NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X
.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
, as updated by other reports we may file from time to time with the Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet as of
December 31, 2017
has been derived from those audited consolidated financial statements. Operating results for the
six
-month period ended
June 30, 2018
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
.
1. Restatement of Previously Issued Unaudited Interim Condensed Consolidated Financial Statements
Subsequent to the issuance of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, management determined a material adjustment was needed to correct the accounting for the early and partial extinguishment of the Company’s Convertible
3.75%
Senior Notes due 2019 (the “2019 Notes”) that resulted from the separate exchange agreements entered into with certain holders of the 2019 Notes in April 2018 (see Note 7 for further information regarding the 2019 Notes). Accordingly, the accompanying unaudited interim condensed consolidated financial statements of the Company for the three and six-months ended June 30, 2018, and the related notes hereto, have been restated to correct this error. In addition, the Company has elected to correct certain other accounting errors, which management believes are immaterial on an individual and aggregate basis to the Company’s unaudited interim condensed consolidated financial statements for the three and six-months ended June 30, 2018 and 2017. The correction of all the foregoing accounting errors is collectively referred to herein as "the Restatement". A summary of the correction of these accounting errors, and their impact on the unaudited condensed consolidated financial statements for the three and six-month periods ended June 30, 2018 and June 30, 2017, are as follows:
(1)
In April 2018, the Company entered into separate exchange agreements with certain holders of the 2019 Notes to exchange an aggregate of
$75.1 million
of the 2019 Notes for an equal amount of newly issued Convertible
4.75%
Senior Notes due 2023. The effect of this exchange was accounted for as an early and partial extinguishment of
$75.1 million
of the 2019 Notes, whereby an aggregate of approximately
$10.1 million
unamortized debt discount and financing costs associated with the 2019 Notes were written off and recognized as non-cash interest expense. Upon further analysis, management determined that the exchange of
$75.1 million
of 2019 Notes should have been accounted for by applying the cash conversion guidance prescribed by ASC 470-20, which requires, upon derecognition, among other things, an allocation of the fair value of the consideration transferred at settlement between (i) the extinguished liability component and (ii) the reacquired equity component. Accordingly, the accompanying unaudited interim condensed consolidated financial statements as of and for the three and six-month periods ended June 30, 2018 have been restated to reflect the application of this guidance in ASC 470-20 by decreasing the amount of non-cash interest expense recognized during the three and six-month periods ended June 30, 2018 by approximately
$7.6 million
, increasing the Company’s outstanding Convertible
4.75%
Senior Notes, net of debt discount and debt issuance costs, as of June 30, 2018 by approximately
$0.4 million
, and decreasing additional paid-in capital as of June 30, 2018 by approximately
$8.0 million
.
(2)
The Company identified approximately
$0.3 million
of uncollectible accounts receivable related to certain prior period pricing and shipment errors. Accordingly, the accompanying unaudited interim condensed consolidated financial statements as of and for the three and six-month periods ended June 30, 2018 has been revised to reflect the write-off of these out of period amounts by decreasing Revenue, net by approximately
$0.3 million
for the three and six-month periods ended June 30, 2018, respectively, decreasing Accounts Receivable, net, by
$0.4 million
and increasing Accounts Payable by
$0.1 million
as of June 30, 2018.
(3)
The Company identified approximately
$0.2 million
of uncollectible accounts receivable related to pricing and shipment errors that were previously written off and incorrectly classified within as Selling, General and Administrative Expenses rather than a reduction of Revenue, net. Accordingly, the accompanying unaudited interim condensed consolidated financial statements as of and for the three and six-month periods ended June 30, 2018 has been revised to reflect the proper classification of this amount by decreasing Revenues, net and decreasing Selling, General and Administrative Expenses by approximately
$0.2 million
for the three and six-month periods ended June 30, 2018, respectively.
(4)
The Company identified approximately
$0.3 million
of costs that were previously incurred and should have been
capitalized to Property, Plant and Equipment, net rather than recognized as Cost of Revenues. Accordingly, the accompanying unaudited interim condensed consolidated financial statements as of and for the three and six-month periods ended June 30, 2018 has been revised to reflect the proper classification of this out of period amount by increasing Property, Plant, and Equipment as of June 30, 2018 and reducing Cost of Revenues for the three and six-month periods ended June 30, 2018 by approximately
$0.3 million
, respectively. The effect on depreciation expense associated with the correction of this error was nil.
(5) The Company pays wholesalers certain fees associated with the sale of the Company’s product. The payment of these fees had been historically classified by the Company as cost of revenues and accrued expenses prior to the adoption of ASC 606,
Revenue from Contracts with Customers.
As disclosed in Note 4, the Company adopted ASC 606 on January 1, 2018 using the modified retrospective method, at which time the Company began classifying the payment of wholesaler fees as a reduction of revenue and accounts receivable. Upon further analysis, however, management determined that these fees should have always been classified as a reduction of revenue and accounts receivable, rather than as costs of revenues and accrued expenses, because the services provided by the Company’s wholesalers cannot generally be provided by third parties and the underlying fees are not specifically identifiable from other services. As a result, the accompanying unaudited interim condensed consolidated financial statements as of and for the three and six-month periods ended June 30, 2017 has been revised to correct the presentation of wholesaler fees as a reduction of revenue rather than as cost of revenues. The correction of this error resulted in a reduction of revenue of approximately of
$2.0 million
and
$4.2 million
, respectively, for the three and six-month periods ended June 30, 2017. In addition, the correction of this error resulted in a reduction in accounts receivable and decrease in accrued expenses of approximately
$5.4 million
, respectively, as of June 30, 2017 and
$7.0 million
, respectively, as of December 31, 2017.
(6) Prior to the adoption of ASC 606, the Company classified Medicaid, Medicare and other rebates (the “Rebates”) as a reduction of accounts receivable, whereas subsequent to adoption of ASC 606 the Company began classifying the Rebates as accrued expenses. Upon further analysis, management determined that the Rebates should have always been classified as accrued expenses because their terms require cash settlement and are payable to third parties that are other than the Company’s customer. The correction of this error resulted in an increase in accounts receivable and increase in accrued expenses of
$2.5 million
, respectively, as of June 30, 2017 and
$1.6 million
, respectively, as of December 31, 2017.
The following tables summarize the effect of the Restatement on the Company's unaudited interim condensed consolidated financial statements as of and for the three and six-months ended June 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2018
|
|
Six months ended June 30, 2018
|
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
$
|
16,751
|
|
|
$
|
(502
|
)
|
(2), (3)
|
$
|
16,249
|
|
|
$
|
31,296
|
|
|
$
|
(502
|
)
|
(2), (3)
|
$
|
30,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
11,728
|
|
|
(263
|
)
|
(4)
|
11,465
|
|
|
21,053
|
|
|
(263
|
)
|
(4)
|
20,790
|
|
|
Selling, general and administrative expenses
|
5,961
|
|
|
(234
|
)
|
(3)
|
5,727
|
|
|
11,321
|
|
|
(234
|
)
|
(3)
|
11,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
21,656
|
|
|
(497
|
)
|
|
21,159
|
|
|
39,732
|
|
|
(497
|
)
|
|
39,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
(4,905
|
)
|
|
(5
|
)
|
|
(4,910
|
)
|
|
(8,436
|
)
|
|
(5
|
)
|
|
(8,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Partial extinguishment of Convertible 3.75% Notes
|
(10,069
|
)
|
|
7,602
|
|
(1)
|
(2,467
|
)
|
|
(10,069
|
)
|
|
7,602
|
|
(1)
|
(2,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
(20,693
|
)
|
|
7,597
|
|
|
(13,096
|
)
|
|
(25,471
|
)
|
|
7,597
|
|
|
(17,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(20,716
|
)
|
|
$
|
7,597
|
|
|
$
|
(13,119
|
)
|
|
$
|
(25,518
|
)
|
|
$
|
7,597
|
|
|
$
|
(17,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
$
|
(0.39
|
)
|
|
$
|
0.14
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
0.14
|
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
June 30, 2018
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
|
Accounts receivable, net
|
$
|
16,232
|
|
|
$
|
(151
|
)
|
(2)
|
$
|
16,081
|
|
|
Total current assets
|
49,688
|
|
|
(151
|
)
|
|
49,537
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
83,027
|
|
|
263
|
|
(4)
|
83,290
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
186,667
|
|
|
$
|
112
|
|
|
$
|
186,779
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
$
|
8,654
|
|
|
$
|
117
|
|
(2)
|
$
|
8,771
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
17,923
|
|
|
117
|
|
|
18,040
|
|
|
|
|
|
|
|
|
|
Convertible 4.75% Senior Notes, net of debt discount and debt issuance costs (face of $75,090, as of June 30, 2018)
|
54,963
|
|
|
406
|
|
(1)
|
55,369
|
|
|
Total liabilities
|
147,544
|
|
|
523
|
|
|
148,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid in capital
|
126,532
|
|
|
(8,008
|
)
|
(1)
|
118,524
|
|
|
Accumulated deficit
|
(85,612
|
)
|
|
7,597
|
|
|
(78,015
|
)
|
|
Total stockholders’ equity
|
39,123
|
|
|
(411
|
)
|
|
38,712
|
|
|
Total liabilities and stockholders' equity
|
$
|
186,667
|
|
|
$
|
112
|
|
|
$
|
186,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2018
|
|
Six months ended June 30, 2018
|
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
|
Net loss
|
$
|
(20,716
|
)
|
|
$
|
7,597
|
|
(1),(2),(3),(4)
|
$
|
(13,119
|
)
|
|
$
|
(25,518
|
)
|
|
$
|
7,597
|
|
(1),(2),(3),(4)
|
$
|
(17,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
$
|
(20,744
|
)
|
|
$
|
7,597
|
|
(1),(2),(3),(4)
|
$
|
(13,147
|
)
|
|
$
|
(25,850
|
)
|
|
$
|
7,597
|
|
(1),(2),(3),(4)
|
$
|
(18,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2018
|
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
|
Net loss
|
$
|
(25,518
|
)
|
|
$
|
7,597
|
|
(1),(2),(3),(4)
|
$
|
(17,921
|
)
|
|
Additional Paid in Capital
|
126,532
|
|
|
(8,008
|
)
|
(1)
|
118,524
|
|
|
Total Stockholder's Equity
|
$
|
39,123
|
|
|
$
|
(411
|
)
|
(1),(2),(3),(4)
|
$
|
38,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2018
|
|
|
As Previously Reported
|
|
Adjustments
|
|
As Restated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(25,518
|
)
|
|
$
|
7,597
|
|
(1),(2),(3),(4)
|
$
|
(17,921
|
)
|
|
|
|
|
|
|
|
|
Stock based compensation
|
1,113
|
|
|
(10
|
)
|
(4)
|
1,103
|
|
|
Partial extinguishment of Convertible 3.75% Senior Notes
|
10,069
|
|
|
(7,602
|
)
|
(1)
|
2,467
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
1,023
|
|
|
(5,250
|
)
|
(2),(5), (a)
|
(4,227
|
)
|
|
Accounts payable and accrued expenses
|
(9,604
|
)
|
|
5,518
|
|
(5), (a)
|
(4,086
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
(12,763
|
)
|
|
253
|
|
|
(12,510
|
)
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Capital expenditures
|
(12,270
|
)
|
|
(253
|
)
|
(4)
|
(12,523
|
)
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
(12,270
|
)
|
|
(253
|
)
|
|
(12,523
|
)
|
|
|
|
|
|
|
|
|
Non cash investing and financing transactions:
|
|
|
|
|
|
|
Capitalized stock compensation in capital expenditures
|
53
|
|
10
|
|
(4)
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations
|
|
|
Three Months Ended June 30, 2017
|
|
Six Months Ended June 30, 2017
|
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
$
|
18,408
|
|
|
$
|
1,976
|
|
(5)
|
$
|
16,432
|
|
|
$
|
38,299
|
|
|
$
|
4,204
|
|
(5)
|
$
|
34,095
|
|
|
Cost of revenues
|
10,371
|
|
|
1,976
|
|
(5)
|
8,395
|
|
|
19,328
|
|
|
4,204
|
|
(5)
|
15,124
|
|
|
Total costs and expenses
|
20,190
|
|
|
1,976
|
|
(5)
|
18,214
|
|
|
37,114
|
|
|
4,204
|
|
(5)
|
32,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheet
|
|
Condensed Consolidated Balance Sheet
|
|
|
June 30, 2017
|
|
December 31, 2017
|
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
$
|
27,272
|
|
|
$
|
2,853
|
|
(5),(6)
|
$
|
24,419
|
|
|
$
|
18,143
|
|
|
$
|
5,401
|
|
(5),(6)
|
$
|
12,742
|
|
|
Total current assets
|
95,009
|
|
|
2,853
|
|
(5),(6)
|
92,156
|
|
|
64,532
|
|
|
5,401
|
|
(5),(6)
|
59,131
|
|
|
Total assets
|
196,385
|
|
|
2,853
|
|
(5),(6)
|
193,532
|
|
|
189,986
|
|
|
5,401
|
|
(5),(6)
|
184,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
12,019
|
|
|
2,853
|
|
(5),(6)
|
9,166
|
|
|
13,502
|
|
|
5,401
|
|
(5),(6)
|
8,101
|
|
|
Total current liabilities
|
21,728
|
|
|
2,853
|
|
(5),(6)
|
18,875
|
|
|
24,097
|
|
|
5,401
|
|
(5),(6)
|
18,696
|
|
|
Total liabilities
|
137,977
|
|
|
2,853
|
|
(5),(6)
|
135,124
|
|
|
145,233
|
|
|
5,401
|
|
(5),(6)
|
139,832
|
|
|
Total liabilities and stockholders' equity
|
196,385
|
|
|
2,853
|
|
(5),(6)
|
193,532
|
|
|
189,986
|
|
|
5,401
|
|
(5),(6)
|
184,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Cash Flows
|
|
|
Six Months Ended June 30, 2017
|
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Accounts receivable
|
$
|
(5,530
|
)
|
|
$
|
(1,522
|
)
|
(5),(6)
|
$
|
(4,008
|
)
|
|
Accounts payable and accrued expenses
|
2,414
|
|
|
1,522
|
|
(5),(6)
|
892
|
|
2. Nature of the Business and Liquidity
Nature of the Business
Teligent, Inc. and its subsidiaries (collectively the “Company”), is a specialty generic pharmaceutical company. Our mission is to become a leader in the specialty generic pharmaceutical market in alternate dosage forms. Under our own label, we currently market and sell generic topical and generic and branded generic injectable pharmaceutical products in the United States and Canada. In the United States, we currently market
28
generic topical pharmaceutical products and
four
branded generic injectable pharmaceutical products. In Canada, we sell over
30
generic and branded generic injectable products and medical devices. Generic pharmaceutical products are bioequivalent to their brand name counterparts. We also provide contract manufacturing services to the pharmaceutical, over-the-counter ("OTC"), and cosmetic markets. We operate our business under
one
reportable segment. Our common stock is traded on the NASDAQ Global Select Market under the
trading symbol “TLGT.” Our principal executive office, laboratories and manufacturing facilities are located at 105 Lincoln Avenue, Buena, New Jersey. We have additional offices located in Iselin, New Jersey, Toronto, Canada, and Tallinn, Estonia.
Liquidity
Our capital resources were comprised of cash and cash equivalents of
$13.7 million
and
$26.7 million
as of June 30, 2018 and December 31, 2017, respectively. The reduction in our cash during the six months ended June 30, 2018 was largely due to our additional year-to-date investment of
$12.5 million
in the Company's new manufacturing facility located in Buena, New Jersey, along with the timing of our accounts receivable collections and expense payments associated with our launch of
five
new products in the U.S. market. In addition, we had an accumulated deficit of
$78.0 million
as of June 30, 2018 and incurred a
$17.9 million
net loss and used
$12.5 million
in net cash from operating activities during the six months ended June 30, 2018.
Our liquidity needs have typically arisen from the funding of our manufacturing facility, research and development programs and the launch of new products. In the past, we have met these cash requirements through cash inflows from operations, working capital management, and proceeds from our Convertible
3.75%
Senior Notes ("2019 Notes"). The 2019 Notes were issued in December 2014 and are due in December 2019. On April 27, 2018, the Company entered into separate exchange agreements with certain holders of the 2019 Notes. The agreements gave the holder the right to exchange in aggregate
$75.1 million
of the 2019 Notes for
$75.1 million
of new Convertible
4.75%
Senior Notes due 2023 (“2023 Notes”). Additional information is provided in Note 7. We expect to continue to incur significant expenditures for the development of new products in our pipeline, and the manufacturing and sales and marketing of our existing product. While we rely heavily on cash flows from operating activities and borrowings and from outside sources to execute our operational strategy and meet our financial commitments and other short-term financial needs, we cannot be certain that sufficient capital will be generated through operations or will be available to the Company to the extent required and on acceptable terms.
In order to continue normal business operations and execution of the Company’s growth strategy, the Company has and will continue to exercise its ability to significantly defer or reduce planned discretionary investments in research and development and capital projects or seek other financing alternatives. Other financing alternatives may include raising additional capital through the sale of its equity, a strategic alliance with a third party or securing debt. If additional acquisition and growth opportunities arise, external financing will be required.
On May 4, 2018, the Company filed Form S-3 under the Securities Act of 1933. The S-3 registration allows the Company to issue, from time to time and at prices to be determined at or prior to the offering, up to
$50.0 million
of any combination of the securities described in the prospectus, either individually or in units should the need to raise cash arise.
On June 1, 2018, the Company secured a term loan ("2021 Term Loan") for
$25.0 million
to support the operations of the business. The first
$15.0 million
of loan proceeds was received on June 1, 2018. The remaining loan proceeds of
$10.0 million
was received on July 16, 2018. The Company is currently evaluating alternative financing methods. As the Company continues to review its capital and debt structure, there can be no assurance that a strategic alliance or debt financing will be available on terms acceptable to the Company, or at all. The board of directors and management of the Company intend to exercise all options available in order to enable the Company to support its current growth strategy and operations beyond December 2019.
Out of Period Adjustments
For the three and six months ended June 30, 2018, the Company recorded the following adjustments (in thousands) related to prior periods. The net impact of the adjustments on any prior annual or interim periods financial statements was not significant. There were no adjustments related to prior periods recorded for the three and six months ended June 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
Six months ended
|
|
|
June 30, 2018
|
June 30, 2018
|
|
Wholesale fees (Revenue)
|
$
|
856
|
|
$
|
1,218
|
|
|
Medicaid (Revenue)
|
297
|
|
297
|
|
|
Pricing and shipment adjustment (Revenue) (2), (3)
|
(502
|
)
|
(502
|
)
|
|
Sales return reserve (Revenue)
|
—
|
|
(577
|
)
|
|
Inventory adjustments (Cost of revenues)
|
—
|
|
95
|
|
|
Capitalization of property, plant and equipment (Cost of revenues) (4)
|
263
|
|
263
|
|
|
Bad debt expense (Selling, general and administrative expenses)
|
(578
|
)
|
(578
|
)
|
|
|
$
|
336
|
|
$
|
216
|
|
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Teligent, Inc. and its wholly-owned and majority-owned subsidiaries. All inter-company accounts and transactions have been eliminated. The Company consolidated the following entities: Igen, Inc., Teligent Pharma. Inc., Teligent Luxembourg S.à.r.l., Teligent OÜ, Teligent Canada Inc., and Teligent Jersey Limited., in addition to the following inactive entities: Microburst Energy, Inc., Blood Cells, Inc. and Flavorsome, Ltd.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the historical valuation of the derivative liability, sales returns and allowances, allowances for excess and obsolete inventories, allowances for doubtful accounts, provisions for income taxes and related valuation allowances, stock based compensation, the assessment for the impairment of long-lived assets (including intangibles, goodwill and property, plant and equipment), property, plant and equipment and legal accruals for environmental cleanup and remediation costs. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid instruments purchased with the original maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes. Cash and cash equivalents include cash on hand and bank demand deposits used in the Company’s cash management program.
The Company has restricted cash, consisting of escrow accounts and letter of credits, which is included within other assets on the Condensed Consolidated Balance Sheet. The Company also presents restricted cash with cash and cash equivalents in the Condensed Consolidated Statement of Cash Flows.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported in the Consolidated Balance Sheet to the total amounts in the Consolidated Statement of Cash Flows as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Cash and cash equivalents
|
$
|
13,675
|
|
|
$
|
26,692
|
|
|
$
|
50,216
|
|
|
$
|
66,006
|
|
|
Restricted cash in other assets
|
472
|
|
|
473
|
|
|
475
|
|
|
475
|
|
|
Cash, cash equivalents and restricted cash in the statement of cash flows
|
$
|
14,147
|
|
|
$
|
27,165
|
|
|
$
|
50,691
|
|
|
$
|
66,481
|
|
Stock Based Compensation
ASC 718-10 defines the fair-value-based method of accounting for stock-based employee compensation plans and transactions used by the Company to account for its issuances of equity instruments to record compensation cost for stock-based employee compensation plans at fair value as well as to acquire goods or services from non-employees. Transactions in which the Company issues stock-based compensation to employees, directors and advisors and for goods or services received from non-employees are accounted for based on the fair value of the equity instruments issued. The Company utilizes pricing models in determining the fair values of options, restricted stock units ("RSU's") and warrants issued as stock-based compensation. These pricing models utilize the market price of the Company’s common stock and the exercise price of the option or warrant, as well as time value and volatility factors underlying the positions. Stock-based compensation expense is recognized over the requisite service period of the award, which usually coincides with the vesting period of the grant.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade receivables, notes payable, accounts payable and other accrued liabilities at
June 30, 2018
approximate their fair value for all periods presented. As of
June 30, 2018
, the net carrying value of the 2019 Notes and 2023 Notes (collectively the "Notes" and discussed in Note 7) was approximately
$115.7 million
compared to their face value of
$143.75 million
. This variance is due to the conversion feature in the Notes rather than to changes in market interest rates. The Notes carry a fixed interest rate and therefore do not subject the Company to interest rate risk. As of June 30, 2018, the net carrying value of the 2021 Term Loan (discussed in Note 7) was approximately
$14.2 million
compared to the face value of
$15.0 million
. The variance is due to debt discount and debt financing costs. The 2021 Term Loan bears interest at a rate of LIBOR plus
9%
, and is therefore subject to market risk.
Loss Per Share
Basic loss per share of common stock is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted loss per share of common stock is computed using the weighted average number of shares of common stock and potential dilutive common stock equivalents outstanding during the period. Potential dilutive common stock equivalents include shares issuable upon the conversion of the 2019 and 2023 Notes, the exercise of options, and the vesting RSU's. For the
three and six
months ended
June 30, 2018
, the potential dilutive common stock equivalents have been excluded from the computation of diluted loss per share, as their effect would have been anti-dilutive.
(in thousands except shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2018 (Restated)
|
|
2017
|
|
2018 (Restated)
|
|
2017
|
|
Basic loss per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss - basic and diluted
|
$
|
(13,119
|
)
|
|
$
|
(919
|
)
|
|
$
|
(17,921
|
)
|
|
$
|
(88
|
)
|
|
Weighted average common shares - basic and diluted
|
53,510,712
|
|
|
53,304,407
|
|
|
53,484,756
|
|
|
53,250,109
|
|
|
Basic and diluted loss per share
|
$
|
(0.25
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
0.00
|
|
Revenue Recognition
The Company recognizes revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. The Company's revenue is recorded net of accruals for estimated chargebacks, rebates, cash discounts, other allowances, and returns. The Company derives its revenues from three types of transactions: sales of its own pharmaceutical products (Company product sales), sales of manufactured product for its customers (contract manufacturing sales), and research and product development services performed for third parties. Due to differences in the substance of these transaction types, the transactions require, and the Company utilizes, different revenue recognition policies for each. Taxes collected from customers and remitted to government authorities and that are related to the sales of the Company’s products are excluded from revenues. See more detailed information in Note 4.
Adoption of ASC Topic 606, "Revenue from Contracts with Customers”
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The standard, including subsequently issued amendments, replaces most existing revenue recognition guidance in U.S. GAAP. The key focus of the new standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company performed a comprehensive review of its existing revenue arrangements as of January 1, 2018 following the aforementioned five-step model. Based on the Company's analysis, there were no changes identified that impacted the amount or timing of revenues recognized under the new guidance as compared to the previous guidance. Additionally, the Company's analysis indicated that there were no changes to how costs to obtain and fulfill our customer contracts would be recognized under the new guidance as compared to the previous guidance. The impact of the adoption of this standard on the Company's Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Operations, and Condensed Consolidated Statement of Cash Flows was not material. The adoption of the new guidance impacted the way the Company analyzes, documents, and discloses revenue recognition under customer contracts beginning on January 1, 2018 and resulted in additional disclosures in the Company's financial statements.
Property, Plant and Equipment
Depreciation and amortization of property, plant and equipment is provided for under the straight-line method over the assets’ estimated useful lives as follows:
|
|
|
|
|
|
|
Useful Lives
|
|
Buildings and Improvements
|
10 - 40 years
|
|
Machinery and Equipment
|
5 - 15 years
|
|
Computer Hardware and Software
|
3 - 5 years
|
|
Furniture Fixtures
|
5 years
|
Leasehold improvements are amortized over the shorter of estimated useful life or the lease term. Repair and maintenance costs are charged to operations as incurred while major improvements are capitalized. Construction in progress ("CIP") costs are amortized based on the asset class when they are put into service. When assets are retired or disposed, the related cost and accumulated depreciation thereon are removed and any gains or losses are included in operating results.
Concentration of Credit Risk
Major customers of the Company are defined as those constituting greater than
10%
of our total revenue. For the
three months ended June 30, 2018
, two of the Company’s customers accounted for
49%
of the Company’s revenue, consisting of
35%
and
14%
, respectively. For the
three months ended June 30, 2017
, three of the Company’s customers accounted for
50%
of the Company’s revenue, consisting of
26%
,
10%
and
14%
, respectively. For the
six months ended June 30, 2018
, two of the Company's customers accounted for
48%
of the Company's revenue, consisting of
35%
and
13%
, respectively. For the
six months ended June 30, 2017
, three of the Company's customers accounted for
52%
of the Company's revenue, consisting of
26%
,
13%
and
13%
, respectively. Accounts receivable related to the Company’s major customers comprised
49%
of all accounts receivable as of
June 30, 2018
, and
67%
of all accounts receivable as of
June 30, 2017
. The loss of one or more of these major customers could have a significant impact on our revenues and harm our business and results of operations
.
For the
three months ended June 30, 2018
, domestic net revenues were
$11.4 million
and foreign net revenues were
$4.9 million
. For the
six months ended June 30, 2018
, domestic net revenues were
$21.6 million
and foreign net revenues were
$9.2 million
. As of
June 30, 2018
, domestic assets were
$125.9 million
and foreign assets were
$60.9 million
. For the three months ended
June 30, 2017
, domestic net revenues were
$13.0 million
and foreign net revenues were
$3.4 million
. For the
six months ended June 30, 2017
, domestic net revenues were
$27.8 million
and foreign net revenues were
$6.3 million
. As of
June 30, 2017
, domestic assets were
$124.8 million
and foreign assets were
$68.7 million
.
Foreign Currency Translation
The net assets of international subsidiaries where the local currencies have been determined to be the functional currencies are translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in the foreign currency translation account, which is included in Accumulated Other Comprehensive (Loss) ("AOCI") and reflected as a separate component of equity. For those subsidiaries
where the U.S. dollar has been determined to be the functional currency, non-monetary foreign currency assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with the U.S. dollar effects of rate changes included in Foreign currency exchange gain line item under the Other income (expense), net section of the Condensed Consolidated Statement of Operations.
Debt Issuance Costs
Expenses related to debt financing activities are capitalized and amortized on an effective interest method, over the term of the loan and are to be netted against the carrying value of the financial liability, as required by ASU 2015-3. This standard aligns the treatment of debt issuance costs and debt discounts in that both reduce the carrying value of the liability. Amortization of debt issuance costs is to be recorded as interest expense on the Condensed Consolidated Statement of Operations.
Adoption of Other Recent Accounting Pronouncements
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): "Restricted Cash (a consensus of the FASB Emerging Issues Task Force)". The update addresses the diversity in the industry with respect to classification and presentation of changes in restricted cash on the statement of cash flows. These amendments require that a statement of cash flows explain the restricted cash change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments in this update were effective for fiscal years beginning after December 15, 2017 for public business entities, including interim periods within those fiscal years. For the Company, the amendments were effective January 1, 2018. The Company's adoption of this ASU, effective January 1, 2018, did not have a significant impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): “Clarifying the Definition of a Business”. The update clarifies the definition of a business, specifically for companies to better evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update were effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company's adoption of this ASU, effective January 1, 2018, did not have a significant impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): “Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings”. The update shows amendments to two SEC Announcements made late in 2016 regarding four specific standards as follows: ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ASU 2016-02, Leases (Topic 842), ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), and ASU 2014-01, Investments - Equity Method and Joint Ventures (Topic 323). The amendments in this update require changes to the U.S. GAAP Financial Reporting Taxonomy and the changes will be incorporated into the proposed 2018 Taxonomy which are available for public comment and finalized as part of the annual release process. The Company's adoption of this ASU, effective January 1, 2018, did not have a significant impact on its consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”. This update addresses guidance for partial sales of nonfinancial assets. It affects (i) an entity that enters into a contract to transfer to a customer a nonfinancial asset, group of nonfinancial assets, or ownership interest in a consolidated subsidiary that is not a business or nonprofit entity, (ii) an entity that historically had transactions within the scope of the real estate-specific derecognition guidance, and (iii) an entity that contributes nonfinancial assets that are not a business or a nonprofit activity to a joint venture or other noncontrolled investee. The amendments were effective at the same time as the amendments in ASU 2014-09. Therefore, for the Company, the amendments were effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Public entities may apply the guidance earlier but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company does not currently expect to enter into any such nonfinancial asset or ownership interest in its consolidated subsidiaries agreements but will refer to the guidance in ASU 2017-05 should that occur. The Company's adoption of this ASU, effective January 1, 2018, did not have a significant impact on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): “Scope of Modification Accounting”. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718, Compensation—Stock Compensation, to a change to the
terms or conditions of a share-based payment award. The amendments affect any entity that changes the terms or conditions of a share-based payment award. The amendments are effective for fiscal years beginning after December 15, 2017. For the Company, the amendments were effective January 1, 2018. The Company has not made any changes to the terms or conditions of share-based payment awards but will refer to the guidance in ASU 2017-09 should that occur. The Company's adoption of this ASU, effective January 1, 2018, did not have a significant impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): “Recognition and Measurement of Financial Assets and Financial Liabilities”. The update supersedes Topic 840, Leases and requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. Topic 842 retains a distinction between finance leases and operating leases, with cash payments from operating leases classified within operating activities in the statement of cash flows. The amendments in this update are effective for fiscal years beginning after December 15, 2018 for public business entities, which for the Company means January 1, 2019. The Company is reviewing all lease agreements inclusive of supplier agreements. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): “Simplifying the Test for Goodwill Impairment”. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. It affects public entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. A public entity that is a U.S. Securities and Exchange Commission ("SEC") filer should adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. For the Company, the amendments are effective January 1, 2020. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This guidance is effective for all entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The amendments in ASU 2018-02 should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of this guidance is not expected to have a material impact on the Company's Consolidated Financial Statements and related disclosures.
4. Revenues, Recognition and Allowances
Revenue Recognition
As of January 1, 2018, the Company adopted the ASC 606 guidance for revenue recognition for contracts, using the modified retrospective method. The implementation of this guidance had no material impact on the measurement or recognition of revenue from customer contracts of prior periods.
Upon adoption of this new guidance, the Company recognizes revenue using the following five steps:
•
Identification of the contract, or contracts, with a customer;
•
Identification of the performance obligations in the contract;
•
Determination of the transaction price, including the identification and estimation of variable consideration;
•
Allocation of the transaction price to the performance obligations in the contract; and
•
Recognition of revenue when we satisfy a performance obligation.
The Company derives its revenues from
three
types of transactions: sales of its own pharmaceutical products (Company product sales), sales of manufactured product for its customers (contract manufacturing sales), and research and product development services performed for third parties.
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the
transaction price using the expected value method based on historical experience as well as applicable information currently available.
Company Product Sales
Revenue from Company product sales is recognized upon transfer of control of a product to a customer at a point in time, generally as the Company's products are sold on an FOB destination basis and because inventory risk and risk of ownership passes to the customer upon delivery.
Company product sales are recorded net of accruals for estimated chargebacks, rebates, cash discounts, other allowances, and returns (collectively, sales returns and allowances or “SRA”).
Contract Manufacturing Sales
The Company recognizes revenue for contract manufacturing sales upon transfer of control of a product to a customer, which is generally upon shipment of products. However, with the new adoption of revenue recognition for contracts, the Company recognizes the revenue over time, rather than upon shipment. These shipments are made in accordance with sales commitments and related sales orders entered into with customers either verbally or in written form.
Contract manufacturing sales are recognized net of accruals for cash discounts and returns which are established at the time of sale, and are included in revenues, net in the Company's Condensed Consolidated Statement of Operations.
Research and Development Services and Other Income
The Company establishes agreed upon product development agreements with its customers to perform product development services. Revenues are recognized in accordance with the agreement upon the completion of the phases of development and when the Company has no future performance obligations relating to that phase of development. Other types of revenue include royalty or licensing revenue, and would be recognized over time, or at a point in time, based upon the contractual term upon completion of the earnings process. Judgments are required to evaluate contingencies such as potential variances in schedule and the costs, the impact of change orders, liability claims, contract disputes and achievement of contractual performance standards.
Revenues by Transaction Type
The Company operates in
one
reportable segment and, therefore, the results of the Company's operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting for the chief decision makers. Net Sales (in thousands) for the
three and six months ended June 30, 2018
and
2017
were as follows (prior-period amounts are not adjusted under the modified-retrospective method of adoption):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Company product sales
|
$
|
14,677
|
|
|
$
|
13,912
|
|
|
$
|
27,913
|
|
|
$
|
28,120
|
|
|
Contract manufacturing sales
|
1,450
|
|
|
2,407
|
|
|
2,748
|
|
|
5,824
|
|
|
Research and development services and other income
|
122
|
|
|
113
|
|
|
$
|
133
|
|
|
$
|
151
|
|
|
Revenue, net
|
$
|
16,249
|
|
|
$
|
16,432
|
|
|
$
|
30,794
|
|
|
$
|
34,095
|
|
Disaggregated information for the Company product sales revenue has been recognized in the accompanying unaudited interim Condensed Consolidated Statements of Operations is presented below according to contract type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
Company Product Sales
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Topical
|
|
$
|
7,888
|
|
|
$
|
8,558
|
|
|
$
|
15,795
|
|
|
$
|
16,153
|
|
|
Injectables
|
|
6,789
|
|
|
5,354
|
|
|
12,118
|
|
|
11,967
|
|
|
Total
|
|
$
|
14,677
|
|
|
$
|
13,912
|
|
|
$
|
27,913
|
|
|
$
|
28,120
|
|
In the
six months ended
June 30, 2018
, Company did not incur, and therefore did not defer, any material incremental costs to obtain contracts.
Sales Returns and Allowances
As is customary in the pharmaceutical industry, the Company’s product sales are subject to a variety of deductions including chargebacks, rebates, cash discounts, other allowances, and returns. Product sales are recorded net of accruals for SRA, which are established at the time of sale. The Company analyzes the adequacy of its accruals for SRA quarterly. Amounts accrued for sales deductions are adjusted when trends or significant events indicate that an adjustment is appropriate. Accruals are also adjusted to reflect actual results. These provisions are estimates based on historical payment experience, historical relationship to revenues, estimated customer inventory levels and current contract sales terms with direct and indirect customers. The Company uses a variety of methods to assess the adequacy of its SRA reserves to ensure that its financial statements are fairly stated. These include periodic reviews of customer inventory data, customer contract programs, subsequent actual payment experience, and product pricing trends to analyze and validate the SRA reserves.
Net Company product sales of
$14.7 million
and
$13.9 million
for the
three months ended June 30, 2018
and
2017
, respectively, are included in product sales, net in the Condensed Consolidated Statements of Operations. Net Company product revenue of $
27.9 million
and $
28.1 million
for the
six months ended
June 30, 2018
and
2017
, respectively, are included in product sales, net in the Condensed Consolidated Statements of Operations. Accounts receivable are presented net of SRA balances of
$19.3 million
and
$33.7 million
at
June 30, 2018
and
2017
, respectively. For the
six months ended
June 30, 2018
, the Company recorded income of
$0.8 million
due to a decrease in the Medicaid reserve primarily related to finalizing the payment per the terms of the product acquisition agreement.
The accrual for chargebacks is one of the Company's most significant estimates for recognition of product sales. A chargeback represents an amount payable in the future to a wholesaler for the difference between the invoice price paid to the Company by its wholesale customer for a particular product and the negotiated contract price that the wholesaler’s customer pays for that product. The Company’s chargeback provision and related reserve varies with changes in product mix, changes in customer pricing and changes to estimated wholesaler inventories. The provision for chargebacks also takes into account an estimate of the expected wholesaler sell-through levels to indirect customers at contract prices. The Company validates the chargeback accrual quarterly through a review of the inventory reports obtained from its largest wholesale customers. This customer inventory information is used to establish the estimated liability for future chargeback claims based on historical chargeback and contract rates. These large wholesalers represent a majority of the Company’s chargeback payments. The Company continually monitors current pricing trends and wholesaler inventory levels to ensure the liability for future chargebacks is fairly stated.
The rebate accrual is used for various discounts and rebates provided to customers. This account has been used for various one-time discounts given to customers. The Company reviews the percentage of products sold through these programs by reviewing chargeback data and uses the appropriate percentages to calculate the rebate accrual. Rebates are invoiced monthly or quarterly and reviewed against the accruals. Other items that could be included in accrued rebates would be price protection fees, shelf stock adjustments (SSAs), or other various amounts that would serve as one time discounts on specific products.
The Company's adjustments for the deductions to gross product sales are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Gross product sales
|
$
|
48,142
|
|
|
$
|
66,744
|
|
|
$
|
84,690
|
|
|
$
|
121,044
|
|
|
|
|
|
|
|
|
|
|
|
Deduction to gross product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks and billbacks
|
21,449
|
|
|
44,090
|
|
|
38,364
|
|
|
74,105
|
|
|
Wholesaler fees for service
|
477
|
|
|
1,976
|
|
|
1,112
|
|
|
4,204
|
|
|
Sales discounts and other allowances
|
11,539
|
|
|
6,766
|
|
|
17,301
|
|
|
14,615
|
|
|
Total reduction to gross product sales
|
$
|
33,465
|
|
|
$
|
52,832
|
|
|
$
|
56,777
|
|
|
$
|
92,924
|
|
|
|
|
|
|
|
|
|
|
|
Company product sales, net
|
$
|
14,677
|
|
|
$
|
13,912
|
|
|
$
|
27,913
|
|
|
$
|
28,120
|
|
Financing and Payment
The Company's payment terms vary by the type and location of the customer and the products or services offered. The term between invoicing and when payment is due is not significant. The Company generally does not have incremental costs to obtain contracts that would otherwise not have been incurred. The Company does not adjust revenue for the promised amount of consideration for the effects of a significant financing component because the Company's customers generally pay the Company within
100
days.
Costs to Obtain or Fulfill a Customer Contract
Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in selling, general and administrative expense in the Condensed Consolidated Statements of Operations.
Costs related to shipping and handling is comprised of outbound freight and associated labor. The Company accounts for shipping and handling activities related to contracts with customers as fulfillment costs which are included in cost of sales in the Condensed Consolidated Statements of Operations.
In connection with
four
of the
30
products the Company currently manufactures, markets and distributes in its own label in the U.S., in accordance with an agreement entered into in December of 2011, the Company is required to pay a royalty calculated based on net sales to one of its pharmaceutical partners. The royalty is calculated based on contracted terms of
40%
of net sales for the
four
products, which is to be paid quarterly to the pharmaceutical partner. Accounts payable and accrued expenses include
$0.6 million
and
$0.4 million
at
June 30, 2018
and
2017
, respectively, related to these royalties. Royalty expense of
$0.7 million
and
$0.4 million
was included in cost of sales in the Condensed Consolidated Statements of Operations for the
three months ended June 30, 2018
and
2017
, respectively. Royalty expense of
$1.5 million
and
$0.9 million
was included in cost of sales in the Condensed Consolidated Statements of Operations for the
six months ended
June 30, 2018
and
2017
, respectively.
5. Inventories
Inventories are valued at the lower of cost or net realizable value, using the first-in-first-out method and consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
(Unaudited)
|
|
(Audited)
|
|
Raw materials
|
$
|
10,655
|
|
|
$
|
8,231
|
|
|
Work in progress
|
944
|
|
|
616
|
|
|
Finished goods
|
8,434
|
|
|
8,532
|
|
|
Inventories reserve
|
(2,458
|
)
|
|
(1,304
|
)
|
|
Inventories, net
|
$
|
17,575
|
|
|
$
|
16,075
|
|
6. Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
(Unaudited)
|
|
(Audited)
|
|
Land
|
$
|
257
|
|
|
$
|
257
|
|
|
Building and improvements
|
17,474
|
|
|
8,613
|
|
|
Machinery and equipment
|
9,674
|
|
|
9,142
|
|
|
Computer hardware and software
|
4,059
|
|
|
3,244
|
|
|
Furniture and fixtures
|
553
|
|
|
449
|
|
|
Construction in progress
|
60,531
|
|
|
55,017
|
|
|
|
92,548
|
|
|
76,722
|
|
|
Less accumulated depreciation and amortization
|
(9,258
|
)
|
|
(8,367
|
)
|
|
Property, plant and equipment, net
|
$
|
83,290
|
|
|
$
|
68,355
|
|
The Company recorded depreciation expense of
$1.1 million
and
$0.8 million
for the
six months ended
June 30, 2018
and
June 30, 2017
, respectively. During the
three months ended June 30, 2018
and
June 30, 2017
, there was
$1.5 million
of interest and
$0.7 million
of interest, respectively, capitalized into construction in progress. For the
six months ended
June 30, 2018
and
June 30, 2017
, there was
$2.8 million
of interest and
$1.2 million
of interest, respectively, capitalized into construction in progress. This increase in capitalized interest is related to outstanding costs for the Company's facility expansion project in Buena. During the
three months ended June 30, 2018
and
June 30, 2017
, there was
$0.7 million
of payroll costs and
$0.2 million
of payroll costs, respectively, capitalized into construction in progress. For the
six months ended
June 30, 2018
and
June 30, 2017
, there was
$1.1 million
of payroll costs and
$0.4 million
of payroll costs, respectively, capitalized into construction in progress.
7. Debt
Convertible Notes
On December 16, 2014, the Company issued
$125.0 million
aggregate principal amount of Convertible
3.75%
Senior Notes, due 2019 (the “2019 Notes”). On December 22, 2014, the Company announced the closing of the initial purchasers’ exercise in full of their option to purchase an additional
$18.75 million
aggregate principal amount of 2019 Notes. The 2019 Notes bear interest at a fixed rate of
3.75%
per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2015, and mature on December 15, 2019, unless earlier repurchased, redeemed or converted. The 2019 Notes are convertible into shares of the Company’s common stock, cash or a combination thereof. On May 20, 2015, the Company received shareholder approval for the increase in the number of shares of common stock authorized and available for issuance upon conversion of the 2019 Notes.
On April 27, 2018, the Company entered into separate exchange agreements with certain holders of the 2019 Notes. The agreements gave the holders the right to exchange, in aggregate,
$75.1 million
of the 2019 Notes for
$75.1 million
of new Convertible
4.75%
Senior Notes due 2023 (the “2023 Notes”). The new 2023 Notes bear a fixed interest rate of
4.75%
per year, payable semi-annually with the principal payable in May 2023. At the option of the holders, the 2023 Notes are convertible into shares of the Company’s common stock, cash or a combination thereof. The initial conversion rate is
$224.71
per share, subject to certain adjustments, related to either the Company's stock price volatility, or the Company's declaration of a stock dividend, stock distribution, share combination or share split expected dividends or other anti-dilutive activities. In addition, holders will be entitled to receive additional shares of common stock for a potential increase of the conversion rate up to
$280.90
per share under a make-whole provision in some circumstances. The Company incurred loan issue costs of
$1.6 million
upon issuance of the 2023 Notes.
In accordance with accounting for convertible debt within the cash conversion guidance of ASC 470-20, we allocated the principal amount of the 2023 Notes between its liability and equity components. The carrying amount of the liability component was determined by measuring the fair value of a similar debt instrument of similar credit quality and maturity that did not have the conversion feature. The carrying amount of the equity component, representing the embedded conversion option, was determined by deducting the fair value of the liability component from the principal amount of the 2023 Notes as a whole. The equity component was recorded to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the 2023 Notes over the carrying amount of the liability component was recorded as a debt discount of
$19 million
, and is being amortized to interest expense using the effective interest method through the maturity date. We allocated the total amount of transaction costs incurred to the liability and equity components using the same proportions as the proceeds from the 2023 Notes. Transaction costs attributable to the liability component were recorded as a direct deduction from the liability component of the 2023 Notes, and are being amortized to interest expense using the effective interest method through the maturity date. Transaction costs attributable to the equity component were netted with the equity component of the 2023 Notes in additional paid-in capital. The effective interest rate of the 2023 Notes, inclusive of the debt discount and issuance costs, is
12.10%
.
The exchange of
$75.1 million
of the 2019 Notes for the 2023 Notes is considered an extinguishment under ASC 470-50. The 2019 Notes are accounted for under cash conversion guidance ASC 470-20, which requires the Company to allocate the fair value of the consideration transferred upon settlement to the extinguishment of the liability component and the reacquisition of the equity component upon derecognition. In accordance with the aforementioned guidance, the Company recorded
$2.5 million
of non-cash interest expense as an extinguishment loss related to the 2019 Notes in the Condensed Consolidated Statement of Operations. In addition the Company recorded a
$7.6 million
reduction of Additional Paid in Capital in connection with the extinguishment of
$75.1 million
of the 2019 Notes.
Term Loan
On June 1, 2018, the Company entered into a credit agreement for
$25.0 million
secured by all Company assets, due June 1, 2021 (“2021 Term Loan”). The 2021 Term Loan has limited financial and non-financial covenants inclusive of a minimum cash carry balance of
$5.0 million
. The 2019 Notes and 2023 Notes are subordinate to the 2021 Term Loan. The first
$15.0 million
of loan proceeds was received on June 1, 2018. The remaining loan proceeds of
$10.0 million
were subject to closing conditions as defined in the agreement and were received on July 16, 2018. The 2021 Term Loan incurred loan issue costs of
$0.5 million
and a discount of
$0.4 million
. The discount is due to lender fees paid on the initial drawdown of
$15.0 million
. The issue costs and discount are recognized as interest expense over the term of the 2021 Term Loan. The 2021 Term Loan bears interest at a rate of LIBOR plus
9%
, with a stated floor of
2%
. The effective interest, inclusive of the debt discounts and issue costs is 12.78%
13.56%
per year.
At June 30, 2018 and December 31, 2017, the net carrying value of the debt and the remaining unamortized debt discounts and debt issuance costs were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
(Unaudited)
|
|
(Audited)
|
|
Face amount of the 2019 Notes (non-current due December 2019)
|
$
|
68,660
|
|
|
$
|
143,750
|
|
|
Face amount of the 2021 Loan (non-current due June 2021)
|
15,000
|
|
|
—
|
|
|
Face amount of the 2023 Notes (non-current due May 2023)
|
75,090
|
|
|
—
|
|
|
|
158,750
|
|
|
143,750
|
|
|
Less unamortized discounts and debt issuance costs
|
28,871
|
|
|
22,773
|
|
|
Total Carrying Value, Net
|
$
|
129,879
|
|
|
$
|
120,977
|
|
For the
six months ended
June 30, 2018
and
2017
, the Company recorded the following expenses in relation to the debt (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Interest expense of the 2019 Notes (1)
|
$
|
878
|
|
|
$
|
1,347
|
|
|
$
|
2,226
|
|
|
$
|
2,695
|
|
|
Interest expense of the 2021 Loan
|
141
|
|
|
—
|
|
|
141
|
|
|
—
|
|
|
Interest expense of the 2023 Notes (1)
|
634
|
|
|
—
|
|
|
634
|
|
|
—
|
|
|
Debt partial extinguishment of 2019 Notes
|
2,467
|
|
|
—
|
|
|
2,467
|
|
|
—
|
|
|
Debt discount amortization of the 2019 Notes (1)
|
1,571
|
|
|
2,126
|
|
|
3,910
|
|
|
4,183
|
|
|
Debt discount amortization of the 2021 Loan
|
14
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
Debt discount amortization of the 2023 Notes (1)
|
498
|
|
|
—
|
|
|
498
|
|
|
—
|
|
|
Debt financing amortization of the 2019 Notes (1)
|
191
|
|
|
232
|
|
|
446
|
|
|
456
|
|
|
Debt financing amortization of the 2021 Loan
|
17
|
|
|
—
|
|
|
17
|
|
|
—
|
|
|
Debt financing amortization of the 2023 Notes (1)
|
42
|
|
|
—
|
|
|
42
|
|
|
—
|
|
|
Interest expense
|
$
|
6,453
|
|
|
$
|
3,705
|
|
|
$
|
10,395
|
|
|
$
|
7,334
|
|
(1) Included within "Interest and other expense, net" on the Condensed Consolidated Statements of Operations, offset by interest income and capitalized interest, as disclosed Note 6.
8. Goodwill and Intangible Assets
Goodwill
The Company acquired the assets of Canadian pharmaceutical company Alveda Pharmaceuticals, Inc., in November 2015. As a result of the acquisition, we recorded goodwill of
$0.4 million
. We assess the recoverability of the carrying value of goodwill in the fourth quarter of each year, and whenever events occur or circumstances change that would, more likely than not, reduce the fair value of our reporting unit below its carrying value. There have been no events or changes in circumstances that would have reduced the fair value of our reporting unit below its carrying value from
December 31, 2017
, through
June 30, 2018
.
No
impairment losses were recognized during the
six months ended
June 30, 2018
.
Changes to the carrying value in goodwill during the
six months ended
June 30, 2018
and the year ending December 31, 2017 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Goodwill balance at December 31, 2016
|
$
|
446
|
|
|
Foreign currency translation
|
25
|
|
|
Goodwill balance at December 31, 2017
|
471
|
|
|
Foreign currency translation
|
(26
|
)
|
|
Goodwill balance at June 30, 2018
|
$
|
445
|
|
Intangible Assets
The following sets forth the major categories of the Company’s intangible assets and the weighted-average remaining amortization period as of
June 30, 2018
and
December 31, 2017
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Weighted Average
Remaining Amortization
Period (Years)
|
|
Trademarks and Technology
|
$
|
39,294
|
|
|
$
|
(6,875
|
)
|
|
$
|
32,419
|
|
|
12.4
|
|
In process research and development ("IPR&D")
|
17,831
|
|
|
—
|
|
|
17,831
|
|
|
N/A
|
|
Customer relationships
|
3,637
|
|
|
(957
|
)
|
|
2,680
|
|
|
7.6
|
|
Total
|
$
|
60,762
|
|
|
$
|
(7,832
|
)
|
|
$
|
52,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Weighted Average
Remaining Amortization
Period (Years)
|
|
Trademarks and Technology
|
$
|
40,380
|
|
|
$
|
(5,684
|
)
|
|
$
|
34,696
|
|
|
12.8
|
|
In-process research and development ("IPR&D")
|
18,311
|
|
|
—
|
|
|
18,311
|
|
|
N/A
|
|
Customer relationships
|
3,783
|
|
|
(773
|
)
|
|
3,010
|
|
|
7.9
|
|
Total
|
$
|
62,474
|
|
|
$
|
(6,457
|
)
|
|
$
|
56,017
|
|
|
|
Changes in intangibles during the
six months ended
June 30, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and Technology
|
|
IPR&D
|
|
Customer Relationships
|
|
Balance at January 1, 2018
|
$
|
34,696
|
|
|
$
|
18,311
|
|
|
$
|
3,010
|
|
|
Amortization
|
(1,363
|
)
|
|
—
|
|
|
(187
|
)
|
|
Loss on impairment
|
(7
|
)
|
|
(15
|
)
|
|
—
|
|
|
Foreign currency translation
|
(907
|
)
|
|
(465
|
)
|
|
(143
|
)
|
|
Balance at June 30, 2018
|
$
|
32,419
|
|
|
$
|
17,831
|
|
|
$
|
2,680
|
|
Assuming no additions, disposals or adjustments are made to the carrying values and/or useful lives of the intangible assets, annual amortization expense on product rights and other related intangibles as of
June 30, 2018
over the remainder of
2018
and each of the next five years is estimated to be as follows (in thousands):
|
|
|
|
|
|
|
|
|
Amortization Expense *
|
|
2018 (remainder of the year)
|
$
|
1,550
|
|
|
2019
|
3,099
|
|
|
2020
|
3,099
|
|
|
2021
|
3,099
|
|
|
2022
|
3,099
|
|
|
2023
|
3,099
|
|
|
Thereafter
|
18,054
|
|
|
Total
|
$
|
35,099
|
|
*IPR&D amounts are assessed for impairment at least annually and will be amortized once products are approved, including the product's respective manufacturing process approvals, and are not included in the table.
The useful lives of the Company’s intangibles are as follows:
|
|
|
|
|
|
Intangibles Category
|
Amortizable Life
|
|
Trademarks and Technology
|
15
|
|
Customer Relationships
|
10
|
9. Stock-Based Compensation
Stock Options
The Company recognized
$0.3 million
and
$0.6 million
of compensation expense related to stock options during the three months ended
June 30, 2018
and
2017
, respectively, and
$0.8 million
and
$1.2 million
during the six months ended
June 30, 2018
and
2017
.
The 1999 Director Stock Option Plan, as amended (the “Director Plan”), provides for the grant of stock options to non-employee directors of the Company at an exercise price equal to the fair market value per share on the date of the grant. As of
December 31, 2017
, an aggregate of
1,975,000
shares had been approved and authorized for issuance pursuant to the Director Plan with no change as of
June 30, 2018
. A total of
2,634,798
options had been granted to non-employee directors through
December 31, 2017
, with no change as of
June 30, 2018
. A total of
807,782
of those had been forfeited through
December 31, 2017
and returned to the option pool for future issuance, with no change as of
June 30, 2018
. The options granted under the Director Plan vest in full
one year
after their respective grant dates and have a maximum term of
ten years
. As of
December 31, 2017
and
June 30, 2018
there were
500,000
shares of common stock options outstanding. As of
December 31, 2017
, the
147,984
options available were transferred to a plan that has superseded the Director Plan, as discussed further in this section, with no additional options transferred as of
June 30, 2018
.
The 1999 Stock Incentive Plan, as amended (“1999 Plan”), replaced all previously authorized employee stock option plans, and no additional options may be granted under those previous plans. Under the 1999 Plan, options or stock awards may be granted to all of the Company’s employees, officers, directors, consultants and advisors to purchase a maximum of
3,200,000
shares of common stock. However, pursuant to the terms of the 1999 Plan, no awards may be granted after March 16, 2009. A total of
2,892,500
options, having a maximum term of
ten years
, have been granted at
100%
of the fair market value of the Company’s common stock at the date of grant. Options outstanding under the 1999 Plan were generally exercisable in cumulative increments over
four years
commencing
one year
from date of grant. As of June 30, 2018, there are
no
options outstanding under the 1999 Plan.
On June 26, 2009, the Board of Directors adopted, and the Company’s stockholders subsequently approved by written consent, the IGI Laboratories, Inc. 2009 Equity Incentive Plan (the “2009 Plan”). The 2009 Plan became effective on July 29, 2009. The 2009 Plan allows the Company to continue to grant options and restricted stock, as under the 1999 Plan, but also authorizes the Board of Directors to grant a broad range of other equity-based awards, including stock appreciation rights, restricted stock units (“RSUs”) and performance awards. The 2009 Plan has been created, pursuant to and consistent with the Company's current compensation philosophy, to assist the Company in attracting, retaining and rewarding designated employees, directors, consultants and other service providers of the Company and its subsidiaries and affiliates, in a manner that will be cost efficient to the Company from both an economic and financial accounting perspective. On April 12, 2010, the Board of Directors adopted, and the Company’s stockholders subsequently approved, an amendment and restatement of the 2009 Plan
to increase the number of shares of Common Stock available for grant under such plan by adding
2,000,000
shares of Common Stock. The 2009 Plan, as amended on May 29, 2010, authorizes up to
5,000,000
shares of the Company’s common stock for issuance pursuant to the terms of the 2009 Plan. The maximum number of shares that may be subject to awards made to any individual in any single calendar year under the 2009 Plan is
1,000,000
shares. As of
June 30, 2018
, there were
24,376
RSUs outstanding,
1,493,960
shares of stock outstanding, and options to purchase
2,932,846
shares of common stock outstanding. As of
December 31, 2017
, there were
99,626
RSUs outstanding,
1,422,020
shares of stock outstanding and options to purchase
3,038,634
shares of common stock outstanding. As of
December 31, 2017
, the
249,052
options available were transferred to a plan that has superseded the 2009 Plan, as discussed further in this section. As of
June 30, 2018
, an additional
98,098
options available were transferred to the superseded plan.
On May 25, 2016, the Board of Directors approved the Company’s
2016
Equity Incentive Plan (the “
2016
Plan”). On May 21, 2018, the Board of Directors adopted, and the Company’s stockholders subsequently approved, an amendment and restatement of the 2016 Plan to increase the number of shares of Common Stock available for grant under such plan by adding
2,000,000
shares of Common Stock. The
2016
Plan, as amended, provides for the issuance of awards of up to
4,000,000
shares of the Company’s common stock, plus any shares of common stock that are represented by awards granted under our Director Plan and 2009 Plan that are forfeited, expire or are canceled without delivery of shares of common stock or which result in the forfeiture of shares of common stock back to the Company on or after May 25, 2016, up to
2,500,000
shares. Generally, shares of common stock reserved for awards under the
2016
Plan that lapse or are canceled, will be added back to the share reserve available for future awards. However, shares of common stock tendered in payment for an award or shares of common stock withheld for taxes will not be available again for grant. The
2016
Plan provides that no participant may receive awards for more than
1,000,000
shares of common stock in any fiscal year. As the
2016
Plan supersedes both the Director Plan and the 2009 Plan, any available shares from both are now incorporated into the
2016
Plan. As of
June 30, 2018
, there were
174,472
RSUs outstanding,
49,667
shares of common stock outstanding and options to purchase
1,335,529
shares of common stock outstanding under the 2016 Plan. As compared to
2017
, as of
December 31, 2017
, there were
89,003
RSUs outstanding,
20,000
shares of common stock outstanding and options to purchase
761,176
shares of common stock outstanding under the 2016 Plan. As of
June 30, 2018
and
December 31, 2017
, there were a total of
2,935,736
shares of common stock and
1,526,857
shares of common stock available under the
2016
Plan, respectively.
As of
June 30, 2018
and
December 31, 2017
, there were options to purchase
4,768,105
and
4,299,810
shares of common stock outstanding, respectively, collectively in the Director Plan, 2009 Plan, and the 2016 Plan.
In the interest of maintaining consistency with the Company's 2016 Equity Incentive Plan, on March 13, 2017, the Company entered into (i) an amendment to the option agreements governing each option grant currently outstanding under the Company's 2009 Equity Incentive Plan, and (ii) an amendment to the RSU, agreements governing each RSU grant currently outstanding under the 2009 Plan. The amendments provide for the automatic vesting upon a change of control of the Company of each option grant and RSU grant, as applicable, outstanding under the 2009 Plan. The amendments had a de minimis value to the holders as of
June 30, 2018
, and therefore no additional stock compensation expense was recognized related to the amendments.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula that uses assumptions noted in the following table. Expected volatilities and risk-free interest rates are based upon the expected life of the grant.
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
Assumptions
|
2018
|
|
2017
|
|
Expected dividends
|
—
|
|
|
—
|
|
|
Risk-free rate
|
2.36
|
%
|
|
1.55
|
%
|
|
Expected volatility
|
60.5% - 62.3%
|
|
|
58.0% - 69.7%
|
|
|
Expected term (in years)
|
3.2 - 3.3 years
|
|
|
3.2 - 3.3 years
|
|
Expected volatility was calculated using the historical volatility of the Company's stock over the expected life of the options. The expected life of the options was estimated based on the Company's historical data. The risk-free interest rate is based on U.S. Treasury yields for securities with terms approximating the terms of the grants. Forfeitures are recognized in the period they occur. The assumptions used in the Black-Scholes options valuation model are highly subjective and can materially affect the resulting valuation.
A summary of option activity under the Director Plan, the 2009 Plan and the 2016 Plan as of
June 30, 2018
and changes during the period are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted Average
Exercise Price
|
|
Outstanding as of January 1, 2018
|
4,299,810
|
|
|
$
|
5.09
|
|
|
Issued
|
679,785
|
|
|
3.29
|
|
|
Exercised
|
(11,000
|
)
|
|
1.08
|
|
|
Forfeited
|
(200,490
|
)
|
|
7.02
|
|
|
Expired
|
—
|
|
|
—
|
|
|
Outstanding as of June 30, 2018
|
4,768,105
|
|
|
$
|
4.76
|
|
|
|
|
|
|
|
|
Exercisable as of June 30, 2018
|
3,546,700
|
|
|
$
|
4.63
|
|
The following tables summarize information regarding options outstanding and exercisable at
June 30, 2018
:
Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Stock Options Outstanding
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Life
|
|
$0.55 - $1.50
|
|
1,735,000
|
|
|
$
|
1.06
|
|
|
3.61
|
|
$1.51 - $5.50
|
|
873,469
|
|
|
3.18
|
|
|
8.52
|
|
$5.51 - $10.67
|
|
2,159,636
|
|
|
8.38
|
|
|
7.45
|
|
Total
|
|
4,768,105
|
|
|
$
|
4.76
|
|
|
6.25
|
Exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Stock Options Exercisable
|
|
Weighted Average Exercise Price
|
|
$0.55 - $1.50
|
|
1,735,000
|
|
|
$
|
1.06
|
|
|
$1.51 - $5.50
|
|
202,166
|
|
|
2.75
|
|
|
$5.51 - $10.67
|
|
1,609,534
|
|
|
8.72
|
|
|
Total
|
|
3,546,700
|
|
|
$
|
4.63
|
|
As of
June 30, 2018
, the intrinsic value of the options outstanding was
$4.5 million
and the intrinsic value of the options exercisable was
$4.3 million
. As of
June 30, 2018
, there was
$2.0 million
of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Plan. The costs will be recognized through February 2021.
Restricted Stock and RSUs
The Company periodically grants restricted stock and RSU awards to certain officers and other employees that typically vest
one
to
three years
from their grant date. The Company recognized
$0.1 million
and $
0.2 million
of compensation expense during the three months ended
June 30, 2018
and
2017
, respectively, and
$0.3 million
and
$0.5
during the six months ended June 30, 2018 and 2017, respectively, related to restricted stock and RSU awards. Stock compensation expense is recognized over the vesting period of the restricted stock and RSUs. At
June 30, 2018
, the Company had approximately
$0.8 million
of total unrecognized compensation cost related to non-vested restricted stock and RSUs, all of which will be recognized through April 2021. The following table summarizes the number of unvested RSUs and their weighted average exercise price for the
six months ended
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
Weighted Average Exercise Price
|
|
Non-vested balance at January 1, 2018
|
|
188,629
|
|
|
$
|
8.27
|
|
|
Changes during the period:
|
|
|
|
|
|
|
|
Shares granted
|
|
122,949
|
|
|
3.36
|
|
|
Shares vested
|
|
(101,607
|
)
|
|
9.07
|
|
|
Shares forfeited
|
|
(11,123
|
)
|
|
7.21
|
|
|
Non-vested balance at June 30, 2018
|
|
198,848
|
|
|
$
|
4.88
|
|
10. Income Taxes
The Company’s income tax expense was
$0.02 million
and
$0.02 million
for the three months ended June 30, 2018 and 2017, respectively. For the same two periods, the effective tax rates were
0.2%
and
2.6%
, respectively. The Company’s income tax expense was
$0.04 million
and
$0.1 million
for the six months ended June 30, 2018 and 2017, respectively and the effective tax rates were
0.3%
and
589%
, respectively.
The Company conducts operations in the United States and certain foreign countries. It is the intent of the Company to permanently reinvest any earnings and profits generated by its foreign affiliates.
One
of its foreign affiliates is subject to tax in Estonia. Estonia has a dual tax regime:
0%
tax rate for earnings and profits as they are generated and
14%
to
20%
tax rates for earnings and profits that are distributed to shareholders. The Company has taken the position that the
14%
to
20%
tax rates apply only when dividends have been declared and recognized as a liability. Accordingly, the Company has provided no taxes on the current earnings generated by its Estonian affiliate.
Income tax expense for the
three and six
months ended
June 30, 2018
and
June 30, 2017
, is recognized based on the Company’s estimated annual effective tax rate, which is based on the tax rate expected for the full calendar year applied to the pre-tax income of the interim period adjusted for discrete items. The Company excludes from the calculation of the annual effective tax rate those jurisdictions that are projected to operate at a loss and in which a tax benefit will not be recognized or which operate in a zero tax rate jurisdiction.
The Company has assessed the impacts of the changes resulting from the United States Tax Cuts and Jobs Act (U.S. TCJA) and has recognized an income tax benefit and a corresponding receivable of
$0.1 million
related to the recoverability of Alternative Minimum Tax Credits. Deferred tax assets, liabilities and valuation allowances have been remeasured at the new rate of
21%
. Except for the recognition of the Alternative Minimum Tax Credit, there was no income impact from the remeasurement since all U.S. net deferred tax assets are fully reserved by the Company. At present, we do not estimate any material impacts from the repatriation tax. While we have completed our provisional analysis of the income tax effects of the U.S.TCJA, the related tax effects may need to be adjusted, possibly materially, due to further refinement of our calculations, changes in interpretations and assumptions that we have made, additional guidance that may be issued by regulatory bodies, and actions and related accounting policy decision we may take as a result of the new legislation. We will complete our analysis over the one-year measurement period from the enactment of the law as provided for by "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" (SAB 118), and any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period(s) when such adjustments are determined.
The Company evaluates the recoverability of its net deferred tax assets based on its history of operating results, its expectations for the future and expiration dates. Based on the preponderance of the evidence, the Company has concluded that it is more likely than not it will be unable to realize the net deferred tax assets in the immediate future and has established a valuation allowance for all U.S. and foreign net deferred tax assets.
At
December 31, 2017
, the Company’s U.S. federal net operating loss carryforwards totaled
$41.7 million
. The Company’s ability to use net operating loss carry forwards is subject to limitation in future periods under certain provisions of Section 382 of the Internal Revenue Code of 1986, as amended, which limit the utilization of net operating losses upon a more than
50%
change in ownership of the Company’s stock that is held by
5%
or greater stockholders. The Company examined the application of Section 382 with respect to an ownership change that took place during 2010, as well as the limitation on the application of net operating loss carry forwards. The Company believes that operating losses subsequent to the change date in 2010 (aggregating
$23.1 million
) are not subject to Section 382 limitations. The Company has estimated that the annual limitation starting in 2010 aggregates from
$1.0 million
to
$2.3 million
per year including the effect of amortization of built in gains. The Company’s loss carryforwards may be further limited in the future if additional ownership changes occur.
The Company is subject to the provisions of ASC 740-10-25, “
Income Taxes”
. ASC 740 prescribes a more likely-than-not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions. For federal purposes, post 1998 tax years remain open to examination as a result of net operating loss carryforwards. The Company is currently open to audit by the appropriate state income taxing authorities for tax years 2013 to 2017. The Company has not recorded any liability for uncertain tax positions.
11. Accrued Expenses
Accrued expenses represent various obligations of the Company including certain operating expenses and taxes payable.
As of
June 30, 2018
and
December 31, 2017
, the largest components of accrued expenses were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
(Unaudited)
|
|
(Audited)
|
|
Capital expenditures
|
$
|
2,476
|
|
|
$
|
1,947
|
|
|
Payroll
|
1,483
|
|
|
1,580
|
|
|
Professional fees
|
1,284
|
|
|
546
|
|
|
Interest expense
|
763
|
|
|
240
|
|
|
Clinical studies
|
603
|
|
|
596
|
|
|
Royalties
|
578
|
|
|
856
|
|
|
Medicaid and Medicare
|
542
|
|
|
1,487
|
|
|
Inventory and Supplies
|
460
|
|
|
58
|
|
|
Rebates
|
332
|
|
|
83
|
|
|
Income Tax
|
60
|
|
|
58
|
|
|
Other
|
688
|
|
|
650
|
|
|
|
$
|
9,269
|
|
|
$
|
8,101
|
|
12. Legal and U.S. Regulatory Proceedings
The Company is involved from time to time in claims which arise in the ordinary course of business. In management's opinion, the Company has made adequate provision for potential liabilities, if any, arising from any such matters. However, litigation is inherently unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments and investigations, claims and changes in any such matters, and developments or assertions by or against the Company relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on its business, financial condition and operating results.
To date,
twelve
putative class action antitrust lawsuits have been filed against the Company along with co-defendants, including Taro Pharmaceuticals U.S.A., Inc. and Perrigo New York Inc.
One
“opt-out” action has additionally been filed against the Company along with
thirty-four
generic manufacturer co-defendants regarding the pricing of econazole nitrate cream along with
twenty-nine
additional drug products not manufactured or sold by the Company. All actions have been consolidated by the Judicial Panel on Multidistrict Litigation to the Eastern District of Pennsylvania for pre-trial proceedings as part of the In re Generic Pharmaceuticals Pricing Antitrust Litigation matter, and the class actions have been consolidated into
three
actions: the direct purchaser, end payer and indirect reseller actions.
The class plaintiffs seek to represent nationwide or state classes consisting of persons who directly purchased, indirectly purchased, paid and/or reimbursed patients for the purchase of generic econazole from July 1, 2014 until the time the defendants’ allegedly unlawful conduct ceased or will cease.
The opt-out plaintiffs allege a conspiracy by
thirty-five
generic manufacturers to fix prices for
thirty
drug products, including econazole nitrate cream, in violation of federal antitrust laws. The opt-out plaintiffs seek treble damages for alleged price
overcharges for the
thirty
drug products identified in the complaint during the alleged period of conspiracy, and also seek injunctive relief against the defendants.
All of these cases are in their initial stages and motions to dismiss have been filed with respect to each of the
three
consolidated class actions. Due to the early stage of these cases, we are unable to form a judgment at this time as to whether an unfavorable outcome is either probable or remote or to provide an estimate of the amount or range of potential loss. We believe these cases are without merit, and we intend to vigorously defend against these claims.
On October 20, 2017, a Demand for Arbitration was filed with the American Arbitration Association by Stayma Consulting Services, Inc. (“Stayma”) against the Company regarding the Company’s development and manufacture for Stayma of
two
generic drug products, one a lotion and one a cream, containing 0.05% of the active pharmaceutical ingredient flurandrenolide. The Company developed the
two
products and Stayma purchased commercial quantities of each; however, Stayma alleges that the Company breached agreements between the parties by developing an additional and different generic drug product, an ointment, containing flurandrenolide, and failing to meet certain contractual requirements. Stayma seeks monetary damages. Because discovery in this matter is ongoing, the Company is unable to form a judgment at this time as to whether an unfavorable outcome is either probable or remote or to provide an estimate of the amount or range of potential loss. The Company believes this case is without merit, and the Company intends to vigorously defend against these claims. The Company filed a counter-claim against Stayma for its failure to pay several past due invoices of approximately
$1.7 million
relating to the development and commercial supply of the
two
subject products. These invoices have been fully reserved.
13. Subsequent Events
The Company was unable to file its Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 with the SEC by the required filing date due to additional time required to restate the Company’s interim condensed consolidated financial statements for the three and six-months ended June 30, 2018 for the matters disclosed in Note 1. As a result, the Company was not in compliance with the non-financial covenant prescribed by the Term Loan disclosed in Note 7 as of September 30, 2018, which requires timely filing of the Company’s annual and interim consolidated financial statements, and the Company’s ability to offer up to
$50.0 million
in debt or equity securities through its existing shelf registration statement on file with the SEC was suspended for a period of twelve months. Moreover, due to the lack of compliance with the non-financial covenant prescribed by the Term Loan, the Company reclassified the net carrying value of
$24.2 million
as current debt in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2018.
On November 12, 2018, the Company entered into a financing commitment whereby Ares Capital Management (“Ares”) has agreed to loan the Company up to
$120.0 million
(“Ares Credit Facility”). The Ares Credit Facility will be secured by all of the Company’s asset and will be funded in three tranches: (1) an asset based revolving credit facility of
$25.0 million
due November 2022 (“2022 Revolver”), (2) a term loan of
$80.0 million
due February 2023 (“2023 Term Loan”), and (3) a delayed draw term loan of
$15.0 million
also due in February 2023 (“2023 Delayed Draw Term Loan”). In addition, the Ares Credit Facility will require the Company to comply with certain affirmative non- financial covenants relating to periodic reporting and maintaining compliance with standard rules and regulations customary in the markets where the Company competes, as well as negative financial covenants limiting levels of indebtedness and restricting certain payments, as well as minimum revenue covenants for each twelve-month period ending December 31, 2018, March 31, 2019 and June 30, 2019, minimum consolidated adjusted EBITDA covenants for the twelve-month period ending September 30, 2019, December 31, 2019, March 31, 2020, June 30, 2020 and September 30, 2020 and minimum net leverage ratio covenants for the twelve-month period ending December 31, 2020 and ending each fiscal quarter thereafter until maturity. The 2023 Term Loan and 2023 Delayed Draw Term Loan will be subordinate to the 2022 Revolver. The proceeds from both the 2022 Revolver and 2023 Term Loan are anticipated to be funded in the fourth quarter upon execution of the final agreements with Ares, whereas the 2023 Delayed Draw Term Loan will be made available when the Company initiates capital improvements to substantially increase manufacturing capacity in its Buena, New Jersey injectable manufacturing facility, which is currently to begin in fiscal year 2018. The Company intends to use the proceeds from 2023 Term Loan to extinguish its existing
$25.0 million
2021 Term Loan, as well as extinguish its remaining outstanding
$68.7 million
of December 2019 Notes. The 2022 Revolver will bear interest at a rate of LIBOR plus
3.75%
, whereas the 2023 Term Loan and 2023 Delayed Draw Term Loan will bear interest at a rate of LIBOR plus
8.75%
with a 24-month paid-in-kind interest option available to the Company should it choose to defer cash interest payments in order to provide further liquidity to continue launching new products.
