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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
| | | | | | | | |
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
| | | | | | | | |
| ☐ | 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 every Interactive Data File required to be submitted 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | ¨ | Accelerated filer | ☑ |
| Non-accelerated filer | ¨ | Smaller reporting company | ☑ |
| Emerging growth 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). ☐
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 was 53,850,427 shares as of November 1, 2019.
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.
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, 2019 (unaudited) | | December 31, 2018 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 6,707 | | | $ | 9,705 | |
| Restricted cash | | 206 | | | 2,892 | |
Accounts receivable, net of allowance for doubtful accounts of $2,539 and $2,636, as of September 30, 2019 and December 31, 2018, respectively | | 20,361 | | | 16,120 | |
| Inventories | | 22,633 | | | 16,296 | |
| Prepaid expenses and other receivables | | 1,670 | | | 3,373 | |
| Total current assets | | 51,577 | | | 48,386 | |
| Property, plant and equipment, net | | 96,088 | | | 91,775 | |
| Intangible assets, net | | 44,287 | | | 48,375 | |
| Goodwill | | 484 | | | 470 | |
| Other assets | | 3,757 | | | 1,886 | |
| Total assets | | $ | 196,193 | | | $ | 190,892 | |
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY/ (DEFICIT) | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 8,822 | | | $ | 5,933 | |
| Accrued expenses | | 10,438 | | | 9,842 | |
| Deferred income | | — | | | 2,426 | |
| Revolver, current portion | | 2,500 | | | — | |
Convertible 3.75% Senior Notes, net of debt discount and debt issuance costs (face of $13,022 and $15,702 as of September 30, 2019 and December 31, 2018, respectively) | | 12,777 | | | 14,411 | |
| Other current liabilities | | 434 | | | — | |
| Total current liabilities | | 34,971 | | | 32,612 | |
| Revolver | | 25,000 | | | 15,000 | |
2023 Term Loans, net of debt issuance costs (face of $76,359 and $70,000 as of September 30, 2019 and December 31, 2018, respectively) | | 74,353 | | | 67,662 | |
Convertible 4.75% Senior Notes, net of debt discount and debt issuance costs (face of $75,090 as of September 30, 2019 and December 31, 2018, respectively) | | 59,434 | | | 56,909 | |
| Deferred tax liability | | 223 | | | 215 | |
| Other long term liabilities | | 2,367 | | | 73 | |
| Total liabilities | | 196,348 | | | 172,471 | |
| Commitments and Contingencies | | | | |
| Stockholders’ equity/ (deficit): | | | | |
Common stock, $0.01 par value, 100,000,000 shares authorized; 53,850,427 and 53,774,221 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | | 558 | | | 557 | |
| Additional paid-in capital | | 117,782 | | | 116,864 | |
| Accumulated deficit | | (116,176) | | | (96,350) | |
| Accumulated other comprehensive loss | | (2,319) | | | (2,650) | |
| Total stockholders’ equity / (deficit) | | (155) | | | 18,421 | |
| Total liabilities and stockholders' equity/ (deficit) | | $ | 196,193 | | | $ | 190,892 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
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, | | |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
| Revenue, net | | $ | 18,466 | | | $ | 18,294 | | | $ | 49,929 | | | $ | 49,088 | |
| | | | | | | | |
| Costs and expenses: | | | | | | | | |
| Cost of revenues | | 11,186 | | | 11,575 | | | 28,346 | | | 32,365 | |
| Selling, general and administrative expenses | | 5,007 | | | 4,845 | | | 15,707 | | | 15,932 | |
| Product development and research expenses | | 2,064 | | | 3,087 | | | 7,721 | | | 10,445 | |
| Total costs and expenses | | 18,257 | | | 19,507 | | | 51,774 | | | 58,742 | |
| Operating income/(loss) | | 209 | | | (1,213) | | | (1,845) | | | (9,654) | |
| | | | | | | | |
| Other Expense: | | | | | | | | |
| Foreign currency exchange loss | | (2,167) | | | (176) | | | (2,458) | | | (2,071) | |
| Debt partial extinguishment of 2019 Notes | | — | | | — | | | (185) | | | (2,467) | |
| Interest and other expense, net | | (5,160) | | | (2,693) | | | (15,262) | | | (7,764) | |
| Loss before income tax expense | | (7,118) | | | (4,082) | | | (19,750) | | | (21,956) | |
| | | | | | | | |
| Income tax (benefit)/expense | | (5) | | | (137) | | | 76 | | | (90) | |
| | | | | | | | |
| Net loss attributable to common shareholders | | $ | (7,113) | | | $ | (3,945) | | | $ | (19,826) | | | $ | (21,866) | |
| | | | | | | | |
| Basic and diluted loss per share | | $ | (0.13) | | | $ | (0.07) | | | $ | (0.37) | | | $ | (0.41) | |
| | | | | | | | |
| | | | | | | | |
| Weighted average shares of common stock outstanding: | | | | | | | | |
| Basic and diluted shares | | 53,850,427 | | | 53,625,768 | | | 53,835,336 | | | 53,532,277 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
TELIGENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited)
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| | Three months ended September 30, | | | | Nine months ended September 30, | | |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net loss | | $ | (7,113) | | | $ | (3,945) | | | $ | (19,826) | | | $ | (21,866) | |
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| Other comprehensive income loss, net of tax: | | | | | | | | |
| Foreign currency translation adjustment | | 36 | | | 108 | | | 331 | | | (224) | |
| Other comprehensive income loss | | 36 | | | 108 | | | 331 | | | (224) | |
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| Comprehensive loss | | $ | (7,077) | | | $ | (3,837) | | | $ | (19,495) | | | $ | (22,090) | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
TELIGENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share information)
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| | | | | | Additional | | | | Accumulated
Other | | Total |
| | Common Stock | | | | Paid-In | | Accumulated | | Comprehensive | | Stockholders’ |
| | Shares | | Amount | | Capital | | Deficit | | (Loss)/Income | | Equity/ (Deficit) |
| Balance, December 31, 2018 (audited) | | 53,774,221 | | | $ | 557 | | | $ | 116,864 | | | $ | (96,350) | | | $ | (2,650) | | | $ | 18,421 | |
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| Stock based compensation expense | | — | | | — | | | 919 | | | — | | | — | | | 919 | |
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| Issuance of stock for vested restricted stock units | | 76,206 | | | 1 | | | (1) | | | — | | | — | | | — | |
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| Cumulative translation adjustment | | — | | | — | | | — | | | — | | | 331 | | | 331 | |
| Net loss | | — | | | — | | | — | | | (19,826) | | | — | | | (19,826) | |
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| Balance, September 30, 2019 (unaudited) | | 53,850,427 | | | $ | 558 | | | $ | 117,782 | | | $ | (116,176) | | | $ | (2,319) | | | $ | (155) | |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
TELIGENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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| | Nine months ended September 30, | | |
| | 2019 | | 2018 |
| Cash flows from operating activities: | | | | |
| Net loss | | $ | (19,826) | | | $ | (21,866) | |
| Reconciliation of net loss to net cash (used in) provided by operating activities: | | | | |
| Depreciation of fixed assets and leases | | 2,700 | | | 1,703 | |
| Provision for bad debt | | (97) | | | 601 | |
| Provision for write down of inventory | | (295) | | | 844 | |
| Issuance of stock to consultant | | — | | | 102 | |
| Stock based compensation | | 896 | | | 1,572 | |
| Amortization of debt costs and debt discount | | 4,657 | | | 7,080 | |
| Amortization of intangible assets | | 2,260 | | | 2,302 | |
| Non cash lease expense | | 308 | | | — | |
| Foreign currency exchange loss | | 2,458 | | | 2,071 | |
Partial extinguishment of Convertible 3.75% Senior Notes | | 185 | | | 2,467 | |
| Gain on sale of fixed assets | | — | | | (20) | |
| Loss on impairment of intangible assets | | — | | | 22 | |
| Non cash interest expense | | 6,359 | | | — | |
| Changes in operating assets and liabilities: | | | | |
| Accounts receivable | | (4,018) | | | (4,587) | |
| Inventories | | (5,970) | | | (2,746) | |
| Prepaid expenses, other current receivables and assets | | 1,666 | | | 2,085 | |
| | | | |
| Accounts payable and accrued expenses | | 2,747 | | | (6,944) | |
| Operating liabilities | | (265) | | | — | |
| Deferred income | | (2,426) | | | — | |
| Net cash used in operating activities | | (8,661) | | | (15,314) | |
| Cash flows from investing activities: | | | | |
| Capital expenditures | | (6,082) | | | (18,315) | |
| Proceeds from sale of fixed assets | | — | | | 38 | |
| Net cash used in investing activities | | (6,082) | | | (18,277) | |
| Cash flows from financing activities: | | | | |
| Proceeds from exercise of common stock options | | — | | | 246 | |
| Proceeds from Revolver | | 12,500 | | | — | |
| Proceeds from 2021 Term Loan | | — | | | 25,000 | |
| Debt issuance costs | | (269) | | | (2,539) | |
Repurchase of 3.75% senior notes | | (2,686) | | | — | |
| Principal paid on lease obligation | | (9) | | | — | |
| Net cash provided by financing activities | | 9,536 | | | 22,707 | |
| Effect of exchange rate on cash and cash equivalents | | (481) | | | (542) | |
| Net decrease in cash, cash equivalents and restricted cash | | (5,207) | | | (10,884) | |
| Cash, cash equivalents and restricted cash at beginning of period | | 13,069 | | | 27,165 | |
| Cash, cash equivalents and restricted cash at end of period | | $ | 7,381 | | | $ | 15,739 | |
| Supplemental Cash flow information: | | | | |
| Cash payments for interest | | $ | 3,211 | | | $ | 3,136 | |
| Cash payments for income taxes | | 68 | | | 66 | |
| Non-cash operating, investing and financing transactions: | | | | |
| | | | |
| Issuance of stock to a consultant | | — | | | 102 | |
| Acquisition of capital expenditures in accounts payable and accrued expenses | | 938 | | | 1,316 | |
| Capitalized interest in capital expenditures | | — | | | 2,013 | |
| Capitalized stock compensation in capital expenditures | | 23 | | | 82 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
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, 2018, 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, 2018 has been derived from those audited consolidated financial statements. Operating results for the nine month period ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
1. Nature of the Business and Liquidity
Nature of the Business
Teligent, Inc. and its subsidiaries (collectively the “Company”), is a specialty generic pharmaceutical company. Our mission is to become a leader in the specialty generic pharmaceutical market in alternate dosage forms. Under our own label, we currently market and sell generic topical and generic and branded generic injectable pharmaceutical products in the United States and Canada. In the United States, we currently market thirty-six generic topical pharmaceutical products and four branded generic injectable pharmaceutical products. In Canada, we sell thirty-two generic and branded generic injectable products and medical devices. Generic pharmaceutical products are bioequivalent to their brand name counterparts. We also provide contract manufacturing services to the pharmaceutical, over the counter ("OTC"), and cosmetic markets. We operate our business under one reportable segment. Our common stock is traded on the Nasdaq Global Select Market under the trading symbol “TLGT.” Our principal executive office, laboratories and manufacturing facilities are located at 105 Lincoln Avenue, Buena, New Jersey. We have additional offices located in Iselin, New Jersey, Mississauga, Canada, and Tallinn, Estonia.
Liquidity
The Company has incurred significant losses and generated negative cash flows from operations in recent years and expects to continue to incur losses and generate negative cash flow for the foreseeable future. As a result, the Company had an accumulated deficit of $116.2 million, total principal amount of outstanding borrowings of $174.1 million, and limited capital resources to fund ongoing operations at September 30, 2019. These capital resources were comprised of cash and equivalents of $6.7 million at September 30, 2019, the generation of cash inflows from working capital, and an additional $10.0 million of borrowing capacity under the Delayed Draw Term Loan A portion of the Company’s Senior Credit Facilities that expires on December 13, 2019. In addition, subsequent to September 30, 2019, the Company issued Series B Senior Unsecured Convertible Notes for aggregate proceeds of $34.4 million, of which the Company expects approximately $27.3 million will be available to fund operations. See Note 7 for additional information regarding the Company’s Senior Credit Facilities and Note 13 for additional information regarding the Company’s Series B Senior Unsecured Convertible Notes.
The Company’s available capital resources may not be sufficient for it to continue to meet its obligations as they become due over the next twelve months if the Company cannot improve its operating results or increase its operating cash inflows. In the event these capital resources are not sufficient, the Company may need to raise additional capital through the sale of equity or debt securities, enter into strategic business collaboration agreements with other companies, seek other funding facilities, or sell assets. However, the Company cannot provide assurances that additional capital will be available on acceptable terms or at all. Moreover, if the Company is unable to meet its obligations when they become due over the next twelve months through its available capital resources, or obtain new sources of capital when needed, the Company may have to delay expenditures, reduce the scope of its manufacturing operations, reduce or eliminate one or more of its development programs, or make significant changes to its operating plan. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In addition, as disclosed in Note 7, the Company is subject to certain financial covenants that are required to be met under the Senior Credit Facilities. These financial covenants include a trailing twelve months (“TTM”) Minimum Revenue covenant that was required to be met each quarterly period through June 30, 2019, a TTM Minimum Adjusted EBITDA that is required to be met each quarterly period from September 30, 2019 through September 30, 2020, and a Maximum Total Net Leverage Ratio that is required to be met each quarterly period thereafter. As of September 30, 2019, the Company was in compliance with the TTM Adjusted EBITDA covenant and currently anticipates it will remain in compliance with this covenant through September 30, 2020. However, a material change in the Company’s operating results over the next twelve months could negatively affect the Company’s ability to maintain compliance with the TTM Adjusted EBITDA covenant. Moreover, while the Company is not required to comply with the Maximum Total Net Leverage ratio until December 31, 2020, the Company currently anticipates that it will not be in compliance with this covenant absent a significant reduction in the Company’s total principal amount of outstanding debt. In the event the Company is unable to comply with this covenant, or obtain a waiver from its lenders, the total amounts outstanding under the Senior Credit Facilities and Convertible Notes would immediately become due in January 2021 for which the Company does not currently expect to have readily available capital resources to meet these obligations without raising additional capital through the sale of equity or debt securities. If the Company is unable to raise additional capital to meet these obligations if they become due in January 2021, the Company may have to seek other strategic alternatives. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In June 2019, the Company received a de-listing notice from the NASDAQ due to its share price being below $1.00 for 30 consecutive trading days. The notice specifies that the Company’s share price must trade above $1.00 per share for ten consecutive trading days prior to December 2, 2019 in order to prevent the Company’s common stock from being de-listed. As of September 30, 2019, and through the date of issuance of the accompanying financial statements, the share price of the Company’s common stock has not traded above $1.00 per share for the required ten consecutive trading days and, as such, the Company has filed a request from the NASDAQ for a 180-day extension. While the Company believes that the ongoing execution of its business plan will ultimately increase the Company’s share price above $1.00 for the required ten consecutive trading days, the Company can provide no assurances that its shares will trade above $1.00 per share within the 180-day extension period, if at all. Moreover, while the Company believes the NASDAQ will grant the 180-day extension request, the Company can provide no assurances that such extension will be granted. As a result, if the Company’s shares are de-listed from the NASDAQ, the Company would be in default of the non-financial covenant required by the Company’s Senior Credit Facilities and Convertible Notes for which the Company would have to seek a waiver from the lenders or seek new capital through the sale of equity or debt securities. If the Company is unable to obtain a waiver or raise new capital to meet these obligations if they become due, the Company may have to seek other strategic alternatives. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
2. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the fiscal years ending December 31, 2019 and 2018. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements contained in the Company’s Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on April 1, 2019. Certain amounts in prior periods have been reclassified to conform to the current year presentation. Such reclassifications did not have a material effect on the Company's financial condition, results of operations, or cash flows as previously reported.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Teligent, Inc. and its wholly owned and majority-owned subsidiaries. All inter-company accounts and transactions have been eliminated. The Company consolidated the following entities: Igen, Inc., Teligent Pharma. Inc., Teligent Luxembourg S.à.r.l., Teligent OÜ, Teligent Canada Inc., and Teligent Jersey Limited., in addition to the following inactive entities: Microburst Energy, Inc., Blood Cells, Inc. and Flavorsome, Ltd.
Use of Estimates
The preparation of financial statements in conformity with 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, allowances for excess and obsolete inventories, allowances for doubtful accounts, provisions for income taxes and related valuation allowances, stock based compensation, the assessment for the impairment of long-lived assets (including intangibles, goodwill and property, plant and equipment) and legal accruals for environmental cleanup and remediation costs. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid instruments purchased with the original maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes. Cash and cash equivalents include cash on hand and bank demand deposits used in the Company’s cash management program.
The Company has restricted cash, consisting of escrow accounts and letter of credits, which is included within other assets, non-current on the Company's Condensed Consolidated Balance Sheet. In addition, pursuant to the Credit Facilities agreement, proceeds from the 2023 Term Loans are deposited in a blocked bank account and restricted for use with the exception of repurchasing remaining 2019 Notes. During the first quarter of 2019, the Company used a total of $2.7 million of restricted cash to repurchase a portion of the remaining 2019 Notes (Note 7).
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported in the Condensed Consolidated Balance Sheet to the total amounts in the Condensed Consolidated Statement of Cash Flows as follows:
| | | | | | | | | | | | | | |
| September 30, 2019 | | | | September 30, 2018 | |
| Cash and cash equivalents | $ | 6,707 | | | | | $ | 15,267 | | |
| Restricted cash | 206 | | | | | — | | |
| Restricted cash in other assets | 468 | | | | | 472 | | |
| Cash, cash equivalents and restricted cash in the statement of cash flows | $ | 7,381 | | | | | $ | 15,739 | | |
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade receivables, restricted cash, accounts payable and other accrued liabilities at September 30, 2019 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, 2019, based on level 2 inputs, the fair value of our Notes (2019 Notes and 2023 Notes) was approximately $57.2 million compared to their carrying value of $72.2 million. In addition, the value of our Senior Credit Facilities was stated at carrying value at September 30, 2019.
Loss Per Common 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 and the exercise of options and warrants. For the three and nine months ended September 30, 2019, 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)
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| Three months ended September 30, | | | | Nine months ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
| Basic loss per share computation: | | | | | | | |
| Net loss - basic and diluted | $ | (7,113) | | | $ | (3,945) | | | $ | (19,826) | | | $ | (21,866) | |
| Weighted average common shares - basic and diluted | 53,850,427 | | | 53,625,768 | | | 53,835,336 | | | 53,532,277 | |
| Basic and diluted loss per share | $ | (0.13) | | | $ | (0.07) | | | $ | (0.37) | | | $ | (0.41) | |
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Concentration of Credit Risk
Major customers of the Company are defined as those constituting greater than 10% of the Company's total revenue. For the three months ended September 30, 2019, two of the Company’s customers accounted for 47% of the Company’s revenue, consisting of 35% and 12%, respectively. For the three months ended September 30, 2018, three of the Company’s customers accounted for 49% of the Company’s revenue, consisting of 25%, 12% and 12%, respectively. For the nine months ended September 30, 2019, two of the Company’s customers accounted for 48% of the Company’s revenue, consisting of 29% and 19%, respectively. For the nine months ended September 30, 2018, three of the Company’s customers accounted for 54% of the Company’s revenue, consisting of 32%, 12% and 10%, respectively. Accounts receivable related to the Company’s major customers comprised 47% of all accounts receivable as of September 30, 2019 and 56% as of September 30, 2018 respectively. The loss of one or more of these major customers could have a significant impact on our revenues and harm our business and results of operations.
For the three months ended September 30, 2019, domestic net revenues were $13.4 million and foreign net revenues were $5.1 million. For the nine months ended September 30, 2019, domestic net revenues were $36.5 million and foreign net revenues were $13.4 million. As of September 30, 2019, domestic assets were $142.5 million and foreign assets were $53.7 million. For the three months ended September 30, 2018, domestic net revenues were $13.3 million and foreign net revenues were $5.0 million. For the nine months ended September 30, 2018, domestic net revenues were $34.9 million and foreign net revenues were $14.2 million. As of September 30, 2018, domestic assets were $131.9 million and foreign assets were $61.0 million.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing lease guidance under Topic 840. The new standard requires lessees to recognize Right-of-Use ("ROU") assets and lease liabilities for all leases with terms greater than 12 months, including those leases that were previously classified as operating leases. Topic 842 retains a distinction between finance leases and operating leases, with measurement and presentation of expenses and cash flows being dependent upon the classification. The Company adopted the new standard effective January 1, 2019 utilizing the optional transition method allowed under ASU 2018-11, Leases (Topic 842): Targeted Improvements. See Note 6 for the Company's additional required disclosures under Topic 842.
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This guidance is effective for all entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The amendments in ASU 2018-02 should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company's adoption of this ASU, effective January 1, 2019, did not have a material impact on its condensed consolidated financial statements.
Recently Issued Not Yet Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”), which requires that a financial asset (or a group of financial assets) measured at an amortized cost basis be presented at the net amount expected to be collected. This approach to estimating credit losses applies to most financial assets measured at amortized cost and certain other instruments, including but not limited to, trade and other receivables. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, which for the Company means January 1, 2020. The Company is currently evaluating the impact of this ASU on its condensed 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. For the Company, the amendments are effective January 1, 2020. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): “Clarifying the Interaction between Topic 808 and Topic 606”. The guidance clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer. For the Company, the amendment will be effective January 1, 2020. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
3. Revenues, Recognition and Allowances
Revenue Recognition
The Company derives its revenues from three types of transactions: sales of its own pharmaceutical products (Company product sales), sales of manufactured product for its customers (contract manufacturing sales), and research and product development services performed for third parties.
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience as well as applicable information currently available.
Company Product Sales
Revenue from Company product sales is recognized upon transfer of control of a product to a customer at a point in time, generally as the Company's products are sold on an FOB destination basis and because inventory risk and risk of ownership passes to the customer upon delivery.
Company product sales are recorded net of accruals for estimated chargebacks, rebates, cash discounts, other allowances, and returns.
Contract Manufacturing Sales
The Company recognizes revenue for contract manufacturing sales over-time, as milestones are achieved. Shipments are made in accordance with sales commitments and related sales orders entered into with customers either verbally or in written form.
Contract manufacturing sales are recognized net of accruals for cash discounts which are established at the time of sale, and are included in Revenue, net in the Company's Condensed Consolidated Statement of Operations.
Research and Development Services and Other Income
The Company establishes agreed upon product development agreements with its customers to perform product development services. Revenues are recognized in accordance with the agreement upon the completion of the phases of development and when the Company has no future performance obligations relating to that phase of development. Other types of revenue include royalty or licensing revenue would be recognized over time, or at a point in time, based upon the contractual term upon completion of the earnings process. Judgments are required to evaluate contingencies such as potential variances in the schedule or costs, the impact of change orders, liability claims, contract disputes or the achievement of contractual performance standards.
Revenues by Transaction Type
The Company operates in one reportable segment and therefore, the results of the Company's operations are reported on a consolidated basis, consistent with internal management reporting utilized by the chief decision maker.
Net revenues for the three and nine months ended September 30, 2019 and 2018 were as follows:
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| Three months ended September 30, | | | | Nine months ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
| Company product sales | $ | 18,228 | | | $ | 16,375 | | | $ | 48,591 | | | $ | 44,288 | |
| Contract manufacturing sales | 167 | | | 1,878 | | | 1,097 | | | 4,626 | |
| Research and development services and other income | 71 | | | 41 | | | $ | 241 | | | $ | 174 | |
| Revenue, net | $ | 18,466 | | | $ | 18,294 | | | $ | 49,929 | | | $ | 49,088 | |
Disaggregated information for the Company product sales revenue has been recognized in the accompanying unaudited interim Condensed Consolidated Statements of Operations, and is presented below according to contract type:
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| | Three months ended September 30, | | | | Nine months ended September 30, | | |
| Company Product Sales | | 2019 | | 2018 | | 2019 | | 2018 |
| Topical | | $ | 13,271 | | | $ | 10,503 | | | $ | 35,240 | | | $ | 26,297 | |
| Injectables | | 4,957 | | | 5,872 | | | 13,351 | | | 17,991 | |
| Total | | $ | 18,228 | | | $ | 16,375 | | | $ | 48,591 | | | $ | 44,288 | |
In the nine months ended September 30, 2019, the Company did not incur, and therefore did not defer, any material incremental costs to obtain contracts.
Sales Returns and Allowances
As is customary in the pharmaceutical industry, the Company’s product sales are subject to a variety of deductions including chargebacks, rebates, cash discounts, other allowances, and returns. Product sales are recorded net of accruals for returns and allowances, which are established at the time of sale. The Company analyzes the adequacy of its accruals for returns and allowances quarterly. Amounts accrued for sales deductions are adjusted when trends or significant events indicate that an adjustment is appropriate. Accruals are also adjusted to reflect actual results. These provisions are estimates based on historical payment experience, historical relationship to revenues, estimated customer inventory levels and current contract sales terms with direct and indirect customers. The Company uses a variety of methods to assess the adequacy of its returns and allowances reserves to ensure that its financial statements are fairly stated. These include periodic reviews of customer inventory data, customer contract programs, subsequent actual payment experience, and product pricing trends to analyze and validate the return and allowances reserves.
The sales returns and allowances were $19.2 million and $18.1 million at September 30, 2019 and December 31, 2018 respectively. In addition, the allowance for doubtful accounts was $2.5 million and $2.6 million at September 30, 2019 and December 31, 2018, respectively. The allowance for doubtful accounts was primarily related to one specific customer in the amount of $1.7 million.
Chargebacks are one of the Company's most significant estimates for recognition of product sales. A chargeback represents an amount payable in the future to a wholesaler for the difference between the invoice price paid to the Company by its wholesale customer for a particular product and the negotiated contract price that the wholesaler’s customer pays for that product. The Company’s chargeback provision and related reserve varies with changes in product mix, changes in customer pricing and changes to estimated wholesaler inventories. The provision for chargebacks also takes into account an estimate of the expected wholesaler sell-through levels to indirect customers at contract prices. The Company validates the chargeback accrual quarterly through a review of the inventory reports obtained from its largest wholesale customers. This customer inventory information is used to establish the estimated liability for future chargeback claims based on historical chargeback and contract rates. These large wholesalers represent a majority of the Company’s chargeback payments. The Company continually monitors current pricing trends and wholesaler inventory levels to ensure the liability for future chargebacks is fairly stated.
Rebates are used for various discounts which can be programs or one-time events. The Company reviews the percentage of products sold through these programs by reviewing chargeback data and uses the appropriate percentages to calculate the rebate accrual. Rebates are invoiced monthly, quarterly or annually and reviewed against the accruals. Other items that could be included in accrued rebates would be price protection fees, shelf stock adjustments (SSAs), or other various amounts that would serve as one-time discounts on specific products.
Consistent with its cash management strategy, the Company reduced the price paid by wholesalers (also referred to as the “WAC” or wholesaler acquisition cost) on several of its products in the second and third quarters of 2018. As a result, its gross product sales and related chargebacks and billbacks are declined in 2019. The Company's adjustments for the deductions to gross product sales are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | | | Nine months ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
| Gross product sales | $ | 41,814 | | | $ | 40,111 | | | $ | 108,550 | | | $ | 124,801 | |
| | | | | | | |
| Deduction to gross product sales: | | | | | | | |
| Chargebacks and billbacks | 14,573 | | | 10,739 | | | 37,285 | | | 49,103 | |
| Wholesaler fees for service | 2,355 | | | 1,662 | | | 6,303 | | | 2,774 | |
| Sales discounts and other allowances | 6,658 | | | 11,335 | | | 16,371 | | | 28,636 | |
| Total reduction to gross product sales | $ | 23,586 | | | $ | 23,736 | | | $ | 59,959 | | | $ | 80,513 | |
| | | | | | | |
| Company product sales, net | $ | 18,228 | | | $ | 16,375 | | | $ | 48,591 | | | $ | 44,288 | |
Financing and Payment
The Company's payment terms vary by the type of the customer and the products or services offered. The term between invoicing and when payment is due is not significant. Generally, the Company does not incur incremental costs to obtain contracts. The Company does not adjust revenue for the effects of a significant financing component as the Company's customers generally pay within 100 days.
Costs to Obtain or Fulfill a Customer Contract
Costs related to shipping and handling are comprised of outbound freight and associated labor. The Company accounts for shipping and handling activities related to contracts with customers as fulfillment costs which are included in cost of sales in the Condensed Consolidated Statements of Operations.
The Company is required to pay a 40% royalty on certain product net sales to a pharmaceutical partner. There are currently 4 products manufactured and distributed under the Company’s label in the U.S. which are subject to this agreement. Payments are made quarterly. Royalty expense of $0.5 million was included in cost of sales in the Condensed Consolidated Statements of Operations for the three months ended September 30, 2019 and 2018, respectively. Royalty expense of $1.1 million and $2.0 million was included in cost of sales in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2019 and 2018, respectively.
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, 2019 | | December 31, 2018 |
| Raw materials | $ | 14,143 | | | $ | 10,456 | |
| Work in progress | 388 | | | 116 | |
| Finished goods | 10,473 | | | 8,391 | |
| Inventories reserve | (2,371) | | | (2,667) | |
| Inventories, net | $ | 22,633 | | | $ | 16,296 | |
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
| | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| Land | $ | 401 | | | $ | 401 | |
| Building and improvements | 58,889 | | | 53,813 | |
| Machinery and equipment | 14,717 | | | 12,229 | |
| Computer hardware and software | 4,738 | | | 4,182 | |
| Furniture and fixtures | 698 | | | 694 | |
| Construction in progress | 29,807 | | | 30,949 | |
| 109,250 | | | 102,268 | |
| Less accumulated depreciation and amortization | (13,162) | | | (10,493) | |
| Property, plant and equipment, net | $ | 96,088 | | | $ | 91,775 | |
The Company recorded depreciation expense of $0.9 million and $0.6 million for the three months ended September 30, 2019 and September 30, 2018, respectively. The Company recorded depreciation expense of $2.7 million and $1.7 million for the nine months ended September 30, 2019 and September 30, 2018, respectively.
There was no interest expense capitalized as construction in progress during the three and nine months ended September 30, 2019. Interest expense of $1.5 million and $4.4 million was capitalized as construction in progress during the three and nine months ended September 30, 2018 respectively. In addition, during the three months ended September 30, 2019 and September 30, 2018, there was $0.3 million and $0.4 million of payroll costs, respectively, capitalized as construction in progress. For the nine months ended September 30, 2019 and September 30, 2018, there was $0.9 million and $1.5 million of payroll costs, respectively, capitalized as construction in progress.
6. Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing lease guidance under Topic 840. The new standard requires lessees to recognize Right-of-Use ("ROU") assets and lease liabilities for all leases with terms greater than 12 months, including those leases that were previously classified as operating leases. Topic 842 retains a distinction between finance leases and operating leases, with measurement and presentation of expenses and cash flows being dependent upon the classification. The Company adopted the new standard on January 1, 2019 utilizing the optional transition method allowed under ASU 2018-11, Leases (Topic 842): Targeted Improvements.
The Company elected to adopt the package of practical expedients allowed under the new accounting guidance, which allows the Company to not reassess previous conclusions regarding 1) whether existing or expired leases are or contain leases 2) the lease classification of existing or expired leases and 3) initial direct costs for existing leases. In addition, the Company adopted the practical expedient to combine lease and non-lease components for all classes of underlying assets.
The Company reviewed its portfolio of lease agreements, and other service contracts to identify embedded leases, and reached conclusions on key accounting assessments related to the standard and finalized the related accounting policies. As a result of the implementation of the new standard, all leases with a term greater than 12 months previously classified as operating leases and only expensed through the Consolidated Statements of Operations are now recorded on the Consolidated Balance Sheets. Per the requirements of the standard, the Company has recorded a ROU asset and a lease liability representing the present value of future lease payments to be paid in exchange of the use of an asset of $1.9 million and $2.0 million respectively as of January 1, 2019. However, there was no cumulative effect adjustment to the opening balance of retained earnings as the assets and the liabilities recorded upon adoption off-set each other.
We have operating and finance leases for our corporate, manufacturing and international facilities as well as certain equipment. Our leases have remaining terms of less than one year to up to 10 years, including available options to extend some of our lease terms for up to 5 years. One of our lease agreements has an early termination option within one year. As the interest rates implicit in our leases are typically not readily determinable, the Company has elected to utilize an incremental borrowing rate as the discount rate, determined based on the expected term of the lease, the Company’s credit risk and existing borrowings. The discount rates utilized ranged from 4.86% to 8.60% and were utilized to determine the present value of the lease liabilities.
The components of lease expense were as follows:
| | | | | | | | | | | |
| Three months ended
September 30, 2019 | | Nine months ended
September 30, 2019 |
| Operating lease cost | $ | 159 | | | $ | 476 | |
| Finance lease cost: | | | |
| Amortization of right-of-use assets | $ | 5 | | | $ | 11 | |
| Interest on lease liabilities | $ | 1 | | | $ | 5 | |
| Total finance lease cost | $ | 6 | | | $ | 16 | |
| | | |
Right-of-use assets obtained in exchange for new operating lease liabilities were $1.0 million as of September 30, 2019. Cash paid for amounts included in the measurement of operating lease liabilities during the three and nine months ended September 30, 2019 was $0.1 million and $0.4 million respectively. Cash paid for amounts included in the measurement of finance lease liabilities during the three and nine months ended September 30, 2019 was not material.
Supplemental balance sheet information related to leases were as follows:
| | | | | |
| September 30, 2019 |
| Operating Leases | |
| Other assets | $ | 2,547 | |
| Other current liabilities | 421 | |
| Other long-term liabilities | 2,307 | |
| Total operating lease liabilities | 2,728 | |
| |
| Finance Leases | |
| Property, plant, and equipment | 81 | |
| Accumulated depreciation | (10) | |
| Property, plant, and equipment, net | 71 | |
| |
| Other current liabilities | 13 | |
| Other long-term liabilities | 60 | |
| Total finance lease liabilities | $ | 73 | |
The weighted average remaining lease terms for operating and financing leases are 6.5 years and 4.9 years, respectively. The weighted average discount rates for operating and finance leases are 8.2% and 8.0%, respectively.
As of September 30, 2019 maturities of lease liabilities were as follows:
| | | | | | | | |
| Operating | Financing |
| Year Ending December 31, | Leases | Leases |
| 2019 (excluding the nine months ended September 30, 2019) | $ | 161 | | $ | 4 | |
| 2020 | 631 | | 18 | |
| 2021 | 607 | | 18 | |
| 2022 | 548 | | 18 | |
| 2023 | 548 | | 18 | |
| 2024 | 235 | | 12 | |
| Thereafter | 841 | | — | |
| Total lease payments | 3,571 | | 88 | |
| Less imputed interest | 843 | | 15 | |
| Total | $ | 2,728 | | $ | 73 | |
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining noncancellable lease terms in excess of one year would have been as follows:
| | | | | |
| Commitments |
| |
| 2019 | $ | 573 | |
| 2020 | 611 | |
| 2021 | 633 | |
| 2022 | 610 | |
| 2023 | 607 | |
| 2024 | 200 | |
| |
| $ | 3,234 | |
7. Debt
Convertible Notes
On December 16, 2014, the Company issued $125.0 million aggregate principal amount of Convertible 3.75% Senior Notes, due 2019 (the “2019 Notes”). On December 22, 2014, the Company announced the closing of the initial purchasers’ exercise in full of their option to purchase an additional $18.75 million aggregate principal amount of 2019 Notes. The 2019 Notes bear interest at a fixed rate of 3.75% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2015, and mature on December 15, 2019, unless earlier repurchased, redeemed or converted. The 2019 Notes are convertible into shares of the Company’s common stock, cash or a combination thereof. On May 20, 2015, the Company received shareholder approval for the increase in the number of shares of common stock authorized and available for issuance upon conversion of the 2019 Notes.
On April 27, 2018, the Company entered into separate exchange agreements with certain holders of the 2019 Notes. The agreements gave the holders the right to exchange, in aggregate, $75.1 million of the 2019 Notes for $75.1 million of new Convertible 4.75% Senior Notes due 2023 (the “2023 Notes”). The new 2023 Notes bear a fixed interest rate of 4.75% per year, payable semi-annually with the principal payable in May 2023. At the option of the holders, the 2023 Notes are convertible into shares of the Company’s common stock, cash or a combination thereof. The initial conversion rate is $224.71 per share, subject to certain adjustments, related to either the Company's stock price volatility, or the Company's declaration of a stock dividend, stock distribution, share combination or share split expected dividends or other anti-dilutive activities. In addition, holders will be entitled to receive additional shares of common stock for a potential increase of the conversion rate up to $280.90 per share under a make-whole provision in some circumstances. The Company incurred loan issue costs of $1.6 million upon issuance of the 2023 Notes.
In accordance with accounting for convertible debt within the cash conversion guidance of ASC 470-20, we allocated the principal amount of the 2023 Notes between its liability and equity components. The carrying amount of the liability component was determined by measuring the fair value of a similar debt instrument of similar credit quality and maturity that did not have the conversion feature. The carrying amount of the equity component, representing the embedded conversion option, was determined by deducting the fair value of the liability component from the principal amount of the 2023 Notes as a whole. The equity component was recorded to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the 2023 Notes over the carrying amount of the liability component was recorded as a debt discount of $19.0 million and is being amortized to interest expense using the effective interest method through the maturity date. We allocated the total amount of transaction costs incurred to the liability and equity components using the same proportions as the proceeds from the 2023 Notes. Transaction costs attributable to the liability component were recorded as a direct deduction from the liability component of the 2023 Notes and are being amortized to interest expense using the effective interest method through the maturity date. Transaction costs attributable to the equity component were netted with the equity component of the 2023 Notes in additional paid-in capital. The effective interest rate of the 2023 Notes, inclusive of the debt discount and issuance costs, is 11.90%.
The exchange of $75.1 million of the 2019 Notes for the 2023 Notes is considered an extinguishment under ASC 470-50. The 2019 Notes are accounted for under cash conversion guidance ASC 470-20, which requires the Company to allocate the fair value of the consideration transferred upon settlement to the extinguishment of the liability component and the reacquisition of the equity component upon derecognition. In accordance with the aforementioned guidance, the Company recorded $2.5 million of non-cash interest expense as an extinguishment loss related to the 2019 Notes in the Condensed Consolidated Statement of Operations. In addition, the Company recorded a $7.6 million reduction of Additional Paid in Capital in connection with the extinguishment of $75.1 million of the 2019 Notes.
In December 2018 the Company used $52.8 million of proceeds from the Senior Credit Facilities (see below) to repurchase the 2019 Notes as well as $0.3 million of proceeds to pay for transaction costs. The repurchase of the 2019 Notes is considered a debt extinguishment under ASC 470-50. The 2019 Notes are accounted for under cash conversion guidance ASC 470-20, which requires the Company to allocate the fair value of the consideration transferred upon settlement to the extinguishment of the liability component and the reacquisition of the equity component upon derecognition. In accordance with the guidance above, the Company allocated a portion of the $52.8 million to the extinguishment of the liability component equal to the fair value of that component immediately before extinguishment and recognized a $1.7 million extinguishment loss in the Consolidated Statement of Operations to measure the difference between (i) the fair value of the liability component and (ii) the net carrying value amount of the liability component (which is net of any unamortized debt issuance costs). In addition, the Company recorded a $2.9 million reduction of Additional Paid in Capital in connection with the extinguishment of the 2019 Notes.
During the quarter ended March 31, 2019, the Company used a total of $2.7 million of proceeds from the Senior Credit Facilities to repurchase a portion of the remaining 2019 Notes. The repurchase of the 2019 Notes is considered a debt extinguishment under ASC 470-50. The 2019 Notes are accounted for under cash conversion guidance ASC 470-20, which requires the Company to allocate the fair value of the consideration transferred upon settlement to the extinguishment of the liability component and the reacquisition of the equity component upon derecognition. In accordance with the guidance above, the Company allocated a portion of the $2.7 million to the extinguishment of the liability component equal to the fair value of that component immediately before extinguishment and recognized a $0.2 million extinguishment loss in the Consolidated Statement of Operations to measure the difference between (i) the fair value of the liability component and (ii) the net carrying value amount of the liability component (which is already net of any unamortized debt issuance costs). In addition, the reduction of Additional Paid in Capital in connection with this extinguishment was immaterial.
Senior Credit Facilities
The Company’s Senior Credit Facilities consist of a $25.0 million revolver (the "Revolver") and three term loans totaling $95.0 million (collectively the "2023 Term Loans") that it entered via an agreement with Ares Management LLC on December 13, 2018. The 2023 Term Loans consist of (i) a $50.0 million Initial Term Loan; (ii) a $30.0 million Delayed Draw Term Loan A; and (iii) a $15.0 million Delayed Draw Term Loan B. The $15.0 million Delayed Draw Term Loan B was then expired in conjunction with the New 2023 Notes that the Company closed on October 31, 2019. The Initial Term Loan matures on the earlier to occur of (a) three months prior to maturity of the 2023 Notes or (b) June 13, 2024. The Company extended commitments related to undrawn amounts of the Delayed Draw Term Loan A from June 30, 2019 to December 13, 2019, pursuant to an amendment the Company entered with Ares Management LLC on July 18, 2019. Drawn amounts under the Delayed Draw Term Loans mature at the same time as the Initial Term Loan. The Revolver matures on the earlier to occur of (a) six months prior to the maturity of the 2023 Notes or (b) December 13, 2023. The Company’s ability to borrow under the Revolver is subject to a borrowing base determined based upon eligible inventory, eligible equipment, eligible real estate and eligible receivables. The Senior Credit Facilities are secured by substantially all of the Company’s assets. All of the Company’s debt is subordinated to the Senior Credit Facilities. The 2023 Term Loans are subordinate to the Revolver. The Senior Credit Facilities have customary financial and non-financial covenants, including affirmative, negative and reporting covenants, representations and warranties, and events of default, including cross-defaults on other material indebtedness, as well as events of default triggered by a change of control and certain actions initiated by the FDA. The financial covenants starts with a minimum revenue test through the quarter ended June 30, 2019, then converts to a minimum adjusted EBITDA test through the quarter ended September 30, 2020 and then converts to a maximum total net leverage ratio through expiry of the Senior Credit Facilities.
The interest rate under the Revolver is calculated, at the option of the Company, at either the one, two, three or six-month London Inter-Bank Offered Rate (or LIBOR) plus 3.75% or the base rate plus 2.75%. The interest rate on the 2023 Term Loans is calculated, at the option of the Company, at either the one, two, three or six-month LIBOR plus 8.75% or the base rate plus 7.75%. Interest on the Senior Credit Facilities is payable in cash except that interest on the 2023 Term Loans is payable, at the option of the Company, in cash or in kind by being added to the principal balance thereof, until the earlier of December 13, 2020 and the date the Company has provided the lenders of the Senior Credit Facilities financial statements demonstrating that the Company has attained twelve months of revenue of at least $125.0 million. A commitment fee of 1.0% per annum is payable by the Company quarterly in arrears on the unused portion of the Delayed Draw Term Loans.
Amounts drawn under the Revolver may be prepaid at the option of the Company without premium or penalty, subject, in the case of acceleration of the Revolver or termination of the revolving credit commitments thereunder, to certain call protections which vary depending on the time at which such prepayments are made. Amounts drawn under the Revolver are subject to mandatory prepayment to the extent that aggregate extensions under the Revolver exceed the lesser of the revolving credit commitment then in effect and the borrowing base then in effect, and upon the occurrence of certain events and conditions, including non-ordinary course asset dispositions, receipt of certain insurance proceeds and condemnation awards and issuances of certain debt obligations. Amounts outstanding under the 2023 Term Loans may be prepaid at the option of the Company subject to applicable premiums, including a make-whole premium, and certain call protections which vary depending on the time at which such prepayments are made. Subject to payment of outstanding obligations under the Revolver as a result of any corresponding mandatory prepayment requirements thereunder, amounts outstanding under the 2023 Term Loans are subject to mandatory prepayment upon the occurrence of certain events and conditions, including non-ordinary course asset dispositions, receipt of certain insurance proceeds and condemnation awards, issuances of certain debt obligations and a change of control transaction.
In connection with the Revolver the Company incurred a debt discount of $0.5 million and debt issuance issue costs of $0.3 million. The debt discount relates to annual fees and lender fees paid on the initial drawdown of $15.0 million. The debt issuance costs and debt discount are recorded as an asset on the Consolidated Balance Sheet and are amortized to interest expense using the straight-line method through the estimated Revolver maturity date. The annual fees related to the Revolver and the Initial Term Loan are amortized to interest expense using the straight-line method over the annual period they relate to. In connection with the Initial Term Loan and Delayed Draw Term Loan A, the Company incurred a debt discount of $1.8 million and debt issuance issue costs of $0.8 million. The debt discount is due to lender fees paid on the Initial Term Loan of $50.0 million and drawdown of Delayed Draw Term Loan A of $20.0 million. The debt issuance costs and debt discount costs are amortized to interest expense using the effective interest rate method through the estimated maturity date. In addition, the Company incurred $0.5 million of debt issuance costs related to the commitment fees paid to the lenders for the undrawn amounts of the Delayed Draw Term Loans. These debt issuance costs are recorded as an asset on the balance sheet and amortized on a straight-line basis over the access period of the Delayed Draw Term Loans through June 30, 2019. As of December 31, 2018, the effective interest, inclusive of the debt discounts and issue costs, of the Revolver and Initial Term Loan and Delayed Draw Term Loan A is 9.3% and 12.4%, respectively.
The Initial Term Loan of $50.0 million and $15.0 million of the Revolver were drawn by the Company on December 13, 2018. On December 21, 2018, the Company drew $20.0 million of the Delayed Draw Term Loan A. In January 2019, the Company drew $5.0 million and subsequently the remaining $5.0 million under the Revolver were drawn down by the Company in April 2019. On September 18, 2019, pursuant to the Protective Advance clause in the Company’s First Lien Credit Agreement with Ares Capital, the Company borrowed an incremental $2.5 million from it’s existing revolving credit facility. Consistent with the terms of the revolving credit facility, Protective Advances are secured by the Administrative Agent’s liens, constitute Obligations pursuant to the First Lien Credit Agreement, and bear interest at the rate applicable to the outstanding revolving credit facility balances, however, the Protective Advance is repayable on demand. The liability was classified as a short-term obligation as of September 30, 2019. The Term Loans are governed by the Second Lien Credit Agreement. The 2023 Term Loans include a 24-month paid-in-kind interest option available to the Company should it choose to defer cash payments in order to maintain the liquidity needed to continue launching new products, and preparing for an FDA prior approval inspection of its new injectable manufacturing facility. The Company has elected the paid-in-kind interest option and increased the principal balance of 2023 Term Loans by $2.2 million and $6.4 million for the three and nine months periods ended September 30, 2019 respectively.
The Ares Senior Credit Facilities require that the Company remains in compliance with certain financial performance covenants including a trailing-twelve-month minimum revenue through June 30, 2019, which then transitions to a trailing-twelve-month EBITDA from September 30, 2019 through September 30, 2020 which then finally transitions to a leverage ratio through expiration of the facility. Pursuant to the Ares Credit Agreement, in the event of a default related to the failure to meet certain covenants, the lender shall have the right, but not the obligation, to permanently reduce the commitment in whole or in part or to declare all or any portion of the outstanding balance to become due and payable. The Company was in compliance with all financial covenants within its Credit Agreement as of September 30, 2019 and will continuously monitor its compliance with the covenants contained in the Credit Agreement.
At September 30, 2019 and December 31, 2018, the net carrying value of the debt and the remaining unamortized debt discounts and debt issuance costs were as follows:
| | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| Face amount of the 2019 Notes (due December 2019) | $ | 13,022 | | | $ | 15,702 | |
| Revolver, current | 2,500 | | | — | |
| Less unamortized discounts and debt issuance costs | (245) | | | (1,291) | |
| Total net carrying value, current | $ | 15,277 | | | $ | 14,411 | |
| | | |
| September 30, 2019 | | December 31, 2018 |
| Face amount of the 2023 Notes (due May 2023) | $ | 75,090 | | | $ | 75,090 | |
| Face amount of the Revolver Credit Facility (due December 2022) | 25,000 | | | 15,000 | |
| Face amount of the 2023 Loan (due February 2023) | 76,359 | | | 70,000 | |
| Total carrying value, non-current | 176,449 | | | 160,090 | |
| Less unamortized discounts and debt issuance costs | (17,662) | | | (20,519) | |
| Total net carrying value, non-current | $ | 158,787 | | | $ | 139,571 | |
8. Goodwill and Intangible Assets
Goodwill
The Company assesses the recoverability of the carrying value of goodwill on a reporting unit basis on October 1 of each year, whenever events occur or changes in circumstances indicate the carrying value of goodwill may not be recoverable. There have been no events or changes in circumstances that would indicate the carrying value of goodwill may not be recoverable through September 30, 2019.
Changes in goodwill during the nine months ended September 30, 2019 and the year ended December 31, 2018
were as follows:
| | | | | |
| Goodwill |
| Goodwill balance at December 31, 2017 | $ | 471 | |
| Foreign currency translation | (1) | |
| Goodwill balance at December 31, 2018 | $ | 470 | |
| Foreign currency translation | 14 | |
| Goodwill balance at September 30, 2019 | $ | 484 | |
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, 2019 and December 31, 2018.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 | | | | | | |
| Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount | | Weighted Average
Remaining Amortization
Period (Years) |
| Trademarks and Technology | $ | 39,243 | | | $ | (10,228) | | | $ | 29,015 | | | 11.0 |
| Product acquisition costs | 12,836 | | | — | | | 12,836 | | | N/A- See description below |
| In process research and development ("IPR&D") | 217 | | | — | | | 217 | | | N/A- See description below |
| Customer relationships | 3,629 | | | (1,410) | | | 2,219 | | | 6.1 |
| Total | $ | 55,925 | | | $ | (11,638) | | | $ | 44,287 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | | | | | | |
| Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Amount | | Weighted Average
Remaining Amortization
Period (Years) |
| Trademarks and Technology | $ | 40,169 | | | $ | (8,239) | | | $ | 31,930 | | | 11.8 |
| Product acquisition costs | 13,308 | | | — | | | 13,308 | | | N/A- See description below |
| In-process research and development ("IPR&D") | 719 | | | — | | | 719 | | | N/A- See description below |
| Customer relationships | 3,557 | | | (1,139) | | | 2,418 | | | 6.9 |
| Total | $ | 57,753 | | | $ | (9,378) | | | $ | 48,375 | | | |
The useful lives of the Company’s intangibles are as follows:
| | | | | |
| Intangibles Category | Amortizable Life |
| Product Acquisition Costs | 10 years |
| Trademarks and Technology | 15 years |
| Customer Relationships | 10 years |
IPR&D and Product Acquisition costs will be amortized over their estimated useful lives once products are commercialized.
9. Stock-Based Compensation
Stock Options
The Company recognized $0.2 million and $0.4 million of compensation expense related to stock options during the three months ended September 30, 2019 and 2018, respectively, and $0.7 million and $1.2 million during the nine months ended September 30, 2019 and 2018, respectively.
On May 25, 2016, the Board of Directors approved the Company’s 2016 Equity Incentive Plan (the “2016 Plan”). On May 21, 2018, the Board of Directors adopted, and the Company’s stockholders subsequently approved, an amendment and restatement of the 2016 Plan to increase the number of shares of Common Stock available for grant under such plan by adding 2,000,000 shares of Common Stock. The 2016 Plan, as amended, provides for the issuance of awards of up to 4,000,000 shares of the Company’s common stock, plus any shares of common stock that are represented by awards granted under our Director Plan and 2009 Plan that are forfeited, expire or are canceled without delivery of shares of common stock or which result in the forfeiture of shares of common stock back to the Company on or after May 25, 2016, up to 2,500,000 shares. Generally, shares of common stock reserved for awards under the 2016 Plan that lapse or are canceled, will be added back to the share reserve available for future awards. However, shares of common stock tendered in payment for an award or shares of common stock withheld for taxes will not be available again for grant. The 2016 Plan provides that no participant may receive awards for more than 1,000,000 shares of common stock in any fiscal year. As the 2016 Plan supersedes both the Director Plan and the 2009 Plan, any available shares from both are now incorporated into the 2016 Plan. As of September 30, 2019, there were 75,048 RSUs outstanding, 136,496 shares of common stock outstanding and options to purchase 3,131,033 shares of common stock outstanding under the 2016 Plan. As of December 31, 2018, there were 161,214 RSUs outstanding, 74,667 shares of common stock outstanding and options to purchase 1,394,285 shares of common stock outstanding under the 2016 Plan. As of September 30, 2019 and December 31, 2018, there were a total of 1,764,961 shares of common stock and 3,113,374 shares of common stock available under the 2016 Plan, respectively.
As of September 30, 2019 and December 31, 2018, there were options to purchase 5,725,141 and 4,352,391 shares of common stock outstanding, respectively, collectively in the Director Plan, 2009 Plan, and the 2016 Plan.
In the interest of maintaining consistency with the Company's 2016 Equity Incentive Plan, on March 13, 2017, the Company entered into (i) an amendment to the option agreements governing each option grant currently outstanding under the Company's 2009 Equity Incentive Plan, and (ii) an amendment to the RSU, agreements governing each RSU grant currently outstanding under the 2009 Plan. The amendments provide for the automatic vesting upon a change of control of the Company of each option grant and RSU grant, as applicable, outstanding under the 2009 Plan. The amendments had a de minimis value to the holders as of September 30, 2019, and therefore no additional stock compensation expense was recognized related to the amendments.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula that uses assumptions noted in the following table. Expected volatilities and risk-free interest rates are based upon the expected life of the grant.
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| Assumptions | 2019 | | 2018 |
| Expected dividends | — | | | — | |
| Risk-free rate | 1.38% - 2.47% | | | 2.38 | % |
| Expected volatility | 64.3% - 75.2% | | 53.2% - 72.5% |
| Expected term (in years) | 3.2 - 3.3 years | | 3.2 - 3.3 years |
Expected volatility was calculated using the historical volatility of the Company's stock over the expected life of the options. The expected life of the options was estimated based on the Company's historical data. The risk free interest rate is based on U.S. Treasury yields for securities with terms approximating the terms of the grants. Forfeitures are recognized in the period they occur. The assumptions used in the Black-Scholes options valuation model are highly subjective, and can materially affect the resulting valuation.
A summary of option activity under the 1999 Director Stock Option Plan, 2009 Equity Incentive Plan, and the 2016 Equity Incentive Plan as of September 30, 2019 and changes during the period are presented below:
| | | | | | | | | | | |
| Number of Options | | Weighted Average Exercise Price |
| Outstanding as of January 1, 2019 | 4,352,391 | | | $ | 4.61 | |
| Issued | 2,365,357 | | | 1.44 | |
| Exercised | — | | | — | |
| Forfeited | (569,516) | | | 2.48 | |
| Expired | (423,091) | | | 4.10 | |
| Outstanding as of September 30, 2019 | 5,725,141 | | | $ | 3.55 | |
| | | |
| Exercisable as of September 30, 2019 | 3,291,600 | | | $ | 4.77 | |
The following tables summarize information regarding options outstanding and exercisable at September 30, 2019:
Outstanding:
| | | | | | | | | | | | | | | | | |
| Stock
Options | | Weighted
Average | | Weighted
Average
Remaining |
| Range of Exercise Prices | Outstanding | | Exercise Price | | Contractual Life |
| $0.00 - $0.78 | 163,905 | | | $ | 0.66 | | | 9.78 |
| $0.79 - $1.50 | 1,712,347 | | | 1.03 | | | 4.56 |
| $1.51 - $5.50 | 2,197,871 | | | 2.22 | | | 8.61 |
| $5.51 - $10.67 | 1,651,018 | | | 8.21 | | | 6.64 |
| Total | 5,725,141 | | | $ | 3.55 | | | 6.87 |
Exercisable:
| | | | | | | | | | | | | | |
| Range of Exercise Prices | | Stock Options Exercisable | | Weighted Average Exercise Price |
| $0.79 - $1.50 | | 1,257,500 | | | $ | 1.03 | |
| $1.51 - $5.50 | | 470,250 | | | 3.17 | |
| $5.51 - $10.67 | | 1,563,850 | | | 8.26 | |
| Total | | 3,291,600 | | | $ | 4.77 | |
As of September 30, 2019, the intrinsic value of the options outstanding was $0.1 million and none of the options were exercisable. As of September 30, 2019, there was $1.3 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Plan. The costs will be recognized through September 2022.
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 immaterial and $0.1 million of compensation expense respectively during the three months ended September 30, 2019 and 2018, respectively and $0.2 million and $0.4 million of compensation expense during the nine months ended September 30, 2019 and 2018, 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, 2019, the Company had approximately $0.2 million of total unrecognized compensation cost related to RSUs, all of which will be recognized through March 2021. The following table summarizes the number of unvested RSUs and their weighted average exercise price for the nine months ended September 30, 2019.
| | | | | | | | | | | | | | |
| | Number of RSUs | | Weighted Average Grant Date Fair Value |
| Non-vested balance at January 1, 2019 | | 175,591 | | | $ | 4.78 | |
| Changes during the period: | | | | |
| Shares granted | | — | | | — | |
| Shares vested | | (76,206) | | | 5.39 | |
| Shares forfeited | | (24,337) | | | 4.40 | |
| Non-vested balance at September 30, 2019 | | 75,048 | | | $ | 4.29 | |
10. Income Taxes
The Company’s income tax expense (benefit) was nil and $(0.1) million for the three months ended September 30, 2019 and 2018, with effective tax rates of 0.07% and 3.36%, respectively. The Company's income tax expense (benefit) for the nine months ended September 30, 2019 and 2018 was $0.1 million and $(0.1) million with effective tax rates of (0.38)% and 0.41%, respectively.
The Company excludes from the calculation of the effective tax rate any entities that are projected to operate at a loss, have no tax benefit that can reasonably be expected, and those entities which operate in a zero tax rate jurisdiction. Due to continuing operating losses in the United States, the tax provision is based on minimum U.S. state income taxes and the operations of certain foreign affiliates that are subject to taxes in their respective countries.
Beginning in 2018, the Company’s net interest expense became subject to limitations imposed by the Tax Cuts and Jobs Act of 2017 (TCJA). Based on actual and projected operating results, the Company is subject to an interest expense limitation. The limitation serves to reduce the net operating loss and create an additional attribute for the disallowed net interest expense. Therefore, there is no effect on earnings.
Also beginning in 2018, TCJA imposed a new tax on the current earnings of controlled foreign subsidiaries called Global Intangible Low-Taxed Income (“GILTI”). The Company continues to monitor the new GLITI tax provisions, associated regulations and rulings as they are issued with the application of ASC 740, Income Taxes. The Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company's measurement of its deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends not only on the Company's current structure and estimated future results of global operations, but also on its intent and ability to modify its structure. The Company is currently in the process of analyzing its structure. For 2018, the Company’s foreign entities as a whole generated an operating loss and that loss exceeds the projected foreign entities’ income for 2019. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not yet made a policy decision regarding whether or not to record deferred taxes associated with GILTI.
The Company evaluates the recoverability of its net deferred tax assets based on its history of operating results, its expectations for the future and expiration dates of its attributes including operating losses. The Company has concluded that it is more likely than not it will be unable to realize the net deferred tax assets in the immediate future and has established a valuation allowance for all U.S. and foreign net deferred tax assets.
At December 31, 2018, the Company’s U.S. federal net operating loss carryforwards totaled $45.1 million. The Company’s ability to use net operating loss carry forwards is subject to limitation in future periods under certain provisions of Section 382 of the Internal Revenue Code of 1986, as amended, which limit the utilization of net operating losses upon a more than 50% change in ownership of the Company’s stock. 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 net operating losses subsequent to the change date in 2010 (aggregating $26.5 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 net loss carryforwards may be further limited in the future if additional ownership changes occur.
The Company is subject to the provisions of ASC 740-10-25, “Income Taxes” (ASC 740) which 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 2014 to 2017. The Company has not recorded any liability for uncertain tax positions.
11. Accrued Expenses
Accrued expenses represent various obligations of the Company including certain operating expenses and taxes payable.
As of September 30, 2019 and December 31, 2018, the largest components of accrued expenses were:
| | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| Interest expense | $ | 2,103 | | | $ | 1,042 | |
| Payroll | 1,968 | | | | 1,908 | |
| Professional fees | 1,754 | | | 2,153 | |
| Wholesaler fees | 1,376 | | | 203 | |
| Medicaid and Medicare rebates | 1,161 | | | 383 | |
| Rebates | 601 | | | 714 | |
| Royalties | 585 | | | 222 | |
| Clinical studies | 334 | | | 334 | |
| Income Tax | 64 | | | 45 | |
| Capital expenditures | 52 | | | 275 | |
| Inventory and Supplies | 42 | | | 1,809 | |
| Other | 398 | | | 754 | |
| $ | 10,438 | | | $ | 9,842 | |
12. Legal and U.S. Regulatory Proceedings
To date, thirteen putative class action antitrust lawsuits have been filed against the Company along with co-defendants, including Taro Pharmaceuticals U.S.A., Inc. and Perrigo New York Inc., regarding the pricing of generic econazole nitrate cream ("econazole"). 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 class plaintiffs seek treble damages for alleged overcharges for econazole during the alleged period of conspiracy, and certain of the class plaintiffs also seek injunctive relief against the defendants. All actions have been consolidated by the Judicial Panel on Multidistrict Litigation to the Eastern District of Pennsylvania for pre-trial proceedings as part of the In re Generic Pharmaceuticals Pricing Antitrust Litigation matter. On October 16, 2018 the court dismissed the class plaintiffs' claims against the Company with leave to replead. On December 21, 2018 the class plaintiffs filed amended complaints, which the Company moved to dismiss on February 21, 2019. This motion remains pending.
Three "opt-out" antitrust lawsuits have been filed against the Company by Humana Inc., The Kroger Co. et al., and United HealthCare Services, Inc., and consolidated into the In re Generic Pharmaceuticals Pricing Antitrust Litigation matter by the Judicial Panel on Multidistrict Litigation. Each of the opt-out complaints names between thirty-six and forty-three defendants (including the Company) and involves allegations regarding the pricing of econazole along with between twenty-four and twenty-nine other drug products that were not manufactured or sold by the Company during the period at issue. The opt-out plaintiffs seek treble damages for alleged overcharges for the drug products identified in the complaint during the alleged period of conspiracy, and two of the complaints also seek injunctive relief. A motion to dismiss the Humana Inc. and The Kroger Co., et al. opt-out complaints was filed on February 21, 2019. A motion to dismiss the United HealthCare Services, Inc. opt-out complaint has not yet been filed. A writ of summons initiating a Pennsylvania state lawsuit has also been filed against the Company and sixty-nine other defendants by apparent additional “opt-out” insurers that purchased, paid and/or reimbursed patients for the purchase of generic econazole in connection with the foregoing, but no complaint has been filed in that matter.
Due to the early stage of these cases, we are unable to form a judgment at this time as to whether an unfavorable outcome is either probable or remote or to provide an estimate of the amount or range of potential loss. We believe these cases are without merit, and we intend to vigorously defend against these claims.
On October 20, 2017, a Demand for Arbitration was filed with the American Arbitration Association by Stayma Consulting Services, Inc. ("Stayma") against the Company regarding the Company's development and manufacture for Stayma of two generic drug products, one a lotion and one a cream, containing 0.05% of the active pharmaceutical ingredient flurandrenolide. The Company developed the two products and Stayma purchased commercial quantities of each; however, Stayma alleges that the Company breached agreements between the parties by developing an additional and different generic drug product, an ointment, containing flurandrenolide, and failing to meet certain contractual requirements. Stayma seeks monetary damages. The Arbitrator has issued an interim award finding that the Company is not liable to Stayma on two of Stayma’s three claims against the Company. The third claim will proceed to a damages phase. The Company believes that Stayma did not suffer any damages related to this claim and will vigorously pursue complete dismissal of this claim. Notwithstanding the Company’s current belief regarding no damages and notwithstanding the Company’s continuing efforts to secure the dismissal of this claim, the Arbitrator may eventually assess damages against the Company. However, the Company is unable at this time, because of the early stages of the assessment of damages, if any, to provide an estimate of the amount or range of the potential loss. In addition, the Arbitrator will determine money damages owed by Stayma to Company relating to Stayma’s failure to pay several past due invoices of approximately $1.7 million.
On December 13, 2018, Valdepharm SA filed a lawsuit alleging that the Company breached contracts regarding two drug products that the Company had sought to have Valdepharm manufacture. On February 12, 2019 the Company answered the complaint and counterclaimed, alleging that Valdepharm breached the contracts by failing to perform its work in compliance with FDA regulations and current Good Manufacturing Practices. Each party seeks damages associated with the alleged breach and related claims. Due to the early stage of the case 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 the claims against Teligent are without merit, and we intend to vigorously defend against them.
On April 15, 2019, Mo-Kan Iron Workers Pension Fund, on behalf of itself and all other persons or entities, except defendants, who purchased Teligent common stock between May 2, 2017 and November 7, 2017, commenced a putative
class action against the Company and its CEO, Jason Grenfell-Gardner, alleging violations of the securities laws. The complaint alleges that the defendants made materially misleading statements regarding the Company's business, operational and compliance policies. On July 1, 2019, the Oklahoma Police Pension Fund and Retirement System was appointed as lead plaintiff in the case ("Lead Plaintiff"). Lead Plaintiff filed a consolidated amended complaint on September 13, 2019. Defendants have until November 13, 2019 to answer or move with respect to the consolidated amended complaint. Due to the early stage of the case, 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 the claims are without merit, and we intend to vigorously defend against them.
13. Subsequent Events
On October 28, 2019, the Company filed the prior approval supplement for its planned first injectable product to be manufactured out of its newly completed expansion of manufacturing site in Buena, NJ. As this is the first injectable filing related to the new expansion, the review will be subject to a pre-approval inspection of the manufacturing site by the FDA, which the Company expects to occur within four months of the date of the filing.
On October 31, 2019, the Company closed its Series B Senior Unsecured Convertible Notes offering in the aggregate principal amount of $34.4 million. The New 2023 Notes will mature in May 2023 and are convertible at the option of the holder at any time prior to maturity at an initial conversion price of $0.72 per share, subject to adjustment under certain circumstances. The New 2023 Notes and any shares of common stock issuable upon conversion of the New 2023 Notes (the “Conversion Shares”) have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state or other jurisdiction’s securities laws, and the New 2023 Notes and the Conversion Shares may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state or other jurisdictions’ securities laws. The Company does not intend to file a registration statement for the resale of the New 2023 Notes or any Conversion Shares. The gross cash proceeds of approximately $29.3 million from the offering are being used to extinguish the Company’s existing 2019 Notes due December 2019, pay amounts owing with respect to other indebtedness, and to fund general corporate and working capital requirements. As part of the offering, the Company entered into agreements with certain holders of its existing 2023 Notes to exchange $9.0 million of the old 2023 Series A Unsecured Convertible Notes for $5.1 million of the Series B Senior Unsecured Convertible Notes. The New 2023 Notes bear interest at a rate of 7.00% per annum if paid in cash, semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2020. The Company also has an option, and has agreed with its senior lender, to PIK the interest at 8.00% per annum, to defer cash payments. The net proceeds from the offering were $27.3 million after deducting the initial purchasers’ discounts and professional fees associated with the transaction.
In connection with the issuance of the New 2023 Series B Unsecured Convertible Notes, the expiration of the $15.0 million Delayed Draw Term Loan B, a part of the Company’s Senior Credit Facility, was accelerated to
October 31, 2019.
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, 2018, 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. The Company operates its business under one reportable segment.
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.
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 36 generic topical pharmaceutical products and four branded injectable pharmaceutical products. We have received FDA approvals for 36 topical generic products from our internally developed pipeline and we have 17 Abbreviated New Drug Applications, ("ANDAs") submitted to the FDA that are awaiting approval. In Canada, we sell 32 generic and branded generic injectable products and medical devices. In addition, we have 45 product candidates at various stages of our development pipeline. 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 traded on the Nasdaq Global Select Market under the trading symbol “TLGT.” Our principal executive office, laboratories and manufacturing facilities are located at 105 Lincoln Avenue, Buena, New Jersey. We have additional offices located in Iselin, New Jersey, Mississauga, 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.
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 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. There are generally three major negotiating entities in the US market. Walgreens Boot Alliance, Inc. consists of Walgreens, Amerisource
Bergen's PRxO Generics program, and Econdisc members. Red Oak Sourcing consists of CVS and Cardinal’s source program. Finally, ClarusOne consists of Walmart, RiteAid and McKesson’s OneStop program. A loss of any of these major entities could result in a significant reduction in revenue.
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, 2019, we had sales to two customers, which individually accounted for 10% or more of our total revenue. Total sales to these customers represented 35% and 12%, respectively, and represented 47% of total revenues. Accounts receivable related to the Company’s major customers comprised 47% of all accounts receivable as of September 30, 2019. For the three months ended September 30, 2018, we had sales to three customers which individually accounted for more than 10% of our total revenue. Total sales to these customers represented 25%, 12% and 12%, respectively, and represented 49% of total revenues. Accounts receivable related to the Company’s major customers comprised 56% of all accounts receivable as of September 30, 2018. For the nine months ended September 30, 2019, we had sales to two customers, which individually accounted for 10% or more of our total revenue. Total sales to these customers represented 29% and 19% respectively, and represented 48% of total revenues. For the nine months ended September 30, 2018, we had sales to three customers, which individually accounted for 10% or more of our total revenue. Total sales to these customers represented 32%, 12% and 10%, respectively, and represented 54% 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, 2019, approximately 0% of our contract manufacturing revenue was derived from pharmaceutical projects, as compared to 80% of total contract manufacturing revenue for the three months ended September 30, 2018. For the nine months ended September 30, 2019, approximately 53% of our contract manufacturing revenue was derived from pharmaceutical projects, as compared to 78% of total contract manufacturing revenue for the nine months ended September 30, 2018. None of our contract manufacturing services customers represented greater than 10% of total revenue for both the three months ended September 30, 2019 and 2018. None of our contract manufacturing services customers represented greater than 10% of total revenue for both the nine months ended September 30, 2019 and 2018.
Product and Pipeline Approvals
The following is a summary of significant approvals announced in 2019:
On January 2, 2019, we announced approval of an ANDA for Gentamicin Sulfate Ointment USP, 0.1%. This was our thirteenth approval for 2018, and our thirty-second approval from its internally developed pipeline of topical generic pharmaceutical medicines. We launched this product in the first quarter of 2019.
On January 24, 2019, we announced approval of an ANDA for Clobetasol Propionate Ointment USP, 0.05%. This was our first approval for 2019, and our thirty-third approval from its internally developed pipeline of topical generic pharmaceutical medicines. We launched this product in the first quarter of 2019.
On March 14, 2019, we announced approval of an ANDA for Desonide ointment, 0.05%. This was our second approval of 2019, and our thirty-fourth approval from its internally developed pipeline of topical generic pharmaceutical medicines. We launched this product in the second quarter of 2019.
On March 19, 2019, we announced approval of an ANDA for Fluocinonide Topical Solution USP, 0.05%. This was our third approval of 2019, and our thirty-fifth approval from its internally developed pipeline of topical generic pharmaceutical medicines. We launched this product in the early third quarter of 2019.
On April 4, 2019, we announced approval of an ANDA for Fluocinonide Cream USP, 0.1%. This was our fourth approval of 2019, and our thirty-sixth approval from its internally developed pipeline of topical generic pharmaceutical medicines. We expect to launch this product in the second half of 2021.
On October 18, 2019, we announced approval of an ANDA for Gentamicin Sulfate Cream USP, 0.1% (gentamicin base). This was our fifth approval of 2019, and our thirty-seventh approval from our internally developed pipeline of topical generic pharmaceutical medicines. We expect to launch this product in the fourth quarter of 2019.
Results of Operations
Three months ended September 30, 2019 compared to September 30, 2018
We had a net loss of $7.1 million, or $0.13 per share, for the three months ended September 30, 2019 ("Current Period"), compared to a net loss of $3.9 million, or $0.07 per share, for the three months ended September 30, 2018 ("Prior Period"). Product Sales, net, include Company Product Sales and Contract Manufacturing Sales, as follows:
Revenues:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Increase/(Decrease) | | |
| Components of Revenue: | | 2019 | | 2018 | | $ | | % |
| Product sales, net | | $ | 18,395 | | | $ | 18,253 | | | $ | 142 | | | 1 | % |
| Research and development services and other income | | 71 | | | 41 | | | 30 | | | 73 | % |
| Total Revenues | | $ | 18,466 | | | $ | 18,294 | | | $ | 172 | | | 1 | % |
Total revenues increased by 1% to $18.5 million for the Current Period from $18.3 million from the Prior Period. The $0.2 million increase primarily resulted from our efforts to broaden and diversify our customer base. As a result we have been able to increase demand for our in-line generic topical portfolio as well as enter into increasingly favorable contracts which have allowed us to increase our gross margin.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Increase/(Decrease) | | |
| | 2019 | | 2018 | | $ | | % |
| Cost of revenues | | $ | 11,186 | | | $ | 11,575 | | | $ | (389) | | | (3) | % |
| Selling, general and administrative expenses | | 5,007 | | | 4,845 | | | 162 | | | 3 | % |
| Product development and research expenses | | 2,064 | | | 3,087 | | | (1,023) | | | (33) | % |
| Totals costs and expenditures | | $ | 18,257 | | | $ | 19,507 | | | $ | (1,250) | | | (6) | % |
Cost of revenues decreased by 3% to $11.2 million for the Current Period from $11.6 million from the Prior Period. Gross margin increased to 39% in the Current Period from 37% from the Prior Period which reflects our efforts to optimize our product portfolio and improve our product profitability from the second half of 2018.
Selling, general and administrative expenses in the Current Period increased by $0.2 million as compared to the Prior Period. This change was due to an increase in personnel costs of $0.3 million, $0.1 million increase in legal fees offset by decline in professional fees of $0.2 million
Product development and research expenses decreased by $1.0 million as compared to the Prior period. The decrease in product development and research expenses was primarily due to (i) $0.3 million decrease in GDUFA fee (the “Generic Drug User Fee Amendments”) and associated Abbreviated New Drug Applications filings, (ii) $0.3 million decrease in exhibit and pilot batch costs, (iii) $0.2 million decrease in personnel costs, (iv) $0.1 million decrease in clinical studies and a $0.1 million decrease in other costs.
Other (Expense) Income, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | (Increase)/Decrease | | |
| | 2019 | | 2018 | | $ | | % |
| Interest and other expense, net | | $ | (5,160) | | | $ | (2,693) | | | $ | (2,467) | | | (92) | % |
| Foreign currency exchange gain / (loss) | | (2,167) | | | (176) | | | (1,991) | | | 1131 | % |
| | | | | | | | |
| | $ | (7,327) | | | $ | (2,869) | | | $ | (4,458) | | | 155 | % |
Interest and other expense, net increased in the Current Period primarily as a result of an increase in interest expense of $0.8 million related to the current debt structure and capitalized interest of $1.6 million from the Prior Period pertaining to the Buena facility.
Foreign exchange loss of $2.2 million in the Current Period was related to the foreign currency translation of our intercompany loans denominated in U.S. dollars to our foreign subsidiaries to be repaid in November 2022. Depending on the changes in foreign currency exchange rates, we will continue to record a non-cash gain or loss on translation for the remaining term of these loans.
Net loss attributable to common stockholders (in thousands, except per share numbers):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | | | Increase/(Decrease) | | |
| 2019 | | 2018 | | $ | | % |
| Net loss attributable to common stockholders | $ | (7,113) | | | $ | (3,945) | | | $ | 3,168 | | | 80 | % |
| Basic and diluted loss per share | $ | (0.13) | | | $ | (0.07) | | | $ | 0.06 | | | (86) | % |
Net loss for the Current Period was $7.1 million as compared to net loss of $3.9 million for the Prior Period. The decrease was primarily due to an increase in i) interest expenses of $2.5 million and ii) greater foreign exchange losses of $2.0 million, offset by a decrease in product development and research expenses of $1.0 million.
Nine months ended September 30, 2019 compared to September 30, 2018
We had a net loss of $19.8 million, or $0.37 per share, for the nine months ended September 30, 2019 ("Current Year"), compared to a net loss of $21.9 million, or $0.41 per share, for the nine months ended September 30, 2018 ("Prior Year"). Product Sales, net, include Company Product Sales and Contract Manufacturing Sales, as follows:
Revenues:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | | | Increase/(Decrease) | | |
| Components of Revenue: | | 2019 | | 2018 | | $ | | % |
| Product sales, net | | $ | 49,688 | | | $ | 48,914 | | | $ | 774 | | | 2 | % |
| Research and development services and other income | | 241 | | | 174 | | | 67 | | | 39 | % |
| Total Revenues | | $ | 49,929 | | | $ | 49,088 | | | $ | 841 | | | 2 | % |
Total revenues increased by 2% to $49.9 million for the Current Year from $49.1 million from the Prior Year. The $0.8 million increase primarily resulted from our efforts to broaden and diversify our customer base. As a result, we have been able to increase the demand surrounding our in-line generic topical portfolio as well as enter into increasingly favorable contracts which have allowed us to improve our gross margin.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | | | Increase/(Decrease) | | |
| | 2019 | | 2018 | | $ | | % |
| Cost of revenues | | $ | 28,346 | | | $ | 32,365 | | | $ | (4,019) | | | (12) | % |
| Selling, general and administrative expenses | | 15,707 | | | 15,932 | | | (225) | | | (1) | % |
| Product development and research expenses | | 7,721 | | | 10,445 | | | (2,724) | | | (26) | % |
| Totals costs and expenditures | | $ | 51,774 | | | $ | 58,742 | | | $ | (6,968) | | | (12) | % |
Cost of revenues decreased by 12% to $28.3 million for the Current Period from $32.4 million from the Prior Period. Gross margin increased to 43% in the Current Year from 34% from the Prior Year which is reflective of our efforts to optimize our product portfolio and improve our product profitability from the second half of 2018.
Selling, general and administrative expenses in the Current Period decreased by $0.2 million as compared to the Prior Period. This change was due to a reduction in personnel costs of $0.4 million, a decline in bad debt expense of $0.9 million and a decrease in professional fees and other costs of $0.2 million offset by an increase in legal fees of $1.3 million.
Product development and research expenses decreased by $2.7 million as compared to the Prior Year. The decrease in product development and research expenses was primarily due to (i) $0.9 million decrease in GDUFA fees and associated Abbreviated New Drug Applications filings, (ii) $0.7 million decrease in exhibit and pilot batch costs, (iii) $0.7 million decrease in personnel costs, (iv) $0.3 million decrease in clinical studies and $0.1 decrease in other costs.
Other (Expense) Income, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | | | (Increase)/Decrease | | |
| | 2019 | | 2018 | | $ | | % |
| Interest and other expense, net | | $ | (15,262) | | | $ | (7,764) | | | $ | (7,498) | | | 97 | % |
| Foreign currency exchange loss | | (2,458) | | | (2,071) | | | (387) | | | 19 | % |
| Partial debt extinguishment of 2019 Notes | | (185) | | | (2,467) | | | 2,282 | | | (93) | % |
| | $ | (17,905) | | | $ | (12,302) | | | $ | (5,603) | | | 46 | % |
Interest and other expense, net increased in the Current Year primarily as a result of a decrease in capitalized interest of $4.5 million from Prior Year pertaining to the Buena facility and an increase in interest expense of $3.0 million related to the current debt structure.
Foreign exchange loss of $2.5 million in the Current Year was related to the foreign currency translation of our intercompany loans denominated in U.S. dollars to our foreign subsidiaries to be repaid in November 2022. Depending on the changes in foreign currency exchange rates, we will continue to record a non-cash gain or loss on translation for the remaining term of these loans.
The change in the partial debt extinguishment of the 2019 Notes of $2.3 million was due to the partial debt extinguishment loss of $2.5 million in connection with the exchange of certain of the 2019 Notes for the 2023 Notes during the second quarter of 2018, in comparison to $0.2 million of partial debt extinguishment loss in connection with the repurchase of $2.7 million of our 2019 Notes during the first quarter of 2019, as discussed in Note 7.
Net loss attributable to common stockholders (in thousands, except per share numbers):
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, | | | | Increase/(Decrease) | | |
| 2019 | | 2018 | | $ | | % |
| Net loss attributable to common stockholders | $ | (19,826) | | | $ | (21,866) | | | $ | (2,040) | | | (9) | % |
| Basic and diluted loss per share | $ | (0.37) | | | $ | (0.41) | | | $ | (0.04) | | | (10) | % |
Net loss for the Current Year was $19.8 million as compared to net loss of $21.9 million for the Prior Year. The improvement was primarily due to an increase in revenues of $0.8 million, a decrease in cost of goods sold of $4.0 million, the decrease of research and development costs of $2.7 million, foreign exchange movement of $0.4 million, and a $2.3 million decrease of loss on the partial debt extinguishment in the Current Year, offset by an increase in interest and other expenses of $7.5 million as discussed above.
Liquidity and Capital Resources
We have incurred significant losses and generated negative cash flows from operations in recent years and expect to continue to incur losses and generate negative cash flow for the foreseeable future. As a result, we had an accumulated deficit of $116.2 million, total principal amount of outstanding borrowings of $174.1 million, and limited capital resources to fund ongoing operations at September 30, 2019. These capital resources were comprised of cash and equivalents of $6.7 million at September 30, 2019, the generation of cash inflows from working capital, and an additional $10.0 million of borrowing capacity under the Delayed Draw Term Loan A portion of our Senior Credit Facilities that expires on December 13, 2019. In addition, subsequent to September 30, 2019, we issued Series B Senior Unsecured Convertible Notes for aggregate proceeds of $34.4 million, of which we expect approximately $27.3 million will be available to fund operations. See Note 7 for additional information regarding our Senior Credit Facilities and Note 13 for additional information regarding our Series B Senior Unsecured Convertible Notes.
Our available capital resources may not be sufficient for us to continue to meet our obligations as they become due over the next twelve months if we cannot improve our operating results or increase our operating cash inflows. In the event these capital resources are not sufficient, we may need to raise additional capital through the sale of equity or debt securities, enter into strategic business collaboration agreements with other companies, seek other funding facilities, or sell assets. However, we cannot provide assurances that additional capital will be available on acceptable terms or at all. Moreover, if we are unable to meet our obligations when they become due over the next twelve months through our available capital resources, or obtain new sources of capital when needed, we may have to delay expenditures, reduce the scope of our manufacturing operations, reduce or eliminate one or more of our development programs, or make significant changes to our operating plan. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In addition, as disclosed in Note 7, we are subject to certain financial covenants that are required to be met under the Senior Credit Facilities. These financial covenants include a trailing twelve months (“TTM”) Minimum Revenue covenant that was required to be met each quarterly period through June 30, 2019, a TTM Minimum Adjusted EBITDA that is required to be met each quarterly period from September 30, 2019 through September 30, 2020, and a Maximum Total Net Leverage Ratio that is required to be met each quarterly period thereafter. As of September 30, 2019, we were in compliance with the TTM Adjusted EBITDA covenant and currently anticipate we will remain in compliance with this covenant through September 30, 2020. However, a material change in our operating results over the next twelve months could negatively affect our ability to maintain compliance with the TTM Adjusted EBITDA covenant. Moreover, while we are not required to comply with the Maximum Total Net Leverage ratio until December 31, 2020, we currently anticipate that we will not be in compliance with this covenant absent a significant reduction in our total principal amount of outstanding debt. In the event we are unable to comply with this covenant, or obtain a waiver from our lenders, the total amounts outstanding under the Senior Credit Facilities and Convertible Notes would immediately become due in January 2021 for which we do not currently expect to have readily available capital resources to meet these obligations without raising additional capital through the sale of equity or debt securities. If we are unable to raise additional capital to meet these obligations if they become due in January 2021, we may have to seek other strategic alternatives. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In June 2019, we received a de-listing notice from the NASDAQ due to our share price being below $1.00 for 30 consecutive trading days. The notice specifies that our share price must trade above $1.00 per share for ten consecutive trading days prior to December 2, 2019 in order to prevent our common stock from being de-listed. As of September 30, 2019, and through the date of issuance of the accompanying financial statements, the share price of our common stock has not traded above $1.00 per share for the required ten consecutive trading days and, as such, we have filed a request from the NASDAQ for a 180-day extension. While we believe that the ongoing execution of our business plan will ultimately increase our share price above $1.00 for the required ten consecutive trading days, we can provide no assurances that our shares will trade above $1.00 per share within the 180-day extension period, if at all. Moreover, while we believe the NASDAQ will grant the 180-day extension request, we can provide no assurances that such extension will be granted. As a result, if our shares are de-listed from the NASDAQ, we would be in default of the non-financial covenant required by our Senior Credit Facilities and Convertible Notes for which we would have to seek a waiver from the lenders or seek new capital through the sale of equity or debt securities. If we are unable to obtain a waiver or raise new capital to meet these obligations if they become due, we may have to seek other strategic
alternatives. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our cash flows from operating, investing and financing activities, as reflected in the condensed Consolidated Statements of Cash Flows, are summarized in the following table:
| | | | | | | | | | | |
| Nine months ended September 30, | | |
| 2019 | | 2018 |
| Net cash provided by (used in) | | | |
| Operating Activities | $ | (8,661) | | | $ | (15,314) | |
| Investing Activities | $ | (6,082) | | | $ | (18,277) | |
| Financing Activities | $ | 9,536 | | | $ | 22,707 | |
Operating Activities
Our operating activities used $8.7 million and $15.3 million of cash and cash equivalents in the nine months ended September 30, 2019 and 2018, respectively, mainly to support our operational activities, which includes a $6.0 million build in inventory to help avoid failure-to-supply fees and for the anticipated launch of injectable manufacturing.
Investing Activities
Our investing activities used $6.1 million of cash and equivalents during the nine months ended September 30, 2019, compared to $18.3 million used during the same period last year, which was primarily related to our facility expansion project in Buena, NJ. We received our certification of our certificate of occupancy for our expanded facility in the fourth quarter of 2018 and continued to develop and file ANDAs with the FDA in 2019.
Financing Activities
Our financing activities provided $9.6 million of cash and cash equivalents during the nine months ended September 30, 2019. The cash provided during the nine months ended September 30, 2019 consisted of $12.5 million of proceeds from the Revolver, offset by the $2.7 million repurchase of our 2019 Notes. Our financing activities provided $22.7 million of cash and cash equivalents during the nine months ended September 30, 2018 primarily due to $25.0 million borrowed from the 2021 Term loan offset by $2.5 million used to pay costs associated with the 2019 Notes, 2023 Notes and 2021 Term loan. The 2021 Term loan was repaid in December 2018.
Our capital resources were comprised of cash and cash equivalents of $6.7 million and $9.7 million as of September 30, 2019 and December 31, 2018 respectively. We had working capital of $16.6 million at September 30, 2019 and $15.8 million at December 31, 2018 respectively.
In order to continue normal business operations and execution of the Company’s growth strategy, the Company may exercise its ability to significantly defer or reduce planned discretionary investments in research and development and capital projects or seek other financing alternatives. Other financing alternatives may include raising additional capital through the sale of its equity, a strategic alliance with a third party or securing debt. If additional acquisition and growth opportunities arise, external financing will be required.
On November 12, 2018, the Company secured a credit agreement for $120.0 million. The facility includes three tranches of funding, an asset based revolving credit facility of $25.0 million due November 2022 (“Revolver”), a term loan of $80.0 million due February 2023 (“2023 Term Loan”), and a delayed draw term loan of $15.0 million also due in February 2023 (“2023 Delayed Draw Term Loan”).
The interest rate under the Revolver is calculated, at the option of the Company, at either the one, two, three or six-month LIBOR plus 3.75% or the base rate plus 2.75%. The interest rate on the 2023 Term Loan and the 2023 Delayed Draw Term Loan bear interest, at the option of the Company, at either the one, two, three or six-month LIBOR plus 8.75% or the base rate plus 7.75%, with a 24-month paid-in-kind interest option available to the Company should it choose to defer cash payments in order to maintain the liquidity needed to continue launching new products, build inventory, and prepare for the FDA prior approval inspection. As of September 30, 2019, the Company elected the paid-in-kind interest option which increased the principal balance of the 2023 Term Loan by $6.4 million to $76.4 million.
Off Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our shareholders.
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.
Please refer to our Annual Report on Form 10-K for the year ended December 31, 2018 for a complete list of all Critical Accounting Policies and Estimates. See also Item 1 for our Condensed Consolidated Financial Statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 2019, our principal debt obligation was related to our 2019 and 2023 Notes and Senior Credit Facilities. Interest accrues at a fixed rate of 3.75% on the outstanding principal amount of the 2019 Notes and is paid semi-annually every June 15 and December 15 until the 2019 Notes mature on December 15, 2019. Interest accrues at a fixed rate of 4.75% on the outstanding principal amount of the 2023 Notes and is paid semi-annually every May 1 and November 1 until the 2023 Notes mature on May 1, 2023. Since the interest rate is fixed, we have no market risk related to the 2019 and 2023 Notes.
On December 13, 2018, pursuant to a Commitment Letter, dated November 12, 2018, between us and Ares Management LLC, we entered into: (i) a First Lien Revolving Credit Agreement, by and among us, as the borrower, certain subsidiaries of the ours, as guarantors, the lenders from time to time party thereto, and ACF Finco I LP, as administrative agent and (ii) a Second Lien Credit Agreement, by and among the Company, as the borrower, certain subsidiaries of the Company, as guarantors, the lenders from time to time party thereto, and Ares Capital Corporation, as administrative agent.
The Senior Credit Facilities consist of an asset based revolving credit facility of $27.5 million (the "Revolver") due November 2022 and three term loans totaling $95.0 million (collectively the "2023 Term Loans") due February 2023. The interest rate under the Revolver is calculated, at the option of the Company, at either the one, two, three or six-month LIBOR plus 3.75% or the base rate plus 2.75%. The interest rate on the 2023 Term Loan and 2023 Delayed Draw Term Loan bear interest, at the option of the Company, at either the one, two, three or six-month LIBOR plus 8.75% or the base rate plus 7.75%, with a 24-month paid-in-kind interest option available to us should the Company choose to defer cash payments in order to maintain the liquidity needed to continue launching new products. As of September 30, 2019, the Company was utilizing a short-term advance of $2.5 million on the Revolver which was subsequently repaid on October 31, 2019. Each tranche of the funding is subject to market risk.
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable and 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. As of September 30, 2019, based on level 2 inputs, the fair value of our Notes (2019 Notes and 2023 Notes) was approximately $57.2 million compared to their carrying value of $72.2 million. For description of the fair value hierarchy and the Company's fair value methodologies, see Note 2 " Summary of Significant Accounting Policies". In addition, the value of our Senior Credit Facilities was stated at carrying value at September 30, 2019.
At September 30, 2019, the majority 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
In connection with the filing of this Form 10-Q for the quarter ended September 30, 2019, our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO") conducted an evaluation of the effectiveness of the design and operation 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 (“Exchange Act”)). As a result of this evaluation, our CEO and CFO concluded that those material weaknesses previously identified in Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December
31, 2018 were still present as of September 30, 2019 (“the Evaluation Date”). Based on those material weaknesses, and the evaluation of our disclosure controls and procedures, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of the Evaluation Date.
Changes in Internal Control over Financial Reporting
There were no changes during the quarter ended September 30, 2019 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation Plan and Status
Our remediation efforts previously identified in Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2018 are ongoing and we continue our initiatives to implement and document policies, procedures, and internal controls. Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort throughout 2019 and beyond, as necessary. We will test the operating effectiveness of certain new and existing controls in connection with our annual evaluation of the effectiveness of internal control over financial reporting; however, the material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. While we believe the steps taken to date and those planned for implementation will improve the effectiveness of our internal control over financial reporting, we have not completed all remediation efforts. Accordingly, as we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses, we have and will continue to perform additional procedures prescribed by management, including the use of manual mitigating control procedures and employing any additional tools and resources deemed necessary, to ensure that our consolidated financial statements are fairly stated in all material respects. The planned remediation activities described in Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2018 highlight our commitment to remediating our identified material weaknesses and remain largely unchanged through the date of filing this Quarterly Report on Form 10-Q.
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
Information about the legal proceedings is included in Item 1, Notes to unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
ITEM 1A. Risk Factors
Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2018 includes a detailed discussion of risks and uncertainties which could adversely affect our future results. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2018 have not materially changed.
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.
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, 2019, 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.
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.
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, 2019, 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.