(a) the statutory requirements have been fulfilled;
(b) the Arrangement is put forward in good, faith; and
(c) the Arrangement is fair and reasonable.
[24] The Applicants submit that on an interim motion such as this, courts have generallylimited their analysis to:
(a) the Applicants' compliance with the statutory requirements of the CBCA; and
(b) the Applicants' good faith in putting forward the Arrangement
(see: Re 8440522 Canada Inc., 2013 ONSC 2509 at para. 41 ("Mobilicity")and Re 45133541 Canada Inc, (Arrangement relatfl a) 2009 QCCS. 6444 atpara. 53 ("Abitibi"))
[25] The CBCA requires the Applicants to establish that:
(a) the Arrangement constitutes an "arrangement" within the meaning ofsubsection 192(1) of the CBCA;
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(b) the Applicants are not "insolvent" within the meaning of subsection 192(2) ofthe CBCA;
(c) it is not practicable for the Applicant to effect a fundamental change in thenature of the Arrangement under any other provision of the CBCA; and
(d) the Applicants have given the Director appointed under section 260 of theCBCA (the "CBCA Director") notice of this Application.
[26] With respect to the first criteria, counsel submits that, under section 192(1) of the CBCA,an "arrangement" includes a number of possible transactions, for example, an exchange ofsecurities of a corporation for property, monies or. other .securities of the corporation or property,monies or securities of another body corporate. The definition of "arrangement" is not limited tothe transactions listed in section 192(1). The essential characteristic of an arrangement is a"fundamental change which could not be otherwise achieved under the CBCA" (see BCE Inc. v.1976 Debentureholders, 2008 SCC 69 at paras. .124-125 ("BCE"); and Re Fairmont Hotels &Resorts Inc., [2006] 0.J: No. 5591 (S.C.J. [Comm. List]) at para. 5).
[27] Counsel to the Applicants submits that Canadian courts have recognized that section 192of the CBCA is a .flexible statutory provision capable of "incorporating whatever tools andmechanisms of corporate law the ingenuity of their creators bring to the particular problem athand" .(see: Re Masonite International Inc. (2009), 56 C.B.R. (5111) 42 (Ont. S.C.J. [Comm. List])at para. 20 and Fairmont Hotels & Resorts Inc., supra at paras. 1 and 5).
[28] The proposed Arrangement is expected to include the exchange of the Secured Debt andUnsecured Debt, each comprised of various note and loan obligations, in exchange for new. debt,equity of CIC, or a combination thereof.
[29] I am satisfied. that the proposed Arrangement falls within the category of "arrangement"contemplated by section 192 of the CBCA and that the Applicants are in compliance with thestatutory requirements of section 192 of the CBCA.
[30] In arriving at this conclusion, I have taken into account the words of Alberta Court ofAppeal in Savage v. Amoco Acquisition Co. (1988), 87 A.R. 321 (C.A.) at para.5 ("Amoco").:
"The- category of "arrangement?" we think exists primarily to deal with .proposalsthat do not quite fit other categories._ To give the words of the .section thenarrow interpretations suggested would. defeat that.pmpose. Accordingly, we saythat "exchange" in section 185.1 includes a compromise, and that the sectiongenerally deals with proposals that are much more than a simple offer to acquiretheshares of another: So long as the proposal is not a sham, .that section isavailable."
[31] Further Canadian courts have granted orders under Section 192 in number of caseswhere the primary purpose was the compromise of debt (see, for example: North AmericanPalladium, et al., Court File No. CV-15-11020-00CL (August 5, 2015); Mega Brands, et al.Court File No. 500-11-038398-109 (Que. Sup. Ct.) (March 22, 2010); Abitibi, supra; TembecArrangement Inc., et al, Court File. No, 08-CL-7367 (February 27, 2008); Mobilicity, supra; Re
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Essar Steel Canada Inc., 2014 ONS.0 4285; and Postniedia Network Inc., et al., Court File No.CV-16-11476-00CL (September 12, 2016).
[32] In this case, I am satisfied that the Affected Debt Instruments fall within the definition ofa "security" and, as applicable a "debt obligation" as "other evidence of indebtedness orguarantee of a corporation" and thus each constitutes a security for the purposes of the CBCA.
[33] With respect to the solvency requirement, section 192(3) of the CBCA requires that acorporation seeking approval of an arrangement must not be insolvent.
[34] Canadian courts have held that the solvency requirement is satisfied where at least one ofthe applicant companies is solvent or where the applicant will be solvent after the arrangement isimplemented (see: Amoco, supra at para. 5; Re Essar Steel, supra at paras, 38 and 39, andMobilicity, supra at para. 53).
[35] I am satisfied that CHCL does not have any .liabilities and is solvent.
[36] The third criteria is whether it "is practicable" to effect the Arrangement under any otherprovision of the CBCA.
[37] Counsel submits that the Canadian courts have adopted a. low threShold ofimpracticability and that the test is one of "practicability" and not "impossibility" (see:. Re EssarSteel, supra at para. 40; Mobilichy, supra, at paras. 61-62; and Re Masonite, supra, at paras, 16-25).
[38] I am satisfied that the proposed Arrangement consists of a number of complex or• Multi-step transactions. In my view, the transactions can be accomplished. far more efficiently byMeans of a plan of arrangement. Accordingly,. b am satisfied that it would be impracticable forthe Applicants to pursue the Arrangement under any other provision of the CBCA.
[39] I also note that the Applicants have given notice to the CBCA Director and that theCBCA Director has confirmed that "the staff of the Director has determined that the Director •does not have standing to review or take a position on this application as there is no arrangementto be reviewed at this time".
[40] I am also satisfied that the Applicants have brought this application in good faith and forno improper purpose. There is evidence that the Applicant are proceeding with the Arrangementfor a valid business purpose, specifically a reduction of more than $2 billion of debt in order toput the Company in a sound financial footing.
[41] I. do note that the proposed Arrangement does affect the interest of non-CBCA entities,including Subsidiary Guarantors. The Applicants point out that while the Subsidiary Guarantorsare not CBCA corporations, they are all wholly-owned direct or indirect subsidiaries of MC andwill be consenting participants to the Recapitalization Transaction.
[42] In support of its argument that the CBCA Arrangement can affect the interests of non-CBCA entities, counsel submits that Canadian courts have previously approved arrangementsinvolving non-CBCA corporations, including Mega Brands; Aurcana; Banro Corporation et ctl.
- Page 7 -
Court File No. CV-17-11700-00CL (February 22, 2017) and Mood Medici Corporation, CourtFile No. CV-17-11809-00CL (May 18, 2017). I accept this position.
Disposition
[43] I am satisfied that this motion should be granted.
[44] Diming now to the specifics of the preliminary interim order, counsel submits that theCBCA permits the granting of an interim order such as the proposed preliminary interim order tofacilitate an arrangement. Further, the courts have granted orders which have stayed anyenforcement steps under agreements to which the Applicants or related entities were a party.
[45] In support of the submission, counsel referenced preliminary orders in Re Essar Steel,Lightstream Resources Ltd., et al. Court File No. 1601-08725; Tervita Corporation, et al. CourtFile No. 1601-12176 (September 14, 2006) (Alberta) and Post Media Nehvork Inc., el al, InterimOrder Granted August 5, 2016).
[46] I also note that the proposed interim order provides full. comeback rights, permitting anyparty who objects to the stay of proceedings to return before the court on seven business days'notice to the Applicants.
[47] The draft order provides for 'Tull pivot" rights. This clause makes it clear that, ifCircumstances arise, these proceedings can be continued 'under the Companies' CreditorsArrangement Act ("CCAA").
[48] There is also a. provision in the draft order with respect to a swap obligation. Theprovision .allows for a closing-out of this obligation, on the same basis that swaps can be closedout pursuant to the CCAA.
[49] Finally,. in my view, where there is an expectation of debt compromise, the parties shouldnot hesitate to incorporate structures or processes that are found in the. CCAA and theBankruptcy and Insolvency Act (the "BIA"). The CCAA and the BIA can provide guidance tothe Applicants as to appropriate procedures to be followed in dealing with affected parties.
[50] I arn satisfied that the draft preliminary interim order is appropriate in thesecircumstances and that it will assist the Company working to advance and finalize the terms ofthe Recapitalization Structure and to return to court for an Interim Order and to ultimately seekapproval of a proposed Arrangement.
[51] The motion is granted and the Preliminary Interim Order shall issue in the form attachedto Tab 3 of the Motion Record.
UN 1 ilL MA'il ER OF AN APPLICATION UNDER SECTION 192 OF THECANA 04 BUSINESS CORPORATIONS ACT, R.S.C. 1985, C. C-44, AS AMENDED,AND Ki ILES 14.05(2) AND 14.05(3) OF THE RULES OF CIVIL PROCEDURE
AND IN THE MATTER OF A PROPOSED ARRANGEMENT OF CONCORDIAINTERNATIONAL CORP. AND CONCORDIA HEALTHCARE (CANADA)L IMITED
Applicants
Court File No. CV-17-584836-00CL
ONTARIOSUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
Proceeding commenced at 'I oronto
MOTION RECORD(Motion for Interim Orderreturnable May 2, 2018)
GOODMANS LLPBarristers & SolicitorsBay Adelaide Centre — West Towel333 Bay Street, Suite 3400Toronto, Canada M5H 2S7
Robert J. Chadwick LSUC#: [email protected] O'Neill LSUC#: 43331Jboneill(&goodmans ca
