|9 Months Ended|
Sep. 30, 2020
|Debt Disclosure [Abstract]|
9. Royalty-Linked Notes
Liability Related to Sale of Future Royalties
On January 21, 2020, as part of the Private Placement, the Company issued 2,579,400 RLNs to a group of accredited investors. On September 8, 2020, as part of the Rights Offering, the Company issued 11,000 RLNs to existing shareholders. The RLNs will entitle the holders thereof to payments, at the applicable payment rate, based solely on a percentage of the Company’s net revenues from U.S. sales of specified sulopenem products earned through December 31, 2045, but will not entitle the holders thereof to any payments unless the Company receives FDA approval for one or more specified sulopenem products prior to December 31, 2025 and the Company earns net revenues on such product. If any portion of the principal amount of the outstanding RLNs, equal to $0.04 per RLN, has not been paid as of the end date on December 31, 2045 (or December 31, 2025, in the event that the Company has not yet received FDA approval with respect to one or more specified sulopenem products by such date), Iterum Bermuda must pay the unpaid portion of the principal amount. The RLNs will earn default interest if the Company breaches certain obligations under the indenture governing the RLNs (but do not otherwise bear interest) and will be subject to a maximum return amount, including all principal and payments and certain default interest in respect of uncurable defaults, of $160.00 (or 4,000 times the principal amount of such note). The RLNs will be redeemable at the Company’s option, subject to the terms of the indenture governing the RLNs (RLN Indenture).
In accordance with exceptions allowed under ASC 815-10, Derivatives and Hedging, due to a limit on the amount of royalties that the noteholders can earn under the RLN, this transaction is accounted for as a debt liability under ASC 470, Debt, that is being amortized using the effective interest method over the life of the arrangement. The Company has no obligation to pay any amount to the noteholders until the net revenue of the specified products are earned. In order to record the amortization of the liability, the Company is required to estimate the total amount of future net revenue to be earned in each period under the RLN Indenture and the payments that will be passed through to the noteholders over the life of the RLN Indenture.
The note proceeds from both the Private Placement and subsequent Rights Offering were allocated based on the relative fair value of the debt instrument, less transactions costs amounting to $1,239, as debt discounts. The Company imputes interest on the amortized cost of the liability using an estimated effective interest rate of 31.1% as of September 30, 2020. Payments to the noteholders in each period, related to future sales of sulopenem, would offset the liability. The Company periodically assesses the revenue forecasts of the specified sulopenem products and the related payments, and to the extent such payments are greater or less than the initial estimate, the Company adjusts the amortization of the liability and interest rate, to ensure the liability is fully amortized on fulfilment of the agreement.
The Company recognized $636 and $1,525 of interest expense related to the RLNs, in the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2020, respectively, related to the accretion of the debt discounts and deferred financing costs. These amounts are recorded in interest expense in the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2020. The balance of the RLNs as of September 30, 2020 is as follows: