0001628280-17-011356.txt : 20171109 0001628280-17-011356.hdr.sgml : 20171109 20171109164135 ACCESSION NUMBER: 0001628280-17-011356 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 66 CONFORMED PERIOD OF REPORT: 20170930 FILED AS OF DATE: 20171109 DATE AS OF CHANGE: 20171109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Teligent, Inc. CENTRAL INDEX KEY: 0000352998 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 010355758 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08568 FILM NUMBER: 171191440 BUSINESS ADDRESS: STREET 1: 105 LINCOLN AVENUE CITY: BUENA STATE: NJ ZIP: 08310 BUSINESS PHONE: 6096971441 MAIL ADDRESS: STREET 1: 105 LINCOLN AVENUE CITY: BUENA STATE: NJ ZIP: 08310 FORMER COMPANY: FORMER CONFORMED NAME: IGI LABORATORIES, INC DATE OF NAME CHANGE: 20100408 FORMER COMPANY: FORMER CONFORMED NAME: IGI INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: IMMUNOGENETICS INC DATE OF NAME CHANGE: 19870814 10-Q 1 teligentinc10q09302017.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
(Mark One)
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________________ to_______________________
 
Commission File Number 001-08568
 
Teligent, Inc.
(Formerly IGI Laboratories, Inc.)
(Exact name of registrant as specified in its charter)
Delaware
01-0355758
(State or other Jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
105 Lincoln Avenue
 
Buena, New Jersey
08310
(Address of Principal Executive Offices)
(Zip Code)
 
(856) 697-1441
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ     No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
¨
Accelerated filer
þ
 
Non-accelerated filer
¨
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). ☐


1



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨     No þ

The number of shares outstanding of the issuer's common stock is 53,400,281 shares as of November 7, 2017.







2



OTHER INFORMATION
 
When used in this report, the terms, “we,” the “Company,” “our,” and “us” refer to Teligent, Inc., a Delaware corporation (formerly IGI Laboratories, Inc.), and its consolidated subsidiaries.

3



PART I
FINANCIAL INFORMATION
 
ITEM 1.    Financial Statements
 
TELIGENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
 
 
 
September 30, 2017
(Unaudited)
 
December 31,
2016*
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
38,231

 
$
66,006

Accounts receivable, net
 
27,568

 
21,735

Inventories
 
14,199

 
12,708

Prepaid expenses and other receivables
 
2,390

 
2,847

Total current assets
 
82,388

 
103,296

 
 
 
 
 
Property, plant and equipment, net
 
57,248

 
26,215

Intangible assets, net
 
56,112

 
52,465

Goodwill
 
476

 
446

Other
 
784

 
804

Total assets
 
$
197,008

 
$
183,226

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
8,865

 
$
4,614

Accrued expenses
 
16,260

 
10,349

Total current liabilities
 
25,125

 
14,963

 
 
 
 
 
Convertible 3.75% senior notes, net of debt discount and debt issuance costs (face of $143,750)
 
118,463

 
111,391

Deferred tax liability
 
239

 
205

Total liabilities
 
143,827

 
126,559

 
 
 
 
 
Stockholders’ equity:
 
 

 
 

Common stock, $0.01 par value, 100,000,000 shares authorized; 53,391,948 and 53,148,441 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
 
554

 
551

Additional paid-in capital
 
105,418

 
102,624

Accumulated deficit
 
(51,319
)
 
(44,903
)
Accumulated other comprehensive loss
 
(1,472
)
 
(1,605
)
Total stockholders’ equity
 
53,181

 
56,667

Total liabilities and stockholders' equity
 
$
197,008

 
$
183,226

 
*Derived from the audited December 31, 2016 financial statements

The accompanying notes are an integral part of the condensed consolidated financial statements.

4



TELIGENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share information)
(Unaudited)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 

 
 

 
 

 
 

Product sales, net
 
$
13,634

 
$
15,709

 
$
51,782

 
$
48,156

Research and development services and other income
 
21

 
442

 
172

 
790

Total revenues
 
13,655

 
16,151

 
51,954

 
48,946

 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 

 
 

 
 

 
 

Cost of revenues
 
10,313

 
8,137

 
29,641

 
23,421

Selling, general and administrative expenses
 
4,121

 
3,694

 
13,126

 
10,813

Product development and research expenses
 
4,606

 
4,017

 
13,387

 
12,496

Total costs and expenses
 
19,040

 
15,848

 
56,154

 
46,730

Operating (loss) income
 
(5,385
)
 
303

 
(4,200
)
 
2,216

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 

 
 

 
 

 
 

Foreign currency exchange gain
 
1,744

 
364

 
6,645

 
1,295

Interest and other expense, net
 
(2,663
)
 
(3,347
)
 
(8,731
)
 
(9,997
)
Loss before income tax expense
 
(6,304
)
 
(2,680
)
 
(6,286
)
 
(6,486
)
 
 
 
 
 
 
 
 
 
Income tax expense
 
24

 
23

 
130

 
68

 
 
 
 
 
 
 
 
 
Net loss
 
$
(6,328
)
 
$
(2,703
)
 
$
(6,416
)
 
$
(6,554
)
 
 
 
 
 
 
 
 
 
Basic and diluted (loss) per share
 
$
(0.12
)
 
$
(0.05
)
 
$
(0.12
)
 
$
(0.12
)
 
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding:
 
 

 
 

 
 

 
 

Basic and diluted shares
 
53,391,948

 
53,093,368

 
53,297,889

 
53,061,630


 The accompanying notes are an integral part of the condensed consolidated financial statements.

5



TELIGENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except shares and per share information)
(Unaudited)
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net loss
 
$
(6,328
)
 
$
(2,703
)
 
$
(6,416
)
 
$
(6,554
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax;
 
 

 
 

 
 

 
 

Foreign currency translation adjustment
 
378

 
(282
)
 
133

 
(992
)
Other comprehensive income (loss)
 
378

 
(282
)
 
133

 
(992
)
 
 
 
 
 
 
 
 
 
Comprehensive loss
 
$
(5,950
)
 
$
(2,985
)
 
$
(6,283
)
 
$
(7,546
)

The accompanying notes are an integral part of the condensed consolidated financial statements.

6



TELIGENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine months ended September 30, 2017
(in thousands, except share information)
(Unaudited)
 
 
 
 
 
 
 
 
Additional
 
Accumulated
Other
 
 
 
Total
 
 
Common Stock
 
Paid-In
 
Comprehensive
 
Accumulated
 
Stockholders’
 
 
Shares
 
Amount
 
Capital
 
Loss
 
Deficit
 
Equity
Balance, December 31, 2016
 
53,148,441

 
$
551

 
$
102,624

 
$
(1,605
)
 
$
(44,903
)
 
$
56,667

 
 
 
 
 
 
 
 
 
 
 
 
 
Stock based compensation expense
 

 

 
2,528

 

 

 
2,528

Stock options exercised
 
171,566

 
2

 
267

 

 

 
269

Issuance of stock for vested restricted stock units
 
71,941

 
1

 
(1
)
 

 

 

Cumulative translation adjustment
 

 

 

 
133

 

 
133

Net loss
 

 

 

 

 
(6,416
)
 
(6,416
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2017
 
53,391,948

 
$
554

 
$
105,418

 
$
(1,472
)
 
$
(51,319
)
 
$
53,181


The accompanying notes are an integral part of the condensed consolidated financial statements.

7



TELIGENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2017 and 2016
(in thousands)
(Unaudited) 
 
 
September 30,
2017
 
September 30,
2016
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(6,416
)
 
$
(6,554
)
Reconciliation of net loss to net cash (used in) provided by operating activities
 
 

 
 

Depreciation and amortization of fixed assets
 
1,264

 
679

Provision for write down of inventory
 
1,489

 
1,000

Stock based compensation
 
2,427

 
2,255

Amortization of debt issuance costs
 
695

 
611

Amortization of intangibles
 
2,143

 
2,146

Foreign currency exchange gain
 
(6,645
)
 
(1,295
)
Amortization of debt discount on convertible 3.75% senior notes
 
6,376

 
5,606

Loss on impairment
 
113

 

Loss on disposal of property
 

 
16

Changes in operating assets and liabilities
 
 

 
 

Accounts receivable
 
(5,764
)
 
(3,168
)
Inventories
 
(2,767
)
 
(4,358
)
Prepaid expenses and other current receivables
 
510

 
3,718

Other assets
 
21

 
283

Accounts payable and accrued expenses
 
3,894

 
2,356

Deferred income
 

 
(475
)
 
 
 
 
 
Net cash (used in) provided by operating activities
 
(2,660
)
 
2,820

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Capital expenditures
 
(26,002
)
 
(11,956
)
Product acquisition costs
 

 
(3,422
)
 
 
 
 
 
Net cash used in investing activities
 
(26,002
)
 
(15,378
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from exercise of common stock options
 
269

 
35

Principal payments on capital lease obligations
 

 
(70
)
Recovery from stockholder, net
 

 
(36
)
 
 
 
 
 
Net cash provided by (used in) financing activities
 
269

 
(71
)
 
 
 
 
 
Effect of exchange rate on cash and cash equivalents
 
618

 
70

Net decrease in cash and cash equivalents
 
(28,393
)
 
(12,629
)
Cash and cash equivalents at beginning of period
 
66,006

 
87,191

 
 
 
 
 
Cash and cash equivalents at end of period
 
$
38,231

 
$
74,632

Supplemental Cash flow information:
 
 

 
 

Cash payments for interest
 
$
2,695

 
$
2,698

Cash payments for income taxes
 
102

 
70

 
 
 
 
 
Non cash investing and financing transactions:
 
 

 
 

Issuance of stock to a consultant
 

 
189

  Acquisition of capital expenditures in accounts payable and accrued expenses
 
5,029

 
42

Capitalized interest in capital expenditures
 
1,058

 
139

  Capitalized stock compensation in capital expenditures
 
101

 
39

 
The accompanying notes are an integral part of the condensed consolidated financial statements.

8



TELIGENT, INC. AND SUBSIDIARIES
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 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These 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, 2016, 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, 2016 has been derived from those audited consolidated financial statements. Operating results for the nine month period ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
 
1. Organization and 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. 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 21 generic topical pharmaceutical products and four branded generic injectable pharmaceutical products.  In Canada, we sell a total of 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 segment. Our common stock is trading 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.
 
2. Liquidity
 
The Company’s principal sources of liquidity have historically been cash and cash equivalents of approximately $38.2 million at September 30, 2017 and cash provided by operations.
 
The Company may require additional funding and this funding will depend, in part, on the timing and structure of potential business arrangements. If necessary, the Company may continue to seek to raise additional capital through the sale of its equity or through a strategic alliance with a third party. There may also be additional acquisition and growth opportunities that may require external financing. There can be no assurance that such financing will be available on terms acceptable to the Company, or at all. The Company also has the ability to defer certain product development and other programs, if necessary. The Company believes that its existing capital resources will be sufficient to support its current business plan and operations beyond November 2018.


9



3. Summary of Significant Accounting Policies
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 sales returns and allowances (“SRA”), allowances for excess and obsolete inventories, allowances for doubtful accounts, provisions for income taxes and related deferred tax asset valuation allowances, stock based compensation, the impairment of long-lived assets (including intangibles, in-process research and development and goodwill) and accruals for environmental cleanup and remediation costs. Actual results could differ from those estimates.
 
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 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 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 September 30, 2017 approximate their fair value for all periods presented.

The Company measures fair value in accordance with ASC 820-10, "Fair Value Measurements and Disclosures". ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820-10 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
 
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
 
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
 
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

As of September 30, 2017, the net carrying value of the Notes (discussed in Note 6) was approximately $118.5 million compared to their face value of $143.75 million. However, 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.

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 Notes, the exercise of options, and the vesting

10



of restricted stock units ("RSU's"). For the three and nine months ended September 30, 2017, 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 
September 30,
 
Nine months ended 
September 30,
 
2017
 
2016
 
2017
 
2016
Basic loss per share computation:
 

 
 

 
 

 
 

Net loss - basic and diluted
$
(6,328
)
 
$
(2,703
)
 
$
(6,416
)
 
$
(6,554
)
Weighted average common shares - basic and diluted
53,391,948

 
53,093,368

 
53,297,889

 
53,061,630

Basic and diluted loss per share
$
(0.12
)
 
$
(0.05
)
 
$
(0.12
)
 
$
(0.12
)

Revenue Recognition

The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred or contractual services rendered, the sales price is fixed or determinable, and collection is reasonably assured in conformity with ASC 605, “Revenue Recognition”.

The Company derives its revenues from three basic types of transactions: sales of its own pharmaceutical products, sales of manufactured product for its customers included in product sales, and research and product development services and other 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.
 
Product Sales, net, include Company Product Sales and Contract Manufacturing Sales, as follows:

Product Sales, Net
(in thousands)
 
 
Three months ended 
September 30,
 
Nine months ended 
September 30,
 
2017
 
2016
 
2017
 
2016
Company product sales
$
11,751

 
$
13,901

 
$
44,075

 
$
34,185

Contract manufacturing sales
1,883

 
1,808

 
7,707

 
13,971

Product sales, net
$
13,634

 
$
15,709

 
$
51,782

 
$
48,156


 
Company Product Sales: The Company records revenue from Company product sales when title and risk of ownership have been transferred to the customer, which is typically upon delivery of products to the customer.
 
As is customary in the pharmaceutical industry, the Company’s gross product sales from Company label products are subject to a variety of deductions in arriving at reported net product sales. When the Company recognizes revenue from the sale of products, an estimate of SRA is recorded, which reduces product sales. Accounts receivable and/or accrued expenses are also reduced and/or increased by the SRA amount. These adjustments include estimates for chargebacks, rebates, cash discounts and returns and other allowances. 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 estimation process used to determine our SRA provision has been applied on a consistent basis and no material adjustments have been necessary to increase or decrease our reserves for SRA as a result of a significant change in underlying estimates. The Company will use a variety of methods to assess the adequacy of our SRA reserves to ensure that our financial statements are fairly stated. These will 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.
 

11



The provision for chargebacks is our most significant sales allowance. A chargeback represents an amount payable in the future to a wholesaler for the difference between the invoice price paid to the Company by our 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 will validate the chargeback accrual quarterly through a review of the inventory reports obtained from our largest wholesale customers. This customer inventory information is used to verify the estimated liability for future chargeback claims based on historical chargeback and contract rates. These large wholesalers represent 90% - 95% 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.
 
Net revenues and accounts receivable balances in the Company’s consolidated financial statements are presented net of SRA estimates. Certain SRA balances are included in accounts payable and accrued expenses.

Gross-To-Net Sales Deductions
(in thousands)
 
Three months ended 
September 30,
 
Nine months ended 
September 30,
 
2017
 
2016
 
2017
 
2016
Gross Company product sales
$
53,460

 
$
64,943

 
$
174,504

 
$
136,329

Reduction to gross Company product sales:
 

 
 

 
 

 
 

Chargebacks and billbacks
30,150

 
43,161

 
104,255

 
82,565

Sales discounts and other allowances
11,559

 
7,881

 
26,174

 
19,579

Total reduction to gross product sales
41,709

 
51,042

 
130,429

 
102,144

 
 
 
 
 
 
 
 
Company product sales, net
$
11,751

 
$
13,901

 
$
44,075

 
$
34,185

 
 
Net Company product sales of $11.8 million and $13.9 million for the three months ended September 30, 2017 and 2016, respectively, are included in product sales, net in the Condensed Consolidated Statements of Operations. Net Company product sales of $44.1 million and $34.2 million for the nine months ended September 30, 2017 and 2016, respectively, are included in product sales, net in the Condensed Consolidated Statements of Operations. Accounts receivable are presented net of SRA balances of $28.1 million and $26.0 million at September 30, 2017 and 2016, respectively. Accounts payable and accrued expenses include $6.2 million and $2.9 million at September 30, 2017 and 2016, respectively, for certain fees related to services provided by the wholesalers. Wholesale fees of $1.5 million and $1.5 million for the three months ended September 30, 2017 and 2016, respectively, were included in cost of goods sold. Wholesale fees of $5.7 million and $2.8 million for the nine months ended September 30, 2017 and 2016, respectively, were included in cost of goods sold. In addition, in connection with four of the 22 products the Company currently markets and distributes in its own label in the U.S., in accordance with an agreement entered into in December 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. In accordance with the agreement, net sales exclude fees related to services provided by the wholesalers. Accounts payable and accrued expenses include $0.6 million and $0.8 million at September 30, 2017 and 2016, respectively, related to these royalties. Royalty expense of $0.6 million and $0.9 million was included in cost of goods sold for the three months ended September 30, 2017 and 2016, respectively. Royalty expense of $1.4 million and $2.2 million was included in cost of goods sold for the nine months ended September 30, 2017 and 2016, respectively. The Company includes significant estimates to arrive at net product sales arising from wholesaler chargebacks, Medicaid and Medicare rebates, allowances and other pricing and promotional programs.
 
Contract Manufacturing Sales: The Company recognizes revenue when title transfers to its customers, which is generally upon shipment of products. These shipments are made in accordance with sales commitments and related sales orders entered into with customers either verbally or in written form. The revenues associated with these transactions, net of appropriate cash discounts, product returns and sales reserves, are recorded upon shipment of the products and are included in product sales, net on the Company’s Condensed Consolidated Statement of Operations. Contract manufacturing sales were $1.9 million and $1.8 million for the three months ended September 30, 2017 and September 30, 2016, respectively. Contract manufacturing sales were $7.7 million and $14.0 million for the nine months ended September 30, 2017 and 2016, respectively.
 

12



Research and Development Services and Other Income:  The Company establishes agreed upon product development agreements with its customers to perform product development services. Product development revenues are recognized in accordance with the product development agreement upon the completion of the phases of development and when the Company has no future performance obligations relating to that phase of development. Revenue recognition requires the Company to assess progress against contracted obligations to assure completion of each stage. These payments are generally non-refundable and are reported as deferred until they are recognizable as revenue. If no such arrangement exists, product development fees are recognized ratably over the entire period during which the services are performed. Other types of revenue include royalty or licensing revenue, and would be recognized based upon the contractual agreement upon completion of the earnings process.

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
3 - 10 years
 
Repair and maintenance costs are charged to operations as incurred while major improvements are capitalized. 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. Interest expense and related payroll costs are capitalized on the portion of debt that is attributable to the expenditures for the plant expansion, related equipment and direct personnel costs.
 
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 September 30, 2017, three of the Company’s customers accounted for 55% of the Company’s revenue, consisting of 30%, 13%, and 12%, respectively. For the three months ended September 30, 2016, two of the Company’s customers accounted for 31% of the Company’s revenue, consisting of 18% and 13%, respectively. For the nine months ended September 30, 2017, three of the Company's customers accounted for 56% of the Company's revenue, consisting of 27%, 15% and 14%. For the nine months ended September 30, 2016, three of the Company's customers accounted for 40% of the Company's revenue, consisting of 19%, 11% and 10%. Accounts receivable related to the Company’s major customers comprised 87% of all accounts receivable as of September 30, 2017, and 45% of all accounts receivable as of September 30, 2016. The loss of one or more of these customers could have a significant impact on our revenues and harm our business and results of operations.
 
For the three months ended September 30, 2017, domestic net revenues were $10.1 million and foreign net revenues were $3.6 million. For the nine months ended September 30, 2017, domestic net revenues were $41.8 million and foreign net revenues were $10.1 million. As of September 30, 2017, domestic assets were $126.4 million and foreign assets were $70.6 million. For the three months ended September 30, 2016, domestic net revenues were $13.5 million and foreign net revenues were $2.7 million. For the nine months ended September 30, 2016, domestic net revenues were $41.2 million and foreign net revenues were $7.7 million. As of September 30, 2016, domestic assets were $135.5 million and foreign assets were $51.7 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 Income (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 Income Statement.


13



Reclassification

Certain prior year amounts were reclassified to conform to current year presentation. In addition, the Company has reclassified certain non-cash transactions related to the capital expenditures, in the amount of $220,000, for the nine months ended September 30, 2016, reducing both cash from operating activities and cash used in investing activities.  For the year ended December 31, 2016, the impact of such reclassification of the non-cash portion of the capital expenditures would have been a reduction of both cash from operating activities and cash used in investing activities, in the amount of $1.8 million.

Prior period adjustment

During the third quarter ended September 30, 2017, the Company recorded an adjustment in the amount of $0.5 million to reduce the foreign exchange gain on the statement of operations, $0.3 million decrease in cash and $0.2 million decrease in other comprehensive income, that related to the three months ended June 30, 2017, as a result of an error regarding the classification and translation of a cash amount related to their wholly owned subsidiary, “Teligent, OU” and as a result of an error regarding the translation of the foreign subsidiaries. The Company concluded that the correction of these errors was immaterial, both quantitatively and qualitatively.

Debt Issuance Costs
 
Expenses related to debt financing activities are capitalized and amortized on an effective interest method, over the term of the loan. See detailed amounts per year in Note 6.

ASU 2015-3 specifies that debt issuance costs are to be netted against the carrying value of the financial liability. Under prior guidance, debt issuance costs were recognized as a deferred charge and reported as a separate asset on the balance sheet. The updated guidance 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 income statement.
 
Adoption of Recent Accounting Pronouncements
 
In April 2015, the FASB issued Accounting Standards Update ("ASU") 2015-03, Interest—Imputation of Interest (Subtopic 835-30): "Simplifying the Presentation of Debt Issuance Costs". The update simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2015. The Company's adoption of this ASU, effective January 1, 2016, did not have any significant impact on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): “Simplifying the Measurement of Inventory”. ASU 2015-11 requires inventory measured using any method other than last-in, first out (“LIFO”) or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Under this ASU, subsequent measurement of inventory using the LIFO and retail inventory method is unchanged. ASU 2015-11 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2016. The Company's adoption of this ASU, effective January 1, 2017, did not have any significant impact on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): “Improvements to Employee Share-Based Payment Accounting”. The update includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this update are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has adopted this ASU, effective January 1, 2017, and is recognizing windfall tax benefits in additional paid in capital on a prospective basis.

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,

14



2018 for public business entities, which for the Company means January 1, 2019. The Company's adoption of this ASU, is not expected to have any 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 are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those annual periods. For the Company, the amendments are effective January 1, 2018. The Company is currently evaluating the impact of this ASU 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 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 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 are effective at the same time as the amendments in ASU 2014-09. Therefore, for the Company, the amendments are 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 is currently evaluating the impact of this ASU 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 are 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 is not expected to have any significant impact on its consolidated financial statements.

Revenue Topic 606 Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The standard, including subsequently issued amendments, will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. 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

15



exchange for those goods or services. To achieve this key focus, there is a five-step approach outlined in the standard. Entities are permitted to apply the new standard either retrospectively, subject to certain practical expedients, or the modified retrospective method that requires the application of the guidance only to contracts that are uncompleted on the date of initial application. For the Company, Topic 606 and subsequently issued amendments will be effective January 1, 2018.

The Company has completed its initial assessment of the new standard, including a detailed review of the Company’s contract portfolio and revenue streams to identify potential differences in accounting as a result of the new standard, and selected the modified retrospective method. Based on the Company’s initial assessment, we do not believe that the adoption of the standard and related amendments will have a significant impact on our revenue recognition patterns as compared to our current revenue recognition policies, assuming that contract structures similar to those in place are in effect at the time of our adoption. However, there are certain industry-specific implementation issues that are still unresolved and, depending on the resolution of these matters, conclusions on the impact on our revenue recognition patterns could change. Through the date of adoption, we will continue to evaluate the impacts of the standard to ensure that our preliminary conclusions continue to remain accurate. Additionally, we will continue our assessment of the impact of the standard on our financial statement disclosures which are expected to be more extensive based on the requirements of the new standard.

4. 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:
 
 
September 30, 2017
 
December 31, 2016
 
(Unaudited)
 
(Audited)
 
(in thousands)
Raw materials
$
7,273

 
$
6,834

Work in progress
629

 

Finished goods
8,019

 
6,284

Reserve
(1,722
)
 
(410
)
Total
$
14,199

 
$
12,708


5. Property, Plant and Equipment
 
Property, plant and equipment consists of the following:
 
 
September 30, 2017
 
December 31, 2016
 
(Unaudited)
 
(Audited)
 
(in thousands)
Land
$
257

 
$
257

Building and improvements
8,576

 
8,515

Machinery and equipment
12,573

 
8,583

Construction in progress
43,742

 
15,496

 
65,148

 
32,851

Less accumulated depreciation and amortization
(7,900
)
 
(6,636
)
Property, plant and equipment, net
$
57,248

 
$
26,215

 
The Company recorded depreciation expense of $1,264,000 and $679,000 for the nine months ended September 30, 2017 and September 30, 2016, respectively. During the three months ended September 30, 2017 and September 30, 2016, there was $1,058,000 of interest and $139,000 of interest, respectively, capitalized into construction in progress. For the nine months ended September 30, 2017 and September 30, 2016, there was $2,285,000 of interest and $236,000 of interest, respectively, capitalized into construction in progress.
 

16



6. Convertible 3.75% Senior Notes

On December 16, 2014, the Company issued $125 million aggregate principal amount of 3.75% Convertible Senior Notes due 2019 (the “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 Notes. The Notes were offered and sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the sale of the Notes were approximately $139 million, after deducting underwriting fees and other related expenses of approximately $4.8 million. Accrued interest in the amount of $1.6 million related to the Notes was included in accrued expenses as of September 30, 2017.
 
The 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 Notes are convertible into shares of the Company’s common stock, cash or a combination thereof. The Notes are convertible at an initial conversion price of approximately $11.29 per share, which is equivalent to an initial conversion rate of 88.5716 shares per $1,000 principal amount of Notes, subject to adjustment in certain events, such as distributions of dividends or stock splits. Holders may convert their Notes at their option prior to September 15, 2019, when or if certain conditions have been met or circumstances have occurred, such as if the Company’s stock price exceeds 130% of the conversion price under the Notes for a designated period of time, or if the trading price of the Notes is, for a designated period of time, less than 98% of the closing sale price of the Company’s common stock multiplied by the then-current conversion rate of the Notes, or if the Company calls Notes for redemption, or if certain specified corporate events occur. Holders may also convert their Notes at their option at any time on or after September 15, 2019 and prior to the close of business on the business day immediately preceding the stated maturity date. In addition, following the occurrence of certain changes of control of the Company described in the Indenture governing the Notes or termination of trading of the Company’s common stock or other securities into which the Notes are convertible (a “make-whole fundamental change”) or the delivery by the Company of a notice of redemption, the conversion rate for a holder who elects to convert its Notes in connection with such make-whole fundamental change or such notice of redemption will increase in certain circumstances. Additionally, subject to certain conditions, the Company may redeem for cash any or all outstanding Notes on or after December 19, 2017 in an amount equal to the outstanding principal amount of such Notes, plus accrued and unpaid interest.

The Notes and any common stock issuable upon conversion of the Notes have not been registered under the Securities Act, applicable state securities laws or the securities laws of any other jurisdiction, and may not be offered or sold in the United States without registration or an applicable exemption from registration requirements. The Company does not intend to file a registration statement for the resale of the Notes or any common stock issuable upon conversion of the Notes, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful.
 
The remaining unamortized discount and unamortized debt financing costs will be amortized over the remaining term of the debt of 2.25 years. At September 30, 2017 and December 31, 2016, the net carrying amount of the Notes and the remaining unamortized debt discount were as follows:
 
 
September 30,
2017
 
December 31,
2016
 
(in thousands)
Face amount of the Notes
$
143,750

 
$
143,750

Unamortized discount
(22,784
)
 
(29,160
)
Debt issuance costs
$
(2,503
)
 
$
(3,199
)
Carrying amount of the Notes
$
118,463

 
$
111,391

 
Debt issuance costs associated with the Notes include fees of $2.5 million at September 30, 2017 and $3.2 million at December 31, 2016.
 
For the three and the nine months ended September 30, 2017 and 2016, the Company recorded the following expenses in relation to the Notes:

17



 
Three months ended 
September 30,
 
Nine months ended 
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Interest Expense at 3.75% coupon rate
$
1,348

 
$
1,348

 
$
4,043

 
$
4,043

Debt discount amortization
2,193

 
1,929

 
6,376

 
5,606

Amortization of deferred financing costs
239

 
210

 
695

 
611

Total interest expense (1)
$
3,780

 
$
3,487

 
$
11,114

 
$
10,260

 
(1) Included within "Interest and other expense, net" on the Condensed Consolidated Statements of Operations, offset by interest income and capitalized interest

7. Goodwill and Intangible Assets

Goodwill
 
The Company assesses 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, 2016, through September 30, 2017. No impairment losses were recognized during the nine months ended September 30, 2017.
 
Changes in goodwill during the nine months ended September 30, 2017 were as follows (in thousands):
 
 
Goodwill
Goodwill balance at December 31, 2016
$
446

Foreign currency translation
30

Goodwill balance at September 30, 2017
$
476

 
Intangible Assets
 
The following sets forth the major categories of the Company’s intangible assets and the weighted-average remaining amortization period as of September 30, 2017 and December 31, 2016.
 
 
September 30, 2017
 
 
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Weighted Average
Remaining Amortization
Period
Trademarks and Technology
$
40,182

 
$
(4,991
)
 
$
35,191

 
13.0
In process research and development ("IPR&D")
17,797

 

 
17,797

 
N/A - Indefinite lived
Customer relationships
3,803

 
(679
)
 
3,124

 
8.1
Total
$
61,782

 
$
(5,670
)
 
$
56,112

 
 
 
  

18



 
December 31, 2016
 
 
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Weighted Average
Remaining Amortization
Period
Trademarks and Technology
35,403

 
(3,123
)
 
32,280

 
13.8
In-process research and development ("IPR&D")
17,024

 

 
17,024

 
N/A - Indefinite lived
Customer relationships
3,565

 
(404
)
 
3,161

 
8.9
Total
55,992

 
(3,527
)
 
52,465

 
 

Changes in intangibles during the nine months ended September 30, 2017 were as follows (in thousands):
 
 
Trademarks
and Technology
 
IPR&D
 
Customer
Relationships
Balance at January 1, 2017
$
32,280

 
$
17,024

 
$
3,161

Amortization
(1,868
)
 

 
(275
)
Loss on impairment

 
(113
)
 

Foreign currency translation
4,779

 
886

 
238

Balance at September 30, 2017
$
35,191

 
$
17,797

 
$
3,124

 
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 September 30, 2017 over the remainder of 2017 and each of the next five years is estimated to be as follows ($ in thousands):
 
 
Amortization
Expense *
2017 (for the remainder of the year)
$
743

2018
2,971

2019
2,971

2020
2,971

2021
2,971

2022
2,971

Thereafter
17,885

 
*IPR&D amounts are assessed for impairment at least annually and will be amortized once products become saleable.
 
8. Stock-Based Compensation
 
Stock Options
 
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. An aggregate of 1,975,000 shares have been approved and authorized for issuance pursuant to the Director Plan. A total of 2,634,798 options have been granted to non-employee directors through September 30, 2017, and 807,782 of those have been forfeited through September 30, 2017 and returned to the option pool for future issuance. 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 September 30, 2017, there were 500,000 shares of common stock options outstanding under the Director Plan. As of September 30, 2017, the 147,984 options available were transferred to the 2016 Plan that has superseded the Director Plan, as discussed further in this section.

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

19



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 are generally exercisable in cumulative increments over four years commencing one year from date of grant.
 
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 September 30, 2017, there were 107,959 RSUs outstanding, 1,413,687 shares of stock outstanding, and options to purchase 3,069,634 shares of common stock outstanding under the 2009 Plan. As of September 30, 2017, the 218,052 options available were transferred to the 2016 Plan that has superseded the 2009 Plan, as discussed further in this section.

On May 25, 2016, the Board of Directors approved the Company’s 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan provides for the issuance of awards of up to 2,000,000 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. 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 September 30, 2017, there were 89,003 RSUs outstanding, 20,000 shares of common stock outstanding and options to purchase 748,543 shares of common stock outstanding under the 2016 Plan. As of September 30, 2017, there were a total of 1,508,490 shares of common stock available under the 2016 Plan.
 
As of September 30, 2017, there were options to purchase 4,318,177 shares of common stock outstanding 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 September 30, 2017, and therefore no additional stock compensation expense was recognized.
 
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.

 
Nine months ended
Assumptions
September 30, 2017
 
September 30, 2016
Expected dividends
%
 
%
Risk-free rate
1.55
%
 
1.11
%
Expected volatility
58.0% - 69.7%

 
68.0% - 70.4%

Expected term (in years)
3.2 - 3.3

 
3.1 - 3.3

  

20



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.

Based upon application of the Black-Scholes option-pricing formula described above, the weighted-average grant-date fair value of options granted during the nine months ended September 30, 2017 and September 30, 2016, were $3.41 per share of common stock and $3.44 per share of common stock, respectively.

A summary of option activity under the Director Plan, the 2009 Plan and the 2016 Plan as of September 30, 2017 and changes during the period are presented below:
 
 
Number of
Options
 
Weighted
Average
Exercise Price
Outstanding as of January 1, 2017
4,105,369

 
$
4.76

Issued
558,345

 
7.35

Exercised
(171,566
)
 
1.56

Forfeited
(173,971
)
 
7.44

Expired

 

Outstanding as of September 30, 2017
4,318,177

 
$
5.11

 


 
 
Exercisable as of September 30, 2017
2,981,134

 
$
3.91

 
The following table summarizes information regarding options outstanding and exercisable at September 30, 2017:
 
Outstanding:
 
 
 
Stock
Options
 
Weighted
Average
 
Weighted
Average
Remaining
Range of Exercise Prices
 
Outstanding
 
Exercise Price
 
Contractual Life
$0.79 - $1.00
 
25,000

 
$
0.79

 
2.26
$1.01 - $1.50
 
1,721,000

 
1.06

 
4.39
$1.51 - $10.67
 
2,572,177

 
7.87

 
8.01
Total
 
4,318,177

 
$
5.11

 
6.53
 

Exercisable:
 
 
 
Stock
Options
 
Weighted
Average
Range of Exercise Prices
 
Exercisable
 
Exercise Price
$0.79 - $1.00
 
25,000

 
$
0.79

$1.01 - $1.50
 
1,721,000

 
1.06

$1.51 - $10.67
 
1,235,134

 
7.93

Total
 
2,981,134

 
$
3.91

 
As of September 30, 2017, the intrinsic value of the options outstanding was $10.8 million and the intrinsic value of the options exercisable was $10.7 million. As of September 30, 2017, there was $2.9 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. The costs will be recognized through September 2020.

21



 
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 $241,500 and $192,000 of compensation expense during the three months ended September 30, 2017 and 2016, respectively, and $709,600 and $564,000 during the nine months ended September 30, 2017 and 2016, respectively related to restricted stock and RSU awards.  Stock compensation expense is recognized over the vesting period of the restricted stock and RSUs.  At September 30, 2017, the Company had approximately $1.0 million of total unrecognized compensation cost related to non-vested restricted stock and RSUs, all of which will be recognized through April 2020. The following table summarizes the number of unvested RSUs and their weighted average exercise price for the nine months ended September 30, 2017.
 
 
Number of
RSUs
 
Weighted Average
Exercise Price
Non-vested balance at January 1, 2017
 
179,900

 
$
9.35

Changes during the period:
 
 

 
 

Shares granted
 
93,468

 
7.26

Shares vested
 
(71,941
)
 
9.82

Shares forfeited
 
(4,465
)
 
7.09

Non-vested balance at September 30, 2017
 
196,962

 
$
8.23


9. Income Taxes

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 rate: 0% for earnings and profits as they are generated and 20% for earnings and profits that are distributed to shareholders. The Company has taken the position that the 20% tax rate applies 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 nine months ended September 30, 2017 and the three and nine months ended September 30, 2016, is recognized based on the Company’s estimated annual effective tax rate, which is based upon 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 evaluates the recoverability of its net deferred tax assets based on its history of operating results, its expectations for the future, and the expiration dates of the net operating loss carry forwards. Based on the preponderance of the evidence, the Company has concluded that it is more likely than not that it will be unable to realize the net deferred tax assets in the immediate future and has established a valuation allowance for all such net deferred tax assets.
 
At December 31, 2016, the Company’s U.S. federal net operating loss carryforwards totaled $33.7 million. The Company’s ability to use net operating loss carry forwards is subject to substantial 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 $15.0 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.

In accordance with ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting” issued by FASB, the Company has recognized windfall profits as an increase in deferred tax assets resulting from an increase in net operating loss carryforwards.  The Company has provided a full valuation allowance for these deferred tax assets.


22



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 2016. The Company has not recorded any liability for uncertain tax positions at September 30, 2017 or December 31, 2016.

The U.S. Internal Revenue Service (“IRS”) has concluded its review of the Company’s 2015 income tax return with no additional income tax expense effect.
 
10. 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 the opinion of management, 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 Company PLC regarding the pricing of econazole nitrate cream. The actions have been transferred 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 consolidated into 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 plaintiffs allege a conspiracy to fix prices for generic econazole in violation of federal antitrust laws or state antitrust, consumer protection, and other laws. Plaintiffs seek treble damages for alleged price overcharges for generic econazole during the alleged period of conspiracy, and the end payer and indirect reseller class plaintiffs 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 complaints. 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 now 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. We intend to file 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. Due to the early stage of this matter, 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 this case is without merit, and we intend to vigorously defend against these claims.


23




ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and other sections of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, that are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates and on management's beliefs and assumptions. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of the Company. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on current expectations of management and are not guarantees of future performance, and involve certain risks, uncertainties and assumptions, which are difficult to predict. These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, the general economic conditions in the markets in which the Company operates, levels of industry research and development spending, the Company’s ability to continue to attract and retain qualified personnel, the fixed price nature of product development agreements or the loss of customers and other factors described in the Company’s filings with the Securities and Exchange Commission, including the “Risk Factors” section as set forth in our Annual Report on Form 10-K for the year ended December 31, 2016, as updated below in this Quarterly Report on Form 10-Q. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The forward-looking statements set forth herein speak only as of the date of this report. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Company Overview
 
Strategic Overview
 
Teligent, Inc. and its subsidiaries (collectively the “Company”) is a specialty generic pharmaceutical company. All references to "Teligent," the "Company," "we," "us," and "our" refer to Teligent, Inc. Our mission is to become a leader in the specialty generic pharmaceutical market. Our platform for growth is centered around the development, manufacturing and marketing a portfolio of generic pharmaceutical products in our own label in topical, injectable, complex and ophthalmic dosage forms. We believe that expanding our development and commercial base beyond topical generics, historically the cornerstone of our expertise, to include injectable generics, complex generics and ophthalmic generics (what we call our "TICO" strategy"), will leverage our existing expertise and capabilities, and broaden our platform for more diversified strategic growth.

Our pipeline includes 32 Abbreviated New Drug Applications ("ANDAs") for additional pharmaceutical products filed with the FDA. Our pipeline also includes one Prior Approval Supplement for our first opthalmic product filed in the second quarter 2017. In addition, we have four abbreviated new drug submissions ("ANDSs") on file with Health Canada, and have an additional 34 product candidates at various stages of our development pipeline. We expect to continue to expand our presence in the generic topical pharmaceutical market through the filing of additional ANDAs with the FDA, the filing of applications to Health Canada, and the subsequent launch of products as these applications are approved. We will also seek to license or acquire further products, intellectual property, or pending applications to expand our portfolio.

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 21 generic topical pharmaceutical products and four branded generic injectable pharmaceutical products. In Canada, we sell a total of 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, OTC, and cosmetic markets. We operate our business under one segment. Our common stock is trading 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.
  
The manufacturing and commercialization of generic specialty pharmaceutical markets is competitive, and there are established manufacturers, suppliers and distributors actively engaged in all phases of our business. We currently manufacture and sell topical generic pharmaceutical products under our own label. In October 2015, we acquired and began to sell our first generic injectable products. We currently market 30 products in Canada. As we continue to execute our TICO strategy, we will compete in other markets, including the injectable and ophthalmic generic pharmaceutical markets, and expect to face other competitors.

The three large wholesale drug distributors are AmerisourceBergen Corporation ("ABC"); Cardinal Health, Inc. ("Cardinal"); and McKesson Drug Company, ("McKesson"). ABC, Cardinal and McKesson are key distributors of our products, as well as a broad

24



range of health care products for many other companies. None of these distributors is an end user of our products. Generally, if sales to any one of these distributors were to diminish or cease, we believe that the end users of our products would likely find little difficulty obtaining our products either directly from us or from another distributor. However, the loss of one or more of these distributors, together with a delay or inability to secure an alternative distribution source for end users, could have a material negative impact on our revenue, business, financial condition and results of operations. Furthermore, these distributors have entered into strategic alliances as follows: ABC with Walgreens, Cardinal with CVS Caremark and McKesson with Rite-Aid and Wal-Mart. Since Walgreens, CVS Caremark, Rite-Aid and Wal-Mart are customers for several of our products, the loss of our distributor relationship with any of the three large wholesalers could result in a reduction to our revenues.
 
We consider our business relationships with ABC, Cardinal and McKesson to be in good standing and have fee for services contracts with each of them. However, a change in purchasing patterns, a decrease in inventory levels, an increase in returns of our products, delays in purchasing products and delays in payment for products by one or more of these distributors could have a material negative impact on our revenue, business, financial condition and results of operations. We continue to analyze the market for other specialty generic drug products through internal research and development. In addition, we continue to explore business development opportunities to add additional products and/or capabilities to our existing portfolio.
 
For the three months ended September 30, 2017, we had sales to three customers, which individually accounted for more than 10% of our total revenue. Total sales to these customers represented 30%, 13% and 12%, respectively, and represented 55% of total revenues. Accounts receivable related to these major customers comprised 87% of all accounts receivable as of September 30, 2017. For the three months ended September 30, 2016, we had sales to two customers which individually accounted for more than 10% of our total revenue. Total sales to these customers represented 18% and 13%, respectively, and represented 31% of total revenues. Accounts receivable related to these major customers comprised 45% of all accounts receivable as of September 30, 2016. For the nine months ended September 30, 2017, we had sales to three customers, which individually accounted for more than 10% of our total revenue. Total sales to these customers represented 27%, 15% and 14%, respectively, and represented 56% of total revenues. For the nine months ended September 30, 2016, we had sales to three customers, which individually accounted for more than 10% of our total revenue. Total sales to these customers represented 19%, 11% and 10%, respectively, and represented 40% of total revenues.
 
Our customers in the contract manufacturing business generally consist of pharmaceutical companies, as well as cosmetic and OTC product marketers, who require product development/manufacturing support. For the three months ended September 30, 2017, approximately 91% of our contract manufacturing revenue was derived from pharmaceutical customers, as compared to 78% of total contract manufacturing revenue for the three months ended September 30, 2016. For the nine months ended September 30, 2017, approximately 87% of our contract manufacturing revenue was derived from pharmaceutical customers, as compared to 90% of total contract manufacturing revenue for the nine months ended September 30, 2016. None of our contract manufacturing services customers represented greater than 10% of total revenue for both the three months ended September 30, 2017 and the three months ended September 30, 2016. None of our contract manufacturing services customers represented greater than 10% of total revenue for the nine months ended September 30, 2017 and one contract manufacturing services customer represented greater than 10% of total revenue for the nine months ended September 30, 2016.

Recent Events
 
On July 21, 2017, we announced approval of an ANDA for Erythromycin Topical Gel USP, 2%. This is Teligent's third approval for 2017, and its fourteenth approval from its internally-developed pipeline of topical generic pharmaceutical medicines. We launched this product in the third quarter of 2017.

On August 22, 2017, we announced approval of an ANDA for Clobestasol Propionate Cream USP, 0.05%, Emollient. This is Teligent's fourth approval for 2017, and its fifteenth approval from its internally-developed pipeline of topical generic pharmaceutical medicines. We launched this product in the fourth quarter of 2017.

On September 19, 2017, we announced approval of an ANDA for Triamcinolone Acetonide Cream USP, 0.1%. This is Teligent's fifth approval for 2017, and its sixteenth approval from its internally-developed pipeline of topical generic pharmaceutical medicines. We launched this product in the fourth quarter of 2017.

On October 2, 2017, we announced approval of an ANDA for Desonide Lotion, 0.05%. This is Teligent's sixth approval for 2017. This product was submitted under a partnered development agreement by Teligent, Inc. with Impax Laboratories, Inc. This the Company's first approval received under this agreement, and it is the third product approved from our original pipeline of five partnered submissions.  We expect this product to be launched in the fourth quarter of 2017.



25



Results of Operations
 
Three months ended September 30, 2017 compared to September 30, 2016
 
We had net loss of $6.3 million, or $0.12 per share, for the three months ended September 30, 2017, compared to a net loss of $2.7 million, or $0.05 per share, for the three months ended September 30, 2016, which resulted from the following:


Revenues (in thousands):
 
 
 
Three Months Ended
September 30,
 
Increase/(Decrease)
Components of Revenue:
 
2017
 
2016
 
$
 
%
Product sales, net
 
$
13,634

 
$
15,709

 
$
(2,075
)
 
(13
)%
Research and development services and other income
 
21

 
442

 
(421
)
 
(95
)%
Total Revenues
 
$
13,655

 
$
16,151

 
$
(2,496
)
 
(15
)%


Revenues were $13.7 million for the three months ended September 30, 2017, compared to $16.2 million for the same period in the prior year. This represents a $2.5 million decrease in 2017 from the same period in the prior year. This decrease in product sales of $2.1 million was primarily due to a decrease in revenue from Lidocaine Ointment 5%, which represented 33% of total revenue in the third quarter of 2016, as compared to 16% of total revenue in the third quarter of 2017, partially offset by product launches and the expansion of our own generic pharmaceutical pipeline. Revenue from our contract manufacturing services was consistent quarter over quarter.
 
Research and development services and other income will not be consistent and will vary, from period to period, depending on the required timeline of each development project and/or agreement.
 
Costs and Expenses (in thousands):
 
 
 
Three Months Ended
September 30,
 
Increase/(Decrease)
 
 
2017
 
2016
 
$
 
%
Cost of revenues
 
$
10,313

 
$
8,137

 
$
2,176

 
27
%
Selling, general and administrative expenses
 
4,121

 
3,694

 
427

 
12
%
Product development and research expenses
 
4,606

 
4,017

 
589

 
15
%
Totals costs and expenditures
 
$
19,040

 
$
15,848

 
$
3,192

 
20
%
  

Cost of sales increased as a percentage of total revenue to 75.5% for the three months ended September 30, 2017 as compared to 50.4% for same period in 2016. This increase in cost of revenue was primarily due to increased revenue from our generic pharmaceutical product line. The increase in cost of sales as a percentage of revenue was driven by new product launches as well as changes in product mix, pricing and related fees, such as wholesaler fees, in addition to customer and product mix for our contract services revenue. For the three months ended September 30, 2017, cost of revenues also included an increase in inventory reserves of $0.6 million of costs related to inventory and raw materials that were expected to expire in less than six months. Consistent with our strategy, we have increased headcount in our production and quality groups to support our growth and expansion into injectable manufacturing. Total employee related costs increased by $0.2 million, headcount increased from 83 at September 30, 2016 to 112 at September 30, 2017. In addition, our rapid growth has contributed to some production inefficiencies, as we are expanding our manufacturing footprint and capacity in topical manufacturing, and adding sterile manufacturing capabilities at the existing facility.

Selling, general and administrative expenses for the three months ended September 30, 2017 increased by $0.4 million as compared to the same period in 2016. In 2017 there was an increase of $0.5 million in legal and professional fees, an $0.1 million related to

26



impairment of intangible asset, offset by a decrease of $0.2 million in salary and related costs including stock based compensation related to stock options and restricted stock.
 
Product development and research expenses for the three months ended September 30, 2017 increased by approximately $0.6 million as compared to the same period in 2016. This was due to increases of $0.6 million in clinical costs, $0.3 million increase in salaries and related costs including stock compensation related to options and restricted stock which is consistent with our hiring plan, $0.1 million increase in overhead costs, offset by decrease of $0.5 million in pilot and exhibit batch costs.


Other Expense (in thousands): 

 
 
Three Months Ended
September 30,
 
Increase/(Decrease)
 
 
2017
 
2016
 
$
 
%
Interest and other expense, net
 
$
(2,663
)
 
$
(3,347
)
 
$
(684
)
 
(20
)%
Foreign currency exchange gain
 
$
1,744

 
$
364

 
$
1,380

 
(379
)%

Interest expense decreased by $0.7 million for the three months ended September 30, 2017 as compared to the same period in 2016. The decrease is related to the interest expense, amortization of debt discount and amortization of debt issuance costs of the Notes (see Note 6), partially offset by capitalized interest of $1.1 million related to our facility expansion. Foreign exchange gain of $1.7 million was recorded in the three months ended September 30, 2017, primarily related to the foreign currency translation of our intercompany loans denominated in U.S. dollars to our foreign subsidiaries. Depending on the changes in foreign currency exchange rates, we will continue to record a non-cash gain or loss on translation for the remainder of the term of these loans. Due to the nature of this transaction, there is no economic benefit to the Company to hedge this transaction.
 
Net Loss (in thousands, except per share numbers):
 
 
 
Three Months Ended
September 30,
 
Increase/(Decrease)
 
 
2017
 
2016
 
$
 
%
Net loss attributable to common stockholders
 
$
(6,328
)
 
$
(2,703
)
 
$
(3,625
)
 
(134
)%
Basic and diluted loss per share
 
$
(0.12
)
 
$
(0.05
)
 
$
(0.07
)
 
(140
)%
 
Net loss for the three months ended September 30, 2017 was $6.3 million as compared to $2.7 million in the same period last year. The increase in loss is due to decrease in revenues of $2.5 million and increases in costs and expenses in 2017 of $3.2 million, offset by an increase in the foreign currency exchange gain of $1.4 million and a decrease in interest and other expense of $0.7 million, as noted above.

Nine months ended September 30, 2017 compared to September 30, 2016

We had net loss of $6.4 million, or $0.12 per share, for the nine months ended September 30, 2017, compared to a net loss of $6.6 million, or $0.12 per share, for the nine months ended September 30, 2016, which resulted from the following:



27



Revenues (in thousands):

 
 
Nine Months Ended
September 30,
 
Increase/(Decrease)
Components of Revenue:
 
2017
 
2016
 
$
 
%
Product sales, net
 
$
51,782

 
$
48,156

 
$
3,626

 
8
 %
Research and development services and other income
 
172

 
790

 
(618
)
 
(78
)%
Total Revenues
 
$
51,954

 
$
48,946

 
$
3,008

 
6
 %
 
Revenues were $52.0 million for the nine months ended September 30, 2017, compared to $49.0 million for the same period in the prior year. This represents a $3.0 million increase in 2017 from the same period in the prior year. This increase was primarily due to increased revenue from the expansion of our own generic pharmaceutical product line, increased revenue from Lidocaine Hydrochloride topical solution and Zantac injectable and approximately $2.3 million of increased revenue from our specialty generic injectable portfolio in Canada. These increases were offset by a decrease in contract manufacturing revenues of $6.3 million from the same period in the prior year, specifically a decline in sales to one of our customers. Consistent with our strategy, we continue to expect contract manufacturing revenue as a percentage of total revenue to decline over time.

Research and development services and other income will not be consistent and will vary, from period to period, depending on the required timeline of each development project and/or agreement.


Costs and Expenses (in thousands):

 
 
Nine Months Ended
September 30,
 
Increase/(Decrease)
 
 
2017
 
2016
 
$
 
%
Cost of revenues
 
$
29,641

 
$
23,421

 
$
6,220

 
27
%
Selling, general and administrative expenses
 
13,126

 
10,813

 
2,313

 
21
%
Product development and research expenses
 
13,387

 
12,496

 
891

 
7
%
Totals costs and expenditures
 
$
56,154

 
$
46,730

 
$
9,424

 
20
%


Cost of sales increased for the nine months ended September 30, 2017 as compared to the same period in 2016 due to the increase in total revenue. Cost of sales increased as a percentage of total revenue to 57% for the nine months ended September 30, 2017 as compared to 48% for the same period in 2016. This increase in cost of revenue was primarily due to increased revenue from our generic pharmaceutical product line. Increase in cost of sales as a percentage of revenue was driven by new product launches as well as changes in product mix, pricing and related fees, such as wholesaler fees, in addition to customer and product mix for our contract services revenue. For the period ended September 30, 2017, cost of revenues included $0.6 million of costs related to the write off of inventory related to two presentations of our frozen bag products.  We have one remaining frozen bag product that we will distribute and sell through the end of 2017. For the period ended September 30, 2017, cost of revenues also included an increase in inventory reserves of $1.0 million of costs related to inventory and raw materials that were expected to expire in less than six months. Consistent with our strategy, we have increased headcount in our production and quality groups to support our growth and expansion into injectable manufacturing. Total employee related costs increased by $0.3 million, headcount increased from 83 at September 30, 2016 to 112 at September 30, 2017. In addition, our rapid growth has contributed to some production inefficiencies, as we are expanding our manufacturing footprint and capacity in topical manufacturing, and adding sterile manufacturing capabilities at the existing facility. In addition, costs as a percentage of sales increased as revenue from contract services decreased by $6.3 million as compared to the same period in 2016, and the change in product mix resulted in an increase in costs as a percentage of sales.

Selling, general and administrative expenses for the nine months ended September 30, 2017 increased by $2.3 million as compared to the same period in 2016. In 2017, there were increases of $1.2 million in salaries and related costs, including stock based compensation related to options and restricted stock consistent with our hiring plan, an increase of $1 million in legal and professional fees, and $0.1 million increase related to an impairment of an intangible asset.

28



 
Product development and research expenses for the nine months ended September 30, 2017 increased by approximately $0.9 million as compared to the same period in 2016. This was due to increases of $0.9 million increase in salaries and related costs including stock compensation related to options and restricted stock which is consistent with our hiring plan, $0.5 million increase in overhead costs, $0.4 million in pilot and exhibit batch costs; offset by $0.6 million decrease in clinical studies costs and $0.3 million decrease in professional fees.


Other Expense (in thousands): 

 
 
Nine Months Ended
September 30,
 
Increase/(Decrease)
 
 
2017
 
2016
 
$
 
%
Interest and other expense, net
 
$
(8,731
)
 
$
(9,997
)
 
$
(1,266
)
 
(13
)%
Foreign currency exchange gain
 
$
6,645

 
$
1,295

 
$
5,350

 
413
 %

Interest expense decreased by $1.3 million for the nine months ended September 30, 2017 as compared to the same period in 2016. The decrease is related to the interest expense, amortization of debt discount and amortization of debt issuance costs of the Notes (see Note 6), partially offset by capitalized interest of $2.3 million related to our facility expansion and interest income from the intercompany loans. Foreign exchange gain of $6.6 million was recorded in the nine months ended September 30, 2017, primarily related to the foreign currency translation of our intercompany loans denominated in U.S. dollars to our foreign subsidiaries. Depending on the changes in foreign currency exchange rates, we will continue to record a non-cash gain or loss on translation for the remainder of the term of these loans. Due to the nature of this transaction, there is no economic benefit to the Company to hedge this transaction.

During the third quarter ended September 30, 2017, the Company recorded an adjustment in the amount of $0.5 million to reduce the foreign exchange gain on the statement of operations, $0.3 million decrease in cash and $0.2 million decrease in other comprehensive income, that related to the three months ended June 30, 2017, as a result of an error regarding the classification and translation of a cash amount related to their wholly owned subsidiary, “Teligent, OU” and as a result of an error regarding the translation of the foreign subsidiaries. The Company concluded that the correction of these errors was immaterial, both quantitatively and qualitatively.


Net Loss (in thousands, except per share numbers):

 
 
Nine Months Ended
September 30,
 
Increase/(Decrease)
 
 
2017
 
2016
 
$
 
%
Net loss attributable to common stockholders
 
$
(6,416
)
 
$
(6,554
)
 
$
(138
)
 
(2
)%
Basic and diluted loss per share
 
$
(0.12
)
 
$
(0.12
)
 
$

 
 %

Net loss for the nine months ended September 30, 2017 was $6.4 million as compared to $6.6 million in the same period last year. The decrease in net loss is due to increases in revenues of $3.0 million, an increase in the foreign currency exchange gain of $5.4 million and a decrease in interest and other expense of $1.3 million, offset by the increase in costs and expenses of $9.4 million in 2017, noted above.


29



Liquidity and Capital Resources
 
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table (in thousands):
  
 
Nine Months Ended September 30,
 
2017
 
2016
Net cash provided by (used in)
 

 
 

Operating Activities
$
(2,660
)
 
$
2,820

Investing Activities
$
(26,002
)
 
$
(15,378
)
Financing Activities
$
269

 
$
(71
)
  
Operating Activities
 
Our operating activities used $2.7 million of cash in the nine months ended September 30, 2017, compared to $2.8 million provided during the same period last year. The cash used in operating activities for the nine months ended September 30, 2017 was a result of our net loss, adjusted for $7.9 million of non-cash expenses offset by a $4.1 million change in operating assets and liabilities. The cash provided by operating activities for the nine months ended September 30, 2016 was a result of the non-cash expenses and changes in operating assets and liabilities, including the receipt of $4.4 million Goods and Services Tax (GST) refund from the Canadian Revenue Agency, originally paid during the Alveda acquisition in the fourth quarter of 2015.
 
Investing Activities
 
Our investing activities used $26.0 million during the nine months ended September 30, 2017, compared to $15.4 million of cash used in investing activities during the same period last year. The funds used for both periods were for capital expenditures, mainly related to the ongoing facility expansion located in Buena, New Jersey. The increase during the nine months ended September 30, 2017 is due to the progression of the facility expansion and timing of the more expensive purchases. The Company expects the facility expansion to be substantially complete at the end of 2017.

Financing Activities
 
Our financing activities provided $269,000 of cash during the nine months ended September 30, 2017, compared to $71,000 of cash used during the nine months ended September 30, 2016. The $269,000 of cash provided in the nine months ended September 30, 2017 consisted of proceeds from the exercise of options to purchase common stock. The cash used in the nine months ended September 30, 2016 consisted mainly of $70,000 of principal payments on capital lease obligations and $36,000 in expenses related to recovery from a stockholder, offset by proceeds from the exercise of options to purchase common stock of $35,000.
 
Our principal sources of liquidity are cash and cash equivalents of approximately $38.2 million at September 30, 2017 and future cash from operations. Our working capital was $57.3 million at September 30, 2017.
 
We may require additional funding and this funding will depend, in part, on the timing and structure of potential business arrangements. If necessary, we may continue to seek to raise additional capital through the sale of our equity or through a strategic alliance with a third party. There may also be additional acquisition and growth opportunities that may require external financing. There can be no assurance that such financing will be available on terms acceptable to us, or at all. We believe that our existing capital resources will be sufficient to support our current business plan beyond November 2018.
 
Off Balance Sheet Arrangements
 
We do not have any off balance sheet arrangements as of the date of this report.

Critical Accounting Policies and Estimates
 
Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates.
 

30



Please refer to our Annual Report on Form 10-K for the year ended December 31, 2016 for a complete list of all Critical Accounting Policies and Estimates. See also Note 3 to our Condensed Consolidated Financial Statements.
 

ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk
 
As of September 30, 2017, our principal debt obligation was related to our Notes. Interest accrues at a fixed rate of 3.75% on the outstanding principal amount of the Notes and is paid semi-annually every June 15 and December 15 until the Notes mature on December 15, 2019.  Since the interest rate is fixed, we have no market risk related to the Notes.
 
We had a revolving Credit and Security Agreement with General Electric Capital Corporation that called for interest to accrue based on a premium above either the current prime rate or current LIBOR rates. We terminated this credit facility in February 2016.
 
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable and the Notes. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate book value because of the short maturity of these instruments.  Based on the closing price of our common stock as of September 30, 2017, the fair value of our Notes was approximately $118 million compared to their face value of $143.75 million as of September 30, 2017.  However, this variance is due to the conversion feature in the Notes rather than to changes in market interest rates.  As noted above, the Notes carry a fixed interest rate and therefore do not subject us to interest rate risk.

At September 30, 2017, the bulk of our cash and cash equivalents was invested in overnight instruments, the interest rates of which may change daily.  Accordingly, these overnight investments are subject to market risk.
 
ITEM 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures
 
Our management evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2017. Due to the material weakness in internal control over financial reporting described below, our Chief Executive Officer and Principal Financial and Accounting Officer have concluded that, as of September 30, 2017, the Company's disclosure controls and procedures were not effective as of September 30, 2017.

During the third quarter of fiscal 2017, management identified a material weakness in our internal control over financial reporting resulting from the lack of timely and effective review of the Company's period-end closing processes. Specifically, management concluded that the material weakness relates to the Company not having adequate personnel and resources in place for its implementation of a new enterprise-wide financial system ("ERP"), and consequently, the same financial reporting personnel were not able to perform a timely and effective review of our period-end closing process.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our third quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, as noted below, we have implemented changes to our internal control over financial reporting to address the material weakness described above.

Remediation

To remediate the material weakness, the Company has begun to implement new procedures and employ additional resources, including the following:

The Company hired new team members and has engaged external resources with significant prior experience with systems similar to the Company's new ERP system to provide additional capacity, analytical and functional capabilities, and cross-training.
The Company implemented business process improvements, particularly relating to its foreign subsidiaries, that are anticipated to enable a faster month-end close and should result in fewer journal entries for quarter-end.
A review of the appropriate training of personnel performing transactions in the Company's ERP system was performed in October 2017, along with a review of all information system access.



31



  
PART II
OTHER INFORMATION
 
ITEM 1.    Legal Proceedings
 
We are involved from time to time in claims which arise in the ordinary course of business. In the opinion of management, we have 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 us relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on our 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 Company PLC regarding the pricing of econazole nitrate cream. The actions have been transferred 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 consolidated into 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 or reimbursed patients for the purchase of generic econazole from any of the defendants from July 1, 2014 until the time the defendants’ allegedly unlawful conduct ceased or will cease.

The plaintiffs allege a conspiracy to fix prices for generic econazole in violation of federal antitrust laws or state antitrust, consumer protection, and other laws. Plaintiffs seek treble damages for alleged price overcharges for generic econazole during the alleged period of conspiracy, and the end payer and indirect reseller class plaintiffs 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 complaints. 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 now 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. We intend to file 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. Due to the early stage of this matter, 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 this case is without merit, and we intend to vigorously defend against these claims.
 

ITEM 1A.    Risk Factors
 
Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2016 includes a detailed discussion of risks and uncertainties which could adversely affect our future results. Except as set forth below, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2016 have not materially changed.
 
Risks Related to Our Business 

We have a history of losses and cannot assure you that we will become profitable, and as a result, we may have to cease operations and liquidate our business.
 
With the exception of 2015 and the three month period ended March 31, 2017, our expenses have exceeded our revenue in each of the last 12 years, and no net income has been available to common stockholders during each of these years. As of September 30, 2017, our stockholders’ equity was $53.2 million and we had an accumulated deficit of $51.3 million. Our future profitability depends on revenue exceeding expenses, but we cannot assure you that this will occur. If we do not become profitable or continue

32



to raise external financing, we could be forced to curtail operations and sell or liquidate our business, and you could lose some or all of your investment.

We rely on a limited number of customers for a large portion of our revenues.
 
We depend on a limited number of customers for a large portion of our revenue. Three of our customers accounted for 55% of our revenue for the three months ended September 30, 2017 and two of our customers accounted for 31% of our revenue for the three months ended September 30, 2016. For the nine months ended September 30, 2017, three of our customers accounted for 56% of our revenue and for the nine months ended September 30, 2016, three of our customers accounted for 40% of our revenue. The loss of one or more of these customers could have a significant impact on our revenues and harm our business and results of operations.

Due to our dependence on a limited number of products, our business will be materially adversely affected if these products do not perform as well as expected.

We expect to generate a significant portion of our total revenues and gross margin from the sale of a limited number of products. While we continue to diversify our product portfolio, two of our products accounted for greater than 10% of our net revenues for either the three or nine month periods ended September 30, 2017. Lidocaine ointment, which we launched at the end of the first quarter of 2016, accounted for 16% and 33% of total revenues for the three months ended September 30, 2017 and 2016, respectively, and 19% and 17% of total revenues for the nine months ended September 30, 2017 and 2016, respectively. Zantac accounted for 7% and 6% of net revenues, for the three months ended September 30, 2017 and 2016, respectively and 12% and 4% of total revenues for the nine months ended September 30, 2017 and 2016, respectively. Any material adverse developments, including increased competition, loss of customers, pricing pressures and supply shortages, with respect to the sale or use of our products and prospective products, or our failure to successfully introduce such products, could have a material adverse effect on our revenues and gross margin.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting.

We are required by the SEC to establish and maintain adequate internal control over financial reporting that provides reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. We are likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses in those internal controls.

As disclosed elsewhere herein, in connection with our financial review management concluded that a material weakness related to the Company not having adequate personnel and resources in place for its implementation of a new ERP existed, and consequently, the same financial reporting personnel were not able to perform a timely and effective review of our period-end closing process.

Since the determination regarding this material weakness, we have devoted, and will continue to devote, significant effort and resources to the remediation and improvement of our internal control over financial reporting. Our plans include the following: new internal and external personnel, new business process improvements and a review of relevant training. The elements of our remediation plan can only be accomplished over time and we can offer no assurance that these initiatives will ultimately have the intended effects. Any failure to maintain such internal controls could adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations, which may have a material adverse effect on our business.

We are subject to stringent regulatory requirements. Failure to adhere to such requirements could harm our business and results of operations. 

In the United States, we and our suppliers of raw materials are also subject to regulation under the Occupational Safety and Health Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other current and potential future federal, state or local regulations. Failure to adhere to such regulations, by either us or our suppliers, could harm our business and results of operations. In addition, our analytical department uses certain hazardous materials and chemicals in limited and controlled quantities. We have implemented safety procedures for handling and disposing of such materials, however, such procedures may not comply with the standards prescribed by federal, state and local regulations. Even if we follow such safety procedures for handling and disposing of hazardous materials and chemicals and such procedures comply with applicable law, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages and any such liability could exceed our resources. Our operations and properties are also subject to a wide variety of increasingly complex and stringent federal, state and local environmental laws and regulations, including those governing

33



the remediation of contaminated soil and groundwater. Such environmental laws may apply to conditions at properties and facilities presently or formerly owned or operated by us, as well as to conditions at properties at which wastes or other contamination attributable to us have been sent or otherwise come to be located. One of our facilities has undergone remediation of environmental contamination, and one of our facilities is currently undergoing remediation of environmental contamination. The total estimated costs for the clean-up and remediation is $0.9 million as of September 30, 2017, and remaining costs accrued at September 30, 2017 totaled $0.1 million. Based on information provided to us from our environmental consultants and what is known to date, we believe the reserves are sufficient for the remaining remediation of the environmental contamination. There is a possibility, however, that the remediation costs may exceed our estimates. In addition, we can give no assurance that the future cost of compliance with existing environmental laws will not give rise to additional significant expenditures or liabilities that would be material to us. Future events, such as new information, changes in existing environmental laws or their interpretation, and more vigorous enforcement policies of federal, state or local regulatory agencies, may have a material adverse effect on our business, financial condition and results of operations. In Canada, we and our suppliers of raw materials are also subject to regulation under Hazardous Products Act, Controlled Products Regulations, Consumer Product Safety Act. Canadian Environmental Protection Act and other current and potential future federal, provincial/territorial or local regulations. Failure to adhere to such regulations, by either us or our suppliers, could harm our business and results of operations. In addition, our analytical department uses certain hazardous materials and chemicals in limited and controlled quantities. We have implemented safety procedures for handling and disposing of such materials, however, such procedures may not comply with the standards prescribed by federal, provincial/territorial and local regulations. Even if we follow such safety procedures for handling and disposing of hazardous materials and chemicals and such procedures comply with applicable law, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages and any such liability could exceed our resources. Future events, such as new information, changes in existing environmental laws or their interpretation, and more vigorous enforcement policies of federal, provincial/territorial or local regulatory agencies, may have a material adverse effect on our business, financial condition and results of operations.
 
Significant balances of intangible assets, including goodwill, are subject to impairment testing and may result in impairment charges, which may materially and adversely affect our results of operations and financial condition. 

A significant amount of our total assets is related to goodwill and intangible assets. As of September 30, 2017, the value of our goodwill and intangible assets net of accumulated amortization was $56.6 million. Goodwill and other intangible assets are tested for impairment annually when events occur or circumstances change that could potentially reduce the fair value of the reporting unit or intangible asset. Impairment testing compares the fair value of the reporting unit or intangible asset to its carrying amount. Any future goodwill or other intangible asset impairment, if any, would be recorded in operating income and could have a material adverse effect on our results of operations and financial condition.

Our ability to use our net operating loss carry forwards and certain other tax attributes may be limited. 

As of December 31, 2016, we had federal net operating loss carry forwards, or NOLs, of approximately $33.7 million which expire from 2020 through 2035. Our ability to utilize our NOLs may be limited under Section 382 of the Internal Revenue Code. The limitations apply if an ownership change, as defined by Section 382, occurs. Generally, an ownership change occurs when certain shareholders increase their aggregate ownership by more than 50 percentage points over their lowest ownership percentage in a testing period (typically three years). Our ability to use net operating loss carry forwards is subject to substantial limitation in future periods under certain provisions of Section 382 of the Internal Revenue Code, which limit the utilization of net operating losses upon a more than 50% change in ownership of our stock that is held by 5% or greater stockholders. We 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. We believe that operating losses subsequent to the change date in 2010 (aggregating $15.0 million) are not subject to Section 382 limitations. We have 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.
 
Currency fluctuations and changes in exchange rates could adversely affect our business, financial condition, results of operations, cash flows, and/or common stock price.
 
Although we report our financial results in U.S. Dollars, a portion of our revenues and other liabilities and our costs are denominated in non-U.S. currencies, including the Euro and Canadian Dollar. Our results of operations and, in some cases, cash flows, have in the past been and may in the future be adversely affected by certain movements in currency exchange rates. The occurrence of any of the above risks could cause a material adverse effect on our business, financial condition, results of operations, cash flows, and/or share price.


34



The Company is exposed to market risk from fluctuations in currency exchange rates.

The Company operates in multiple jurisdictions denominated in currencies of the local jurisdiction. Additionally, the Company
may enter into acquisition, licensing, borrowing or other financial transactions that may give rise to currency exposure. Since
the Company cannot, with certainty, foresee and mitigate against such adverse fluctuations, fluctuations in currency exchange
rates could negatively affect the Company’s results of operations, financial position and cash flows.

Risks Related to our Indebtedness
 
Our substantial indebtedness could materially adversely affect our business, financial condition or results of operations and prevent us from fulfilling our obligations under the Notes.
 
On December 16, 2014, the Company issued $125 million aggregate principal amount of 3.75% Convertible Senior Notes due 2019 (the “Notes”). After giving effect to the issuance of the Notes, we will have a substantial amount of indebtedness. As of September 30, 2017, our total consolidated indebtedness was $143.7 million. Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on, or other amounts due in respect of our indebtedness. Our substantial indebtedness, combined with our other financial obligations and contractual commitments, may have a material adverse impact on us. For example, it could

make it difficult for us to satisfy our obligations with respect to our outstanding and other future debt obligations;
increase our vulnerability to general adverse economic conditions or a downturn in the industries in which we operate;
impair our ability to obtain additional financing in the future for working capital, investments, acquisitions and other general corporate purposes;
require us to dedicate a substantial portion of our cash flows to the payment to our financing sources, thereby reducing the availability of our cash flows to fund working capital, investments, acquisitions and other general corporate purposes; and
place us at a disadvantage compared to our competitors.

Risks Related to Our Securities
 
Shares of our common stock are relatively illiquid which may affect the trading price of our common stock.
 
For the nine months ended September 30, 2017, the average daily trading volume of our common stock on the NASDAQ Global Select Market was approximately 346,068 shares. As a result of our relatively small public float, our common stock may be less liquid than the stock of companies with broader public ownership. Among other things, trading of a relatively small volume of our common stock may have a greater impact on the trading price for our shares than would be the case if our public float were larger.

ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
ITEM 3.    Defaults Upon Senior Securities
 
None.
 
ITEM 4.    Mine Safety Disclosures

None.
 

ITEM 5.    Other Information
 
None.

35



ITEM 6.    Exhibits

Exhibit
 
 
Number
 
Description
 
 
 
31.1*
 
 
 
 
31.2*
 
 
 
 
32.1*
 
 
 
 
32.2*
 
 
 
 
101*
 
The following financial information from this Quarterly Report on Form 10-Q for the period ended September 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Balance Sheets; (iii) the Condensed Consolidated Statements of Cash Flows; (iv) the Condensed Consolidated Statement of Comprehensive Income(Loss); (v) the Condensed Consolidated Statement of Equity; and (vi) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.
 
* Filed herewith.

36



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Teligent, Inc.
 
 
 
Date: November 9, 2017
By:
/s/   Jason Grenfell-Gardner
 
 
Jason Grenfell-Gardner
 
 
President and Chief Executive Officer
 
 
 
Date: November 9, 2017
By:
/s/   Jenniffer Collins
 
 
Jenniffer Collins
 
 
Chief Financial Officer
 
Exhibit Index
 
Exhibit
 
 
Number
 
Description
 
 
 
31.1*
 
 
 
 
31.2*
 
 
 
 
32.1*
 
 
 
 
32.2*
 
 
 
 
101*
 
The following financial information from this Quarterly Report on Form 10-Q for the period ended September 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Balance Sheets; (iii) the Condensed Consolidated Statements of Cash Flows; (iv) the Condensed Consolidated Statement of Comprehensive Income(Loss); (v) the Condensed Consolidated Statement of Equity; and (vi) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.
 
* Filed herewith.


37
EX-31.1 2 tlgtq32017ex311.htm EXHIBIT 31.1 Exhibit


Exhibit 31.1

 
CERTIFICATION
OF
JASON GRENFELL-GARDNER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OF
TELIGENT, INC.
 
I, Jason Grenfell-Gardner, President and Chief Executive Officer of Teligent, Inc., certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of Teligent, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date: November 9, 2017
 
 
/s/ Jason Grenfell-Gardner
 
Jason Grenfell Gardner
 
President and Chief Executive Officer


EX-31.2 3 tlgtq32017ex312.htm EXHIBIT 31.2 Exhibit


Exhibit 31.2
 
CERTIFICATION
OF
JENNIFFER COLLINS
CHIEF FINANCIAL OFFICER
OF
TELIGENT, INC.
  
I, Jenniffer Collins, Chief Financial Officer of Teligent, Inc., certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of Teligent, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date: November 9, 2017
 
 
/s/ Jenniffer Collins
 
Jenniffer Collins
 
Chief Financial Officer



EX-32.1 4 tlgtq32017ex321.htm EXHIBIT 32.1 Exhibit


Exhibit 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Teligent, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jason Grenfell-Gardner, President and Chief Executive Officer of the Company, state and certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: November 9, 2017
 
 
/s/ Jason Grenfell-Gardner
 
Jason Grenfell Gardner
 
President and Chief Executive Officer



EX-32.2 5 tlgtq32017ex322.htm EXHIBIT 32.2 Exhibit


Exhibit 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Teligent, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jenniffer Collins, Chief Financial Officer of the Company, state and certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to  §  906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: November 9, 2017
 
 
/s/ Jenniffer Collins
 
Jenniffer Collins
 
Chief Financial Officer



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