Exhibit 99.1

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements in the discussion and analysis regarding industry outlook, our expectations regarding the performance of our business and the forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion together with the sections entitled “Risk Factors,” “Business” and the audited consolidated financial statements, including the related notes, appearing elsewhere herein. All references to years, unless otherwise noted, refer to our fiscal years, which end on December 31. As used herein, unless the context suggests otherwise, “we,” “us,” “our,” “the Company” or “Osmotica” refer to Osmotica Pharmaceuticals plc. This discussion and analysis is based upon the historical financial statements of Osmotica Pharmaceuticals plc included herein. Prior to the Reorganization (as defined in the accompanying Notes to Consolidated Financial Statements), Osmotica Pharmaceuticals plc was a subsidiary of Osmotica Holdings S.C.Sp. and had no material assets and conducted no operations other than activities incidental to its formation, the Reorganization and its initial public offering.

We are a fully integrated biopharmaceutical company focused on the development and commercialization of specialty products that target markets with underserved patient populations. In 2017, we generated total revenues across our existing portfolio of promoted specialty neurology and women’s health products, as well as our non-promoted products, which are primarily complex formulations of generic drugs. In 2018 we received regulatory approval from the U.S. Food and Drug Administration, or the FDA, for M-72 (methylphenidate hydrochloride extended-release tablets, 72 mg) for the treatment of attention deficit hyperactivity disorder, or ADHD in patients aged 13 to 65, as well as Osmolex ER (amantadine extended-release tablets) for the treatment of Parkinson’s disease and drug-induced extrapyramidal reactions, which are involuntary muscle movements caused by certain medications, in adults. We launched M-72 in the second quarter of 2018 and launched Osmolex ER in January 2019. In addition, we have a late-stage development pipeline highlighted by two new drug application or NDAs, candidates in Phase III clinical trials: Ontinua ER (arbaclofen extended-release tablets) for muscle spasticity in multiple sclerosis patients and RVL-1201 (oxymetazoline hydrochloride ophthalmic solution, 0.1%) for the treatment of blepharoptosis, or droopy eyelid. Many of our products use our proprietary osmotic-release drug delivery system, Osmodex, which we believe offers advantages over alternative extended-release, or ER, technologies.

Our core competencies span drug development, manufacturing and commercialization. Our specialized neurology and women’s health sales teams support the ongoing commercialization of our existing promoted product portfolio as well as the launch of new products. As of December 31, 2018, we actively promoted five products: M-72, Lorzone (chlorzoxazone scored tablets) and ConZip (tramadol hydrochloride extended-release capsules) in specialty neurology; and OB Complete, our family of prescription prenatal dietary supplements, and Divigel (estradiol gel, 0.1%) in women’s health. We launched M-72 in the second quarter of 2018, and Osmolex ER, which was approved by the FDA on February 16, 2018, was fully launched in January 2019. As of December 31, 2018, we sold a portfolio consisting of approximately 37 non-promoted products, which has generated strong cash flow. The cash flow from these non-promoted products has contributed to our investments in research and development and business development activities. Certain of our key products, particularly those that incorporate our proprietary Osmodex drug delivery system, are or are expected to be manufactured in our Marietta, Georgia facility.  Many of our existing products benefit from several potential barriers to entry, including intellectual property protection, formulation and manufacturing complexities, data exclusivity, as well as U.S. Drug Enforcement Administration, or DEA, regulation and quotas for API. Our non-promoted products compete in generic markets where barriers to entry are lower than markets in which certain of our promoted products compete.  In particular, both methylphenidate ER tablets and venlafaxine ER tablets, or VERT have experienced, and are expected to continue to experience pricing erosion due to additional competition from other generic pharmaceutical companies.  It is anticipated that this pricing erosion will result in lower net sales, revenue and profitability in 2019 and subsequent years.

We are focused on progressing our pipeline, which is highlighted by two Phase III candidates under clinical development — arbaclofen ER and RVL‑1201. We developed arbaclofen ER using our proprietary Osmodex drug delivery system and believe this formulation will provide an efficacious and safe treatment for spasticity in multiple sclerosis patients. We recently received topline data from our second Phase III clinical trial of arbaclofen in multiple sclerosis patients with spasticity. The initial review of the preliminary topline data indicates that both doses of arbaclofen demonstrated superiority to placebo in one of the two co-primary endpoints.  In addition, there were numerous signals of efficacy and the safety profile was in line with previously reported results. Based on the efficacy and safety exhibited for arbaclofen, the Company remains encouraged and plans to proceed with its clinical and regulatory strategy to submit an NDA. At this time, however, it is unclear whether or not the Company will be required to conduct an additional clinical trial which may delay our submission past 2019.  If we are required to conduct any such additional clinical trial, our development costs may increase, our regulatory approval process could be denied or delayed and we may not be able to commercialize and commence sales of arbaclofen ER in the time frame currently contemplated, if at all.

We acquired the rights to RVL‑1201 in 2017 and are conducting a second Phase III clinical trial of RVL‑1201 for droopy eyelid. If approved, RVL‑1201 would be the first non‑surgical treatment option approved by the FDA for droopy eyelid. We plan to invest selectively in expanding our product portfolio by leveraging both our proprietary Osmodex drug delivery system to develop differentiated products as well as our management team’s operating experience to pursue external business development opportunities.

Financial Operations Overview

Recent Transactions

RevitaLid Acquisition

On October 24, 2017, we entered into a stock purchase agreement to acquire the outstanding stock of RevitaLid, Inc., or RevitaLid. RevitaLid is the owner of RVL‑1201, an ophthalmic product that treats blepharoptosis, which had been licensed from one of the sellers in the transaction. Osmotica obtained all rights under the license agreement and is undertaking the clinical development and, if approved, the commercialization of RVL‑1201, which includes conducting clinical trials and filing an NDA with the FDA. The transaction was accounted for as an asset acquisition of acquired in‑process research and development, or IPR&D, and because there was no alternative future use for the acquired asset, the purchase price, including net deferred tax assets and liabilities, was expensed and included in research and development expenses.

Segment Information

We currently operate in one business segment focused on the development and commercialization of pharmaceutical products that target markets with underserved patient populations. We are not organized by market and are managed and operated as one business. We also do not operate any separate lines of business or separate business entities with respect to our products. A single management team reports to our chief operating decision maker who comprehensively manages our entire business. Accordingly, we do not accumulate discrete financial information with respect to separate service lines and do not have separately reportable segments. See Note 2, Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere herein.

Components of Results of Operations

Revenues

Our revenues consist of product sales, royalty revenues and licensing and contract revenue.

Net product sales—Our revenues consist primarily of product sales of our promoted products, principally M-72, Lorzone, Divigel and the OB Complete family of prescription prenatal dietary supplements, and our non‑promoted products, principally methylphenidate ER and venlafaxine ER, or VERT. We ship product to a customer pursuant to a purchase order, which in certain cases is pursuant to a master agreement with that customer, and we invoice the customer

upon shipment. For these sales we recognize revenue when control has transferred to the customer, which is typically on delivery to the customer.  The amount of revenue we recognize is equal to the selling price, adjusted for any variable consideration, which includes estimated chargebacks, commercial rebates, discounts and allowances at the time revenues are recognized.

Royalty revenue—For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all the royalty has been allocated has been satisfied (or partially satisfied).

Licensing and contract revenue—The Company has arrangements with commercial partners that allow for the purchase of product from the Company by the commercial partners for purpose of sub-distribution. Licensing revenue is recognized when the performance obligation identified in the arrangement is completed. Variable considerations, such as returns on product sales, government program rebates, price adjustments and prompt pay discounts associated with licensing revenue, are generally the responsibility of our commercial partners.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of personnel expenses, including salaries and benefits for employees in executive, finance, accounting, business development, legal and human resource functions. General and administrative expenses also include corporate facility costs, including rent, utilities, legal fees related to corporate matters and fees for accounting and other consulting services. We expect to incur additional general and administrative expenses as a public company, including costs associated with the preparation of our SEC filings, increased legal and accounting costs, investor relations costs, incremental director and officer liability insurance costs, as well as costs related to compliance with the Sarbanes‑Oxley Act of 2002 and the Dodd‑Frank Wall Street Reform and Consumer Protection Act.

Research and Development

Costs for research and development are charged as incurred and include employee‑related expenses (including salaries and benefits, travel and expenses incurred under agreements with contract research organizations, or CROs, contract manufacturing organizations and service providers that assist in conducting clinical and preclinical studies), costs associated with preclinical activities and development activities and costs associated with regulatory operations.

Costs for certain development activities, such as clinical studies, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the patterns of costs incurred, and are reflected in our consolidated financial statements as prepaid expenses or accrued expenses as applicable.

Total revenues increased by $18.0 million to $263.7 million for the year ended December 31, 2018, as compared to $245.7 million for the year ended December 31, 2017.

Net Product Sales. Net product sales increased by $23.7 million to $261.4 million for the year ended December 31, 2018, as compared to $237.7 million for the year ended December 31, 2017, primarily due to methylphenidate ER, which was approved and launched in the third quarter of 2017, and M-72, which was launched in the second quarter of 2018. While we experienced significant growth in methylphenidate ER during 2018, this trend is expected to reverse in

2019.  Two new competitors received FDA approval for AB-rated methylphenidate ER products in the first and fourth quarters of 2018, and we anticipate additional competitors in 2019.  Accordingly, we anticipate average selling prices will decline which will negatively affect our net sales of methylphenidate ER in 2019 and in future years. 

Product sales from VERT decreased by 31% for the year ended December 31, 2018, reflecting additional competition and a greater proportion of sales from our lower priced authorized generic product, which accounted for substantially all VERT unit volume during the year. Prior to 2018, one other company sold competing dosage strengths of VERT. During the third quarter of 2018, another company launched competing dosage strengths of VERT.  We expect that these competing products as well as additional generic product launches in the future, if any, will continue to negatively affect our sales of VERT for 2019 and future years.

Product sales from Lorzone declined 23% for the year ended December 31, 2018, reflecting the shift of promotional efforts to M-72 which was launched in the second quarter of 2018, partially offset by price increases instituted during 2018. Product sales from Divigel increased by 26%, driven primarily by targeted promotional activities and strong patient access. Product sales from the OB Complete family of prescription prenatal dietary supplements increased by 1% as sales levels rebounded after initially falling following the discontinuation of our OB Complete Gold prenatal vitamin line during 2017. Other non-promoted product sales decreased by 68%, largely due to the termination in the second quarter of 2017 of a marketing and distribution relationship with the ANDA holder of a portfolio of products, including aripiprazole together with a favorable resolution in late 2017 of disputed gross sales deductions taken by a wholesale customer.

Royalty Revenue. Royalty revenue decreased by $4.5 million for the year ended December 31, 2018, compared to the prior year period, primarily due to lower product sales by third parties.

Licensing and Contract Revenue. Licensing and contract revenue decreased by $1.3 million in 2018 primarily due to the discontinuation in April 2017 of promotional activities for Monistat, a women’s health product, on behalf of a third party, and a decline in sales on other contract revenue products.

Cost of goods sold increased $12.4 million in the year ended December 31, 2018 to $140.1 million as compared to $127.6 million in the year ended December 31, 2017. The increase was primarily driven by a $33.3 million increase in amortization of intangible assets, largely attributable to a full year of amortization for methylphenidate ER following its approval and launch in the third quarter of 2017. The increase in depreciation expense is largely attributable to a full year of depreciation related to an expansion project for our manufacturing facility in Marietta, Georgia which was completed during the second quarter of 2017. Royalty expense decreased by $19.4 million primarily reflecting the termination in the second quarter of 2017 of the distribution and marketing arrangement with the ANDA holder for a portfolio of products, including aripiprazole, for which we paid a significant royalty rate on our net sales. The $2.1 million decrease in other cost of goods sold is mostly due to lower API costs for methylphenidate ER during 2018.

Gross profit percentage was  47% for the year ended December 31, 2018 as compared to 48% for the year ended December 31, 2017. Excluding amortization and depreciation, our gross profit percentage increased to 77% for the year

ended December 31, 2018 as compared with 67% for the year ended December 31, 2017, primarily as a result of the termination in the second quarter of 2017 of the distribution and marketing relationship with the ANDA holder for a portfolio of products, including aripiprazole, for which we paid a significant royalty rate on net sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $17.3 million in the year ended December 31, 2018 to $74.2 million as compared to $57.0 million in the year ended December 31, 2017. The increase in our selling, general and administrative expenses reflects additions to salesforce headcount and marketing costs associated with the launches of M-72 and Osmolex ER, together with costs we incurred related to our initial public offering and severance expenses due to restructuring of our sales force.

Research and Development Expenses

Research and development expenses increased by $3.5 million in the year ended December 31, 2018 to $43.7 million as compared to $40.2 million in the year ended December 31, 2017. The increase was largely attributable to clinical trial costs of arbaclofen ER and RVL-1201, each of which are in Phase III clinical trials, together with additional headcount. Partially offsetting this increase, research and development expenses for the year ended December 31, 2017 included approximately $16.4 million related to the acquisition of RevitaLid, Inc., owner of the rights to RVL-1201.  The purchase of RevitaLid was accounted for as an acquisition of in-process R&D with no alternative future use and expensed at the time of acquisition.

The following table summarizes our research and development expenses incurred for the periods indicated (dollars in thousands):

Impairment of Intangible Assets and Goodwill

Impairment of intangible assets and goodwill was $104.2 million during the year ended December 31, 2018. During 2018 we recognized impairments of finite-lived developed technology assets of $10.3 million consisting of the write down to fair value of nifedipine and Khadezla of $6.2 million and $4.1 million, respectively.  Nifedipine was impaired due to a greater competitive environment which reduced the anticipated royalty revenue from our license partner, and in late 2018, we made the decision to discontinue commercialization of Khedezla and recognized an impairment charge of $4.1 million.  In December 2018, we made the decision to cease development of Generic Product A, an indefinite-lived In-Process R&D asset which resulted in an impairment charge of $7.6 million.  In December 2018, circumstances and events related to pricing on certain of our generic assets, together with our decision to discontinue development and commercialization of Khedezla and Generic Product A, made it more likely than not that goodwill had become impaired.  As a result, we performed an assessment of goodwill as of December 31, 2018.  Based on the results of this assessment, we recognized an impairment charge of $86.3 million for the year ended December 31, 2018. 

The following table details the impairment charges for such periods (in thousands):

Impairment of Fixed Assets

Fixed asset impairments for the years ended December 31, 2018 and 2017 were $0.1 million and $0.5 million, respectively, due to the abandonment of assets at a warehouse we ceased leasing, the termination of a capital project that had not reached completion, and the fair market value for equipment being lower than its carrying value.

Interest Expense and Amortization of Debt Discount

Interest expense and amortization of debt discount decreased by $8.3 million in the year ended December 31, 2018 to $20.8 million as compared to $29.1 million in the year ended December 31, 2017. The decrease in borrowing costs reflects lower costs associated with a refinancing concluded in December 2017 which refinanced our LIBOR-based term loan, senior subordinated note, and junior subordinated PIK note borrowings.

Other Non‑operating (Income) Expenses, net

Other non-operating (income) expense was $0.7 million and $(4.5) million for the years ended December 31, 2018 and 2017, respectively. On December 21, 2017, we amended our senior secured credit facilities to increase the principal amount by $59.0 million. Proceeds from these incremental borrowings were used to fully repay our senior subordinated notes and PIK notes. On October 31, 2018, we prepaid $50.0 million of term loans under our senior secured credit facility.  Other non-operating income (expense) included $0.9 million and $4.9 million of debt extinguishment costs for years ended December 31, 2018 and 2017, respectively, offset by interest and other miscellaneous income.

Income tax benefit decreased by $35.4 million in the year ended December 31, 2018 to $9.0 million as compared to $44.4 million in the year ended December 31, 2017.

The income tax benefit for the year ended December 31, 2018 and 2017 reflect significant differences in the usual relationship of income tax benefit before income taxes. The primary cause of this, as well as the change in the effective income tax rate period over period, relates to the following items: the decrease in the U.S. statutory income tax rate to 21% from 34% for the year ended December 31, 2018 compared to the same period in 2017; a disproportionate change in the income tax rate for the year ended December 31, 2018 as a result of credits from research and development when compared to the loss before income taxes; and the fact that in both periods there were ordinary losses in certain foreign tax jurisdictions in which we operate where no tax benefit is expected to be recognized, which subsequently requires that these jurisdictions not be included in the calculation of the interim annual effective income tax rate. In addition, during the year ended December 31, 2018 there was a discrete item of expense included in the income tax provision related to a decrease in the Argentinian statutory rate as a result of a law change.

Liquidity and Capital Resources

Our principal sources of liquidity are cash generated from operations and amounts available to be drawn under our Revolving Credit Facility, or Revolver.  Our primary uses of cash are to fund operating expenses, product development costs, capital expenditures, debt service payments, as well as strategic business and product acquisitions.

As of December 31, 2018, we had cash and cash equivalents of $70.8 million and borrowing availability under the Revolver of $50.0 million. We also had $271.4 million aggregate principal amount borrowed under our term loans and $1.8 million under our note payable for insurance financing. During the year ended December 31, 2018 we generated

$37.6 million of cash from operations, and during the year ended December 31, 2017, we generated cash flows from operations of $57.8 million. We expect to generate positive cash flow from operations in the future through sales of our existing products, launches of approved products currently in our development pipeline and sales derived from in-licenses or acquisitions of other products; however, we expect our levels of cash flow generated to be lower due to price erosion on methylphenidate ER and VERT.

As of December 31, 2018, the interest rate was 6.09% and 6.59% for our Term A Loan and Term B Loan, respectively. As of December 31, 2017, the interest rate was 5.25% and 5.75% for our Term A Loan and Term B Loan, respectively.

At December 31, 2018, there were no outstanding borrowings or outstanding letters of credit under the Revolver. Availability under the Revolver as of December 31, 2018 was $50.0 million.

On October 22, 2018, we completed our IPO, in which we issued and allotted 7,647,500 ordinary shares at a public offering price of $7.00 per share.  The number of shares issued in the IPO reflected the exercise in full of the underwriters’ option to purchase 997,500 additional ordinary shares.  In addition, we issued and allotted 2,014,285 ordinary shares at the public offering price in a private placement to certain existing shareholders.  The aggregate net proceeds of the IPO and the private placement were approximately $58.1 million after deducting underwriting discounts and commissions and offering expenses.  Shortly after the IPO, we prepaid $50 million of our Term A loan and Term B loan.

During the year ended December 31, 2018, we benefited from the commercial launch of methylphenidate ER and M-72 in September 2017 and April 2018, respectively. Methylphenidate ER competes in generic markets for which future competition will erode profitability over time. In late 2018, we became aware of several companies launching competing versions of methylphenidate ER.  As a result, we anticipate price erosion which will negatively affect profitability of methylphenidate in 2019 and future years.  During 2017 and 2018, we made significant investments in research and development, primarily for Ontinua ER and RVL-1201, both of which are in Phase III clinical trials.

We believe that our existing cash balances, cash we expect to generate from operations from our existing product portfolio, our near‑term product launches and our product pipeline, as well as funds available under the Revolver, will be sufficient to fund our operations and to meet our existing obligations for at least the next 12 months.

The adequacy of our cash resources depends on many assumptions, including primarily our assumptions with respect to product sales and expenses, as well as other factors, such as successful development and launching of new products and strategic product or business acquisitions. Our assumptions may prove to be wrong or other factors may adversely affect our business, and as a result we could exhaust or significantly decrease our available cash resources, and we may not be able to generate sufficient cash to service our debt obligations which could, among other things, force us to raise additional funds or force us to reduce our expenses, either of which could have a material adverse effect on our business.

To continue to grow our business over the longer term, we plan to commit substantial resources to internal product development, clinical trials of product candidates, expansion of our commercial, manufacturing and other operations and product acquisitions and in‑licensing. We have evaluated and expect to continue to evaluate a wide array of strategic transactions as part of our plan to acquire or in‑license and develop additional products and product candidates to augment our internal development pipeline. Strategic transaction opportunities that we pursue could materially affect our liquidity and capital resources and may require us to incur additional indebtedness, seek equity capital or both. In addition, we may pursue development, acquisition or in‑licensing of approved or development products in new or existing therapeutic areas or continue the expansion of our existing operations. Accordingly, we expect to continue to opportunistically seek access to additional capital to license or acquire additional products, product candidates or companies to expand our operations, or for general corporate purposes. Strategic transactions may require us to raise additional capital through one or more public or private debt or equity financings or could be structured as a collaboration or partnering arrangement. Any equity financing would be dilutive to our shareholders, and the consent of the lenders under our senior secured credit facilities could be required for certain financings.

Net cash provided by operating activities

Cash flows from operating activities are primarily driven by earnings from operations (excluding the impact of non-cash items), the timing of cash receipts and disbursements related to accounts receivable and accounts payable and the timing of inventory transactions and changes in other working capital amounts. Net cash provided by operating activities was $37.6 million and $57.8 million for the years ended December 31, 2018 and 2017, respectively.

The decrease in cash provided by operating activities in the year ended December 31, 2018, as compared to year ended December 31, 2017, was due to changes in working capital, primarily as a result of greater level of accounts receivable and inventories and, a lower level of accounts payable, partially offset by prepaid assets and higher accrued expenses. 

Net cash outflow related to operating assets and liabilities was $25.0 million for the year ended December 31, 2018 as compared with the net cash inflow of $9.5 million for the year ended December 31, 2017. The change was largely driven by greater levels of accounts receivable and inventories related to methylphenidate ER, which was launched late in the third quarter of 2017, and lower levels of accounts payable, offset by lower levels of prepaid assets and higher accrued expenses during the period.

During the year ended December 31, 2018, accounts receivable was a $17.0 million use of funds, due to greater levels of accounts receivable from product sales, and lower reserves for chargebacks, commercial rebates and doubtful accounts. Inventories were also a use of funds of $7.4 million primarily due to increased methylphenidate ER inventories to meet customer demand. Prepaid expenses and other current assets were a $4.7 million source of funds while accounts payable, represented a $11.3 million use of funds.

Net cash used in investing activities

Our uses of cash in investing activities during the years ended December 31, 2018 and 2017 reflected purchases of property, plant and equipment and were $4.1 million and $6.9 million, respectively.  In 2017 we invested $12.5 million in the acquisition of RevitaLid, Inc., owner of rights to RVL-1201.  Purchases of property, plant and equipment in the year ended December 31, 2017 included the costs of completion of the expansion construction project for our Marietta, Georgia manufacturing facility, and the purchase of other property, plant and equipment.

Net cash provided by (used in) financing activities

Net cash provided by financing activities of $3.6 million during the year ended December 31, 2018 primarily related to the $58.1 million of net proceeds from our IPO and a $2.7 million net increase in insurance financing loans, partially offset by $56.1 million of repayments of our term loans under our senior secured credit facility.

Net cash used in financing activities of $23.3 million during the year ended December 31, 2017 primarily related to debt repayments and payment of contingent consideration related to the 2014 in-license of a portfolio of women’s health products, including Divigel and distributions to partners.

Our liability for unrecognized tax benefits has been excluded from the above contractual obligations table as the nature and timing of future payments, if any, cannot be reasonably estimated. As of December 31, 2018, our liability for unrecognized tax benefits was $1.5 million (excluding interest and penalties). We do not anticipate that the amount of our liability for unrecognized tax benefits will significantly change in the next 12 months.

Critical Accounting Estimates

The significant accounting policies and basis of presentation are described in Note 2, Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere herein.

Summary of Significant Accounting Policies.  The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosures in the notes thereto. Some of these estimates can be subjective and complex. Although we believe that our estimates and assumptions are reasonable, there may be other reasonable estimates or assumptions that differ significantly from ours. Further, our estimates and assumptions are based upon information available at the time they were made. Actual results could differ from those estimates.

In order to understand our consolidated financial statements, it is important to understand our critical accounting estimates. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make

assumptions about matters that were highly uncertain at the time the accounting estimate was made and (ii) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition, results of operations or cash flows. We believe the following accounting policies and estimates to be critical:

Revenue Recognition

Upon adoption of Accounting Standards Update (“ASU”) No. 2014‑09, Revenue from Contracts with Customers (ASC Topic 606) on January 1, 2018, we recognize revenue as described below. The implementation of the new revenue recognition standard did not have a material impact on our consolidated financial statements. The information presented for the periods prior to January 1, 2018 has not been restated and is reported under ASC Topic 605.

Product Sales—Revenue is recognized at the point in time when our performance obligations with our customers have been satisfied. At contract inception, we determine if the contract is within the scope of ASC Topic 606 and then evaluates the contract using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue at the point in time when the Company satisfies a performance obligation.

Revenue is recorded at the transaction price, which is the amount of consideration we expect to receive in exchange for transferring products to a customer. We considered the unit of account for each purchase order that contains more than one product. Because all products in a given purchase order are generally delivered at the same time and the method of revenue recognition is the same for each, there is no need to separate an individual order into separate performance obligations. In the event that we fulfilled an order only partially because a requested item is on backorder, the portion of the purchase order covering the item is generally cancelled, and the customer has the option to submit a new one for the backordered item. We determine the transaction price based on fixed consideration in our contractual agreements, which includes estimates of variable consideration, and the transaction price is allocated entirely to the performance obligation to provide pharmaceutical products. In determining the transaction price, a significant financing component does not exist since the timing from when we deliver product to when the customers pay for the product is less than one year and the customers do not pay for product in advance of the transfer of the product.

We record product sales net of any variable consideration, which includes estimated chargebacks, commercial rebates, discounts and allowances and doubtful accounts. We utilize the expected value method to estimate all elements of variable consideration included in the transaction. The variable consideration is recorded as a reduction of revenue at the time revenues are recognized. We will only recognize revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period. These estimates may differ from actual consideration amount received and we will re‑assess these estimates each reporting period to reflect known changes in factors.

Royalty Revenue—For arrangements that include sales‑based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all the royalty has been allocated has been satisfied (or substantially satisfied).

Licensing and Contract Revenue— We have arrangements with commercial partners that allow for the purchase of product from us by the commercial partner for purposes of sub‑distribution. We recognize revenue from an arrangement when control of such product is transferred to the commercial partner, which is typically upon delivery. In these situations the performance obligation is satisfied when product is delivered to our commercial partner. Licensing revenue is recognized in the period in which the product subject to the sublicensing arrangement is sold. Sales deductions, such as returns on product sales, government program rebates, price adjustments, and prompt pay discounts in regard to licensing revenue is generally the responsibility of our commercial partners and not recorded by us.

Freight—We record amounts billed to customers for shipping and handling as revenue, and record shipping and handling expenses related to product sales as cost of goods sold. We account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. When shipping and

handling costs are incurred after a customer obtains control of the products, we also have elected to account for these as costs to fulfill the promise and not as a separate performance obligation.

Sales Deductions

Product sales are recorded net of estimated chargebacks, commercial and governmental rebates, discounts, allowances, copay discounts, advertising and promotions and estimated product returns, or collectively, “sales deductions.”

Provision for estimated chargebacks, certain commercial rebates, discounts and allowances and doubtful accounts settled in sales credits at the time of sales are analyzed and adjusted, if necessary, monthly and recorded against gross trade accounts receivable. Estimated product returns, certain commercial and governmental rebates and customer coupons settled in cash are analyzed and adjusted, if necessary, monthly and recorded as a component of accrued expenses.

Calculating certain of these items involves estimates and judgments based on sales or invoice data, contractual terms, historical utilization rates, new information regarding changes in applicable regulations and guidelines that would impact the amount of the actual rebates, our expectations regarding future utilization rates and estimated customer inventory levels. Amounts accrued for sales deductions are adjusted when trends or significant events indicate that adjustment is appropriate and to reflect actual experience. The most significant items deducted from gross product sales where we exercise judgment are chargebacks, commercial and governmental rebates, product returns, discounts and allowances and advertising and promotions.

Where available, we have relied on information received from our wholesaler customers about the quantities of inventory held, including the information received pursuant to days of sales outstanding, which we have not independently verified. For other customers, we have estimated inventory held based on buying patterns. In addition, we have evaluated market conditions for products primarily through the analysis of wholesaler and other third party sell‑through, as well as internally‑generated information, to assess factors that could impact expected product demand at December 31, 2018 and December 31, 2017. We believe that the estimated level of inventory held by our customers is within a reasonable range as compared to both: (i) historical amounts and (ii) expected demand for the products that represent majority of the volume at December 31, 2018 and December 31, 2017.

If the assumptions we use to calculate our allowances for sales deductions do not appropriately reflect future activity, our financial position, results of operations and cash flows could be materially impacted.

The following table presents the activity and ending balances for our product sales provisions for the years ended December 31, 2018 and 2017 (in thousands):

Total items deducted from gross product sales were $682.3 million (excluding $4.9 million in provisions for advertising and promotion), or 71.9% as a percentage of gross product sales, during the year ended December 31, 2018. Total items deducted from gross product sales were $404.6 million, or 62.6% as a percentage of gross product sales, in 2017.

Chargebacks—We enter into contractual agreements with certain third parties such as retailers, hospitals and group‑purchasing organizations, or GPOs, to sell certain products at predetermined prices. Most of the parties have elected to have these contracts administered through wholesalers that buy the product from us and subsequently sell it to these third parties. When a wholesaler sells products to one of these third parties that are subject to a contractual price

agreement, the difference between the price paid to us by the wholesaler and the price under the specific contract is charged back to us by the wholesaler. Utilizing this information, we estimate a chargeback percentage for each product and record an allowance for chargebacks as a reduction to gross sales when we record our sale of the products. We reduce the chargeback allowance when a chargeback request from a wholesaler is processed. Our provision for chargebacks is fully reserved for at the time when sales revenues are recognized.

We obtain product inventory reports from major wholesalers to aid in analyzing the reasonableness of the chargeback allowance and to monitor whether wholesaler inventory levels do not significantly exceed customer demand. We assess the reasonableness of our chargeback allowance by applying a product chargeback percentage that is based on a combination of historical activity and current price and mix expectations to the quantities of inventory on hand at the wholesalers according to wholesaler inventory reports. In addition, we estimate the percentage of gross sales that were generated through direct and indirect sales channels and the percentage of contract compared to non‑contract revenue in the period, as these each affect the estimated reserve calculation. In accordance with our accounting policy, we estimate the percentage amount of wholesaler inventory that will ultimately be sold to third parties that are subject to contractual price agreements based on a trend of such sales through wholesalers. We use this percentage estimate until historical trends indicate that a revision should be made. On an ongoing basis, we evaluate our actual chargeback rate experience, and new trends are factored into our estimates each quarter as market conditions change.

Events that could materially alter chargebacks include: changes in product pricing as a result of competitive market dynamics or negotiations with customers, changes in demand for specific products due to external factors such as competitor supply position or consumer preferences, customer shifts in buying patterns from direct to indirect through wholesalers, which could either individually or in aggregate increase or decrease the chargebacks depending on the direction and trend of the change(s).

Chargebacks were $365.0 million and $202.4 million, or 38.5% and 31.3% as a percentage of gross product sales, for the years ended December 31, 2018 and 2017, respectively. Chargebacks as a percentage of gross product sales increased in 2018 as compared with 2017, primarily due to a change in product mix and pricing. We expect that chargebacks will continue to significantly impact our reported net product sales.

Commercial Rebates—We maintain an allowance for commercial rebates that we have in place with certain customers. Commercial rebates vary by product and by volume purchased by each eligible customer. We track sales by product number for each eligible customer and then apply the applicable commercial rebate percentage, using both historical trends and actual experience to estimate our commercial rebates. We reduce gross sales and increase the commercial rebates allowance by the estimated rebate amount when we sell our products to eligible customers. We reduce the commercial rebate allowance when we process a customer request for a rebate. At each month end, we analyze the allowance for commercial rebates against actual rebates processed and make necessary adjustments as appropriate. Our provision for commercial rebates is fully reserved for at the time sales revenues are recognized.

The allowance for commercial rebates takes into consideration price adjustments which are credits issued to reflect increases or decreases in the invoice or contract prices of our products. In the case of a price decrease, a shelf‑stock adjustment credit is given for product remaining in customer’s inventories at the time of the price reduction. Contractual price protection results in a similar credit when the invoice or contract prices of our products increase, effectively allowing customers to purchase products at previous prices for a specified period of time. Amounts recorded for estimated shelf‑stock adjustments and price protections are based upon specified terms with direct customers, estimated changes in market prices, and estimates of inventory held by customers. We regularly monitor these and other factors and evaluate the reserve as additional information becomes available.

We ensure that commercial rebates are reasonable through review of contractual obligations, review of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter commercial rebates include: changes in product pricing as a result of competitive market dynamics or negotiations with customers, changes in demand for specific products due to external factors such as competitor supply position or consumer preferences,

customer shifts in buying patterns from direct to indirect through wholesalers, which could either individually or in aggregate increase or decrease the commercial rebates depending on the direction and velocity of the change(s).

Commercial rebates were $257.9 million and $134.5 million, or 27.2% and 20.8% as a percentage of gross product sales, for the years ended December 31, 2018 and 2017, respectively. Commercial rebates as a percentage of gross product sales increased in 2018 as compared to 2017 primarily due to the change in product mix and customer contracts. We expect that commercial rebates will continue to significantly impact our reported net sales.

Government Program Rebates—Federal law requires that a pharmaceutical distributor, as a condition of having federal funds being made available to the states for the manufacturer’s drugs under Medicaid and Medicare Part B, must enter into a rebate agreement to pay rebates to state Medicaid programs for the distributor’s covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program under a fee‑for‑service arrangement. CMS is responsible for administering the Medicaid rebate agreements between the federal government and pharmaceutical manufacturers. Rebates are also due on the utilization of Medicaid managed care organizations, or MMCOs. We also pay rebates to MCOs for the reimbursement of a portion of the sales price of prescriptions filled that are covered by the respective plans. The liability for Medicaid, Medicare and other government program rebates is settled in cash and is estimated based on historical and current rebate redemption and utilization rates contractually submitted by each state’s program administrator and assumptions regarding future government program utilization for each product sold, and accordingly recorded as a reduction of product sales. Medicaid rebates are typically billed up to 180 days after the product is shipped, but can be as much as 270 days after the quarter in which the product is dispensed to the Medicaid participant. In addition to the estimates mentioned above, our calculation also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. Periodically, we adjust the Medicaid rebate provision based on actual claims paid. Due to the delay in billing, adjustments to actual claims paid may incorporate revisions of this provision for several periods. Because Medicaid pricing programs involve particularly difficult interpretations of complex statutes and regulatory guidance, our estimates could differ from actual experience.

Government program rebates were $18.6 million and $26.0 million, or 2.0% and 4.0% as a percentage of gross product sales, during the years ended December 31, 2018 and 2017, respectively.

Product Returns—Certain of our products are sold with the customer having the right to return the product within specified periods. Estimated return accruals are made at the time of sale based upon historical experience. Our return policy generally allows customers to receive credit for expired products within six months prior to expiration and within one year after expiration. Our provision for returns consists of our estimates for future product returns.

Historical factors such as one‑time recall events as well as pending new developments such as comparable product approvals or significant pricing movement that may impact the expected level of returns are taken into account monthly to determine the appropriate accrued expense. As part of the evaluation of the liability required, we consider actual returns to date that are in process, the expected impact of any product recalls and the amount of wholesaler’s inventory to assess the magnitude of unconsumed product that may result in product returns to us in the future. The product returns level can be impacted by factors such as overall market demand and market competition and availability for substitute products which can increase or decrease the pull through for sales of our products and ultimately impact the level of product returns. In determining our estimates for returns and allowances, we are required to make certain assumptions regarding the timing of the introduction of new products. In addition, we make certain assumptions with respect to the extent and pattern of decline associated with generic competition. To make these assessments, we utilize market data for similar products as analogs for our estimations. We use our best judgment to formulate these assumptions based on past experience and information available to us at the time. We continually reassess and make the appropriate changes to our estimates and assumptions as new information becomes available to us. Product returns are fully reserved for at the time when sales revenues are recognized.

Our estimate for returns may be impacted by a number of factors, but the principal factor relates to the level of inventory in the distribution channel. When we are aware of an increase in the level of inventory of our products in the distribution channel, we consider the reasons for the increase to determine whether we believe the increase is temporary or other‑than‑temporary. Increases in inventory levels assessed as temporary will not result in an adjustment to our

provision for returns. Some of the factors that may be an indication that an increase in inventory levels will be temporary include:

Conversely, other‑than‑temporary increases in inventory levels may be an indication that future product returns could be higher than originally anticipated and, accordingly, we may need to adjust our provision for returns. Some of the factors that may be an indication that an increase in inventory levels will be other‑than‑temporary include:

We ensure that product returns are reasonable through inspection of historical trends and evaluation of recent activity. Furthermore, other events that could materially alter product returns include: acquisitions and integration activities that consolidate dissimilar contract terms and could impact the return rate as typically we purchase smaller entities with less contracting power and integrate those product sales to our contracts; and consumer demand shifts by products, which could either increase or decrease the product returns depending on the product or products specifically demanded and ultimately returned.

Product returns were $20.5 million and $26.3 million, or 2.2% and 4.1% as a percentage of gross product sales, during the years ended December 31, 2018 and 2017, respectively. Product returns as a percentage of gross product sales decreased in 2018 as compared to 2017 primarily due to the launch of methylphenidate ER in September, 2017, and product recalls which were not present in 2018. Product returns as a percentage of gross product sales are not expected to change materially for 2019.

Promotions and Co‑Pay Discount Cards—From time to time we authorize various retailers to run in-store promotional sales of our products. We accrue an estimate of the dollar amount expected to be owed back to the retailer. Additionally, we provide consumer co-pay discount cards, administered through outside agents to provide discounted products when redeemed. Upon release of the cards into the market, we record an estimate of the dollar value of co-pay discounts expected to be utilized taking into consideration historical experience.

Advertising and promotions as a percentage of gross product sales did not change materially during the periods presented.  Promotions and co-pay discount cards are included in advertising and promotions, which were $4.9 million and $4.4 million, or 0.5% and 0.7% as a percentage of gross product sales, during the years ended December 31, 2018 and 2017, respectively.

Discounts and allowances were $20.2 million and $15.4 million, or 2.1% and 2.4% as a percentage of gross product sales, during the years ended December 31, 2018 and 2017, respectively. Discounts and allowances as a percentage of gross product sales did not change materially during the periods presented and are not expected to change materially for the remainder of 2018.

Valuation of long‑lived assets

As of December 31, 2018, our combined long‑lived assets balance, including property, plant and equipment and finite‑lived intangible assets, is $437.9 million.

Long‑lived assets, other than goodwill and other indefinite‑lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Factors that we consider in deciding when to perform an impairment review include significant changes in our forecasted projections for the asset or asset group for reasons including, but not limited to, significant under‑performance of a product in relation to expectations, significant changes or planned changes in our use of the assets, significant negative industry or economic trends, and new or competing products that enter the marketplace. The impairment test is based on a comparison of the undiscounted cash flows expected to be generated from the use of the asset group.

Our long‑lived intangible assets, which consist of distribution rights, product rights, tradenames and developed technology, are initially recorded at fair value upon acquisition. To the extent they are deemed to have finite lives, they are then amortized over their estimated useful lives using either the straight‑line method or based on the expected pattern of cash flows. Factors giving rise to our initial estimate of useful lives are subject to change. Significant changes to any of these factors may result in a reduction in the useful life of the asset and an acceleration of related amortization expense, which could cause our operating income, net income and net income per share to decrease.

Recoverability of an asset that will continue to be used in our operations is measured by comparing the carrying amount of the asset to the forecasted undiscounted future cash flows related to the asset. In the event the carrying amount of the asset exceeds its undiscounted future cash flows and the carrying amount is not considered recoverable, impairment may exist. If impairment is indicated, the asset is written down by the amount by which the carrying value of the asset exceeds the related fair value of the asset with the related impairment charge recognized within the statements of operations. Our reviews of long‑lived assets during the two years ended December 31, 2018 and 2017 resulted in certain impairment charges. These charges relate to both finite and indefinite-lived intangible assets, which are described in Note 7, Goodwill and Other Intangible Assets, to our consolidated financial statements.

These impairment charges were generally based on fair value estimates determined using either discounted cash flow models or preliminary offers from prospective buyers. The discounted cash flow models include assumptions related to product revenue, growth rates and operating margin. These assumptions are based on management’s annual and ongoing budgeting, forecasting and planning processes and represent our best estimate of future product cash flows. These estimates are subject to the economic environment in which we operate, demand for the products and competitor actions. The use of different assumptions would have increased or decreased our estimated discounted future cash flows and the resulting estimated fair values of these assets, causing increases or decreases in the resulting asset impairment charges. Events giving rise to impairment are an inherent risk in the pharmaceutical industry and cannot be predicted.

We recorded impairment charges of $10.3 million and $15.9 million, regarding definite‑lived intangible assets for the years ended December 31, 2018 and 2017, respectively.

Goodwill and indefinite‑lived intangible assets

Goodwill and indefinite‑lived intangible assets are assessed for impairment on an annual basis as of October 1st of each year or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Goodwill Impairment Assessment—We are organized in one reporting unit and evaluate goodwill for our company as a whole. Under the authoritative guidance issued by the Financial Accounting Standards Board, or FASB, we have the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the goodwill impairment test is performed. As further described in Note 2, Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere herein, effective January 1,

2017, we early adopted Accounting Standards Update (ASU) No. 2017‑04 “Intangibles — Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment” (ASU 2017‑04). Subsequent to adoption, we perform our goodwill impairment tests by comparing the fair value and carrying amount of our reporting unit. Any goodwill impairment charges we recognize for our reporting unit are equal to the lesser of (i) the total goodwill allocated to that reporting unit and (ii) the amount by which that reporting unit’s carrying amount exceeds its fair value.

The goodwill impairment test requires us to estimate the fair value of the reporting unit and to compare the fair value of the reporting unit with its carrying amount. If the carrying value exceeds its fair value, an impairment charge is recorded for the difference. If the carrying value recorded is less than the fair value calculated then no impairment loss is recognized. The fair value of our reporting unit is determined using an income approach that utilizes a discounted cash flow model or, where appropriate, the market approach, or a combination thereof. The discounted cash flow models are dependent upon our estimates of future cash flows and other factors. Our estimates of future cash flows are based on a comprehensive product by product forecast over a ten‑year period and involve assumptions concerning (i) future operating performance, including future sales, long‑term growth rates, operating margins, variations in the amounts, allocation and timing of cash flows and the probability of achieving the estimated cash flows and (ii) future economic conditions, all which may differ from actual future cash flows.

Assumptions related to future operating performance are based on management’s annual and ongoing budgeting, forecasting and planning processes and represent our best estimate of the future results of our operations as of a point in time. These estimates are subject to many assumptions, such as the economic environments in which we operate, demand for the products and competitor actions. Estimated future cash flows are discounted to present value using a market participant, weighted average cost of capital. The financial and credit market volatility directly impacts certain inputs and assumptions used to develop the weighted average cost of capital such as the risk-free interest rate, industry beta, debt interest rate and our market capital structure. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The use of different inputs and assumptions could increase or decrease our estimated discounted future cash flows, the resulting estimated fair values and the amounts of related goodwill impairments, if any. The discount rates applied to the estimated cash flows for our October 1, 2018 and 2017 annual goodwill impairment test were 14% and 9.0%, respectively, depending on the overall risk associated with the particular asset and other market factors. We believe the discount rates and other inputs and assumptions are consistent with those that a market participant would use.

Based on the quantitative goodwill impairment assessment performed, we determined that there was no impairment of goodwill as of October 1, 2018 and for the year ended December 31, 2017. An increase of 50 basis points to our assumed discount rate used in our goodwill assessment would not have materially changed the results of our analyses.

In December 2018, we determined that, subsequent to our annual impairment testing, circumstances and events related to pricing on certain of our generic assets, together with our decision to discontinue commercialization of a developed technology asset, and discontinue development of an IPR&D asset, made it more likely than not that goodwill had become impaired.  As a result, we performed an assessment of goodwill as of December 31, 2018. Based on the results of this assessment, it was determined that the carrying value of goodwill exceeded its fair value by $86.3 million and an impairment charge was recognized for the year ended December 31, 2018.

IPR&D Intangible Asset Impairment Assessment—IPR&D, which are indefinite-lived intangible assets representing the value assigned to acquired Research and Development, or R&D, projects that principally represent rights to develop and sell a product that we have acquired which has not yet been completed or approved. These assets are subject to impairment testing until completion or abandonment of each project. The fair value of our indefinite-lived intangible assets is determined using an income approach that utilizes a discounted cash flow model and requires the development of significant estimates and assumptions involving the determination of estimated net cash flows for each year for each project or product (including net revenues, cost of sales, R&D costs, selling and marketing costs and other costs which may be allocated), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, and competitive trends impacting each asset and related cash flow stream as well as other factors. The discount rates applied to the estimated cash flows for our October 1, 2018 and 2017 indefinite-lived intangible asset impairment test were 14% and 9.0%, respectively. The major risks and uncertainties associated with the timely and successful completion of the

IPR&D projects include legal risk, market risk and regulatory risk. If applicable, upon abandonment of the IPR&D product, the assets are reduced to zero. Upon approval of the products in development for sale and placement into service, the associated IPR&D intangible assets are transferred to Product Rights amortizing intangible assets. The useful life of an amortizing asset generally is determined by identifying the period in which substantially all of the cash flows are expected to be generated.

If the fair value of the IPR&D is less than its carrying amount, an impairment loss is recognized for the difference. Based on results of the impairment assessment performed, we recognized impairment charges to IPR&D of $7.6 million and $56.6 million for the years ended December 31, 2018 and 2017, respectively. The 2018 impairment charge reflects our decision to cease development activities on a generic asset thereby reducing its fair value to zero.

Income Taxes

Income taxes are recorded under the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Deferred income tax assets are reduced, as is necessary, by a valuation allowance when we determine it is more‑likely‑than‑not that some or all of the tax benefits will not be realizable in the future. Realization of the deferred tax assets is dependent on a variety of factors, some of which are subjective in nature, including the generation of future taxable income, the amount and timing of which are uncertain. In evaluating the ability to recover the deferred tax assets, we consider all available positive and negative evidence, including cumulative income in recent fiscal years, the forecast of future taxable income exclusive of certain reversing temporary differences and significant risks and uncertainties related to our business. In determining future taxable income, management is responsible for assumptions utilized including, but not limited to, the amount of U.S. federal, state and international pre‑tax operating income, the reversal of certain temporary differences, carryforward periods available to us for tax reporting purposes, the implementation of feasible and prudent tax planning strategies and other relevant factors. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates that we are using to manage the underlying business. We assess the need for a valuation allowance each reporting period, and would record any material changes that may result from such assessment to income tax expense in that period.

We account for uncertain tax positions in accordance with ASC 740‑10, Accounting for Uncertainty in Income Taxes. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The evaluation of unrecognized tax benefits is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. We evaluate unrecognized tax benefits and adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. The liabilities for unrecognized tax benefits can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the more‑likely‑than‑not threshold or the liability becomes effectively settled through the examination process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax benefit.

The most significant tax jurisdictions are Ireland, the United States, Argentina and Hungary. Significant estimates are required in determining the provision for income taxes. Some of these estimates are based on management’s interpretations of jurisdiction‑specific tax laws or regulations and the likelihood of settlement related to tax audit issues. Various internal and external factors may have favorable or unfavorable effects on the future effective income tax rate. These factors include, but are not limited to, changes in tax laws, regulations or rates, changing interpretations of

existing tax laws or regulations, changes in estimates of prior years’ items, changes in the international organization, likelihood of settlement, and changes in overall levels of income before taxes.

As of December 31, 2018 and 2017, the Company has a federal net operating loss carryover of $3.3 million and $4.4 million, respectively and net operating loss carryovers in certain foreign tax jurisdictions of approximately $22.4 million and $80.1 million, respectively which will begin to expire in 2022. At December 31, 2018 and 2017, the Company had total tax credit carryovers of approximately $4.6 million and $9.1 million, respectively, primarily consisting of Federal Orphan Drug Tax Credit carryovers. These credit carryovers are expected to be fully realized prior to their expiration, beginning in 2036.

We make an evaluation at the end of each reporting period as to whether or not some or all of the undistributed earnings of our subsidiaries are indefinitely reinvested. While we have concluded in the past that some of such undistributed earnings are indefinitely reinvested, facts and circumstances may change in the future. Changes in facts and circumstances may include a change in the estimated capital needs of our subsidiaries, or a change in our corporate liquidity requirements. Such changes could result in our management determining that some or all of such undistributed earnings are no longer indefinitely reinvested. In that event, we would be required to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely reinvested outside the relevant tax jurisdiction.

For the year ended December 31, 2018, we have not recorded any measurement period adjustments to the provisional estimates recorded as of December 31, 2017 in accordance with the SEC’s Staff Accounting Bulletin No. 118, or SAB 118. We analyzed the impact of the U.S. Tax Cuts and Jobs Act under SAB 118 and do not believe that any additional adjustments were required.

Share‑based compensation

Prior to the consummation of the IPO, our employees were eligible to receive equity awards from the 2016 Plan (as defined below). Following the consummation of the IPO, employees are eligible to receive equity awards from the 2018 Equity Incentive Plan.

Effective February 3, 2016, Osmotica Holdings S.C.Sp. adopted the 2016 Equity Incentive Plan, or the 2016 Plan, under which, the Company’s officers and key employees were granted options to purchase common units.  The options awards were made up of two components: 50% of options granted were Time Awards, or Time Based Options, and 50% were Performance Awards, or Performance Based Options. The Time Based Options vested 25% annually from original grant date. The Performance Based Options were to vest immediately upon the achievement by the majority investors in the Company having received (on a cumulative basis) aggregate net proceeds exceeding certain return on investment targets. The Time Awards and Performance Awards contained a sales restriction in the form of a liquidity event and subsequent disposal of common units by the Major Limited Partners (as defined in the 2016 Plan) before the employee was able to sell vested and exercised common units and were required to remain employed to avoid Company’s call option on such common units at a lower of cost or fair market value.

Prior to the Company’s IPO on October 22, 2018, the Company amended the 2016 Plan effective upon the IPO.  Under the amended 2016 Plan at the IPO, the Time Based Options and the Performance Based Options converted to options to purchase our ordinary shares on the same basis as common units of Osmotica Holdings S.C.Sp. were converted to ordinary shares, with corresponding adjustments to the exercise price and the number of the options as well as the removal of existing sales restriction.  In connection with this modification, the Time Based Options continued to vest in accordance with their original vesting schedule while the Performance Based Options were converted into options which vest with the passage of time, in equal annual installments on the first four anniversaries of the IPO, subject to the continued employment on each vesting date.

In addition, prior to the IPO the Company adopted the 2018 Equity Incentive Plan, or the 2018 Plan effective upon the IPO.  During 2018, the Company granted Time Based Options vesting in a single installment on the fourth anniversary of the Company’s IPO, generally subject to the employee’s continued employment on the vesting date.

We account for share-based compensation awards in accordance with the FASB Accounting Standards Codification, or ASC, Topic 718, Compensation — Stock Compensation, or ASC 718. ASC 718 requires service-based and equity settled share-based awards issued to employees to be recognized as expense based on their grant date fair values. We use the Black-Scholes option pricing model to value our share option awards and we account for forfeitures of share option awards as they occur in accordance with ASU No. 2016-09. For awards issued to employees, we recognize compensation expense on a graded vesting basis over the requisite service period, which is generally the vesting period of the award.

The conversion of the Performance Based Options to new Time Based Options upon IPO was accounted for as a modification under ASC 718 where the fair value of such awards determined on the modification date, or the IPO date will be recognized over their remaining vesting period.

Each award was approved by our directors at a per share exercise price not less than the per share fair value in effect as of that award date.

Estimating the fair value of options requires the input of subjective assumptions, including the estimated fair value of our ordinary shares, the exercise price, the expected option term, share price volatility, the risk-free interest rate and expected dividends. The assumptions used in our Black-Scholes option-pricing model represent management's best estimates and involve a number of variables, uncertainties and assumptions and the application of management's judgment, as they are inherently subjective. If any assumptions change, our share-based compensation expense could be materially different in the future.

These assumptions used in our Black-Scholes option-pricing model are estimated as follows:

Historically for all periods prior to the IPO, our board of directors has determined the fair value of the common unit underlying our options with assistance from management and based upon information available at the time of grant. Given the absence of a public trading market for our common units, estimating the fair value of our common units has required complex and subjective judgments and assumptions, including the most recent valuations of our common units based on the actual operational and financial performance, current business conditions and discounted cash flow projections. The estimated fair value of our common unit was adjusted for lack of marketability and control existing at the grant date.

For valuations after the consummation of the IPO, the board of directors determines the fair value of each share of underlying ordinary shares based on the closing price of our ordinary shares as reported on the date of grant.

During the year end December 31, 2018 we recognized $1.9 million of stock compensation expense.

Recently Issued Accounting Standards

For a discussion of recent accounting pronouncements, please see Note 2, Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere herein.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

Osmotica Pharmaceuticals plc

Dublin, Ireland

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Osmotica Pharmaceuticals plc (the “Company”) and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive loss, changes in shareholders’ equity/partners’ capital, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Method Related to Revenue

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue during the year ended December 31, 2018 due to the adoption of Accounting Standards Codification 606, “Revenue from Contracts with Customers.”

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ BDO USA, LLP

We have served as the Company's auditor since 2016.

Woodbridge, New Jersey

March 27, 2019 (except for Note 1, as to which the date is December 20, 2019)

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.