(3.4) | | | | | | | | | | (4.1) | | | | | | | (4.2) | | | | | | | (4.3) | | | | | | | (4.4) | | | | | | | (4.5) | | | | | | | (4.6)* | | | | | | (4.7) | | | | | | (10.1)#(4.3) | IGI, Inc. 1998 Directors Stock Plan,Indenture dated as amendedof July 20, 2020, by and among the Company, the Subsidiary Guarantors named therein, and Wilmington Trust, National Association, as Trustee and Collateral Agent (incorporated by reference to Exhibit 4.1 to the Company’s Registration StatementReport on Form S-8 (Registration No. 333-160342),8-K, filed June 30, 2009)July 20, 2020). | | | | | (10.2)(4.4) | | | | | | (4.5) | | | | | | (4.6) | | | | | | (4.7) | | | | | | (4.8)* | | | | | |
| | | | | | | | | (10.1)# | | | | | | (10.3)(10.2)# | | | | | | (10.4)(10.3)# | | | | | | (10.5)# | | | | | | (10.6)# | | | | | | (10.7)# | | | | | | (10.8)# | | | | | | (10.9)# | | | | | | (10.10)+ | | | | | |
| | | | | | | | | (10.11) | | | | | | (10.12) | | | | | | (10.13)+ | | | | | | (10.14) | Credit Agreement dated as of November 18, 2014, by and among IGI Laboratories, Inc., Igen, Inc., and IGI Labs, Inc. as Borrowers, the other Persons party thereto that are designated as Credit Parties, General Electric Capital Corporation as Agent for all Lenders, GE Capital Bank as a Lender, and the other financial institutions party thereto as Lenders (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K, filed November 24, 2014). | | | | | (10.15) | | | | | | (10.16) | | | | | | (10.17) | Second Amendment to Credit Agreement, dated as of August 14, 2015, by and among Teligent, Inc., Igen, Inc. and Teligent Pharma, Inc. as Borrowers, General Electric Capital Corporation as Agent, and the Lenders signatory thereto (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 10-Q, filed November 9, 2015). | | | | | (10.18) | Third Amendment to Credit Agreement, dated as of September 16, 2015, by and among Teligent, Inc., Igen, Inc. and Teligent Pharma, Inc. as Borrowers, General Electric Capital Corporation as Agent, and the Lenders signatory thereto (incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q, filed November 9, 2015). | | | | | (10.19)+ | Asset Purchase Agreement, dated as of October 5, 2015, by between Concordia Pharmaceuticals Inc., S.à.r.l., Barbados Branch, on the one hand, and Teligent, Inc. and Teligent Jersey Limited, on the other hand (incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q, filed November 9, 2015). | | | | | (10.20) | | | | | | (10.21) | | | | | | (10.22) | | | | | | (10.23)(10.4) | | | | | |
| | | | | | | | | (10.24)(10.5) | | | | | | (10.25)(10.6) | | | | | | (10.26) | | | | | | (10.27) | First Amendment to Asset Purchase Agreement, dated December 10, 2015, by and between Concordia Pharmaceuticals Inc., S.à.r.l., Barbados Branch, on the one hand, and Teligent, Inc. and Teligent Jersey Limited, on the other hand (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K, filed December 15, 2015). | | | | | (10.28) | Trademark Assignment Agreement, dated December 10, 2015, by and between Concordia Pharmaceuticals Inc., S.à.r.l., Barbados Branch, on the one hand, and Teligent Jersey Limited, on the other hand (incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 8-K, filed December 15, 2015). | | | | | (10.29)(10.7)# | | | | | | (10.30)(10.8)# | | | | | | (10.31)(10.9)# | | | | | | (10.32)#(10.10) | | | | | | (10.33)# | | | | | | (10.34)# | | | | | | (10.35)#(10.11) | | | | | | (10.36)#(10.12) | | | | | | (10.38)# | | | | | | (10.39)*(10.13) | | | | | |
| | | | | | | | | (10.40)*(10.14) | | | | | | (10.41) | | | | | | (10.42) | | | | | | (10.43)(10.15) | | | | | | (10.44)(10.16) | | |
| | | | | | | | | | | | (10.45)(10.17)# | | | | | | (10.46)*(10.18)# | | | | | | (10.47)(10.19)# | | | | | | (10.48)(10.20)# | | | | | | (10.21) | | | | | | (10.49)(10.22) | | | | | | (10.23)# | | | | | | (10.24)# | | | | | | (10.25)# | | | | | | (10.26) | | | | | | (10.27) | | | | | | (10.28) | | | | | | (10.29) | | | | | | (10.30) | | | | | |
| | | | | | | | | (10.31) | | | | | | (10.32) | | | | | | (10.33) | | | | | | (10.34) | | | | | | (10.35) | | | | | | (10.36) | | | | | | (10.37) | | | | | | (21)* | | | | | | (23.1)* | | | | | | (31.1)* | | | | | | (31.2)* | | | | | | (32.1)* | | | | | | (101)* | The following financial information from this Annual Report on Form 10-K for the year ended December 31, 2019,2020, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Statements of Operations; (ii) the Consolidated Balance Sheets; (iii) the Consolidated Statements of Cash Flows; and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text. | |
*Filed herewith. #Indicates management contract or compensatory plan. +Portions of this Exhibit were omitted and filed separately with the Secretary of the SEC pursuant to a request for confidential treatment that has been granted by the SEC.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | | | | Teligent, Inc. | | | | | | By: | /s/ Timothy B. Sawyer | | | Timothy B. Sawyer | | | President and Chief Executive Officer |
Date: April 13, 2020May 3, 2021 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below and on the dates indicated. | | | | | | | | | | | | | | | Signature | | Title | | Date | | | | | | /s/ Timothy B. Sawyer | | Director, President and Chief Executive Officer | | April 13, 2020May 3, 2021 | Timothy B. Sawyer | | (Principal Executive Officer) | | | | | | | | /s/ Damian FinioKeith James | | Chief FinancialPrincipal Accounting Officer | | April 13, 2020May 3, 2021 | Damian FinioKeith James | | (Principal Financial Officer, Principal Accounting Officer) | | | | | | | | /s/ Steven Koehler | | Director | | April 13, 2020May 3, 2021 | Steven Koehler | | | | | | | | | | /s/ James Gale | | Director | | April 13, 2020 | James Gale | | | | | | | | | | /s/ Bhaskar Chaudhuri | | Director | | April 13, 2020May 3, 2021 | Bhaskar Chaudhuri | | | | | | | | | | /s/ John Celentano | | Director | | April 13, 2020May 3, 2021 | John Celentano | | | | | | | | | | /s/ Carole Ben-Maimon | | Director | | April 13, 2020May 3, 2021 | Carole Ben-Maimon | | | | | | | | | | /s/ Thomas Sabatino | | Director | | April 13, 2020May 3, 2021 | Thomas Sabatino | | | | | | | | | | /s/ William S. Marth | | Director | | May 3, 2021 | William S. Marth | | | | | | | | | | /s/ R. Carter Pate | | Director | | May 3, 2021 | R. Carter Pate | | | | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Teligent, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Teligent, Inc. and subsidiaries (the "Company") as of December 31, 20192020 and 2018,2019, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity (deficit), and cash flows, for each of the two years in the period ended December 31, 2019,2020, and the related notes and the schedule listed in the Index to Consolidated Financial Statements (collectively referred to as the "financial statements ")statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019,2020, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant recurring losses and may not be able to remain in compliance with the financial covenants required by its Senior Credit Facilities, as amended, and has stated that the uncertainty they anticipate in maintaining sufficient liquidity to fund ongoing operations raisesthese uncertainties raise substantial doubt about itsthe Company’s ability to continue as a going concern. Management's plans in regard toregarding these mattersuncertainties are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has adopted Accounting Standards Update 842, Leases, using the optional transition method, on January 1, 2019.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue, Recognition and Allowances - Chargebacks and Rebates — Refer to Notes 2 and 8 to the financial statements
Critical Audit Matter Description
As customary in the pharmaceutical industry, the Company’s product sales are subject to a variety of deductions, including chargebacks and rebates. Product sales are recorded net of accruals for both chargebacks and rebates. 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. 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 and rebates provided to customers. The Company reviews the percentage of products sold through these programs by reviewing chargeback data and uses the appropriate percentages to calculate the rebate accrual. Rebates are invoiced monthly or quarterly and reviewed against the accruals.
Given the significant judgments made by management to estimate chargebacks and rebates, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to chargebacks and rebates included the following, among others: • We evaluated the appropriateness and consistency of management’s methods and assumptions used to calculate chargebacks and rebates. • We tested the mathematical accuracy of the chargebacks and rebates calculations. • We tested significant assumptions and key inputs used to calculate chargebacks and rebates by comparing them to third party data, contractual arrangements with the Company’s customers, and/or historical data. • We evaluated the precision of significant assumptions by performing retrospective reviews of forecasted amounts and compared them to actual amounts. • We tested the overall reasonableness of the chargebacks recorded at period end by developing an expectation for comparison to actual recorded balances. • We tested payments processed throughout the year.
Property, Plant and Equipment and Goodwill and Intangible Assets - Impairment of Long-Lived Assets — Refer to Notes 2, 4 and 9 to the financial statements Critical Audit Matter Description
The Company reviews its long-lived assets, including property, plant and equipment and definite lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In performing such review for recoverability, the Company compares expected future cash flows of assets to the carrying value of the assets. If the expected future cash flows (undiscounted) are less than the carrying amount of such assets, the Company recognizes an impairment loss for the difference between the carrying value of the assets and their estimated fair value, with fair values being determined using projected discounted cash flows at the lowest level of cash flows identifiable in relation to the assets being reviewed.
During the year ended December 31, 2020, the Company recorded impairment charges of $101.5 million consisting of a property, plant and equipment impairment charge of $79.8 million and an intangible assets impairment charge of $21.7 million.
Given the significant judgments made by management related to certain business assumptions, including revenue projections, and valuation assumptions, including the determination of the standalone fair value of real and personal property, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to impairment of long-lived assets included the following, among others:
• We evaluated the reasonableness of management’s estimates and assumptions and tested the significant assumptions used in the quantitative models. • We involved our valuation specialists to assist us in identifying the significant assumptions underlying the quantitative models, assessed the rationale and supporting documents related to these assumptions and determined the appropriateness and reasonableness of the methodologies employed. • We compared the revenue forecasts prepared by management to historical revenues as well as third-party market data to evaluate the reasonableness of the assumptions. • We tested the mathematical accuracy of the model calculations. • We assessed the appropriateness of the disclosures in the financial statements.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
April 13, 2020May 3, 2021
We have served as the Company’s auditor since 2018.
TELIGENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share information)
| | | | | | | | | | | | | | | | | 12/31/2019 | | 12/31/2018 | ASSETS | | | | | Current assets: | | | | | Cash and cash equivalents | | $ | 15,508 | | | $ | 9,705 | | Restricted cash | | 206 | | | 2,892 | | Accounts receivable, net of allowance for doubtful accounts of $2,208 and $2,636, as of December 31, 2019 and December 31, 2018, respectively | | 20,374 | | | 16,120 | | Inventories | | 23,031 | | | 16,296 | | Prepaid expenses and other receivables | | 2,525 | | | 3,373 | | Total current assets | | 61,644 | | | 48,386 | | Property, plant and equipment, net | | 96,349 | | | 91,775 | | Intangible assets, net | | 44,645 | | | 48,375 | | Goodwill | | 491 | | | 470 | | Other | | 3,776 | | | 1,886 | | Total assets | | $ | 206,905 | | | $ | 190,892 | | | | | | | LIABILITIES AND STOCKHOLDERS’ (DEFICIT)/EQUITY | | | | | Current liabilities: | | | | | Accounts payable | | $ | 6,875 | | | $ | 5,933 | | Accrued expenses | | 9,285 | | | 9,842 | | Deferred income, current | | — | | | 2,426 | | Convertible 3.75% Senior Notes, net of debt discount and debt issuance costs (face of $15,702 as of December 31, 2018 ) | | — | | | 14,411 | | Capital lease obligation, current | | 446 | | | — | | Total current liabilities | | 16,606 | | | 32,612 | | | | | | | Convertible 4.75% Senior Notes, net of debt discount and debt issuance costs (face of $66,090 and $75,090 as of December 31, 2019 and December 31, 2018, respectively) | | 53,093 | | | 56,909 | | Revolver (face of $25,000 and $15,000 as of December 31, 2019 and December 31, 2018, respectively) | | 25,000 | | | 15,000 | | Series B Senior Convertible Notes, net of debt discount and debt issuance costs (face of $34,405 as of December 31, 2019) | | 21,824 | | | — | | 2023 Term Loan, net of debt issuance costs (face of $88,464 and $70,000 as of December 31, 2019 and December 31, 2018, respectively) | | 86,452 | | | 67,662 | | Derivative liability | | 6,776 | | | — | | Deferred tax liability | | 205 | | | 215 | | Other long term liabilities | | 2,256 | | | 73 | | Total liabilities | | 212,212 | | | 172,471 | | Commitments and Contingencies | | | | | Stockholders’ (deficit)/equity: | | | | | | | | | | | | | | | Common stock, $0.01 par value, 100,000,000 shares authorized; 53,850,427 and 53,774,221 shares issued and outstanding as of December 31, 2019 and December 31, 2018, respectively | | 558 | | | 557 | | Additional paid-in capital | | 117,967 | | | 116,864 | | Accumulated deficit | | (121,474) | | | (96,350) | | Accumulated other comprehensive loss, net of taxes | | (2,358) | | | (2,650) | | Total stockholders’ (deficit)/equity | | (5,307) | | | 18,421 | | Total liabilities and stockholders’ (deficit)/equity | | $ | 206,905 | | | $ | 190,892 | |
| | | | | | | | | | | | | | | | | 12/31/2020 | | 12/31/2019 | ASSETS | | | | | Current assets: | | | | | Cash and cash equivalents | | $ | 5,946 | | | $ | 15,508 | | Restricted cash | | 206 | | | 206 | | Accounts receivable, net of allowance for doubtful accounts of $2,399 and $2,208, as of December 31, 2020 and December 31, 2019, respectively | | 11,257 | | | 20,374 | | Inventories | | 23,396 | | | 23,031 | | Prepaid expenses and other receivables | | 3,486 | | | 2,525 | | Total current assets | | 44,291 | | | 61,644 | | Property, plant and equipment, net | | 16,131 | | | 96,349 | | Intangible assets, net | | 22,964 | | | 44,645 | | Goodwill | | 501 | | | 491 | | Other | | 3,901 | | | 3,776 | | Total assets | | $ | 87,788 | | | $ | 206,905 | | | | | | | LIABILITIES AND STOCKHOLDERS’ (DEFICIT)/EQUITY | | | | | Current liabilities: | | | | | Accounts payable | | $ | 7,972 | | | $ | 6,875 | | Accrued expenses | | 14,713 | | | 9,285 | | | | | | | | | | | | Capital lease obligation, current | | 436 | | | 446 | | Total current liabilities | | 23,121 | | | 16,606 | | | | | | | Convertible 4.75% Senior Notes, net of debt discount and debt issuance costs (face of $0 and $66,090 as of December 31, 2020 and December 31, 2019, respectively) | | 0 | | | 53,093 | | Revolver (face of $25,000 and $25,000 as of December 31, 2020 and December 31, 2019, respectively) | | 25,000 | | | 25,000 | | Series B Senior Convertible Notes, net of debt discount and debt issuance costs (face of $0 and $34,405 as of December 31, 2020 and December 31, 2019, respectively) | | 0 | | | 21,824 | | Series C Senior Secured Convertible Notes, net of debt discount and debt issuance costs (face of $50,323 and $0 as of December 31, 2020 and December 31, 2019, respectively) | | 31,922 | | | 0 | | Series D Senior Convertible Notes, net of debt discount and debt issuance costs (face of $3,352 and $0 as of December 31, 2020 and December 31, 2019, respectively) | | 5,796 | | | 0 | | 2023 Term Loan, net of debt issuance costs (face of $102,905 and $88,464 as of December 31, 2020 and December 31, 2019, respectively) | | 99,490 | | | 86,452 | | Derivative liabilities | | 7,507 | | | 6,776 | | Deferred tax liability | | 190 | | | 205 | | Other long term liabilities | | 4,914 | | | 2,256 | | Total liabilities | | 197,940 | | | 212,212 | | Commitments and Contingencies | | 0 | | 0 | Stockholders’ deficit: | | | | | | | | | | | | | | | Common stock, $0.01 par value, 100,000,000 shares authorized; 21,754,223 and 5,385,043 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively | | 220 | | | 56 | | Additional paid-in capital | | 135,218 | | | 118,469 | | Accumulated deficit | | (243,496) | | | (121,474) | | Accumulated other comprehensive loss, net of taxes | | (2,094) | | | (2,358) | | Total stockholders’ deficit | | (110,152) | | | (5,307) | | Total liabilities and stockholders’ deficit | | $ | 87,788 | | | $ | 206,905 | |
The accompanying notes are an integral part of the consolidated financial statements.
TELIGENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 20192020 and 20182019 (in thousands, except sharesshare and per share information) | | | | 2019 | | 2018 | | | | 2020 | | 2019 | | Revenue, net | Revenue, net | | $ | 65,896 | | | $ | 65,865 | | | Revenue, net | | $ | 45,309 | | | $ | 65,896 | | | | Costs and Expenses: | Costs and Expenses: | | | Costs and Expenses: | | | Cost of revenues | Cost of revenues | | 42,373 | | | 43,480 | | | Cost of revenues | | 49,031 | | | 42,373 | | | Selling, general and administrative expenses | Selling, general and administrative expenses | | 20,785 | | | 23,408 | | | Selling, general and administrative expenses | | 27,011 | | | 20,785 | | | Impairment charges | | Impairment charges | | 101,533 | | | 0 | | | Product development and research expenses | Product development and research expenses | | 10,758 | | | 14,076 | | | Product development and research expenses | | 7,674 | | | 10,758 | | | Total costs and expenses | Total costs and expenses | | 73,916 | | | 80,964 | | | Total costs and expenses | | 185,249 | | | 73,916 | | | Operating loss | Operating loss | | (8,020) | | | (15,099) | | | Operating loss | | (139,940) | | | (8,020) | | | | Other Expense: | | | | Foreign currency exchange loss | | (1,523) | | | (3,371) | | | | Other Income (Expense): | | Other Income (Expense): | | | Other income | | Other income | | 3,349 | | | 0 | | | Foreign currency exchange gain/(loss) | | Foreign currency exchange gain/(loss) | | 4,961 | | | (1,523) | | | Debt partial extinguishment of 2019 Notes | Debt partial extinguishment of 2019 Notes | | (185) | | | (4,235) | | | Debt partial extinguishment of 2019 Notes | | 0 | | | (185) | | | Debt extinguishment of Prior Term Loan | | — | | | (1,315) | | | | | Interest and other expense, net | Interest and other expense, net | | (21,154) | | | (12,298) | | | Interest and other expense, net | | (28,824) | | | (21,154) | | | Change in the fair value of derivative liability | | 6,769 | | | — | | | | Loss on debt restructuring | | (920) | | | — | | | | Gain/(loss) on debt restructuring | | Gain/(loss) on debt restructuring | | 51,858 | | | (920) | | | Inducement loss | | Inducement loss | | (9,183) | | | 0 | | | Change in the fair value of derivative liabilities | | Change in the fair value of derivative liabilities | | (2,305) | | | 6,769 | | | Loss before income tax expense | Loss before income tax expense | | (25,033) | | | (36,318) | | | Loss before income tax expense | | (120,084) | | | (25,033) | | | | Income tax expense / (benefit) | | 91 | | | (62) | | | | Income tax expense | | Income tax expense | | 1,938 | | | 91 | | | | | Net loss attributable to common stockholders | Net loss attributable to common stockholders | | $ | (25,124) | | | $ | (36,256) | | | Net loss attributable to common stockholders | | $ | (122,022) | | | $ | (25,124) | | | | Basic and diluted loss per share | Basic and diluted loss per share | | $ | (0.47) | | | $ | (0.68) | | | Basic and diluted loss per share | | $ | (14.67) | | | $ | (4.67) | | | | Weighted average shares of common stock outstanding: | | Weighted average shares of common stock outstanding: | | | Basic and diluted shares | | Basic and diluted shares | | 8,319,388 | | | 5,383,914 | | | | Weighted average shares of common stock outstanding: | | | | Basic and diluted | | 53,839,139 | | | 53,592,930 | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
TELIGENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the years ended December 31, 20192020 and 20182019 (in thousands)
| | | | 2019 | | 2018 | | | | 2020 | | 2019 | | Net loss | Net loss | | $ | (25,124) | | | $ | (36,256) | | | Net loss | | $ | (122,022) | | | $ | (25,124) | | | | Other comprehensive loss, net of tax | | | | | | | | Other comprehensive (loss)/income, net of tax | | Other comprehensive (loss)/income, net of tax | | Foreign currency translation adjustment | Foreign currency translation adjustment | | 292 | | | (631) | | | Foreign currency translation adjustment | | 264 | | | 292 | | | Other comprehensive loss | | 292 | | | (631) | | | | Other comprehensive (loss)/income | | Other comprehensive (loss)/income | | 264 | | | 292 | | | | Comprehensive loss | Comprehensive loss | | $ | (24,832) | | | $ | (36,887) | | | Comprehensive loss | | $ | (121,758) | | | $ | (24,832) | | |
The accompanying notes are an integral part of the consolidated financial statements.
TELIGENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 20192020 and 20182019 (in thousands) | | | | | | | | | | | | | | | | | 2020 | | 2019 | Cash flows from operating activities: | | | | | Net loss | | $ | (122,022) | | | $ | (25,124) | | Reconciliation of net loss to net cash (used in) provided by operating activities: | | | | | Depreciation of fixed assets and leases | | 3,840 | | | 3,688 | | Write down of fixed assets | | 398 | | | 0 | | Provision for write down of inventory | | 9,775 | | | (459) | | Provision for bad debt expense | | 192 | | | (428) | | | | | | | Stock based compensation | | 754 | | | 1,076 | | Amortization of debt costs and debt discount | | 7,810 | | | 6,514 | | Amortization of intangibles | | 2,709 | | | 3,008 | | Right-of-use asset lease expense | | 459 | | | 408 | | Deferred income taxes | | (27) | | | (22) | | Foreign currency exchange (gain) loss | | (4,961) | | | 1,523 | | Partial extinguishment of 3.75% senior notes | | 0 | | | 185 | | Non cash interest expense | | 18,484 | | | 8,464 | | | | | | | Impairment of long-lived assets | | 101,533 | | | 0 | | (Gain)/loss on debt restructuring | | (51,858) | | | 920 | | Inducement loss | | 9,183 | | | 0 | | Change in the fair value of derivative liability | | 2,305 | | | (6,769) | | Changes in operating assets and liabilities: | | | | | Accounts receivable | | 9,003 | | | (3,655) | | Inventories, net | | (9,792) | | | (6,145) | | Prepaid expenses and other current receivables | | (968) | | | 815 | | | | | | | Accounts payable and accrued expenses | | 4,541 | | | 377 | | Operating liabilities | | 1,874 | | | (369) | | Deferred income | | 0 | | | (2,426) | | Net cash used in operating activities | | (16,768) | | | (18,419) | | Cash flows from investing activities: | | | | | Capital expenditures | | (4,034) | | | (8,203) | | Disposal of fixed assets | | 139 | | | 0 | | | | | | | | | | | | Net cash used in investing activities | | (3,895) | | | (8,203) | | Cash flows from financing activities: | | | | | | | | | | Proceeds from 2023 term loan | | 0 | | | 10,000 | | Proceeds from 2023 Series B senior notes | | 0 | | | 17,750 | | Proceeds from 2023 Series B bifurcated conversion option | | 0 | | | 11,525 | | Proceeds from revolver | | 0 | | | 12,500 | | Proceeds from 2023 Series C senior notes | | 12,000 | | | 0 | | Repayment of revolver | | 0 | | | (2,500) | | Repayment of 3.75% senior notes | | 0 | | | (13,022) | | Debt issuance costs | | (3,063) | | | (3,107) | | Repurchase of 3.75% senior notes | | 0 | | | (2,686) | | Government grant advance | | 3,378 | | | 0 | | | | | | | Non cash income | | (3,349) | | | 0 | | Principal payments on financing lease obligations | | (14) | | | (11) | | | | | | | | | | | | Net cash provided by financing activities | | 8,952 | | | 30,449 | | | | | | | Effect of exchange rate on cash, cash equivalents and restricted cash | | 2,241 | | | (714) | | Net (decrease) increase in cash, cash equivalents and restricted cash | | (9,470) | | | 3,827 | | Cash, cash equivalents and restricted cash at beginning of year | | 16,182 | | | 13,069 | | | | | | | Cash, cash equivalents and restricted cash at end of year | | $ | 6,712 | | | $ | 16,182 | | | | | | | Supplemental Cash flow information: | | | | | Cash payments for interest | | $ | 3,267 | | | $ | 5,633 | | Cash payments for income taxes | | 157 | | | 150 | | Non cash investing and financing transactions: | | | | | | | | | | Acquisition of capital expenditures in accounts payable and accrued expenses | | 110 | | | 46 | | Capitalized stock compensation in capital expenditures | | 12 | | | 28 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | 2019 | | 2018 | Cash flows from operating activities: | | | | | Net loss | | $ | (25,124) | | | $ | (36,256) | | Reconciliation of net loss to net cash provided by (used in) operating activities: | | | | | Depreciation of fixed assets | | 3,688 | | | 2,579 | | Gain on sale of assets | | — | | | (20) | | Provision for write down of inventory | | (459) | | | 1,363 | | Provision for bad debt | | (428) | | | 452 | | Issuance of stock to consultant | | — | | | 102 | | Stock based compensation | | 1,076 | | | 1,970 | | Amortization of debt costs and debt discount | | 6,514 | | | 9,226 | | Amortization of intangibles | | 3,008 | | | 3,096 | | Non cash lease expense | | 408 | | | — | | Deferred income taxes | | (22) | | | 73 | | Foreign currency exchange loss (gain) | | 1,523 | | | 3,371 | | Partial extinguishment of 3.75% senior notes | | 185 | | | 4,235 | | Non cash interest expense | | 8,464 | | | — | | Extinguishment of prior term loan | | — | | | 1,315 | | Loss on impairment of intangible assets | | — | | | 1,924 | | Loss on debt restructuring | | 920 | | | — | | Change in the fair value of derivative liability | | (6,769) | | | — | | Changes in operating assets and liabilities: | | | | | Accounts receivable | | (3,655) | | | (4,047) | | Inventories | | (6,145) | | | (1,877) | | Prepaid expenses and other current receivables | | 803 | | | 224 | | Other assets | | 12 | | | (26) | | Accounts payable and accrued expenses | | 377 | | | (3,405) | | Operating liabilities | | (369) | | | — | | Deferred income | | (2,426) | | | 2,426 | | Net cash used in operating activities | | (18,419) | | | (13,275) | | Cash flows from investing activities: | | | | | Capital expenditures | | (8,203) | | | (25,332) | | Disposal of fixed assets | | — | | | 38 | | | | | | | | | | | | Net cash used in investing activities | | (8,203) | | | (25,294) | | Cash flows from financing activities: | | | | | Proceeds from prior term loan | | — | | | 25,000 | | Proceeds from 2023 term loan | | 10,000 | | | 70,000 | | Proceeds from 2023 Series B senior notes | | 17,750 | | | — | | Proceeds from 2023 Series B bifurcated conversion option | | 11,525 | | | — | | Proceeds from revolver | | 12,500 | | | 15,000 | | Repayment of revolver | | (2,500) | | | — | | Repayment of prior term loan, net | | — | | | (25,550) | | Repayment of 3.75% senior notes | | (13,022) | | | — | | Debt issuance costs | | (3,107) | | | (6,239) | | Repurchase of 3.75% senior notes | | (2,686) | | | (53,123) | | Proceeds from exercise of common stock options and warrants | | — | | | 251 | | Principal payments on capital lease obligations | | (11) | | | (6) | | | | | | | | | | | | Net cash provided by financing activities | | 30,449 | | | 25,333 | | | | | | | Effect of exchange rate on cash, cash equivalents and restricted cash | | (714) | | | (860) | | Net increase (decrease) in cash, cash equivalents and restricted cash | | 3,827 | | | (13,236) | | Cash, cash equivalents and restricted cash at beginning of year | | 13,069 | | | 27,165 | | | | | | | Cash, cash equivalents and restricted cash at end of year | | $ | 16,182 | | | $ | 13,069 | | | | | | | Supplemental Cash flow information: | | | | | Cash payments for interest | | $ | 5,633 | | | $ | 7,340 | | Cash payments for income taxes | | 150 | | | 89 | | Non cash investing and financing transactions: | | | | | | | | | | Acquisition of capital expenditures in accounts payable and accrued expenses | | 46 | | | 568 | | Capitalized stock compensation in capital expenditures | | 28 | | | 96 | | Issuance of stock to consultant | | — | | | 102 | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
TELIGENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) For the years ended December 31, 20192020 and 20182019 (in thousands, except share information) | | | | | Additional | | Accumulated Other | | | Total | | | | Additional | | Accumulated Other | | | Total | | | | | | Common Stock | | | Paid-In | | Accumulated | | Comprehensive | | | Stockholders’ | | | | | Common Stock | | Paid-In | | Accumulated | | Comprehensive | | | Stockholders’ | | | | | | Shares | | Amount | | Capital | | Deficit | | Loss | | | Equity | | | | | Shares | | Amount | | Capital | | Deficit | | Loss | | | Equity (Deficit) | | Balance, January 1, 2018 | | | | 53,400,281 | | | $ | 554 | | | $ | 106,312 | | | $ | (60,094) | | | $ | (2,019) | | | | $ | 44,753 | | | Balance, December 31, 2018 | | Balance, December 31, 2018 | | | | 53,774,221 | | | $ | 557 | | | $ | 116,864 | | | $ | (96,350) | | | $ | (2,650) | | | | $ | 18,421 | | | Issuance of stock to consultant | | | | 25,000 | | | — | | | 102 | | | — | | | — | | | | 102 | | | Stock based compensation expense | | | | | | 2,066 | | | — | | | — | | | | 2,066 | | | Stock options exercised | | | | 239,000 | | | 2 | | | 249 | | | — | | | — | | | | 251 | | | Issuance of stock for vested restricted stock units | | | | 109,940 | | | 1 | | | (1) | | | — | | | — | | | | — | | | Fair value of conversion feature on Convertible 4.75% Senior Notes | | | | 18,658 | | | | 18,658 | | | Partial extinguishment of equity component of Convertible 3.75% Senior Notes | | | | (10,522) | | | | (10,522) | | | Cumulative translation adjustment | | | | — | | | — | | | — | | | — | | | (631) | | | | (631) | | | Net loss | | | | — | | | — | | | — | | | (36,256) | | | — | | | | (36,256) | | | Balance, December 31, 2018 | | | | 53,774,221 | | | $ | 557 | | | $ | 116,864 | | | $ | (96,350) | | | $ | (2,650) | | | | $ | 18,421 | | | | Stock based compensation expense | Stock based compensation expense | | | | — | | | — | | | 1,104 | | | — | | | — | | | | 1,104 | | Stock based compensation expense | | | | | | 1,104 | | | — | | | — | | | | 1,104 | | | Issuance of stock for vested restricted stock units | Issuance of stock for vested restricted stock units | | | | 76,206 | | | 1 | | | (1) | | | — | | | — | | | | — | | Issuance of stock for vested restricted stock units | | | | 76,206 | | | 1 | | | (1) | | | — | | | — | | | | 0 | | | Cumulative translation adjustment | Cumulative translation adjustment | | | | — | | | — | | | — | | | — | | | 292 | | | | 292 | | Cumulative translation adjustment | | | | — | | | — | | | — | | | — | | | 292 | | | | 292 | | Net loss | Net loss | | | | — | | | — | | | — | | | (25,124) | | | — | | | | (25,124) | | Net loss | | | | — | | | — | | | — | | | (25,124) | | | — | | | | (25,124) | | Balance, December 31, 2019 | Balance, December 31, 2019 | | | | 53,850,427 | | | 558 | | | $ | 117,967 | | | $ | (121,474) | | | $ | (2,358) | | | | $ | (5,307) | | Balance, December 31, 2019 | | | | 53,850,427 | | | $ | 558 | | | $ | 117,967 | | | $ | (121,474) | | | $ | (2,358) | | | | $ | (5,307) | | | Balance, December 31, 2019 (post reverse split | | Balance, December 31, 2019 (post reverse split | | | | 5,385,043 | | | $ | 56 | | | $ | 118,469 | | | $ | (121,474) | | | $ | (2,358) | | | | (5,307) | | Stock based compensation expense | | Stock based compensation expense | | | | — | | | — | | | 767 | | | — | | | — | | | | 767 | | | RS and RSU vested | | RS and RSU vested | | | | 4,906 | | | — | | | — | | | — | | | — | | | | — | | Reclassification of derivative liabilities to equity | | Reclassification of derivative liabilities to equity | | | | — | | | — | | | 8,460 | | | — | | | — | | | | 8,460 | | Warrant issuance | | Warrant issuance | | | | — | | | — | | | 329 | | | — | | | — | | | | 329 | | Fair value of conversion feature on Convertible 2023 Series D Notes | | Fair value of conversion feature on Convertible 2023 Series D Notes | | | | 16,362,654 | | | 164 | | | 9,721 | | | — | | | — | | | | 9,885 | | APIC related to Series C Convertible Notes | | APIC related to Series C Convertible Notes | | | | — | | | — | | | (2,528) | | | — | | | — | | | | (2,528) | | Cumulative translation adjustment | | Cumulative translation adjustment | | | | — | | | — | | | — | | | — | | | 264 | | | | 264 | | Net loss | | Net loss | | | | — | | | — | | | — | | | (122,022) | | | — | | | | (122,022) | | Share rounding as a result of the reverse stock split | | Share rounding as a result of the reverse stock split | | | | 1,620 | | | — | | | — | | | — | | | — | | | | — | | Balance, December 31, 2020 | | Balance, December 31, 2020 | | | | 21,754,223 | | | $ | 220 | | | $ | 135,218 | | | $ | (243,496) | | | $ | (2,094) | | | | $ | (110,152) | | |
The accompanying notes are an integral part of the consolidated financial statements.
TELIGENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business and Going Concern Nature of the Business
Teligent, Inc. and its subsidiaries (collectively the “Company”) is a Delaware corporation incorporated in 1977 and is a specialty generic pharmaceutical company. Teligent’s mission is to become a leader in the high-barrier generic pharmaceutical market. Under its own label, the Company markets and sells generic topical, and branded generic, and generic injectable pharmaceutical products in the United States and Canada. In the United States, the Company currently markets 3837 generic topical pharmaceutical products and 42 branded genericinjectable pharmaceutical products. In Canada, the Company sells over 3231 generic and branded generic injectable products and medical devices. Generic pharmaceutical products are bioequivalent to their brand name counterparts. The Company also provides contract manufacturing services to the pharmaceutical, over-the-counter, ("OTC"over the counter (“OTC”), and cosmetic markets. The Company operates its business under 1 segment. OurIts common stock hasis traded on the Nasdaq Global Select Market under the trading symbol “TLGT” since October 26, 2015.“TLGT.” The Company’s principal executive office, laboratories, and manufacturing facilities are located at 105 Lincoln Avenue, Buena, New Jersey. It has additional offices located in Iselin, New Jersey and Mississauga, Canada.
Impact Related to COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of novel coronavirus disease (“COVID-19”) as a pandemic, and the Company expects its operations in all locations to be affected as the virus continues to proliferate. In alignment with the directives in the state of New Jersey, as a Pharmaceutical manufacturing facility, Teligent is considered "essential" and the Company has remained open for its business. The Company will stay open as long as permitted and conditions remain safe for its employees to continue to supply its products to the patients that need them.
Teligent’s first priority is the health and safety of its employees while positioning its business to manage throughout this pandemic. The outbreak and any preventative or protective actions that Teligent, its customers, suppliers or other third parties with which it has business relationships, or governments may take in respect of the COVID-19 outbreak could disrupt its business and the business of its customers. Global health concerns, such as COVID-19, could also develops, manufactures, fills,result in social, economic, and packages topical semi-solidlabor instability in the countries in which the Company or the third parties with whom it engages operate. In addition, the COVID-19 outbreak could result in a severe economic downturn and liquid productshas already significantly affected the financial markets of many countries. A severe or prolonged economic downturn or political disruption could result in a variety of risks to the Company's business, including its ability to raise capital when needed on acceptable terms, if at all. A weak or declining economy or political disruption could also strain its suppliers or third party CMOs, possibly resulting in supply disruption, or cause its customers to delay purchases or payments for brandedits products. The COVID-19 pandemic may also create delays in the review and generic pharmaceutical customers,approval of its regulatory submissions as well as the OTC and cosmetic markets. These products are used in a wide range of applications from cosmetics and cosmeceuticalsits pending reinspection related to the prescription treatmentCompany's warning letter and pre-approval inspection for commercial production on the newly installed injectable line at the Company’s New Jersey facility by the FDA. Given these uncertainties, the Company is unable to predict the overall impact that the COVID-19 pandemic will have on its business as of conditions like dermatitis, psoriasis,the date of this filing.
The Company has taken preventative measures to help ensure business continuity while maintaining safe and eczema. Teligent receivedstable operations. It has directed all non-production employees to work from home in accordance with state and local guidelines and has implemented social distancing measures on-site at its certificationmanufacturing facility to protect employees and its products. Its employees are provided daily personal protective equipment upon their arrival to the facility and the Company has implemented temperature monitoring services at its newly established single point of expanded facility inentrance. The Company has also implemented a routine sanitization process of the fourth quarterfacility. It has adjusted its production schedule to concentrate on high demand or low stock product to help reduce employee concentrations while continuing to focus on production levels necessary to meet our customer demand.
The Company's financial results and anticipated future results have been negatively impacted due to COVID-19. Under the provisions of 2018 and continued to develop and file ANDAs with the FDA in 2019. AsASC 360-10-55, the Company continues to executereview its long-lived assets for impairment whenever events or changes in circumstances indicate that the expansioncarrying amount of the assets may not be recoverable. The Company performs the analysis by comparing the expected future cash flows of the assets to the carrying value of the related long-lived assets. The Company recorded impairment charges of $101.5 million for the year ended December 31, 2020 related to property, plant and equipment of $79.8 million (Note 4), product acquisition costs of $13.5 million, trademarks and technology of $8.1 million and in process research and development of $0.1 million (Note 9).
The Company's financial performance has been adversely impacted by the COVID-19 pandemic. In the first quarter of 2020, the Company initiated a company-wide cost reduction initiative targeted at eliminating discretionary spending and ensuring that remaining expenditures are reduced in line with the lower demand for its products in light of COVID-19 impact to the business. Effective on May 4, 2020, the Company's Executive Leadership Team and all employees with annual salaries exceeding $100,000 accepted a 20% and 15% eight-week reduction in pay, respectively. Over the same eight-week period, the Company furloughed a portion of employees at its Buena, NJ manufacturing facility. Effective on June 19, 2020, the Company initiated a reduction-in-force, terminating 53 employees and furloughing an additional 15 employees thus reducing the employee base at its Buena, NJ facility. Terminated employees were offered a severance package and the Company will pay both the employee and employer portion of health benefits for the employees that were furloughed. At December 31, 2020, the Company’s employee base after these actions and a company-wide effort to reduce recruitment is down 31% from the start of the year. The associated one-time employee severance costs totaled $0.3 million and are reflected primarily in cost of revenues and the product development and research expenses in the Company’s Consolidated Statement of Operations for the year ended December 31, 2020.
On May 15, 2020, the Company received $3.4 million of proceeds from the U.S. Small Business Administration Paycheck Protection Program (the "Government Grant Advance") and has been utilizing the advance to balance its employee-related actions previously taken with the business needs to ensure a significant portion of the loan will be forgiven. The Government Grant Advance matures in 2 years with accrued interest at an annual rate of 1.00%, being deferred for payments on amounts not forgiven at the later of (a) 10 months following the borrower's covered period, or (b) when the SBA remits any amounts forgiven to the lender. According to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, the Company recorded $3.4 million in other income on the Consolidated Statements of Operations for the year ended December 31, 2020.
In May 2020, the Company modified 1 of its office lease agreements and obtained a deferral of 2 months rental payments amid the Pandemic at the company's choice on a later date. According to FASB Staff Q&A on Topic 842 and 841, because the amount of the total consideration paid under the modified lease agreement is substantially the same as the original agreement, except the deferral of the lease payments which only affect the timing of the payments, the Company accounted for the concession as if no changes to the lease contract were made and continues to recognize expenses during the deferral period.
In addition, the Company decided to shift its research and development operation being performed in its Tallinn, Estonia office to its US manufacturing site at Buena, New Jersey and commercial base beyondsubsequently to wind-down its Estonia operation. In September 2020, the Company entered into a letter of intent with its former Chief Executive Officer, a related party of the Company, to sell certain of Estonia's assets, primarily lab machinery, equipment and office furniture for a sales price of $125 thousand in cash. The transaction was closed on October 23, 2020.
The Company markets a portfolio of FDA-approved medicines, including several generic alternatives in the United States. These products include both injectable and topical genericsprescription medicines. From late March to include injectable generics, complex genericsthe end of April 2020, several data sources suggested that patient visits to the dermatologist in the United States were down more than 50% in comparison to the typical number of dermatologist visits realized prior to shelter-in-place guidelines. As a consequence of COVID-19, dermatology visits are still down versus pre-pandemic levels. But, as shelter-in-place guidelines across the country were relaxed, several data sources reflected an increase in dermatology visits and ophthalmic generics (what we call our “TICO strategy”),thus patient demand for topical pharmaceutical products. Although estimates vary, beginning in late May and into early June, there have been positive signs that the market for dermatology pharmaceutical products is rebounding driven by increased 90-day prescription refills approved by the Pharmacy Benefit Managers and the emergence of stronger telehealth networks. In fact, since mid-June data sources have shown the category return to 80% of pre-pandemic levels. Teligent sales have mostly mirrored these increases, although percentages vary by product. The Company remains cautiously optimistic given the consequences of COVID-19 in some locations have proven to change rapidly. Due to the level of uncertainty and potential consequences of less stringent guidelines, it will compete in other markets, includingis still extremely challenging to predict the ophthalmic generic pharmaceutical market,pace of the anticipated increase and expects to face other competitors.whether or not there might be a second wave of decline.
Going Concern
ASU 205-40 – Presentation of Financial Statements – Going Concern requires management to evaluate an entity’s ability to continue as a going concern within one year after the date the financial statements are available for issuance. Specifically, management is required to evaluate whether the presence of negativeadverse conditions or events, when considered individually and in the aggregate, raise substantial doubt about an entity’s ability to continue as a going concern. Substantial doubt exists when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are available for issuance. Management has identified the following negativeadverse conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern as of December 31, 2019:concern:
•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 flowflows for the foreseeable future. These significant losses and negative cash flows intensified during the year ended December 31, 2020 due to the adverse impact on the Company from the COVID-19 pandemic. As a result, the Company had an accumulated deficit of $121.5$243.5 million, total principal amount of outstanding borrowings of $214.0$162 million, and limited capital resources to fund ongoing operations at December 31, 2019.2020. These capital resources were comprised of cash and cash equivalents of $15.5$6.7 million at December 31, 20192020 and the generation of cash inflows from working capital. The Company’s available capital resources maywill 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 theseits capital resources are not sufficient, the Company maywill need to raise additional capitalfunds 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 assurancesany assurance 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, make significant changes to its operating plan or cease its operations. Management has concluded this uncertainty raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
•As disclosed in Note 17-Subsequent Events,6 and Note 7, the Company is subjectrequired to remain in compliance with certain financial and non-financial covenants as set forthprescribed by its Senior Credit Facilities with Ares. During the year ended December 31, 2020 and in early 2021, the Company amended its Senior Credit Facilities three times – on April 6, 2020, amendmentsJuly 20, 2020, and January 27, 2021, to among other things, seek a waiver with respect to the Senior Credit Facilities. TheseCompany’s lack of compliance with certain financial and non-financial covenants includeand amend the financial covenants. The most recent amendment on January 27, 2021 granted a trailing twelve months (“TTM”) Minimum Revenue covenant that is requiredwaiver with respect to be met each quarterly period from March 31, 2020 throughthe Company’s lack of compliance with certain financial and non-financial covenants as of December 31, 2020, a TTM Minimum Adjusted EBITDA that isand amended, among other things, the financial covenants whereby the Company will now be required to be met each quarterly period from March 31, 2021 through maturity, andremain in compliance with a minimum liquidity covenant testedof $1 million for the period from January 27, 2021 through February 15, 2021, and $3 million at all times thereafter through March 31, 2022. In addition, beginning on March 31, 2022 the Company will be required to remain in compliance with a Trailing Twelve Months “TTM” Consolidated Adjusted EBITDA financial covenant on a quarterly basis through December 31, 2022. While the Company was able to remain in compliance with these financial covenants through the termdate of issuance of the agreement. These amendments supersedeaccompanying consolidated financial statements, based on the Company’s current operating forecast, management has concluded that the Company may be unable to remain in compliance with one or both of these financial covenants included inand/or certain of its non-financial covenants over the original and amended agreements disclosed in Note 6-Debt. In the eventnext twelve months. If the Company is unable to comply withremain in compliance these covenants, or obtainbe granted a waiver, from its lenders, the lender shallAres will have the right, but not the obligation, to permanently reduce its commitment under the commitmentSecured Credit Facilities in whole or in part or to declare all or any portion of the outstanding balanceamounts under the Senior Credit Facilities as due and payable.payable on demand. Furthermore, in the event that outstanding
balances under the Aresoutstanding amounts on the Senior Credit agreementsFacilities are declared due and payable byon demand, the lender, the lendersholders of the 2023 Series A and Series B UnsecuredC Secured Convertible Notes shalland 2023 Series D Convertible Notes disclosed in Note 6 will also have the right, but not the obligation, to declare all of the outstanding balanceamounts under such Notes as due and payable as well.on demand. If the Company is unable to remain in compliance with its financial and non-financial covenants and, as a result, Ares and the holders of the Notes declare the outstanding amounts as due and payable on demand, the Company will need to raise additional capital to meet these obligations the Company may have toor seek other strategic alternatives, including ceasing itswhich may include pursuit of a merger or other transaction involving a change of control, restructure the outstanding debt, seek relief under the U.S. Bankruptcy Code, or cease operations. Management has concluded this uncertainty raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
•In June 2019,During the year ended December 31, 2020, the Company received aseveral de-listing noticenotices from The Nasdaq Market, the NASDAQ due to its share price being below $1.00 for 30 consecutive trading days.exchange in which the Company’s common stock is registered and traded on. The notice specifiednotices informed the Company, among other things, that the Company's share price must trade aboveCompany’s common stock traded below the $1.00 per share minimum required by the Nasdaq Market for a period of at least 30 consecutive days and/or the Company’s market capitalization fell below the $15 million minimum required by the Nasdaq Market for a period of at least 30 consecutive days. While the Company was able to regain compliance on February 19, 2021, The Nasdaq Market notified the Company again on April 9, 2021 that the Company’s common stock traded below the $1.00 per share minimum for a period of at least 30 consecutive days. In order to regain compliance, the closing bid price of the Company’s securities must be at least $1.00 per share
for a minimum of ten consecutive trading days prior to December 2, 2019 in order to prevent its common stock from being de-listed. For the 180 days preceding December 2, 2019 the Company's share price remained below $1.00. The Company requested a second 180-day extension. NASDAQ denied its request andbusiness days. If the Company chosedoes not regain compliance by October 6, 2021, the Company may be eligible for additional time to file for an appeal. Theregain compliance or if the Company was grantedis otherwise not eligible, the Company may request a hearing date forbefore a Hearings Panel. If the end of January 2020. Subsequent to the appeal hearing, NASDAQ set a deadline of April 17, 2020 for the Company is unable to regain compliance with NASDAQ’s continuing listing requirements. In early March 2020The Nasdaq Market, Ares will have the COVID-19 global pandemic triggered a significant declineright, but not the obligation, to permanently reduce its commitment under the Secured Credit Facilities in global capital markets, including NASDAQ. In lightwhole or in part or declare all or any portion of this significant decline, the Company requested NASDAQ to reconsideroutstanding amounts under the April 17, 2020 deadline. NASDAQ agreed to the Company’s requestSenior Credit Facilities as due and set a new deadline to regain compliance by June 1, 2020. In January 2020, the Company’s Board of Directors and shareholders approved a reverse stock splitpayable on demand. Furthermore, in the rangeevent the outstanding amounts on the Senior Credit Facilities are declared due and payable on demand, the holders of any whole number between five (5) and ten (10) to one (1). While the Company believes that the reverse stock split will ultimately increase its share price above $1.00 for the required ten consecutive trading days, it can provide no assurances that its shares will trade above $1.00 per share for the required time period. A de-listing from the NASDAQ would be a “Fundamental Change” under the Company’s 2023 Series A and Series B Unsecured Convertible Notes which triggers a right by the holders to require the Company repurchase the Convertible Notes. In such an event, the Company would need to seek financing to repurchase theC Secured Convertible Notes and there is no guarantee that such financing would be available or on terms acceptable to the Company. If noteholders demanded a repurchase of the notes and the Company could not finance the repurchase, it would be in default under the Indentures governing the2023 Series D Convertible Notes and in that event the lenders of the Ares Credit agreements wouldshall also have the right, but not the obligation, to declare all of the outstanding balanceamounts under those agreementssuch Notes as due and payable as well. Therefore, in the event ofon demand. Management has concluded this uncertainty raises substantial doubt about the Company’s shares are de-listed from the NASDAQ, the Company would likely haveability to seek some combination of waivers from its lenders and noteholders and seek new capital through the sale of equity or debt securities. If the Company is unable to obtain such waivers or raise new capital to meet these obligations if they become due, it may have to seek other strategic alternatives, including ceasing operations.continue as a going concern. The accompanying consolidated 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 and Principles of Consolidation The accompanying auditedconsolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company consolidates the following entities: Igen, Inc., Teligent Pharma. Inc., Teligent Luxembourg S.à.r.l., Teligent OÜ and Teligent Canada Inc, in addition to the following inactive entities: Microburst Energy, Inc., Blood Cells, Inc. and Flavorsome, Ltd. All inter-company accounts and transactions have been eliminated. Certain amounts in the prior periods presented have been reclassified to conform to the current period financial statement presentation. These reclassifications have no effect on previously reported net income.
Reverse Stock Split
On May 28, 2020, the company effectuated a one-for-ten reverse stock split of its outstanding shares of common stock (the "Reverse Stock Split"). The Reverse Stock Split reduces the Company's shares of outstanding common stock and stock options. Fractional shares of Common Stock that would have otherwise resulted from the Reverse Stock Split were rounded up to the nearest whole share. All share and per share data for all periods presented in the accompanying Consolidated Financial Statements and the related disclosures have been adjusted retroactively to reflect the Reverse Stock Split. The number of authorized shares of common stock and the par value per share remains unchanged.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the valuation of the derivative liabilityliabilities associated with certain Notes and the Senior Credit Facility, sales returns and allowances, allowances for excess and obsolete inventories, allowances for doubtful accounts, provisions for income taxes and related valuation allowances, stock based compensation, the assessment for the impairment of long-lived assets (including intangibles, goodwill and property, plant and equipment), property, plantindefinite-lived assets (including, goodwill, intangibles, and equipmentIn-Process research and development), and legal accruals.accruals for environmental cleanup and remediation costs. The Company bases its estimates and assumptions on historical experience, known or expected trends and various other assumptions that it believes to be reasonable.As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.
Related Parties
The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of financial statements is not required in those statements. The disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of
establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
On September 8, 2020, the Company entered into a letter of intent to execute a Business Transfer Agreement with The J. Molner Company OU, a corporation organized and existing under the laws of Estonia, which the former President and Chief Executive Officer Jason Grenfell Gardner has ownership in to sell certain assets held in the company’s Estonia entity. The transaction closed on October 23, 2020 for the purchase price of $125,000 less a credit of $5,675 for transition services to complete all local audits as required by Estonia laws before the agreement date.
Cash Equivalents
The Company considers all highly liquid instruments purchased with anthe 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 are included within other long-term assets on the Consolidated Balance Sheet. In addition, pursuantPursuant to the New Credit Facilities agreement, proceeds from the 2023 Term Loan were deposited in a blocked bank account and restricted for use for the sole purpose of repurchasing the outstanding 2019 Notes. DuringIn the first quarterbeginning of 2019, the Company used a total of $2.7 million of the restricted cash to repurchase a portion of the remaining 2019 Notes. The Company settled the remaining 2019 Notes were settled on theirupon its maturity in December 2019 (Note 6).
The Company presents restricted cash with cash and cash equivalents in the Consolidated Statement of Cash Flows. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported in the Consolidated Balance Sheet to the total amounts in the Consolidated Statement of Cash Flows as follows (in thousands):
| | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | | Cash and cash equivalents | $ | 15,508 | | | $ | 9,705 | | | | Restricted cash | 206 | | | 2,892 | | | | Restricted cash in other assets | 468 | | | 472 | | | | Cash, cash equivalents and restricted cash in the statement of cash flows | $ | 16,182 | | | $ | 13,069 | | | |
| | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | | Cash and cash equivalents | $ | 5,946 | | | $ | 15,508 | | | | Restricted cash | 206 | | | 206 | | | | Restricted cash in other assets | 560 | | | 468 | | | | Cash, cash equivalents and restricted cash in the statement of cash flows | $ | 6,712 | | | $ | 16,182 | | | |
Inventories
Inventories are valued at the lower of cost, using the first-in, first-out (“FIFO”) method, or market.net realizable value. The Company records an inventory reserve for losses associated with dated, expired, excess and obsolete items. This reserve is based on management’s current knowledge with respect to inventory levels, planned production, and extension capabilities of materials on hand. Management does not believe the Company’s inventory is subject to significant risk of obsolescence in the near term.
Property, Plant and Equipment
Depreciation and amortization of property, plant and equipment is provided for under the straight-line method over the assets’ estimated useful lives as follows:
| | | | | | | | | Descriptions | | Useful Lives | | | | Buildings and improvements | | 10-40 years | Machinery and equipment | | 5-15 years | Computer hardware and software | | 3-5 years | Furniture and fixtures | | 5 years | | | | | | |
Leasehold improvements are amortized over the shorter of the estimated useful life or remaining lease term. Repair and maintenance costs are charged to operations as incurred while major improvements are capitalized. Construction in progress ("CIP") costs are depreciated based on their respective asset class when they are put into service. When assets are retired or
disposed, the historical cost and accumulated depreciation thereon are removed with any gains or losses included in operating results.
Intangible Assets
Definite-lived intangible assets are stated at cost less accumulated amortization. Amortization of definite-lived intangible assets are computed on a straight-line basis over the assets’ estimated useful life, generally for periods ranging from 10 to 15 years. The Company continually evaluates the reasonableness of the useful lives of these assets. Indefinite-lived intangible assets are not amortized, but instead are tested at least annually for impairment. Costs to renew or extend the term of a recognized intangible asset are expensed as incurred. An impairment is recognized in the amount, if any, by which the carrying amount of
such assets exceeds its respective fair value and would be recorded in selling, general and administrative expense on the Consolidated Statements of Operations.
In-Process Research and Development
Amounts allocated to in-process research and development (“IPR&D”) in connection with a business combination are recorded at fair value and are considered indefinite-lived intangible assets subject to annual impairment testing. As products in development are approved for sale, the associate balance will be allocated to product rights and amortized over their estimated useful lives. These valuations reflect, among other things, the impact of changes to the development programs, the projected development and regulatory time frames and the current competitive environment. The IPR&D are solely those assets acquired in the 2015 business combination of Alveda. The Company performed its annual impairment test and does not believe an impairment existed as of December 31, 2019.
Long-Lived Assets
In accordance with the provisions of ASC 360-10-55, theThe Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In performing such review for recoverability, the Company compares expected future cash flows of assets to the carrying value of the long-lived assets and related identifiable intangibles. If the expected future cash flows (undiscounted) are less than the carrying amount of such assets, the Company recognizes an impairment loss for the difference between the carrying value of the assets and their estimated fair value, with fair values being determined using projected discounted cash flows at the lowest level of cash flows identifiable in relation to the assets being reviewed. The Company recorded impairment charges of $101.5 million for the year ended December 31, 2020 related to property, plant and equipment of $79.8 million, product acquisition costs of $13.5 million, trademarks and technology of $8.1 million and in process research and development of $0.1 million.
Intangible Assets
Definite-lived intangible assets are stated at cost less accumulated amortization. Amortization of definite-lived intangible assets are computed on a straight-line basis over the assets’ estimated useful life, generally for periods ranging from 10 to 15 years. The Company continually evaluates the reasonableness of the useful lives of these assets. Indefinite-lived intangible assets are not amortized, but instead are tested at least annually for impairment. Costs to renew or extend the term of a recognized intangible asset are expensed as incurred. An impairment is recognized in the amount, if any, by which the carrying amount of such assets exceeds its respective fair value and would be recorded in selling, general and administrative expense on the Consolidated Statements of Operations. The Company recorded impairment charges of $21.7 million related to product acquisition costs of $13.5 million, trademark and technology of $8.1 million and IPR&D of $0.1 million for the year ended December 31, 2020.
In-Process Research and Development
Amounts allocated to in-process research and development (“IPR&D”) in connection with a business combination are recorded at fair value and are considered indefinite-lived intangible assets subject to annual impairment testing. As products in development are approved for sale, the associate balance will be allocated to product rights and amortized over their estimated useful lives. These valuations reflect, among other things, the impact of changes to the development programs, the projected development and regulatory time frames and the current competitive environment. The IPR&D are solely those assets acquired in the 2015 business combination of Alveda. The Company recorded impairment charges of $0.1 million related to IPR&D for the year ended December 31, 2020.
Product Acquisition Costs
Product acquisition costs represent ANDAs and NDAs acquired in asset acquisitions, which are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company expects to amortize these costs over a 10-year useful life commencing when the product is sold. At December 31, 2019,2020, product acquisition costs included assets acquired from AstraZeneca, Valeant and Sebela.AstraZeneca. The Company performed its annualrecorded impairment test and does not believe an impairment existed ascharges of $13.5 million related to product acquisition costs for the year ended December 31, 2019.2020.
Goodwill
Goodwill which represents the excess of purchase price over the fair value of the net assets acquired, is carried at cost.acquired. Goodwill is tested for impairment on an annual basis on October 1 of each fiscal year or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company early adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): “Simplifying the Test for Goodwill Impairment” in the fourth quarter of 2019. This amendment eliminates Step Two of the goodwill impairment test. Under the amendments in this update, an entity has the option to perform a qualitative assessment to determine if the quantitative impairment test is required. If the quantitative impairment test is required, the Company would perform the annual goodwill impairment test by comparing the carrying value of its reporting unit to its fair value. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value would be recorded.In accordance with the amendment, the Company performed the qualitative impairment test on October 1, 2019 and concluded its Goodwill was not impaired.
The carrying value of goodwill at December 31, 20192020 was $0.5 million. We believe it is unlikely that there will be a material change in the future estimates or assumptions used to test for impairment losses on goodwill. However, if actual results were not consistent with our estimates or assumptions, we could be exposed to an impairment charge.
Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, trade receivables, restricted cash, accounts payable and other accrued liabilities at December 31, 20192020 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 December 31, 2019, based on level 2 inputs,2020, the fair value of our 2023 Notes was approximately$23.0 million compared to theirand the respective net carrying value of $53.1 million and the fair value of our 2023 Series Boutstanding Convertible Notes was approximately $28.9 million including the derivative liability of $6.8 millionare as mentioned below.follows (in thousands):
As of December 31, 2019, based on level 3 inputs, the fair value of the derivative liability associated with our 2023 Series B Notes was $6.8 million. (Note 7).
| | | | | | | | | | Fair Value | Net Carrying Value | 2023 Series C Convertible Notes | $ | 30,148 | | $ | 31,922 | | 2023 Series D Convertible Notes | 1,459 | | 5,796 | |
Debt Issuance Costs Expenses related to debt financing activities are capitalized and amortized on an effective interest method, over the term of the loan and are to be netted against the carrying value of the financial liability, as required by ASU 2015-3. This standard aligns the treatment of debt issuance costs and debt discounts in that both reduce the carrying value of the liability. Amortization of debt issuance costs are recorded as interest expense on the Consolidated Statement of Operations.
Revenue Recognition
The Company recognizes revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. The Company’s revenue is recorded net of accruals for estimated chargebacks, rebates, cash discounts, other allowances, and returns. The Company derives its revenues from three types of transactions: sales of its own pharmaceutical products (Company product sales), sales of manufactured product for its customers (contract manufacturing sales), and research and product development services performed for third parties. Due to differences in the substance of these transaction types, the transactions require, and the Company utilizes, different revenue recognition policies for each. Taxes collected from customers and remitted to government authorities and that are related to the sales of the Company’s products are excluded from revenues.
Adoption of ASC Topic 606, "Revenue from Contracts with Customers”
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The standard, including subsequently issued amendments, replaces most existing revenue recognition guidance in U.S. GAAP. The key focus of the new standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company performed a comprehensive review of its existing revenue arrangements as of January 1, 2018 following the aforementioned five-step model. Based on the Company's analysis, there were no changes identified that impacted the amount or timing of revenues recognized under the new guidance as compared to the previous guidance. Additionally, the Company's
analysis indicated that there were no changes to how costs to obtain and fulfill our customer contracts would be recognized under the new guidance as compared to the previous guidance. The impact of the adoption of this standard on the Company's Consolidated Balance Sheet, Consolidated Statement of Operations, and Consolidated Statement of Cash Flows was not material. The adoption of the new guidance impacted the way the Company analyzes, documents, and discloses revenue recognition under customer contracts beginning on January 1, 2018 and resulted in additional disclosures in the Company's financial statements.
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: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 and returns which are established at the time of sale, and are included in Revenue, net in the Company's Consolidated Statement of Operations. Research and Development Income: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, which would be recognized over time, or at a point in time, based upon the contractual term upon completion of the earnings process. Judgments are required to evaluate contingencies such as potential variances in schedule and the costs, the impact of change orders, liability claims, contract disputes and achievement of contractual performance standards.
Revenue and Provision for 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 ("SRA"), 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.
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 estimates 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 and rebates provided to customers. The Company reviews the percentage of products sold through these programs utilizing chargeback data and applies the appropriate program percentages to calculate the rebate accrual. Rebate invoices and/or payments may be received monthly, quarterly or annually and reviewed against the accruals. Other items that could be included in accrued rebates represent price protection fees, shelf stock adjustments (SSAs), or other various amounts that would serve as one-time discounts on specific products. Net revenues and accounts receivable balances in the Company’s consolidated financial statements are presented net of SRA estimates. Certain SRA balances are included in accounts payable and accrued expenses.
Accounts receivable are presented net of SRA balances of $30.5$28.9 million and $18.1$30.5 million at December 31, 20192020 and 2018,2019, respectively. The allowance for doubtful accounts was $2.2$2.4 million and $2.6$2.2 million at December 31, 20192020 and 2018,2019, respectively. These balances are primarily related to one specific customer in the amount of $1.7 million.
Additionally, the Company markets and distributes 40 products under its own label in the U.S., where in accordance with an agreement entered into in December of 2011, the Company is required to pay a royalty calculated based on net sales to one of its pharmaceutical partners. The royalty is calculated based on contracted terms of 40% of net sales for the 40 products, which is to be paid quarterly to its partner. Accounts payable and accrued expenses include $0.4$0.3 million and $0.2$0.4 million at December 31, 20192020 and 2018,2019, respectively, related to these royalties. Royalty expense of $1.4$0.7 million and $2.2$1.4 million was included in cost of goods sold for the years ended December 31, 2020 and 2019 and 2018 respectively. The Company includes significantSignificant estimates are required to arrive at the respective net product sales for wholesaler chargebacks, Medicaid and Medicare rebates, allowances and other pricing and promotional programs. Concentration of Risk Financial instruments, which subject the Company to concentration of credit risk, consist primarily of cash equivalents and trade receivables. The Company maintains its cash in accounts with quality financial institutions. Although the Company currently believes that the financial institutions with which the Company does business will be able to fulfill their commitments to us, there is no assurance that those institutions will be able to continue to do so.
Major customers of the Company are defined as those constituting greater than 10% of our total revenue. In 2020, we had sales to three customers which individually accounted for more than 10% of our total revenue. These customers had sales of $11.5 million, $5.2 million and $4.5 million respectively, which represented 47% of total revenues in the aggregate. Accounts receivable related to these major customers comprised 48%, 19% and 8% respectively, and represented 75% of all accounts receivable as of December 31, 2020. In 2019, we had sales to two customers which individually accounted for more than 10% of our total revenue. These customers had sales of $17.6 million and $9.6 million, respectively, whichand represented 41% of total revenues in the aggregate. Accounts receivable related to these major customers comprised of 25%, and 6%22%, respectively, and represented 31% of all accounts receivable as of December 31, 2019. In 2018, we had sales to three customers which individually accounted for more than 10% of our total revenue. These customers had sales of $21.2 million, $7.3 million and $6.9 million, respectively, and represented 54% of total revenues in the aggregate. Accounts receivable related to these major customers comprised of 30%, 19% and 19%, respectively, and represented 68% of all accounts receivable as of December 31, 2018.
Diflorasone Diacetate Ointment USP 0.05% accounted for 15% of the Company's total revenues in 2019. There was no product which individually accounted for more than 10% of the total revenues in 2018.2020. For the year ended December 31, 2020, domestic net revenues were $34.5 million and foreign net revenues were $10.8 million. As of December 31, 2020, domestic assets were $139.9 million and foreign assets were $41.2 million. For the year ended December 31, 2019, domestic net revenues were $48.4 million and foreign net revenues were $17.5 million. As of December 31, 2019, domestic assets were $154.3 million and foreign assets were $52.6 million. For the year ended December 31, 2018, domestic net revenues were $45.6 million and foreign net revenues were $20.2 million. As of December 31, 2018, domestic assets were $132.7 million and foreign assets were $58.2 million.
While the companyCompany purchases raw materials to manufacture certain products, it also utilizes CMO's to purchase finished products. The Company currently purchases from numerous sources which therefore reduces the risk of delays or difficulties in obtaining materials and/or products.
Acquisitions The Company accounts for acquired businesses using the acquisition method of accounting, which requires with limited exceptions, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net assets acquired is recorded as goodwill. When net assets that do not constitute a business are acquired, no goodwill is recognized.
Contingent consideration, if any, is included as part of the acquisition cost and is recognized at fair value as of the acquisition date. Any liability resulting from contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved. These changes in fair value are recognized in earnings. Accounts Receivable and Allowance for Doubtful Accounts
The Company extends credit to wholesaler and distributor customers and national retail chain customers, based upon credit evaluations, in the normal course of business, primarily with 60 to 90-day terms. The Company maintains customer-related accruals and allowances that consist primarily of chargebacks, rebates, sales returns, shelf stock allowances, administrative fees and other incentive programs. Some of these adjustments relate specifically to the generic prescription pharmaceutical business. Typically, the aggregate gross-to-net adjustments related to these customers can exceed 70% of the gross sales through this distribution channel. Certain of these accruals and allowances are recorded in the balance sheetConsolidated Balance Sheet as current liabilities and others are recorded as a reduction to accounts receivable.
The Company extends credit to its contract services customers based upon credit evaluations in the normal course of business, primarily with 30-day terms. The Company does not require collateral from its customers. Bad debt provisions are provided for on the allowance method based on historical experience and management’s evaluation of outstanding accounts receivable. The Company reviews the allowance for doubtful accounts regularly, and past due balances are reviewed individually for collectability. The Company charges off uncollectible receivables against the allowance when the likelihood of collection is remote.
Foreign Currency Translation The net assets of international subsidiaries where the local currencies have been determined to be the functional currencies are translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in the foreign currency translation account, which is included in accumulated other comprehensive income (loss) (AOCI) and reflected as a separate component of equity.stockholders' equity (deficit). For those subsidiaries where the U.S. dollar has been determined to be the functional currency, non-monetary foreign currency assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with the U.S. dollar effects of rate changes included in Other (income) expense, net.Expense.
Foreign exchange lossgain of $1.5$5.0 million was recorded for the year ended December 31, 2019,2020, primarily related to the foreign currency translation of our intercompany loans denominated in U.S. dollars to our foreign subsidiaries. These loans are to be repaid in November 2022. Depending on the changes in foreign currency exchange rates, the Company will continue to record a non-cash gain or loss on translation for the remainder of the term of these loans. Due to the nature of this transaction, there is no economic benefit to the Company to hedge these transactions. Accounting for Environmental Costs Accruals for environmental remediation are recorded when it is probable a liability has been incurred and costs are reasonably estimable. The estimated liabilities are recorded at undiscounted amounts. Environmental insurance recoveries are included in the statementConsolidated Statement of operationsOperations in the year in which the issue is resolved through settlement or other appropriate legal process. Income Taxes The Company records income taxes in accordance with ASC 740-10, “Accounting for Income Taxes,” under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to operating loss and tax credit carry forwards and differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded based on a determination of the ultimate realizability of future deferred tax assets. The Company complies with the provisions of ASC 740-10-25 that clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with ASC 740-10, “Accounting for Income Taxes,” and prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Additionally, ASC 740-10 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. There were 0 unrecognized tax benefits as of the date of adoption. As such, there are 0 unrecognized tax benefits included in the balance sheet that would, if recognized, affect the effective tax rate. The Company records interest and penalties relating to uncertain tax positions as a component of income tax expense.before income taxes.
Stock-Based Compensation ASC 718-10 defines the fair-value-based method of accounting for stock-based employee compensation plans and transactions used by the Company to account for its issuances of equity instruments to record compensation cost for stock-based employee compensation plans at fair value as well as to acquire goods or services from non-employees. Transactions in which the Company issues stock-based compensation to employees, directors and advisors and for goods or services received from non-employees are accounted for based on the fair value of the equity instruments issued. The Company utilizes pricing models in determining the fair values of options, RSUs and warrants issued as stock-based compensation. These pricing models utilize the market price of the Company’s common stock and the exercise price of the option or warrant, as well as time value and volatility factors underlying the positions. Stock-based compensation expense is recognized over the requisite service period of the award, which usually coincides with the vesting period of the grant. Product Development and Research The Company’s research and development costs are expensed as incurred. Shipping and Handling Costs Costs related to shipping and handling are comprised of outbound freight and the associated labor. These costs are recorded in costs of sales. For the years ended December 31, 20192020 and 2018,2019, the costs relating to shipping and handling totaled $1.8$1.6 million and $2.1$1.8 million, respectively. 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. Due to the net loss for the years ended December 31, 20192020 and 2018,2019, the effect of the Company’s potential dilutive common stock equivalents was anti-dilutive; as a result, the basic and diluted weighted average number of common shares outstanding and net loss per common share are the same. As of December 31, 20192020 and 2018,2019, the shares of common stock issuable in connection with stock options and warrants have been excluded from the diluted loss per share, as their effect would have been anti-dilutive.
For the years ended December 31, 20192020 and 20182019 (in thousands except shares and per share data) | | | | 2019 | | 2018 | | | | | 2020 | | 2019 | | | Basic loss per share computation: | Basic loss per share computation: | | | | | | | Basic loss per share computation: | | | | | | | Net loss attributable to common stockholders —basic and diluted | Net loss attributable to common stockholders —basic and diluted | | $ | (25,124) | | | $ | (36,256) | | | | Net loss attributable to common stockholders —basic and diluted | | $ | (122,022) | | | $ | (25,124) | | | | Weighted average common shares —basic and diluted | Weighted average common shares —basic and diluted | | 53,839,139 | | | 53,592,930 | | | | Weighted average common shares —basic and diluted | | 8,319,388 | | | 5,383,914 | | | | Basic and diluted loss per share | Basic and diluted loss per share | | $ | (0.47) | | | $ | (0.68) | | | | Basic and diluted loss per share | | $ | (14.67) | | | $ | (4.67) | | | | |
Adoption of Other Recent Accounting Pronouncements In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU No. 2020-04”). The update provides optional guidance for a limited period to ease the potential burden in accounting for (or recognizing the effects of) contract modifications on financial reporting caused by reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company adopted this guidance in the second quarter of 2020. The adoption of this guidance had no impact on the Company's Consolidated Financial Statements or the related disclosures.
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. 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. Per the requirements of the standard, the Company 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.
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 amendment, effective January 1, 2019, did not have a material impact on its consolidated financial statements and the related disclosures.
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 on January 1, 2020, with early adoption permitted. The Company early adopted this amendment in the lastfourth quarter of 2019. The adoption of this amendment did not have a material impact on the Company's consolidated financial statements and the related disclosures.
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. In accordance with the amendment, entities should perform the annual goodwill impairment test by comparing the carrying value of their reporting units to their fair value. An entity should record an impairment charge for the amount by which its carrying amount exceeds its reporting unit’s fair value. The Company early adopted the amendment in the fourth quarter of 2019. The adoption of this amendment did not have a material impact on the Company's consolidated financial statements and the related disclosures.
Recently Issued and Not Yet Adopted Accounting PronouncementsContract 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 and returns which are established at the time of sale, and are included in Revenue, net in the Company's Consolidated Statement of Operations. Research and Development 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, which would be recognized over time, or at a point in time, based upon the contractual term upon completion of the earnings process. Judgments are required to evaluate contingencies such as potential variances in schedule and the costs, the impact of change orders, liability claims, contract disputes and achievement of contractual performance standards.
Revenue and Provision for 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 ("SRA"), 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.
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 estimates 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 and rebates provided to customers. The Company reviews the percentage of products sold through these programs utilizing chargeback data and applies the appropriate program percentages to calculate the rebate accrual. Rebate invoices and/or payments may be received monthly, quarterly or annually and reviewed against the accruals. Other items that could be included in accrued rebates represent price protection fees, shelf stock adjustments (SSAs), or other various amounts that would serve as one-time discounts on specific products. Net revenues and accounts receivable balances in the Company’s consolidated financial statements are presented net of SRA estimates. Certain SRA balances are included in accounts payable and accrued expenses.
Accounts receivable are presented net of SRA balances of $28.9 million and $30.5 million at December 31, 2020 and 2019, respectively. The allowance for doubtful accounts was $2.4 million and $2.2 million at December 31, 2020 and 2019, respectively. These balances are primarily related to one specific customer in the amount of $1.7 million. Additionally, the Company markets and distributes 0 products under its own label in the U.S., where in accordance with an agreement entered into in December of 2011, the Company is required to pay a royalty calculated based on net sales to one of its pharmaceutical partners. The royalty is calculated based on contracted terms of 40% of net sales for the 0 products, which is to be paid quarterly to its partner. Accounts payable and accrued expenses include $0.3 million and $0.4 million at December 31, 2020 and 2019, respectively, related to these royalties. Royalty expense of $0.7 million and $1.4 million was included in cost of goods sold for the years ended December 31, 2020 and 2019 respectively. Significant estimates are required to arrive at the respective net product sales for wholesaler chargebacks, Medicaid and Medicare rebates, allowances and other pricing and promotional programs. Concentration of Risk Financial instruments, which subject the Company to concentration of credit risk, consist primarily of cash equivalents and trade receivables. The Company maintains its cash in accounts with quality financial institutions. Although the Company currently believes that the financial institutions with which the Company does business will be able to fulfill their commitments to us, there is no assurance that those institutions will be able to continue to do so.
Major customers of the Company are defined as those constituting greater than 10% of our total revenue. In 2020, we had sales to three customers which individually accounted for more than 10% of our total revenue. These customers had sales of $11.5 million, $5.2 million and $4.5 million respectively, which represented 47% of total revenues in the aggregate. Accounts receivable related to these major customers comprised 48%, 19% and 8% respectively, and represented 75% of all accounts receivable as of December 31, 2020. In 2019, we had sales to two customers which individually accounted for more than 10% of our total revenue. These customers had sales of $17.6 million and $9.6 million, respectively, and represented 41% of total revenues in the FASB issuedaggregate. Accounts receivable related to these major customers comprised of 25%, and 22%, respectively, and represented 31% of all accounts receivable as of December 31, 2019.
Diflorasone Diacetate Ointment USP 0.05% accounted for 15% of the Company's total revenues in 2019. There was no product which individually accounted for more than 10% of the total revenues in 2020. For the year ended December 31, 2020, domestic net revenues were $34.5 million and foreign net revenues were $10.8 million. As of December 31, 2020, domestic assets were $139.9 million and foreign assets were $41.2 million. For the year ended December 31, 2019, domestic net revenues were $48.4 million and foreign net revenues were $17.5 million. As of December 31, 2019, domestic assets were $154.3 million and foreign assets were $52.6 million.
While the Company purchases raw materials to manufacture certain products, it also utilizes CMO's to purchase finished products. The Company currently purchases from numerous sources which therefore reduces the risk of delays or difficulties in obtaining materials and/or products.
Acquisitions The Company accounts for acquired businesses using the acquisition method of accounting, standard updatewhich requires with limited exceptions, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net assets acquired is recorded as goodwill. When net assets that do not constitute a business are acquired, no goodwill is recognized.
Contingent consideration, if any, is included as part of the acquisition cost and is recognized at fair value as of the acquisition date. Any liability resulting from contingent consideration is remeasured to simplifyfair value at each reporting date until the contingency is resolved. These changes in fair value are recognized in earnings. Accounts Receivable and Allowance for Doubtful Accounts
The Company extends credit to wholesaler and distributor customers and national retail chain customers, based upon credit evaluations, in the normal course of business, primarily with 60 to 90-day terms. The Company maintains customer-related accruals and allowances that consist primarily of chargebacks, rebates, sales returns, shelf stock allowances, administrative fees and other incentive programs. Some of these adjustments relate specifically to the generic prescription pharmaceutical business. Typically, the aggregate gross-to-net adjustments related to these customers can exceed 70% of the gross sales through this distribution channel. Certain of these accruals and allowances are recorded in the Consolidated Balance Sheet as current liabilities and others are recorded as a reduction to accounts receivable.
The Company extends credit to its contract services customers based upon credit evaluations in the normal course of business, primarily with 30-day terms. The Company does not require collateral from its customers. Bad debt provisions are provided for on the allowance method based on historical experience and management’s evaluation of outstanding accounts receivable. The Company reviews the allowance for doubtful accounts regularly, and past due balances are reviewed individually for collectability. The Company charges off uncollectible receivables against the allowance when the likelihood of collection is remote.
Foreign Currency Translation The net assets of international subsidiaries where the local currencies have been determined to be the functional currencies are translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in the foreign currency translation account, which is included in accumulated other comprehensive income (loss) (AOCI) and reflected as a separate component of stockholders' equity (deficit). For those subsidiaries where the U.S. dollar has been determined to be the functional currency, non-monetary foreign currency assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with the U.S. dollar effects of rate changes included in Other Expense.
Foreign exchange gain of $5.0 million was recorded for the year ended December 31, 2020, primarily related to the foreign currency translation of our intercompany loans denominated in U.S. dollars to our foreign subsidiaries. These loans are to be repaid in November 2022. Depending on the changes in foreign currency exchange rates, the Company will continue to record a non-cash gain or loss on translation for the remainder of the term of these loans. Due to the nature of this transaction, there is no economic benefit to the Company to hedge these transactions. Accounting for Environmental Costs Accruals for environmental remediation are recorded when it is probable a liability has been incurred and costs are reasonably estimable. The estimated liabilities are recorded at undiscounted amounts. Environmental insurance recoveries are included in the Consolidated Statement of Operations in the year in which the issue is resolved through settlement or other appropriate legal process. Income Taxes The Company records income taxes in accordance with ASC 740-10, “Accounting for Income Taxes,” under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to operating loss and tax credit carry forwards and differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The standard’s amendments include changeseffect on deferred taxes of a change in various subtopicstax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded based on a determination of the ultimate realizability of future deferred tax assets. The Company complies with the provisions of ASC 740-10-25 that clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with ASC 740-10, “Accounting for Income Taxes,” and prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Additionally, ASC 740-10 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. There were 0 unrecognized tax benefits as of the date of adoption. The Company records interest and penalties relating to uncertain tax positions as a component of income before income taxes.
Stock-Based Compensation ASC 718-10 defines the fair-value-based method of accounting for income taxes including, but not limitedstock-based employee compensation plans and transactions used by the Company to accountingaccount for “hybrid” tax regimes, tax basis step-upits issuances of equity instruments to record compensation cost for stock-based employee compensation plans at fair value as well as to acquire goods or services from non-employees. Transactions in goodwill obtained in a transaction that is not a business combination, intraperiod tax allocation exceptionwhich the Company issues stock-based compensation to incremental approach, ownership changes in investments, interim-period accountingemployees, directors and advisors and for enacted changes in tax law, and year-to date loss limitation in interim-period tax accounting. The guidance is effectivegoods or services received from non-employees are accounted for fiscal years beginning after December 15, 2020 with early adoption permitted, includingbased on the interim periods within those years.fair value of the equity instruments issued. The Company utilizes pricing models in determining the fair values of options, RSUs and warrants issued as stock-based compensation. These pricing models utilize the market price of the Company’s common stock and the exercise price of the option or warrant, as well as time value and volatility factors underlying the positions. Stock-based compensation expense is evaluatingrecognized over the impact this guidance will haverequisite service period of the award, which usually coincides with the vesting period of the grant. Product Development and Research The Company’s research and development costs are expensed as incurred. Shipping and Handling Costs Costs related to shipping and handling are comprised of outbound freight and the associated labor. These costs are recorded in costs of sales. For the years ended December 31, 2020 and 2019, the costs relating to shipping and handling totaled $1.6 million and $1.8 million, respectively. 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. Due to the net loss for the years ended December 31, 2020 and 2019, the effect of the Company’s Consolidated Financial Statementspotential dilutive common stock equivalents was anti-dilutive; as a result, the basic and related disclosures.diluted weighted average number of common shares outstanding and net loss per common share are the same. As of December 31, 2020 and 2019, the shares of common stock issuable in connection with stock options and warrants have been excluded from the diluted loss per share, as their effect would have been anti-dilutive.
For the years ended December 31, 2020 and 2019 (in thousands except shares and per share data) | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | | Basic loss per share computation: | | | | | | | Net loss attributable to common stockholders —basic and diluted | | $ | (122,022) | | | $ | (25,124) | | | | Weighted average common shares —basic and diluted | | 8,319,388 | | | 5,383,914 | | | | Basic and diluted loss per share | | $ | (14.67) | | | $ | (4.67) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adoption of Other Recent Accounting Pronouncements In June 2016,March 2020, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses2020-04, Reference Rate Reform (Topic 326)848): MeasurementFacilitation of Credit Lossesthe Effects of Reference Rate Reform on Financial InstrumentsReporting (“ASU No. 2016-13”2020-04”), which requires that. The update provides optional guidance for a limited period to ease the potential burden in accounting for (or recognizing the effects of) contract modifications on 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 originallyreporting caused by reference rate reform. ASU 2020-04 is effective for public businessall entities for fiscal years beginning afteras of March 12, 2020 through December 15, 2019.31, 2022. The Financial Accounting Standards Board subsequently postponedCompany adopted this guidance in the effective date for small reporting companies to January 2023, which for the Company means January 1, 2023. Basedsecond quarter of 2020. The adoption of this guidance had no impact on the current status of the evaluation, the Company believes the adoption of the guidance will not have a material impact on itsCompany's Consolidated Financial Statements andor the related disclosures. The Company expects to continue and finalize its evaluation and assessment as required by the guidance upon adoption.
3. Inventories
Inventories as of December 31, 2019 and 2018 consisted of (in thousands):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | Raw materials | | $ | 14,117 | | | $ | 10,456 | | Work in progress | | 133 | | | 116 | | Finished goods | | 10,989 | | | 8,391 | | Inventories reserve | | (2,208) | | | (2,667) | | Inventories, net | | $ | 23,031 | | | $ | 16,296 | |
4. Property, Plant and Equipment
Property, plant and equipment, at cost, as of December 31, 2019 and 2018, consisted of (in thousands):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | Land | | 401 | | | $ | 401 | | Building and improvements | | 58,959 | | | 53,813 | | Machinery and equipment | | 14,897 | | | 12,229 | | Computer hardware and software | | 4,771 | | | 4,182 | | Furniture and fixtures | | 705 | | | 694 | | Construction in progress | | 30,759 | | | 30,949 | | | | 110,492 | | | 102,268 | | Less accumulated depreciation and amortization | | (14,143) | | | (10,493) | | Property, plant and equipment, net | | $ | 96,349 | | | $ | 91,775 | |
The Company recorded depreciation expense of $3.7 million and $2.6 million in 2019 and 2018, respectively. The Company capitalized the interest expense of $4.4 million as construction in progress during the twelve months ended December 31, 2018 and received a certificate of completion of its building in the fourth quarter of 2018. There was no interest expense capitalized as construction in progress during the twelve months ended December 31, 2019. In addition, during the twelve months ended December 31, 2019 and 2018, there were $1.2 million and $1.8 million respectively, of payroll costs capitalized as construction in progress.
5. 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 oneffective 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)1) whether existing or expired leases are or contain leases, (2)2) the lease classification of existing or expired leases and (3)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 operatingIn 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 finance leasesJobs Act. This guidance is effective for our corporate, manufacturingall entities for fiscal years, and international facilities as well as certain equipment. Our leases have remaining termsinterim 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 less than 1 yearadoption or retrospectively to up to ten 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. Aseach period in which 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 termeffect 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:
| | | | | | | | | | | Year ended December 31, 2019 | Operating lease cost | | | $ | 635 | | Finance lease cost: | | | | | Amortization of right-of-use assets | | | $ | 14 | | Interest on lease liabilities | | | $ | 6 | | Total finance lease cost | | | $ | 20 | | | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities were $1.0 million during the year ended December 31, 2019. Cash paid for amounts includedchange in the measurement of operating lease liabilities during the year ended December 31, 2019 was $0.6 million. Cash paid for amounts includedU.S. federal corporate income tax rate in the measurementTax Cuts and Jobs Act is recognized. The Company's adoption of finance lease liabilities duringthis amendment, effective January 1, 2019, did not have a material impact on its consolidated financial statements and the three months and year ended December 31, 2019 was not material.
Supplemental balance sheet information related to leases were as follows:
| | | | | | | December 31, 2019 | Operating Leases | | Other assets | $ | 2,453 | | Other current liabilities | 434 | | Other long-term liabilities | 2,199 | | Total operating lease liabilities | 2,633 | | | | Finance Leases | | Property, plant, and equipment | 81 | | Accumulated depreciation | (12) | | Property, plant, and equipment, net | 69 | | | | Other current liabilities | 12 | | Other long-term liabilities | 57 | | Total finance lease liabilities | $ | 69 | |
The weighted average remaining lease terms for operating and financing leases are 6.3 years and 4.7 years, respectively. The weighted average discount rates for operating and finance leases are 8.2% and 8.0%, respectively.
As of December 31, 2019 maturities of lease liabilities were as follows:
| | | | | | | | | | Operating | Financing | Year Ending December 31, | Leases | Leases | 2020 | $ | 635 | | $ | 18 | | 2021 | 610 | | 18 | | 2022 | 550 | | 18 | | 2023 | 549 | | 18 | | 2024 | 236 | | 12 | | Thereafter | 843 | | — | | Total lease payments | 3,423 | | 84 | | Less imputed interest | 790 | | 15 | | Total | $ | 2,633 | | $ | 69 | |
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 non-cancelable 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 | |
6. Debt
Convertible Notes
2019 Notes, 2023 Notes and 2023 Series B Notes
On December 16, 2014, the Company issued $125.0 million aggregate principal amount of 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 the 2019 Notes. The 2019 Notes bore 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 matured on December 15, 2019, unless earlier repurchased, redeemed or converted. The 2019 Notes were 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 possible 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 the 2023 Notes. The 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 $4.45 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 debt issuance costs of $1.6 million upon issuance of the 2023 Notes.disclosures.
In accordance with accountingNovember 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 convertible debt withinas revenue under Topic 606 when the cash conversion guidancecollaborative arrangement participant is a customer. The Company early adopted this amendment in the fourth quarter of ASC 470-20, the Company allocated the principal amount2019. The adoption 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 thatthis amendment did not have a material impact on the conversion feature. The carrying amount ofCompany's consolidated financial statements and 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. The Company allocated the total amount of debt issuance costs incurred to the liability and equity components using the same proportions as the proceeds from the 2023 Notes. The debt issuance 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 11.9%.related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): “Simplifying the Test for Goodwill Impairment”. The exchange of $75.1 million ofupdate simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the 2019 Notes for the 2023 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.goodwill impairment test. In accordance with the aforementioned guidance,amendment, entities should perform the Company allocated a portion ofannual goodwill impairment test by comparing the $75.1 million to the extinguishment of the liability component equal to the fair value of that component immediately before extinguishment and recognized a $2.5 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 amount of the liability component (which is already net of any unamortized debt issuance costs). 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 a portion of 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 already 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.
In the beginning of 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). The reduction of Additional Paid in Capital in connection with this extinguishment was immaterial. The Company settled the remaining 2019 Notes of $13.0 million in principal upon its maturity in December 2019.
2023 Series B Notes
On October 31, 2019, the Company closed its offering of the 2023 Series B Notes in the aggregate principal amount of $34.4 million. The 2023 Series B 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 2023 Series B Notes and any shares of common stock issuable upon conversion of the 2023 Series B 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 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 2023 Series B Notes or any Conversion Shares.
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 2023 Notes for $5.1 million of the 2023 Series B Notes. The gross cash proceeds of approximately $29.3 million from the financing were used to extinguish the Company’s existing 2019 Notes in December 2019 and intended to pay amounts owing with respect to other indebtedness and to fund general corporate and working capital requirements. The 2023 Series B 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 financing were $26.9 million after deducting a total of $2.3 million of the initial purchasers’ discounts and professional fees associated with the transaction.
Under ASC 470-60, Troubled Debt Restructurings by Debtors, the exchange of the $9.0 million of the 2023 Notes for the $5.1 million of the 2023 Series B Notes represents a troubled debt restructuring ("TDR"). The TDR did not result in a gain recognition. As a result, a new effective interest rate was established based on the $7.2 million carrying value of their reporting units to their fair value. An entity should record an impairment charge for the original debt, net ofamount by which its carrying amount exceeds its reporting unit’s fair value. The Company early adopted the $2.0 million fair value of the embedded derivative liability related to the new debt issuedamendment in the TDR and $0.2 million issuance costs, getting accreted to $6.8 million representing the total amountfourth quarter of the future undiscounted cash flows related to the $5.1 million2019. The adoption of the 2023 Series B Notes.
In accordance with ASC 815-15, Derivatives and hedging, Embedded Derivatives, the embedded conversion option should be bifurcated and separately accounted for as a derivative instrument, because the Companythis amendment did not have enough authorized shares available to share-settle the conversion option. Such derivative instruments should be initially and subsequently measured at fair value, with changes in fair value recognized in earnings (see Note 7). The derivative liability recorded at the issuance date was $13.5 million, including the $2.0 million above accounted for in the TDR, which was subsequently remeasured to $6.8 million as of December 31, 2019, with $6.8 million recognized as a gain on change in fair value of derivative in the Company's statement of operations. Further, the $0.9 million of allocated issuance costs associated with the bifurcated conversion features embedded in the notes was recognized as a loss on debt restructuring in the Company’s statement of operations for the year ended December 31, 2019. In accordance with ASC 470-20, the initial carrying amount of the liability component of the 2023 Series B Notes, excluding the $5.1 million portion above is accounted for as a TDR, upon issuance is the residual amount between total proceeds from the transaction and the derivative liability net of allocated issuance costs. The $1.4 million debt issuance costs attributable to the liability component were recorded as a direct deduction from the liability component of the 2023 Series B Notes and are being amortized to interest expense using the effective interest method through the maturity date. The discount from the par amount of the 2023 Series B Notes will be accreted to par utilizing the effective-interest rate method over the term of the Notes from the issuance date through May 2023. The effective interest rate of the 2023 Notes, inclusive of the debt discount and issuance costs is 27.4%.
Prior Term Loan
On June 1, 2018, the Company entered into a credit agreement for $25.0 million in original principal amount of term loans secured by all Company assets (the “Prior Term Loan”). The Prior Term Loan incurred debt issuance costs of $0.5 million and a debt discount of $0.4 million. The debt discount is due to lender fees paid on the initial drawdown of $15.0 million. The debt issuance costs and debt discount were amortized to interest expense using the effective interest method through the maturity date. In December 2018, the Company used $25.6 million of proceeds from the Senior Credit Facilities (see below) to repay the Prior Term Loan which was comprised of $25.0 million of principal, $0.5 million of transaction costs and $0.1 million of interest. The repayment of the Prior Term Loan is considered a debt extinguishment under ASC 470-50. In 2018, the Company recorded $1.3 million of extinguishment loss related to the repayment of the Prior Term Loan in the Consolidated Statement of Operations.
Senior Credit Facilities
On December 13, 2018 we entered into the Senior Credit Facilities, consisting of the Revolver and Term Loans. The Senior Credit Facilities also included a $15.0 million delayed draw term loan b commitment, which remained undrawn and expired on October 31, 2019. As of December 31, 2019, $25.0 million was drawn under the Revolver and $88.5 million of Term Loans were outstanding. As of December 31, 2019, the Revolver was fully drawn. 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 the Second Lien Agent on July 18, 2019. The extended Delayed Draw Term Loan A was subsequently drawn down by the Company in December 2019. Drawn amounts under the Delayed Draw Term Loans mature at the same time as the Initial Term Loan. The Term Loans mature on the earliest to occur of the June 23, 2024 and the date of that is 181 days prior to the maturity date of each of (x) the 2023 Notes and (y) the 2023 Series B Notes. The Revolver matures on the earliest to occur of the June 23, 2024 and the date of that is 91 days prior to the maturity date of each of (x) the 2023 Notes and (y) the 2023 Series B Notes. 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 liens securing the Term Loans are subordinate to the liens securing the Revolver. The Senior Credit Facilities had 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 which were superseded by the amendments noted below. The financial covenants consisted of a minimum revenue test, a minimum adjusted EBITDA test and a maximum total net leverage ratio.
The Revolver bears interest at a fluctuating rate of interest equal to one, two, three or six-month LIBOR plus a margin of 3.75% or a rate based on the prime rate plus a margin of 2.75%. The Term Loans bear interest at a fluctuating rate of interest equal to one, two, three or six-month LIBOR plus a margin of 8.75% or a rate based on the prime rate plus a margin of 7.75%. Interest on the Senior Credit Facilities is payable in cash quarterly in arrears (or more frequently in connection with customary LIBOR interest provisions), provided, that the Company may elect (and has covenanted to the lenders under its First Lien Credit Agreement to) pay interest on the Term Loans in kind until the earlier to occur of the date upon which Company has provided financial statements demonstrating twelve-months of revenue of at least $125.0 million and (ii) December 28, 2020.
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 or reduction 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 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 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 is due 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. The effective interest rates, inclusive of the debt discounts and issuance costs, for the various borrowing tranches of the Revolver were between 6.2% and 9.1%. The effective interest rates, inclusive of the debt discounts and issuance costs for the Initial Term Loan and Delayed Draw Term Loan A were between 9.1% and 12.2%.
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 terms of the First Lien Credit Agreement, the Company borrowed an advance in the aggregate principal amount of $2.5 million (the “Protective Advance”). The Protective Advance is a secured Obligations under the First Lien Credit Agreement, and bears interest at the rate applicable to the Revolver. The Protective Advance was subsequently repaid in November 2019 along with a repayment fee of $0.1 million. The Company drew down the remaining $10.0 million under its borrowing capacity of Delayed Draw Term Loan A before its expiry in December of 2019. The $15.0 million Delayed Draw Term Loan B expired upon the issuance of the 2023 Series B Notes, prior to the Company drawing down any monies.
The Term Loans are governed by the Second Lien Credit Agreement. The 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 Term Loans by $8.5 million for the twelve month periods ended December 31, 2019 respectively.
On April 6, 2020, the Company entered into amendments pertaining to the Senior Credit Facilities. The amendments collectively among other things, (i) increase the interest rates on April 6, 2020, (ii) reset certain prepayment premiums and modify the terms of certain mandatory prepayments and (iii) modify certain financial covenant levels inclusive of the disposition of prior covenants as of and for the period ended December 31, 2019. Additional information pertaining to the Senior Credit Facilities amendments is included in the Subsequent Event footnote.
At December 31, 2019 and December 31, 2018, the net carrying amount of the debt and the remaining unamortized debt discounts and debt issuance costs were as follows (in thousands):
| | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | (Current) | | (Current) | Face amount of the 2019 Notes (due December 2019) | $ | — | | | $ | 15,702 | | Less unamortized discounts and debt issuance costs | — | | | 1,291 | | Total net carrying value | $ | — | | | $ | 14,411 | | | | | | | December 31, 2019 | | December 31, 2018 | Face amount of the 2023 Notes (due May 2023) | $ | 66,090 | | | $ | 75,090 | | Face amount of the Revolver Credit Facility (due December 2022) | 25,000 | | | 15,000 | | Face amount of the 2023 Series B Notes (due May 2023) | 34,405 | | | — | | Face amount of the 2023 Loan (due February 2023) | 88,464 | | | 70,000 | | Total carrying value, non-current | $ | 213,959 | | | $ | 160,090 | | Less unamortized discounts and debt issuance costs | 27,589 | | | 20,519 | | Total net carrying value, non-current | $ | 186,370 | | | $ | 139,571 | |
Debt Maturities Schedule
Aggregate maturities of the Company’s debt are presented below (in thousands):
| | | | | | Year Ending December 31, | | 2022 | 25,000 | | 2023 | 188,959 | | Total | $ | 213,959 | |
7. Derivatives
The Company accounts for its derivative instruments in accordance with ASC 815-10, “Derivatives and Hedging”. ASC 815-10 establishes accounting and reporting standards requiring that derivative instruments, including derivative instruments embedded in other contracts, be recorded on the balance sheet as either an asset or liability measured at its fair value. ASC 815-10 also requires that changes in the fair value of derivative instruments be recognized currently in results of operations unless specific hedge accounting criteria are met.
The Company has not entered into hedging activities to date. The Company's derivative liability at December 31, 2019 was the embedded convertible option of its 2023 Series B Notes issued on October 31, 2019, which has been recorded as a liability at fair value and was revalued at each reporting date, with changes in the fair value of the instruments included in the consolidated statements of operations as non-operating income (expense). The Company does not have a derivative liability at December 31, 2018.
The terms and assumptions used in connection with the valuation of the convertible option of the 2023 Series B Notes are as follows:
| | | | | | | | | | Initial Measurement | Measurement | Measurement date | 10/31/2019 | 12/31/2019 | Issuance date | 10/31/2019 | 10/31/2019 | Maturity date | 5/1/2023 | 5/1/2023 | Term (years) | 3.5 | 3.33 | Principal | $ | 34,405 | | $ | 34,405 | | Coupon | 7.00% cash/ 8.0% PIK | 7.00% cash/ 8.0% PIK | Seniority | Senior unsecured | Senior unsecured | Conversion price | $ | 0.72 | | $ | 0.72 | | | | | Stock price | $ | 0.63 | | $ | 0.43 | | Risk free rate | 1.5 | % | 1.6 | % | | | | Volatility | 47.3 | % | 47.3 | % |
The following table presents the Company’s liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2019.
| | | | | | | | | | | | | | | | Quoted Prices in Active markets for Identical Assets and Liabilities | Significant Other Observable Inputs | Significant Unobservable Inputs | Balance as of December 31, 2019 | Descriptions | (Level 1) | (Level 2) | (Level 3) | | Derivative liability related to Series B Convertible Notes | — | | — | | $ | 6,776 | | $ | 6,776 | |
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the year ended December 31, 2019. Any unrealized gains or losses on the derivative liabilities are recorded as non-operating income or expense in the Company’s statement of operations.
| | | | | | | | | | | | | Initial Measurement | Subsequent Measurement | Balance as of | Descriptions | 10/31/2019 | (Gain) or loss recognized in earnings from Change in Fair Value | 12/31/2019 | Fair value of convertible feature of Series B Convertible Notes | $ | 13,545 | | $ | (6,769) | | $ | 6,776 | |
8. Revenues, Recognition and Allowances
Revenue Recognition
As of January 1, 2018, the Company adopted the ASC 606 guidance for revenue recognition for contracts, using the modified retrospective method. The implementation of this guidance had no material impact on the measurement or recognition of revenue from customer contracts of prior periods.
Upon adoption of this new guidance,Company's consolidated financial statements and the Company recognizes revenue using the following five steps:
•Identification of the contract, or contracts, with a customer;
•Identification of the performance obligations in the contract;
•Determination of the transaction price, including the identification and estimation of variable consideration;
•Allocation of the transaction price to the performance obligations in the contract; and
•Recognition of revenue when we satisfy a performance obligation.related disclosures.
The Company derives its revenues from 3 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 and returns which are established at the time of sale, and are included in Revenue, net in the Company's 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, which 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 orand the costs, the impact of change orders, liability claims, contract disputes and achievement of contractual performance standards.
Revenues by Transaction Type
The Company operates in 1 reportable segmentRevenue and therefore, the results of the Company's operations are reported on a consolidated basis, consistent with internal management reportingProvision for the chief decision maker. Net Sales (in thousands) for the three years ended December 31, 2019 and 2018 were as follows (prior-period amounts are not adjusted under the modified-retrospective method of adoption):
| | | | | | | | | | | | | | | Years ended December 31, | | | | | | 2019 | | 2018 | | | Company product sales | $ | 64,291 | | | $ | 59,591 | | | | Contract manufacturing sales | 1,362 | | | 6,047 | | | | Research and development services and other income | 243 | | | 227 | | | | Revenue, net | $ | 65,896 | | | $ | 65,865 | | | | | | | | | |
Disaggregated information for the Company product sales revenue has been recognized in the accompanying audited Consolidated Statements of Operations, and is presented below according to contract type (in thousands):
| | | | | | | | | | | | | | | Years ended December 31, | | | | | Company Product Sales | 2019 | | 2018 | | | Topical | $ | 46,150 | | | $ | 35,118 | | | | Injectables | 18,141 | | | 24,473 | | | | Total | $ | 64,291 | | | $ | 59,591 | | | | | | | | | |
For the twelve months ended December 31, 2019, Company did not incur, and therefore did not defer, any material incremental costs to obtain contracts.
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 ("SRA"), 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.
Accounts receivable are presented net of returns and allowances of $30.5 million and $18.1 million at December 31, 2019 and 2018, respectively. The allowance for doubtful accounts was $2.2 million and $2.6 million at December 31, 2019 and 2018, respectively. These allowances are 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 estimatealso estimates 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 thea 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 and rebates provided to customers. This account has been used for various one-time discounts given to customers. The Company reviews the percentage of products sold through these programs by reviewingutilizing chargeback data and usesapplies the appropriate program percentages to calculate the rebate accrual. Rebates are invoicedRebate invoices and/or payments may be received monthly, quarterly or quarterly
annually and reviewed against the accruals. Other items that could be included in accrued rebates would berepresent price protection fees, shelf stock adjustments (SSAs), or other various amounts that would serve as one-time discounts on specific products.
Net revenuerevenues and accounts receivable balances in the Company’s consolidated financial statements are presented net of sales and returns and allowances (SRA)SRA estimates. Certain SRA balances are included in accounts payable and accrued expenses.
Accounts receivable are presented net of SRA balances of $28.9 million and $30.5 million at December 31, 2020 and 2019, respectively. The Company's adjustmentsallowance for doubtful accounts was $2.4 million and $2.2 million at December 31, 2020 and 2019, respectively. These balances are primarily related to one specific customer in the deductionsamount of $1.7 million. Additionally, the Company markets and distributes 0 products under its own label in the U.S., where in accordance with an agreement entered into in December of 2011, the Company is required to gross productpay a royalty calculated based on net sales to one of its pharmaceutical partners. The royalty is calculated based on contracted terms of 40% of net sales for the two0 products, which is to be paid quarterly to its partner. Accounts payable and accrued expenses include $0.3 million and $0.4 million at December 31, 2020 and 2019, respectively, related to these royalties. Royalty expense of $0.7 million and $1.4 million was included in cost of goods sold for the years ended December 31, 2020 and 2019 respectively. Significant estimates are required to arrive at the respective net product sales for wholesaler chargebacks, Medicaid and 2018 are as follows (in thousands):Medicare rebates, allowances and other pricing and promotional programs. | | | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | | | | | 2019 | | 2018 | | | Gross product sales | | $ | 156,301 | | | $ | 158,278 | | | | | | | | | | | Reduction to gross product sales: | | | | | | | Chargebacks and billbacks | | 60,008 | | | 60,770 | | | | Wholesaler fees for service | | 9,000 | | | 5,503 | | | | Sales discounts and other allowances | | 23,002 | | | 32,414 | | | | Total reduction to gross product sales | | $ | 92,010 | | | $ | 98,687 | | | | | | | | | | | Total product sales, net | | $ | 64,291 | | | $ | 59,591 | | | |
Concentration of Risk Financial instruments, which subject the Company to concentration of credit risk, consist primarily of cash equivalents and trade receivables. The Company maintains its cash in accounts with quality financial institutions. Although the Company currently believes that the financial institutions with which the Company does business will be able to fulfill their commitments to us, there is no assurance that those institutions will be able to continue to do so.
9. Goodwill and Intangible Assets
Goodwill
The Company acquired the assets of Canadian pharmaceutical company Alveda Pharmaceuticals, Inc., in November 2015. As a resultMajor customers of the acquisition, goodwill of $0.4 million was recorded. Our annual impairment test is conducted annually on October 1. Goodwill is also tested for impairment whenever an event occurs or circumstances change that would more likelyCompany are defined as those constituting greater than not reduce the fair value of its reporting unit below its carrying amount. There have been no events or changes in circumstances that would have reduced the fair value10% of our reporting unit below its carrying valuetotal revenue. In 2020, we had sales to three customers which individually accounted for more than 10% of our total revenue. These customers had sales of $11.5 million, $5.2 million and therefore no impairment losses have been recognized pertaining$4.5 million respectively, which represented 47% of total revenues in the aggregate. Accounts receivable related to goodwill.
Changes in goodwill during the two years ended December 31, 2019these major customers comprised 48%, 19% and December 31, 2018 were as follows (in thousands):
| | | | | | | Goodwill | January 1, 2018 | $ | 471 | | | | | | Foreign currency translation | (1) | | December 31, 2018 | 470 | | | | | | Foreign currency translation | 21 | | December 31, 2019 | $ | 491 | |
Intangible Assets
The following sets forth the major categories8% respectively, and represented 75% of the Company’s intangible assets and the weighted-average remaining amortization periodall accounts receivable as of December 31, 2020. In 2019, we had sales to two customers which individually accounted for more than 10% of our total revenue. These customers had sales of $17.6 million and $9.6 million, respectively, and represented 41% of total revenues in the aggregate. Accounts receivable related to these major customers comprised of 25%, and 22%, respectively, and represented 31% of all accounts receivable as of December 31, 2018 for those assets that are not already fully amortized (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | | | | | | | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Amortization Period | Trademarks and Technology | | $ | 39,943 | | | $ | (10,885) | | | $ | 29,058 | | | 10.8 | Product acquisition costs | | 13,103 | | | — | | | 13,103 | | | N/A - See description below | In-process research and development (“IPR&D”) | | 327 | | | — | | | 327 | | | N/A - See description below | Customer relationships | | 3,658 | | | (1,501) | | | 2,157 | | | 5.9 | Total | | $ | 57,031 | | | $ | (12,386) | | | $ | 44,645 | | | |
2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | | | | | | | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Amortization Period | 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 | | | |
Diflorasone Diacetate Ointment USP 0.05% accounted for 15% of the Company's total revenues in 2019. There was no product which individually accounted for more than 10% of the total revenues in 2020.
Changes in intangibles duringFor the year ended December 31, 2020, domestic net revenues were $34.5 million and foreign net revenues were $10.8 million. As of December 31, 2020, domestic assets were $139.9 million and foreign assets were $41.2 million. For the year ended December 31, 2019, domestic net revenues were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Product Acquisition Costs | | Trademarks and Technology | | IPR&D | | Customer Relationships | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2018 | | $ | 13,308 | | | $ | 31,930 | | | $ | 719 | | | $ | 2,418 | | Amortization | | — | | | (2,646) | | | — | | | (362) | | | | | | | | | | | Intangible assets placed in service | | — | | | 301 | | | (301) | | | — | | | | | | | | | | | Foreign currency translation | | (205) | | | (527) | | | (91) | | | 101 | | Balance at December 31, 2019 | | $ | 13,103 | | | $ | 29,058 | | | $ | 327 | | | $ | 2,157 | |
The Company recorded amortization expense of $3.0$48.4 million and $3.1 million in 2019 and 2018, respectively. The Company recorded an impairment loss of $0.7 million and $1.2 million related with product acquisition costs and IPR&D, respectively, in 2018. Thereforeign net revenues were no impairment losses pertaining to intangibles for the year ending December 31, 2019.
Assuming no additions, disposals or adjustments are made to the carrying values and/or useful lives of the intangible assets, annual amortization expense on trademarks and technology and customer relationships for each of the following years is estimated to be as follows (in thousands):
| | | | | | | | | Year ending December 31, | | Amortization Expense * | 2020 | | $ | 3,008 | | 2021 | | 3,008 | | 2022 | | 3,008 | | 2023 | | 3,008 | | 2024 | | 3,008 | | Thereafter | | 16,175 | | Total | | $ | 31,215 | |
*IPR&D and Product Acquisition Costs are not included in the table.
The useful lives of the Company’s intangible assets are as follows:
| | | | | | | | | Intangibles Category | | Amortizable Life | Product Acquisition Costs | | 10 years | Trademarks & Technology | | 15 years | Customer Relationships | | 10 years |
10. Stock-Based Compensation
Stock Options
The 1999 Director Stock Option Plan, as amended (the “Director Plan”), provides for the grant of stock options to non-employee directors of the Company at an exercise price equal to the fair market value per share on the date of the grant. As of May 25, 2016, this plan is no longer active for grants. There were 485,000 and 500,000 stock options outstanding as of December 31, 2019 and 2018, respectively.
On June 26, 2009, the Board of Directors adopted, and the Company’s stockholders subsequently approved by written consent, the IGI Laboratories, Inc. 2009 Equity Incentive Plan (the “2009 Plan”). The 2009 Plan became effective on July 29, 2009 and was no longer active for grants subsequent to May 25, 2016. The 2009 Plan allowed the Company to grant options and restricted stock, as well as the Board of Directors to authorize a broad range of other equity-based awards, including stock appreciation rights, restricted stock units ("RSUs") and performance awards to consultants, service providers, employees and board members. On April 12, 2010, the Board of Directors adopted, and the Company’s stockholders subsequently approved, an amendment and restatement of the 2009 Plan to increase the number of shares of Common Stock available for grant under such plan by adding 2,000,000 shares of Common Stock. The 2009 Plan, as amended on May 29, 2010, authorizes up to 5,000,000 shares of the Company’s common stock for issuance pursuant to the terms of the 2009 Plan. The maximum number of shares that may be subject to awards made to any individual in any single calendar year under the 2009 Plan is 1,000,000 shares. There were 1,847,608 stock options outstanding and 1,868,302 shares of stock outstanding as of December 31, 2019. There were no RSUs outstanding at December 31, 2019. There were 14,377 RSUs, 1,853,925 shares of stock outstanding and 2,458,106 stock options outstanding as of December 31, 2018.$17.5 million. As of December 31, 2019, 1,369,038 options availabledomestic assets were transferred to the superseded plan.
On May 25, 2016, the Board of Directors approved the Company's 2016 Equity Incentive Plan (the "2016 Plan"). On May 21, 2018, the Board of Directors adopted,$154.3 million 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 currently forfeited, expired or canceled grants without delivery of shares of common stock to the recipient which would be returned to the plan for reissuance 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 either the Director Plan or the 2009 Plan, any available shares from either are now incorporated into the 2016 Plan. As of December 31, 2019, thereforeign assets were 62,680 RSUs outstanding, 136,496 shares of common stock outstanding and 2,835,131 stock options under the 2016 Plan. As of December 31, 2018, there were 161,214 RSUs outstanding, 74,667 shares of common stock outstanding and 1,394,285 stock options outstanding under the 2016 Plan. As of December 31, 2019 and December 31, 2018, there were 5,167,739 and 4,352,391 stock options
outstanding respectively in the Director Plan, 2009 Plan, and the 2016 Plan. As of December 31, 2019, there were 2,334,731 options available to grant under the plan.$52.6 million.
In the interest of maintaining consistency with the Company's 2016 Equity Incentive Plan, on March 13, 2017,While the Company entered into (i) an amendmentpurchases raw materials to manufacture certain products, it also utilizes CMO's to purchase finished products. The Company currently purchases from numerous sources which therefore reduces 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 then outstanding under the 2009 Plan. The amendments provide for the automatic vesting upon a changerisk 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 December 31, 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 utilizing the Black-Scholes option-pricing formula and the assumptions noteddelays or difficulties in the following table. Expected volatilities and risk-free interest rates are based upon the expected life of the grant.
| | | | | | | | | | | | | | | | Assumptions | | 2019 | | 2018 | | Expected dividends | | 0 | % | | 0 | % | | Risk free rate | | 1.38 - 2.47% | | | 2.44 | % | | Expected volatility | | 64.33 - 76.81% | | 52.7 - 72.5% | | Expected term (in years) | | 3.2 – 3.3 years | | 3.2 – 3.3 years | |
Volatility was estimated based on 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 in which they occur. The assumptions utilized in the Black-Scholes option valuation model are highly subjective and can affect the resulting valuation.obtaining materials and/or products.
Stock option transactions in each of the past two years under the aforementioned plans in total were:
| | | | | | | | | | | | | | | | | | | | | | | Shares | | Exercise Price Per Share | | Weighted Average Exercise Price | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | January 1, 2018 shares issuable under options | | 4,299,810 | | | $0.79 - $10.67 | | $ | 5.09 | | Granted | | 839,785 | | | 1.73-4.25 | | | 3.34 | | Exercised | | (239,000) | | | 1.02-1.83 | | 1.05 | | Expired | | — | | | — | | | — | | Forfeited | | (548,204) | | | 2.02-10.67 | | 8.04 | | December 31, 2018 shares issuable under options | | 4,352,391 | | | $0.79-$10.67 | | $ | 4.61 | | Granted | | 2,468,129 | | | $0.55-$1.80 | | 0.61 | | Exercised | | — | | | — | | | — | | Expired | | (761,780) | | | $1.02-$10.67 | | | 2.42 | | Forfeited | | (891,001) | | | $0.66-$8.67 | | 1.04 | | December 31, 2019 shares issuable under options | | 5,167,739 | | | $0.55-$10.67 | | $ | 3.34 | |
The following table summarizes information concerning outstanding and exercisable options as of December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options Outstanding | | | | | | Options Exercisable | | | Range of Exercise Price | | Number of Options | | Weighted Average Remaining Life (Years) | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price | $0.00 - $0.78 | | 195,155 | | | 9.58 | | $ | 0.65 | | | — | | | $ | — | | $0.79 - $1.50 | | 1,781,369 | | | 4.52 | | 1.02 | | | 1,265,000 | | | 1.03 | | $1.51 - $5.50 | | 1,884,517 | | | 8.25 | | 2.27 | | | 482,288 | | | 3.30 | | $5.51 - $10.67 | | 1,306,698 | | | 5.97 | | 8.44 | | | 1,250,518 | | | 7.73 | | Total | | 5,167,739 | | | 6.44 | | $ | 3.34 | | | 2,997,806 | | | $ | 4.49 | |
The following table summarizes information concerning outstanding and exercisable options as of December 31, 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options Outstanding | | | | | | Options Exercisable | | | Range of Exercise Price | | Number of Options | | Weighted Average Remaining Life (Years) | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price | $0.79 - $1.50 | | 1,510,000 | | | 3.12 | | $ | 1.06 | | | 1,510,000 | | | $ | 1.06 | | $1.51 - $5.50 | | 992,457 | | | 8.27 | | 3.23 | | | 199,826 | | | 2.76 | | $5.51 - $10.67 | | 1,849,934 | | | 6.99 | | 8.24 | | | 1,528,686 | | | 8.45 | | | | | | | | | | | | | Total | | 4,352,391 | | | 5.94 | | $ | 4.61 | | | 3,238,512 | | | $ | 4.65 | |
The Company has recorded $0.9 million, $1.5 million related to its stock option based compensation expenses in costaccounts for acquired businesses using the acquisition method of sales, product developmentaccounting, which requires with limited exceptions, that assets acquired and research expenses, and selling, general and administrative expenses on the accompanying Consolidated Statements of Operations for the years ended December 31, 2019 and 2018, respectively. The aggregate intrinsic value of options outstanding was $0.0 millionliabilities assumed be recognized at December 31, 2019 and $0.5 million at December 31, 2018. The aggregate intrinsic valuetheir estimated fair values as of the options exercisable was $0 million at December 31, 2019 and $0.5 million at December 31, 2018. The total intrinsic valueacquisition date. Transaction costs are expensed as incurred. Any excess of the options exercised during 2019 and 2018 was $0 million, $0.1 million, respectively.
A summary of non-vested options at December 31, 2019 and changes during the year ended December 31, 2019 is presented below:
| | | | | | | | | | | | | | | | | Options | | Weighted Average Grant Date Fair Value | Non-vested options at January 1, 2019 | | 1,113,878 | | | $ | 2.00 | | Granted | | 2,468,129 | | | 0.61 | | Vested | | (521,073) | | | 2.20 | | Forfeited | | (891,001) | | | 1.04 | | Non-vested options at December 31, 2019 | | 2,169,933 | | | $ | 0.77 | |
As of December 31, 2019, there was $1.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements under the Plan. The costs will be recognized through November 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 $0.2 million and $0.5 million, respectively, of compensation expense during the years ended December 31, 2019 and 2018 related to restricted stock awards and RSUs. Stock compensation
expense is recognizedconsideration transferred over the vesting period of the restricted stock and RSUs. At December 31, 2019, the Company had approximately $0.1 million of total unrecognized compensation cost related to non-vested restricted stock and RSUs, all of which will be recognized through March 2021.
There have been no restricted stock issuances in the years ended 2019 and 2018.
A summary of non-vested RSUs and changes during each of the past two years is as follows:
| | | | | | | | | | | | | | | | | Number of RSUs | | Weighted Average Issuance Price | Non-vested balance at January 1, 2018 | | 188,629 | | | $8.27 | | | | | | | Changes during the period: | | | | | Shares granted | | 122,949 | | | 3.36 | | Shares vested | | (109,940) | | | 8.95 | | Shares forfeited | | (26,047) | | | 5.76 | | Non-vested balance at December 31, 2018 | | 175,591 | | | $4.78 | | | | | | | Changes during the period: | | | | | Shares granted | | — | | | — | | Shares vested | | (76,206) | | | 5.39 | | Shares forfeited | | (36,705) | | | 4.74 | | Non-vested balance at December 31, 2019 | | 62,680 | | | $4.07 | | | | | | |
11. Accrued Expenses
Accrued expenses represent various obligations of the Company including certain operating expenses and taxes payable.
For the fiscal years ended December 31, 2019, and 2018, the largest components of accrued expenses were (in thousands):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | Professional fees | | $ | 1,881 | | | $ | 2,153 | | Payroll | | 1,789 | | | 1,908 | | Interest expense | | 1,539 | | | 1,042 | | Medicaid and Medicare | | 987 | | | 383 | | Rebates | | 774 | | | 714 | | Wholesaler Fees | | 747 | | | 203 | | Royalties | | 377 | | | 222 | | Clinical Studies | | 334 | | | 334 | | Inventory and supplies | | 250 | | | 1,809 | | Income Tax | | 20 | | | 45 | | Capital expenditures | | 23 | | | 275 | | Other | | 564 | | | 754 | | | | $ | 9,285 | | | $ | 9,842 | |
12. Income Taxes
The Company is subject to U.S. federal income tax and files a consolidated federal income tax return which includes all eligible U.S. subsidiary companies. The Company is also subject to tax in the states of Alabama, Illinois, Montana, New Jersey and
Tennessee. The Company conducts significant operations in certain foreign countries and is, accordingly, subject to tax in those foreign jurisdictions consisting of Canada (including the province of Ontario), Estonia, Luxembourg and Jersey.
Loss before income tax for the years ended December 31, 2019 and 2018 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | U.S. operations | | $ | (20,212) | | | $ | (32,183) | | Foreign operations | | (4,821) | | | (4,135) | | | | | | | Global Total | | $ | (25,033) | | | $ | (36,318) | |
The Company’s current tax expense (benefit) was $0.1 million and $(0.1) million for the years ended December 31, 2019 and 2018, respectively. The provision (credit) for income taxes attributable to continuing operations before income taxes for the years ended December 31, 2019 and 2018 is as follows (in thousands):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | Current tax expense (benefit): | | | | | Federal | | $ | — | | | $ | — | | State and local | | 23 | | | 30 | | Foreign | | 87 | | | (157) | | Total current tax expense (benefit) | | 110 | | | (127) | | Deferred tax expense: | | | | | Federal | | — | | | — | | State and local | | — | | | — | | Foreign | | (19) | | | 65 | | Total deferred tax (benefit) expense | | (19) | | | 65 | | | | | | | Total income tax expense (benefit) | | $ | 91 | | | $ | (62) | |
A comparison of income tax (benefit) expense at the U.S. statutory rate of 21% in 2019 and 2018 to the Company's effective rate is as follows (in thousands):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | Expected Statutory benefit | | $ | (5,257) | | | $ | (7,627) | | | | | | | | | | | | Other non-deductible expenses | | 133 | | | 256 | | Change in valuation allowance | | 4,674 | | | 6,572 | | Research credits | | (504) | | | — | | | | | | | Tax rate differential - foreign vs. U.S. | | 1,073 | | | 791 | | State income taxes, net of federal benefit | | 18 | | | 23 | | | | | | | Prior year true-up | | (45) | | | (93) | | Exchange gain | | (1) | | | 16 | | | | $ | 91 | | | $ | (62) | |
During the fourth quarter of 2018, the Company completed its full assessment and finalized the accounting for the impact of the United States Tax Cuts and Jobs Act (U.S. TCJA) and concluded that there was no additional impact.
Deferred tax balances included in the Consolidated Balance Sheets as of December 31, 2019 and 2018 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | Deferred Tax Assets: | | | | | Sales allowances and doubtful accounts | | $ | 2,991 | | | $ | 1,964 | | Inventory reserve | | 652 | | | 962 | | Deferred revenue | | — | | | 590 | | Accrued expenses | | 206 | | | 23 | | Property, plant and equipment | | 272 | | | 258 | | Tax operating loss carryforwards | | 10,851 | | | 9,951 | | Tax credit and other carryforwards | | 5,996 | | | 1,299 | | Stock compensation | | 566 | | | 538 | | Total deferred tax assets | | 21,534 | | | 15,585 | | Less valuation allowance | | (18,562) | | | (12,120) | | Net deferred tax assets | | 2,972 | | | 3,465 | | | | | | | Deferred Tax Liabilities: | | | | | Convertible debt conversion features | | (3,070) | | | (3,514) | | Foreign exchange | | (14) | | | (28) | | Intangible assets | | (93) | | | (138) | | Total deferred tax liabilities | | (3,177) | | | (3,680) | | Net deferred tax liability | | $ | (205) | | | $ | (215) | |
The Company evaluates the recoverability of its deferred tax assets based on its history of operating results, its expectations for the future, and the expiration datesassigned values of the net operating loss carry forwards. Based on the preponderance of the evidence, the Company has concludedassets acquired is recorded as goodwill. When net assets that itdo not constitute a business are acquired, no goodwill is more likely than not that it will be unable to realize the net deferred tax assets in the immediate future and has established a full valuation allowance for substantially all deferred tax assets. Accordingly, the Company has provided a valuation allowance of $18.6 million and $12.1 million for the years ended December 31, 2019 and 2018, respectively, on its deferred tax assets. The valuation allowance increased $6.5 million during 2019. This increase was due to $5.6 million related to changes in deferred taxes and $0.9 million related to the 2019 net operating loss.recognized.
Operating loss, tax credit and other carry forwards as of December 31, 2019 and 2018 were as follows (in thousands):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | Federal: | | | | | Net operating losses (see below) | | $ | 48,531 | | | $ | 45,081 | | Disallowed interest expense (no expiration) | | 17,783 | | | 5,018 | | Contributions (expiring through 2024) | | 658 | | | 524 | | Research tax credits (expiring through 2026) | | 1342 | | | 135 | | | | | | | State: | | | | | New Jersey (expiring in 2039) | | 4,942 | | | 2,976 | | Other states (expiring through 2039) | | 3,266 | | | 2,307 | | New Jersey research credits (expiring in 2026) | | 764 | | | — | | | | | | | Foreign | | | | | Net operating losses (no expiration) | | $ | — | | | $ | 257 | |
At December 31, 2019, the Company’s U.S. federal net operating loss carryforwards will expire as follows (in thousands):
| | | | | | | | | Year | | Net Operating Loss | 2020 - 2023 | | $ | 8,227 | | 2024 - 2029 | | 9,063 | | 2030 - 2032 | | 9,926 | | 2033 - 2036 | | 6,296 | | 2037 | | 8,116 | | No expiration but subject to limitation | | 6,903 | | Total | | $ | 48,531 | |
Contingent consideration, if any, is included as part of the acquisition cost and is recognized at fair value as of the acquisition date. Any liability resulting from contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved. These changes in fair value are recognized in earnings. Federal net operating losses arising duringAccounts Receivable and after 2018 are not subject to expiration; however, their usage is limited to 80% of taxable income during the year of use.
The Company’s ability to use net operating loss carry forwards is subject to substantial limitation in future periods under certain provisions of Section 382 of the Internal Revenue Code of 1986, as amended, which limit the utilization of net operating losses upon a more than 50% change in ownership of the Company’s stock that is held by 5% or greater stockholders. The Company examined the application of Section 382 with respect to an ownership change that took place during 2010, as well as the limitation on the application of net operating loss carry forwards. The Company believes that operating losses subsequent to the change date in 2010 (aggregating $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 loss carryforwards may be further limited in the future if additional ownership changes occur.Allowance for Doubtful Accounts
The Company extends credit to wholesaler and distributor customers and national retail chain customers, based upon credit evaluations, in the normal course of business, primarily with 60 to 90-day terms. The Company maintains customer-related accruals and allowances that consist primarily of chargebacks, rebates, sales returns, shelf stock allowances, administrative fees and other incentive programs. Some of these adjustments relate specifically to the generic prescription pharmaceutical business. Typically, the aggregate gross-to-net adjustments related to these customers can exceed 70% of the gross sales through this distribution channel. Certain of these accruals and allowances are recorded in the Consolidated Balance Sheet as current liabilities and others are recorded as a reduction to accounts receivable.
The Company extends credit to its contract services customers based upon credit evaluations in the normal course of business, primarily with 30-day terms. The Company does not require collateral from its customers. Bad debt provisions are provided for on the allowance method based on historical experience and management’s evaluation of outstanding accounts receivable. The Company reviews the allowance for doubtful accounts regularly, and past due balances are reviewed individually for collectability. The Company charges off uncollectible receivables against the allowance when the likelihood of collection is subjectremote.
Foreign Currency Translation The net assets of international subsidiaries where the local currencies have been determined to be the functional currencies are translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in the foreign currency translation account, which is included in accumulated other comprehensive income (loss) (AOCI) and reflected as a separate component of stockholders' equity (deficit). For those subsidiaries where the U.S. dollar has been determined to be the functional currency, non-monetary foreign currency assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with the U.S. dollar effects of rate changes included in Other Expense.
Foreign exchange gain of $5.0 million was recorded for the year ended December 31, 2020, primarily related to the foreign currency translation of our intercompany loans denominated in U.S. dollars to our foreign subsidiaries. These loans are to be repaid in November 2022. Depending on the changes in foreign currency exchange rates, the Company will continue to record a non-cash gain or loss on translation for the remainder of the term of these loans. Due to the nature of this transaction, there is no economic benefit to the Company to hedge these transactions. Accounting for Environmental Costs Accruals for environmental remediation are recorded when it is probable a liability has been incurred and costs are reasonably estimable. The estimated liabilities are recorded at undiscounted amounts. Environmental insurance recoveries are included in the Consolidated Statement of Operations in the year in which the issue is resolved through settlement or other appropriate legal process. Income Taxes The Company records income taxes in accordance with ASC 740-10, “Accounting for Income Taxes,” under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to operating loss and tax credit carry forwards and differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded based on a determination of the ultimate realizability of future deferred tax assets. The Company complies with the provisions of ASC 740-10-25 Income Taxes (ASC 740). ASC 740 prescribes a more likely-than-not threshold for the financial statement recognition of uncertain tax positions. ASC 740that clarifies the accounting for uncertainty in income taxes by prescribingrecognized in an entity’s financial statements in accordance with ASC 740-10, “Accounting for Income Taxes,” and prescribes a minimum recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax positionpositions taken or expected to be taken in a tax return. OnFor those benefits to be recognized, a quarterly basis, the Company undergoes a processtax position must be more-likely-than-not to evaluate whether income tax accruals are in accordance withbe sustained upon examination by taxing authorities. Additionally, ASC 740740-10 provides guidance on uncertain tax positions.derecognition,
Federal income tax returns for the years 2014 and 2015 have been examined by the U.S. Internal Revenue Service without any income tax expense consequences. For federal purposes (except for the years 2014 and 2015), 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 through 2018. The Company has not recorded any liability for uncertain tax positions at December 31, 2019 or December 31, 2018.
13. Commitments
The Company’s commitments and contingencies consisted of leases for warehouse, office space and equipment. See Note 6 Leases for future lease payments under non-cancellable leases.
The Company has certain licensing and development agreement in place under which the Company will pay certain licensing fees and milestones over the lives of certain projects. These commitments totaled approximately $2.4 million as of December 31, 2019, and will be paid over the next several years in accordance with agreed upon milestones.
14. Legal and U.S. Regulatory Proceedings
To date, 13 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 pharmaceuticals, including econazole nitrate. 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 pharmaceuticals from as early as July 1, 2009 until the time the defendants’ allegedly unlawful conduct ceased or will cease. The class plaintiffs seek treble damages for alleged overcharges during the alleged period of conspiracy, and certain of the class plaintiffs also seek injunctive relief against the defendants. The 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. On December 19, 2019 certain class plaintiffs filed a further complaint that included additional claims against the Company based on the Company’s sales of fluocinolone acetonide. A motion to dismiss this complaint has not yet been filed.
“Opt-out” antitrust lawsuits have additionally been filed against the Company by various plaintiffs, including Humana Inc.; The Kroger Co. et al.; United HealthCare Services, Inc.; Molina Healthcare, Inc.; MSP Recovery Claims, Series LLC; Health Care Service Corp.;classification, interest and Harris County, Texas. All but 1 of these complaints have been consolidated into the In re Generic Pharmaceuticals Pricing Antitrust Litigation matter by the Judicial Panel on Multidistrict Litigation. Eachpenalties, accounting in interim periods, disclosure and transition. There were 0 unrecognized tax benefits as of the opt-out complaints names update of adoption. The Company records interest and penalties relating to NaN defendants (includinguncertain tax positions as a component of income before income taxes.
Stock-Based Compensation ASC 718-10 defines the Company)fair-value-based method of accounting for stock-based employee compensation plans and involves allegations regarding the pricing of econazole along with up to 180 other drug products, most of which were not manufactured or soldtransactions used by the Company to account for its issuances of equity instruments to record compensation cost for stock-based employee compensation plans at fair value as well as to acquire goods or services from non-employees. Transactions in which the Company issues stock-based compensation to employees, directors and advisors and for goods or services received from non-employees are accounted for based on the fair value of the equity instruments issued. The Company utilizes pricing models in determining the fair values of options, RSUs and warrants issued as stock-based compensation. These pricing models utilize the market price of the Company’s common stock and the exercise price of the option or warrant, as well as time value and volatility factors underlying the positions. Stock-based compensation expense is recognized over the requisite service period of the award, which usually coincides with the vesting period of the grant. Product Development and Research The Company’s research and development costs are expensed as incurred. Shipping and Handling Costs Costs related to shipping and handling are comprised of outbound freight and the associated labor. These costs are recorded in costs of sales. For the years ended December 31, 2020 and 2019, the costs relating to shipping and handling totaled $1.6 million and $1.8 million, respectively. 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 at issue. The opt-out plaintiffs seek treble damages for alleged overchargesperiod. 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. Due to the net loss for the drug products identifiedyears ended December 31, 2020 and 2019, the effect of the Company’s potential dilutive common stock equivalents was anti-dilutive; as a result, the basic and diluted weighted average number of common shares outstanding and net loss per common share are the same. As of December 31, 2020 and 2019, the shares of common stock issuable in connection with stock options and warrants have been excluded from the complaint during the alleged period of conspiracy, and some 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 remaining opt-out complaints has not yetdiluted loss per share, as their effect would have been filed.anti-dilutive.
DueFor the years ended December 31, 2020 and 2019
(in thousands except shares and per share data) | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | | Basic loss per share computation: | | | | | | | Net loss attributable to common stockholders —basic and diluted | | $ | (122,022) | | | $ | (25,124) | | | | Weighted average common shares —basic and diluted | | 8,319,388 | | | 5,383,914 | | | | Basic and diluted loss per share | | $ | (14.67) | | | $ | (4.67) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adoption of Other Recent Accounting Pronouncements In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU No. 2020-04”). The update provides optional guidance for a limited period to ease the potential burden in accounting for (or recognizing the effects of) contract modifications on financial reporting caused by reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company adopted this guidance in the second quarter of 2020. The adoption of this guidance had no impact on the Company's Consolidated Financial Statements or the related disclosures.
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. 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. Per the requirements of the standard, the Company 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.
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 stageadoption permitted. The amendments in ASU 2018-02 should be applied either in the period of these cases,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 amendment, effective January 1, 2019, did not have a material impact on its consolidated financial statements and the related disclosures.
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. The Company early adopted this amendment in the fourth quarter of 2019. The adoption of this amendment did not have a material impact on the Company's consolidated financial statements and the related disclosures.
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. In accordance with the amendment, entities should perform the annual goodwill impairment test by comparing the carrying value of their reporting units to their fair value. An entity should record an impairment charge for the amount by which its carrying amount exceeds its reporting unit’s fair value. The Company early adopted the amendment in the fourth quarter of 2019. The adoption of this amendment did not have a material impact on the Company's consolidated financial statements and the related disclosures.
Recently Issued and Not Yet Adopted Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 simplifies the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. In addition, ASU 2020-06 amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. The Amendments also affects the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The amendments are effective for public entities excluding smaller reporting companies for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is evaluating the impact this guidance will have on its Condensed Consolidated Financial Statements and related disclosures upon adoption effective January 1, 2024.
In December 2019, the FASB issued ASU No. 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", which is intended to simplify the accounting for income taxes. ASU 2019-12 includes changes in various subtopics of accounting for income taxes including, but not limited to, accounting for “hybrid” tax regimes, tax basis step-up in goodwill
obtained in a transaction that is not a business combination, intraperiod tax allocation exception to an incremental approach, ownership changes in investments, interim-period accounting for enacted changes in tax law, and year-to-date loss limitation in interim-period tax accounting. The guidance is effective for fiscal years beginning after December 15, 2020 with early adoption permitted, including the interim periods within those years. The Company is evaluating the impact this guidance will have on the Company’s Consolidated Financial Statements and related disclosures.
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 initially effective for public business entities for fiscal years beginning after December 15, 2019. The Financial Accounting Standards Board subsequently postponed the effective date for small reporting companies to January 2023, which for the Company is unable to form a judgment at this time as to whether an unfavorable outcome is either probable or remote or to provide an estimatemeans January 1, 2023. Based on the current status of the amount or rangeevaluation, the Company believes the adoption of potential loss.the guidance will not have a material impact on its Consolidated Financial Statements and related disclosures. The Company believes these casesexpects to continue and finalize its evaluation and assessment as required by the guidance upon adoption.
3. Inventories Inventories are without meritvalued at the lower of cost or net realizable value and using the first-in-first-out method. Inventories as of December 31, 2020 and 2019 consisted of (in thousands): | | | | | | | | | | | | | | | | | 2020 | | 2019 | Raw materials | | $ | 13,487 | | | $ | 14,117 | | Work in progress | | 386 | | | 133 | | Finished goods | | 21,525 | | | 10,989 | | Inventories reserve | | (12,002) | | | (2,208) | | Inventories, net | | $ | 23,396 | | | $ | 23,031 | |
During 2020, there was a significant increase in Inventories reserve due to a combination of lower sales resulting from lower demand due to COVID-19 and quality issues related to the FDA Warning Letter.
4. Property, Plant and Equipment Property, plant and equipment, at cost, as of December 31, 2020 and 2019, consisted of (in thousands): | | | | | | | | | | | | | | | | | 2020 | | 2019 | Land | | $ | 257 | | | $ | 401 | | Building and improvements | | 11,660 | | | 58,959 | | Machinery and equipment | | 1,625 | | | 14,897 | | Computer hardware and software | | 300 | | | 4,771 | | Furniture and fixtures | | 74 | | | 705 | | Construction in progress | | 2,302 | | | 30,759 | | | | 16,218 | | | 110,492 | | Less accumulated depreciation and amortization | | (87) | | | (14,143) | | Property, plant and equipment, net | | $ | 16,131 | | | $ | 96,349 | |
The Company recorded depreciation expense of $3.8 million and $3.7 million in 2020 and 2019, respectively. The Company recorded an impairment charge of $79.8 million against its Property, Plant and Equipment at December 31, 2020 due to projected future undiscounted cash flows associated with the assets were determined to be unrecoverable.
The Company received the certificate of completion of its building in the fourth quarter of 2018. During the year ended December 31, 2020 and 2019, there were $0.6 million and $1.2 million respectively, of payroll costs capitalized as construction in progress.
5. 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.
The Company has operating and finance leases for its corporate, manufacturing and international facilities as well as certain equipment. The Company's leases have remaining terms of less than 1 year to up to ten years, including available options to extend some of its lease terms for up to 5 years. One of its 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.
In May 2020, the Company modified one of its office lease agreements and obtained a deferral of 2 months rental payments amid the pandemic. According to FASB Staff Q&A on Topic 842 and 841, because the amount of the total consideration paid under the modified lease agreement is substantially the same as the original agreement, except the deferral of the lease payments which only affect the timing of the payments, the Company accounted for the concession as if no changes to the lease contract were made and continues to recognize expenses during the deferral period.
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:
| | | | | | | | | | | | | | Year ended December 31, 2020 | Year ended December 31, 2019 | Operating lease cost | | | $ | 623 | | $ | 635 | | Finance lease cost: | | | | | Amortization of right-of-use assets | | | $ | 14 | | $ | 14 | | Interest on lease liabilities | | | $ | 5 | | $ | 6 | | Total finance lease cost | | | $ | 19 | | $ | 20 | | | | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities were 0 and $1.0 million during the year ended December 31, 2020 and December 31, 2019, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $0.6 million during the years ended December 31, 2020 and December 31, 2019, Cash paid
for amounts included in the measurement of finance lease liabilities during the years ended December 31, 2020 and December 31, 2019 was not material.
Supplemental balance sheet information related to leases were as follows:
| | | | | | | | | | December 31, 2020 | December 31, 2019 | Operating Leases | | | Other assets | $ | 2,001 | | $ | 2,453 | | Other current liabilities | 422 | | 434 | | Other long-term liabilities | 1,761 | | 2,199 | | Total operating lease liabilities | 2,183 | | 2,633 | | | | | Finance Leases | | | Property, plant, and equipment | 81 | | 81 | | Accumulated depreciation | (25) | | (12) | | Property, plant, and equipment, net | 56 | | 69 | | | | | Other current liabilities | 14 | | 12 | | Other long-term liabilities | 43 | | 57 | | Total finance lease liabilities | $ | 57 | | $ | 69 | |
The weighted average remaining lease terms for operating and financing leases are 6 years and 3.7 years and 6.3 years and 4.7 years for the year ended December 31, 2020 and December 31, 2019, respectively. The weighted average discount rates for operating and finance leases are 8.4% and 8.0%, and 8.2% and 8.0% for the year ended December 31, 2020 and December 31, 2019, respectively.
As of December 31, 2020 maturities of lease liabilities were as follows: | | | | | | | | | | Operating | Financing | Year Ending December 31, | Leases | Leases | 2021 | $ | 587 | | $ | 18 | | 2022 | 551 | | 18 | | 2023 | 550 | | 18 | | 2024 | 237 | | 12 | | 2025 | 209 | | 0 | | Thereafter | 640 | | 0 | | Total lease payments | 2,774 | | 66 | | Less imputed interest | 591 | | 9 | | Total | $ | 2,183 | | $ | 57 | |
6. Debt
Convertible Notes
2019 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 the 2019 Notes. The 2019 Notes bore 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 matured on December 15, 2019, unless earlier repurchased, redeemed or converted. The 2019 Notes were 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 possible conversion of the 2019 Notes.
On April 27, 2018, the Company entered into separate exchange agreements with certain holders of the 2019 Notes that effected the exchange, in aggregate, of $75.1 million of the 2019 Notes for $75.1 million of the Convertible 4.75% Senior Notes due 2023 (the Series A Notes”).
In December 2018 the Company used $52.8 million of proceeds from the Senior Credit Facilities (see below) to repurchase a portion of the 2019 Notes and also used $0.3 million of proceeds to pay for transaction costs. The repurchase of the 2019 Notes was considered a debt extinguishment under ASC 470-50. The 2019 Notes were accounted for under cash conversion guidance ASC 470-20, which required 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 already 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.
In the beginning of 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 was considered a debt extinguishment under ASC 470-50. The 2019 Notes were accounted for under cash conversion guidance ASC 470-20, which required 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 was already net of any unamortized debt issuance costs). The reduction of Additional Paid in Capital in connection with this extinguishment was immaterial. The Company settled the remaining 2019 Notes of $13.0 million in principal upon its maturity in December 2019.
Series A Notes
On April 27, 2018, the Company entered into separate exchange agreements with certain holders of the 2019 Notes that effected the exchange, in aggregate, of $75.1 million of the 2019 Notes for $75.1 million of the Convertible 4.75% Senior Notes due 2023 (the "Series A Notes"). The Series A 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 Series A Notes were convertible into shares of the Company’s common stock, cash or a combination thereof. The initial conversion rate was $44.50 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 are entitled to receive additional shares of common stock under a make-whole provision in some circumstances. The Company incurred debt issuance costs of $1.6 million upon issuance of the Series A Notes.
In accordance with accounting for convertible debt within the cash conversion guidance of ASC 470-20, the Company allocated the principal amount of the Series A 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 Series A Notes
as a whole. The equity component was recorded to additional paid-in capital and is not remeasured as long as it intendscontinues to vigorously defend against these claims.meet the conditions for equity classification. The excess of the principal amount of the Series A 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. The Company allocated the total amount of debt issuance costs incurred to the liability and equity components using the same proportions as the proceeds from the Series A Notes. The debt issuance costs attributable to the liability component were recorded as a direct deduction from the liability component of the Series A 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 Series A Notes in additional paid-in capital. The effective interest rate of the Series A Notes, inclusive of the debt discount and issuance costs, is 11.9%.
The exchange of $75.1 million of the 2019 Notes for the Series A Notes is considered a debt extinguishment under ASC 470-50. The 2019Notes are accounted for under cash conversion guidance ASC 470-20, which required 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 allocated a portion of the $75.1 million to the extinguishment of the liability component equal to the fair value of that component immediately before extinguishment and recognized a $2.5 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 amount of the liability component (which is already net of any unamortized debt issuance costs). 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.
Following the issuance of the Series D Notes described below, all outstanding debt with respect to the Series A Notes had been extinguished through exchange of Series C Notes and Series D Notes (see below).
Series B Notes
On October 20, 2017,31, 2019, the Company closed its offering of the 2023 Series B Convertible Notes in the aggregate principal amount of $34.4 million (the Series B Notes”). The Series B Notes were scheduled to mature in May 2023 and were convertible at the option of the holder at any time prior to their maturity. The initial conversion price was $7.20 per share, subject to adjustment under certain circumstances.
As part of the offering, the Company entered into agreements with certain holders of its existing Series A Notes to exchange $9.0 million of the Series A Notes for $5.1 million of the Series B Notes. The gross cash proceeds of approximately $29.3 million from the financing were used to extinguish the Company’s existing 2019 Notes in December 2019 and intended to pay amounts owing with respect to other indebtedness and to fund general corporate and working capital requirements. The net proceeds from the financing were $26.9 million after deducting a Demand for Arbitration was filedtotal of $2.3 million of the initial purchasers’ discounts and professional fees associated with the American Arbitration Associationtransaction. The Series B 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 Company has elected the paid-in-kind interest option and increased the principal balance of the Series B Notes by Stayma Consulting Services, Inc. (“Stayma”$2.0 million during the year ended December 31, 2020.
Under ASC 470-60, Troubled Debt Restructurings by Debtors, the exchange of the $9.0 million of the Series A Notes for the $5.1 million of the Series B Notes represents a troubled debt restructuring ("TDR") against. The TDR did not result in a gain recognition. As a result, a new effective interest rate was established based on the $7.2 million carrying value of the original debt, net of the $2.0 million fair value of the embedded derivative liability related to the new debt issued in the TDR and $0.2 million issuance costs, getting accreted to $6.8 million representing the total amount of the future undiscounted cash flows related to the $5.1 million of the Series B Notes.
In accordance with ASC 815-15, Derivatives and hedging, Embedded Derivatives, the embedded conversion option should be bifurcated and separately accounted for as a derivative instrument, because the Company regardingdid not have enough authorized shares available to share-settle the conversion option. Such derivative instruments was initially and subsequently measured at fair value, with changes in fair value recognized in earnings (Note 7). The derivative liability recorded at the issuance date was $13.5 million, including the $2.0 million above accounted for in the TDR, which was subsequently remeasured to $2.8 million as of March 31, 2020, with $4.0 million recognized as a gain on change in fair value of the derivative in the Company's Consolidated Statement of Operations mainly due to a share price decline during the first quarter of 2020. On May 28, 2020, the Company effectuated a one-for-ten reverse stock split on its outstanding shares of common stock (Note 2), which allows the Company to have sufficient authorized shares to share-settle the embedded convertible option. The derivative liability had a fair value of $6.3 million as of the reverse stock split date, with a $3.5 million mark-to-market loss recognized in the Consolidated
Statement of Operations in the second quarter of 2020. Also, on the reverse stock split date, the $6.3 million of the fair value of the derivative liability was reclassed to the stockholder's equity without further subsequent remeasurement required.
The $0.9 million of allocated issuance costs associated with the bifurcated conversion features embedded in the notes was recognized as a loss on debt restructuring in the Company’s development and manufactureconsolidated statement of operations for Stayma of 2 generic drug products, one a lotion and one a cream, containing 0.05%the year ended December 31, 2019. In accordance with ASC 470-20, the initial carrying amount of the active pharmaceutical ingredient flurandrenolide. liability component of the Series B Notes, excluding the $5.1 million portion above is accounted for as a TDR, upon issuance is the residual amount between total proceeds from the transaction and the derivative liability net of allocated issuance costs. The $1.4 million debt issuance costs attributable to the liability component were recorded as a direct deduction from the liability component of the Series B Notes and are being amortized to interest expense using the effective interest method through the maturity date. The discount from the par amount of the Series B Notes will be accreted to par utilizing the effective-interest rate method over the term of the Notes from the issuance date through May 2023. The effective interest rate of the Series BNotes, inclusive of the debt discount and issuance costs is 27.4%.
Following the issuance of the Series D Notes described below, all outstanding debt with respect to the Series B Notes had been extinguished through exchange of Series C Notes and Series D Notes (see below).
Series C Notes
On July 20, 2020, the Company completed the sale and issuance of $13.8 million aggregate principal amount of Series C Notes. After taking into account an original issue discount and other fees payable to the Purchasers, the Company received net cash proceeds of approximately $10.0 million, which the Company is using for general corporate purposes.
The Company developedalso issued approximately $32.3 million in aggregate principal amount of Series C Notes in exchange for approximately $35.9 million in aggregate principal amount, plus accrued but unpaid interest thereon, of the 2 productsCompany’s outstanding Series B Notes, giving effect to a 10.0% discount on the principal amount of the Series B Notes exchanged. In addition, the Company issued approximately $3.7 million in aggregate principal amount of Series C Notes in exchange for approximately $8.2 million in aggregate principal amount, plus accrued but unpaid interest thereon, of the Company’s outstanding Series A Notes, giving effect to a 55.0% discount on the principal amount of the Series A Notes exchanged.
Interest on the Series C Notes accrues at the rate of 9.5% per annum and Stayma purchased commercial quantitiesis payable in kind and capitalized with principal semiannually in arrears on March 1 and September 1 of each; however, Stayma allegeseach year, beginning on September 1, 2020. The Series C Notes will mature on March 30, 2023, unless earlier converted or repurchased and are subordinate to the indebtedness under the Senior Credit Facilities. The Company has elected the paid-in-kind interest option and increased the principal balance of the Series C Notes by $0.5 million in the year ended December 31, 2020. The Company agreed to use its commercially reasonable best efforts to obtain the approval of its stockholders that is required under applicable Nasdaq rules and regulations to permit holders of the Series C Notes to beneficially own shares of common stock without being subject to the Nasdaq Change of Control Cap. In the event that the Company breached agreements betweendid not obtain such stockholder approval at an annual or special meeting of its stockholders on or before October 31, 2020, holders of a majority in aggregate principal amount of outstanding Series C Notes could elect to increase the parties by developing aninterest rate payable on the Series C Notes to 18.0% per annum until such stockholder approval is obtained, which would continue to be paid in kind in the form of additional principal with respect to any applicable period in which the increased interest rate remains in effect. Pursuant to a notice dated November 2, 2020, the holders of a majority in principal amount of the outstanding Series C Notes elected to increase the interest rate payable on the Series C Notes from 9.5% to 18.0%. The Company convened and different generic drug product, an ointment, containing flurandrenolide,adjourned a special meeting of stockholders on October 22, 2020, and failingfurther adjourned such special meeting on November 11, 2020 and November 25, 2020, due to meet certain contractual requirements. Stayma seeks monetary damages.a lack of quorum. The arbitrator has issued an interim award finding thatspecial meeting of stockholders was held on December 16, 2020, pursuant to which the stockholders of the Company approved the holders of the Series C Notes beneficially owning shares of common stock without being subject to the Nasdaq Change of Control Cap. As a result of the approval, the interest rate payable on the Series C Notes was decreased to 9.5%.
The Series C Notes are convertible at an initial conversion price per share of common stock equal to $2.78. The Series C holders are entitled to convert principal and accrued, unpaid interest on the Series C Notes into, at the Company’s election, cash, shares of the Company’s common stock, or a combination thereof, subject to certain limitations and adjustments under certain circumstances. The initial conversion price represents a conversion premium of 20.0% to the average daily volume weighted average price of the Company's common stock for the 10 consecutive trading day period ended and including July 17, 2020. The Series C Notes are not redeemable by the Company, but the Company has the right to force conversion of the Series C Notes if the Company’s per-share stock price exceeds the conversion price of the Series C Notes by 100% for a period of time after January 1, 2022, by 75.0% or a period of time after July 1, 2022, and by 50.0% for a period of time after January 1, 2023.
In connection with the issuance of the Series C Notes, the Company and certain of the Company’s material U.S. subsidiaries (the “Guaranteeing U.S. Subsidiaries”) granted a third lien security interest in substantially all of their respective assets. Teligent Canada Inc., a subsidiary of the Company organized under the laws of the Province of British Columbia (“Teligent Canada”), also granted a third lien security interest in substantially all of its assets. The security interests granted by the Company, the Guaranteeing U.S. Subsidiaries and Teligent Canada are subordinate to the security interests granted to the agents under the Senior Credit Facilities.
The Series C Notes provide for customary events of default. In the case of certain events of default, either the trustee or noteholders holding no less than 25% of the aggregate principal amount outstanding under the Series C Notes may declare all of the outstanding principal amount of the Series C Notes and accrued and unpaid interest, if any, to be immediately due and payable. Upon certain events of bankruptcy, insolvency, or reorganization of the Company or certain of its subsidiaries, the outstanding principal amount of the Series C Notes and accrued and unpaid interest, if any, will become automatically immediately due and payable.
The exchange of $35.9 million in aggregate principal amount, plus accrued but unpaid interest of the Company's outstanding 7.0% Series B Notes and $8.2 million in aggregate principal amount, plus accrued but unpaid interest thereon, of the Company's outstanding Series A Notes was considered a debt extinguishment under ASC 470-50. The Series A Notes and Series B Notes were accounted for under cash conversion guidance in 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. In accordance with the aforementioned guidance, the Company allocated $19.3 million of Series A Notes and $0.5 million of Series B Notes to the extinguishment of the liability component equal to the fair value of that component immediately before extinguishment and recognized a $11.8 million extinguishment gain in the gain/(loss) on debt restructuring line on the Consolidated Statement of Operations. The extinguishment gain was measured as the difference between (i) the fair value of the liability component immediately before derecognition and (ii) the net carrying amount of the liability component (which is not liable to Stayma on 2already net of Stayma’s 3 claims against the Company. The third claim will proceed to a damages phase.any unamortized debt issuance costs). The Company has argued that Stayma did not suffer any damages related to this claimrecorded a $16.2 million reduction of Additional Paid in Capital in connection with the extinguishment of Series A and will vigorously pursue complete dismissal of the third claim.Series B Notes. In addition, the arbitrator will determine money damages owed by StaymaCompany paid $1.8 million in lender fees and $2.2 million in third party fees of which $1.2 million are included in the gain on debt restructuring line of the Consolidated Statement of Operations and $1.0 million attributable to the equity component is recorded in APIC.
In accordance with accounting for convertible debt within the cash conversion guidance of ASC 470-20, the Company allocated the principal amount of the Series C 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 initial proceeds ascribed to the Series C 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 Series C notes over the carrying amount of the liability component (inclusive of the put feature, see Note 7) was recorded as a debt discount of $14.6 million, and is being amortized to interest expense using the effective interest method through the maturity date.
Series D Notes
On September 22, 2020, the Company completed the issuance of approximately $27.5 million aggregate principal amount of Series D Notes in exchange for approximately $59.0 million in aggregate principal amount, plus accrued but unpaid interest, of Series A Notes, giving effect to a 53.4% discount on the principal amount of the Series A Notes exchanged. The Company also issued approximately $0.4 million aggregate principal amount of the Series D Notes in exchange for approximately $0.5 million in aggregate principal amount, plus accrued but unpaid interest, of the Company’s outstanding Series B Notes, giving effect to a 31.9% discount on the principal amount of the Series B Notes exchanged.
Following the issuance of the Series D Notes, all amounts owing with respect to the Series A Notes and Series B Notes had been paid and the related indentures and the Company’s obligations thereunder were satisfied and discharged.
Holders of the Series D Notes are entitled to convert principal and accrued, unpaid interest on the Series D Notes into, at the Company’s election, cash, shares of the Company’s common stock, or a combination thereof, subject to certain limitations, at an initial conversion price per share of common stock equal to $1.50, subject to adjustment under certain circumstances. Since the original issuance of the Series D Notes on September 22, 2020 and continuing through December 31, 2020, the holders thereof have converted $24.5 million principal amount of Series D Notes into a total of 16.4 million shares of common stock. The Series D Notes are not redeemable by the Company.
The indenture relating to Stayma’s failurethe Series D Notes provides for customary events of default. In the case of certain events of default, either the trustee or noteholders holding more than 25% of the aggregate principal amount outstanding under the Series D Notes may declare all of the outstanding principal amount of the Series D Notes and accrued and unpaid interest, if any, to pay several pastbe immediately due invoicesand payable. Upon certain events of approximately $1.7bankruptcy, insolvency, or reorganization of the Company or certain of its subsidiaries, the outstanding principal amount of the Series D Notes and accrued and unpaid interest, if any, will become automatically and immediately due and payable.
The exchange of the $59.0 million of the Series A Notes and $0.5 million of Series B Notes for $27.9 million of aggregate principal amount of Series D Notes represented a TDR. In accordance with ASC 470-60, as the exchange transaction involved only a modification of terms and did not involve a transfer of assets or grant of an equity interest, the Company accounted for the exchange transaction prospectively from the time of the restructuring and accordingly recorded the Series D Notes at the carrying amount of the Series A Notes and Series B Notes. Furthermore, as the maximum total undiscounted future cash payments equal or exceed the carrying amount of the Series D Notes, no gain was recognized related to the exchange transaction. The Company recorded the Series D Notes in the amount of $50.1 million which equals the sum of the Series A and Series B Notes carrying amounts as of the Series D Notes issuance date. The $0.6 million of Series D Notes issuance costs were expensed in the third quarter of 2020 and reported in the gain/(loss) on debt restructuring line in the Consolidated Statement of Operations.
Subsequent to issuance of the Series D Notes, the holders have started to convert the notes into common stock of the Company. As the conversion features under the Series D Notes are much more beneficial than the conversion terms of the Series A Notes and Series B Notes as discussed above, the Company deemed it appropriate to analogize to the induced conversion guidance associated with instruments subject to cash conversion guidance. In accordance with this guidance, upon each conversion of the Series D Notes, the Company will recognize an inducement loss equal to the excess of the fair value of the consideration transferred over the fair value of the consideration that would have been issuable under the original conversion terms. The Company will then determine the extinguishment gain/loss by allocating the fair value of consideration issuable under the original terms between (1) the extinguishment of the liability component and (2) the reacquisition of the original instrument’s equity component in accordance with ASC 470-20. The fair value of the liability component will be allocated to the liability component and compared with the net carrying amount of the liability component in the determination of a gain or loss upon debt extinguishment. Any remaining amount of the fair value of consideration issuable under the original terms will be allocated to the equity component. During the year ended December 31, 2020, $24.5 million, of Series D Notes were converted into the Company’s common stock at 666.6667 conversion rate per $1,000 principal amount of Series D Notes. As a result, the Company recognized an inducement loss of $9.2 million and an extinguishment gain of $42.7 million. In connection with the accounting for these conversion transactions, no amount was allocated to the equity component as the fair value of the liability component exceeded the fair value of the consideration issuable under the original terms.
Senior Credit Facilities
On December 13, 2018, Valdepharm SA filed a lawsuit alleging that the Company breached contracts regarding 2 drug products thatentered into: (i) a First Lien Revolving Credit Agreement, by and among the Company, had soughtas the borrower, certain of our subsidiaries, as guarantors, the lenders from time to have Valdepharm manufacture. On February 12,time party thereto, and ACF Finco I LP, as administrative agent (the “First Lien Agent”) (as amended on October 31, 2019, the Company answered“First Lien Credit Agreement”) and (ii) a Second Lien Credit Agreement, by and among us, as the complaintborrower, certain of our subsidiaries, as guarantors, the lenders from time to time party thereto, and counterclaimed, alleging that Valdepharm breachedAres Capital Corporation, as administrative agent (the “Second Lien Agent”) (as amended on February 8, 2019, June 29, 2019 and October 31, 2019, the contracts by failing to perform its work in compliance with FDA regulations“Second Lien Credit Agreement” and, current Good Manufacturing Practices. Each party seeks damages associatedtogether with the alleged breachFirst Credit Agreement, the “Senior Credit Facilities”). The Senior Credit Facilities consist of a first lien asset based revolving credit facility of up to $25.0 million ("Revolver") and an aggregate of $80.0 million in original principal amount of second lien term loans consisting of a $50.0 million initial term loan and a $30.0 million delayed draw term loan A (collectively, the “Term Loans”). The Senior Credit Facilities also included a $15.0 million delayed draw term loan B commitment, which remained undrawn and expired on October 31, 2019. As of December 31, 2020, $25.0 million was drawn under the Revolver and $102.9 million of Term Loans were outstanding. The Revolver was fully drawn in 2019. The Company extended commitments related claims. Dueto 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 the Second Lien Agent on July 18, 2019. The extended Delayed Draw Term Loan A was subsequently drawn down by the Company in December 2019. Drawn amounts under the Delayed Draw Term Loans mature at the same time as the Initial Term Loan. The Term Loans mature on the earliest to occur of June 23, 2024 and the date of that is 181 days prior to the early stagematurity date of each of (x) the Series A Notes and (y) the Series B Notes. The Revolver matures on the earliest to occur of June 23, 2024 and the date of that is 91 days prior to the maturity date of each of (x) the Series A Notes and (y) the Series B Notes. 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 case the Company is unable to form a judgment at this time as to whether an unfavorable outcome is either probable or remote or to provide an estimateCompany’s assets. All of the amount or range of potential loss.Company’s debt is subordinated to the Senior Credit Facilities. The Company believesliens securing the claims against TeligentTerm Loans are without merit, and it intendssubordinate to vigorously defend against them.the liens securing the Revolver. The Senior Credit Facilities had customary
On April 15, 2019 a federal class action was filed the Oklahoma Police Pension Fund and Retirement System against the Company and certain individual defendants in the U.S. District Court, Southern District of New York. The lawsuit was brought on behalf of persons or entities who purchased or otherwise acquired publicly-traded Teligent, Inc. securities from March 7, 2017 through November 6, 2017. The complaint alleges that defendants made false or misleading statements regarding the Company’s business, operational, and compliance policies in violation of U.S. securities laws. The plaintiff seeks to recover compensable damages. Due to the early stage of these cases, the Company is unable to form a judgment at this time as to whether an unfavorable outcome is either probable or remote or to provide an estimate of the amount or range of potential loss.The Company believes these cases are without merit and it intends to vigorously defend against these claims.
15. Employee Benefits
The Company has a 401(k) contribution plan, pursuant to which employees may elect to contribute to the plan, in whole percentages, up to 100% of compensation. Employees’ contributions are subject to a maximum contribution of $19.0 thousand for 2019 and $18.5 thousand for 2018, plus a catch-up contribution of up to for $6.0 thousand for 2019 and 2018, if a participant qualifies. The Company matches 100% of the first 3% of compensation contributed by participants and 50% of the next 2% of compensation contributed by participants. The Company contribution is in the form of cash, which is vested immediately. The Company has recorded charges to expense related to this plan of $368.7 thousand and $358.2 thousand in 2019 and 2018, respectively.
16. Quarterly Results (Unaudited)
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 which were superseded by the amendments noted below. The following isfinancial covenants consisted of a summary of certain quarterly financial information for the fiscal years 2019minimum revenue test, a minimum adjusted EBITDA test and 2018: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total | | | (in thousands, except per share data) | | | | | | | | | Year Ended December 31, 2019 | | | | | | | | | | | Total revenues, net | | $ | 13,122 | | | $ | 18,341 | | | $ | 18,466 | | | $ | 15,967 | | | $ | 65,896 | | Gross profit | | 5,762 | | | 8,541 | | | 7,280 | | | 1,940 | | | 23,523 | | Operating loss | | (2,740) | | | 686 | | | 209 | | | (6,175) | | | (8,020) | | Net loss | | (8,724) | | | (3,989) | | | (7,113) | | | (5,298) | | | (25,124) | | Net loss attributable to common stockholders | | (8,724) | | | (3,989) | | | (7,113) | | | (5,298) | | | (25,124) | | Basic loss per share | | $ | (0.16) | | | $ | (0.08) | | | $ | (0.13) | | | $ | (0.10) | | | $ | (0.47) | | Diluted loss per share | | $ | (0.16) | | | $ | (0.08) | | | $ | (0.13) | | | $ | (0.10) | | | $ | (0.47) | | | | | | | | | | | | | Year Ended December 31, 2018 | | | | | | | | | | | Total revenues, net | | $ | 14,545 | | | $ | 16,249 | | | $ | 18,294 | | | $ | 16,777 | | | $ | 65,865 | | Gross profit | | 5,220 | | | 4,784 | | | 6,719 | | | 5,662 | | | 22,385 | | Operating loss | | (3,531) | | | (4,910) | | | (1,213) | | | (5,445) | | | (15,099) | | Net loss | | (4,802) | | | (13,119) | | | (3,945) | | | (14,390) | | | (36,256) | | Net loss attributable to common stockholders | | (4,802) | | | (13,119) | | | (3,945) | | | (14,390) | | | (36,256) | | Basic loss per share | | $ | (0.09) | | | $ | (0.25) | | | $ | (0.07) | | | $ | (0.27) | | | $ | (0.68) | | Diluted loss per share | | $ | (0.09) | | | $ | (0.25) | | | $ | (0.07) | | | $ | (0.27) | | | $ | (0.68) | |
a maximum total net leverage ratio.
17. Subsequent EventsThe Revolver bore interest at a fluctuating rate of interest equal to one, two, three or six-month LIBOR plus a margin of 3.75% or a rate based on the prime rate plus a margin of 2.75%. The Term Loans bore interest at a fluctuating rate of interest equal to one, two, three or six-month LIBOR plus a margin of 8.75% or a rate based on the prime rate plus a margin of 7.75%. Interest on the Senior Credit Facilities was payable in cash quarterly in arrears (or more frequently in connection with customary LIBOR interest provisions), provided, that the Company may elect (and has covenanted to the lenders under its First Lien Credit Agreement to) pay interest on the Term Loans in kind until the earlier to occur of the date upon which Company has provided financial statements demonstrating twelve-months of revenue of at least $125.0 million and (ii) December 28, 2020.
COVID-19 PandemicAmounts 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 or reduction 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 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 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 March 2020,connection with the World Health Organization declaredRevolver, the outbreakCompany incurred a debt discount of novel coronavirus disease (“COVID-19”)$0.5 million and debt issuance costs of $0.3 million. The debt discount is due 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 a pandemic,an asset on the Consolidated Balance Sheet and we expect our operations in all locationsare amortized to be affected asinterest expense using the virus continues to proliferate. We have adjusted certain aspects of our operations to protect our employees while avoiding business interruption. Only employees essentialstraight-line method through the estimated Revolver maturity date. The annual fees related to the production and quality control aspects of our products remain on-site at our manufacturing and production facility in Buena, New Jersey. The outbreak and any preventative or protective actions that we, our customers, suppliers or other third parties with which we have business relationships, or governments may take in respect of the COVID-19 outbreak could disrupt our businessRevolver and the businessInitial 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 our customers. Global health concerns, such as COVID-19, could also result in social, economic,$1.8 million and labor instability indebt issuance issue costs of $0.8 million. The debt discount is due to lender fees paid on the countries in which we orInitial 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 third parties with whom we engage operate.effective interest rate method through the estimated maturity date. In addition, the COVID-19 outbreak could result in a severe economic downturn and has already significantly affected the financial marketsCompany incurred $0.5 million of many countries. A severe or prolonged economic downturn or political disruption could result in a variety of risks to our business, including our ability to raise capital when needed on acceptable terms, if at all. A weak or declining economy or political disruption could also strain our suppliers or third party CMOs, possibly resulting in supply disruption, or cause our customers to delay purchases or payments for our products. The COVID-19 pandemic may also create delays in the review and approval of our regulatory submissions as well as our pending reinspectiondebt issuance costs related to our warning letter and pre-approval inspectionthe commitment fees paid to the lenders for commercial productionthe undrawn amounts of the Delayed Draw Term Loans. These debt issuance costs were recorded as an asset on the newly installed injectable line atbalance sheet and amortized on a straight-line basis over the Company’s New Jersey facility byaccess period of the FDA.Delayed Draw Term Loans through June 30, 2019.
We have initiated more frequentThe Initial Term Loan of $50.0 million and detailed communications with our suppliers$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 down $5.0 million and subsequently the trackingremaining $5.0 million under the Revolver were drawn down by the Company in April 2019. On September 18, 2019, pursuant to terms of customer ordersthe First Lien Credit Agreement, the Company borrowed an advance in the aggregate principal amount of $2.5 million (the “Protective Advance”). The Protective Advance is secured Obligations under the First Lien Credit Agreement and wholesaler sell through data to help identify breaks in trends which may either facilitatebears interest at the better servicing of our customers or negatively impact the achievement of our targets at risk. We will continue to monitor the situation closely and react accordingly to any future restrictions or limitations, while keeping the health of our employees and the interest of our customers and business in mind. Duerate applicable to the uncertaintyRevolver. The Protective Advance was subsequently repaid in November 2019 along with a repayment fee of $0.1 million. The Company drew down the severity and durationremaining $10.0 million under its borrowing capacity of Delayed Draw Term Loan A before its expiry in December of 2019. The $15.0 million Delayed Draw Term Loan B expired upon the issuance of the pandemic,Series B Notes, prior to the impact on our revenues, profitability and statement of financial position is uncertain at this time.Company drawing down any monies.
SeniorThe Term Loans are governed by the Second Lien Credit Facilities AmendmentAgreement. The 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 Term Loans by $14.4 million and $22.9 million for the year and since inception through the period ended December 31, 2020, respectively.
On April 6, 2020 (the “Amendment Closing Date”), the Company entered (i) Amendment No. 2 of the Revolver and Amendment No. 4 of the Term Loans, effective as of December 31, 2019. The amendments collectively among other things, (i)
increase the interest rates, (ii) reset certain prepayment premiums and modify the terms of certain mandatory prepayments and (iii) modify certain financial covenant levels inclusive of the disposition of prior covenants as of and for the period ended December 31, 2019. The additions and changes to financial covenants set forth in both Amendments are: (i) a new minimum net revenue covenant is added that is tested on the last day of each fiscal quarter from March 31, 2020 until the quarter ending December 31, 2020, (ii) resets a minimum consolidated adjusted EBITDA covenant that is tested on the last day of each fiscal quarter ending during the period from March 31, 2021 to maturity, (iii) eliminates a total net leverage covenant and (iv) adds a minimum liquidity covenant tested at all times during the term of the Senior Credit Facilities.
The associated increase in interest rates arewere effective as of the Amendment Closing Date. The Revolver bears interest at a fluctuating rate of interest equal to the one, two, three or six-month LIBOR plus a margin of 5.5% or a rate based on the prime rate plus a margin of 4.5%, with a LIBOR floor of 1.5%. The Term Loans bear interest at a fluctuating rate of interest equal to the one, two, three or six-month LIBOR plus a margin of 13.0%13% or a rate based on the prime rate plus a margin of 12.0%12%, with a LIBOR floor of 1.5%. Interest on the Senior Credit Facilities is payable in cash quarterly in arrears (or more frequently in connection with customary LIBOR interest provisions), provided, that the Company may elect (and has covenanted to the lenders under its Senior Credit Facilities and subsequent amendments thereto) to pay interest on the Term Loans in kind through December 13, 2021 but only if the following occurs: (1) the Company receives a “warning letter close-out letter” from the Federal Drug Administration in response to corrective actions taken by the Company since receipt of the warning letter in November 2019 and (2) the Company receives a written recommendation from the Federal Drug Administration setting forth its approval decision in respect of the pre-approval inspection for commercial production on the newly installed injectable line at the Company’s New Jersey facility. If only one of those items occurs by December 13, 2020, then the Company may still elect to pay interest in kind during 2021, but only from the time the second condition has been satisfied until December 13, 2021. Thereafter, a portion of interest on the loans accruing at a rate of 4.25% per annum may continue to be paid in kind.
Both amendments provide that in the event of receipt of net proceeds from a disposition triggering a mandatory prepayment, net proceeds of such disposition will be applied as follows: (i) first, to be retained by the Company or applied
to amounts outstanding under the First Lien Credit Agreement until such time as liquidity of the Company and its subsidiaries equals $10.0 million, (ii) next to amounts outstanding under the Revolver (without a permanent reduction in the revolving loan commitments of the lenders) until such amounts are paid in full (with the first lien administrative agent having the right to waive such prepayment, in which event, such net proceeds are applied to amounts outstanding under the Second Lien Credit Agreement), and (iii) finally, to amounts outstanding under the Term Loans. In addition, pursuant to the Revolver, the Company has agreed at all times to maintain book cash of the Company and its subsidiaries not in excess of $10.0 million with any excess being required to prepay the outstanding obligations under the Revolver.
The following additions and changes toCompany was in compliance with its financial covenants set forth in both Amendments are: (i) a new minimum netas of December 31, 2020. If the Company fails to comply with its trailing twelve months revenue covenant, is added that is testedan event of default under the Credit Agreement would be triggered and its obligations under the Senior Credit Facilities or other agreements (including as a result of cross-default provisions) may be accelerated. As such, as of June 30, 2020, the Company recorded a $5.6 million derivative liability associated with certain mandatory prepayment penalties and the recognition of future interest payments in the anticipation of a potential future default on its Senior Credit Facilities. The Company reversed the event of default liability in the third quarter of 2020 based on the last daySeries C Notes offering which terminates the previous revenue covenant under the Senior Credit Facilities, according to which the Company recognized a $5.6 million gain in change in the fair value of each fiscal quarter from March 31, 2020 until the quarter endingderivative liability line on the Consolidated Statement of Operations for the year ended December 31, 2020 (ii) resets a minimum consolidated adjusted EBITDA covenant that is tested on the last day of each fiscal quarter ending during the period from March 31, 2021 to maturity, (iii) eliminates a total net leverage covenant and (iv) adds a minimum liquidity covenant tested at all times during the term of the Senior Credit Facilities.(Note 7).
After the modification, the effective interest rates, inclusive of the debt discounts and issuance costs for the Initial Term Loan and Delayed Draw Term Loan A were between 16.6% and 17.7% and for the various borrowing tranches of the Revolver, were between 9.6% and 10.9%.
In connection with the transactions contemplated by the Term Loan Amendment, onAmendments dated April 6, 2020, the Company issued to the Term Loan lenders certain warrantsWarrants to purchase shares of the Company’s common stock (collectively, the “Warrants”).The Warrants are exercisable for up to, in the aggregate, 5,389,949538,995 of pre-reversepost reverse stock split shares of the Company’s common stock at an exercise price of $0.01 per share of common stock.share. The Warrants initially were recorded at fair value upon issuance and classified as a liability as the Company did not have sufficient authorized unissued shares for the Warrants’ exercise. The Warrants were remeasured to fair value up to the reverse stock split date, with any fair value adjustments recognized in the condensed consolidated statements of operations. The Warrants were reclassified as equity at their fair value upon the reverse stock split date and will becomenot be remeasured subsequently. The estimated fair value of the Warrants on the date of issuance of $1.4 million was recorded as a debt discount. The Warrants had a fair value of $2.2 million as of the reverse stock split date which was reclassified to equity. The Warrants are exercisable at any time after the Company implements the reverse stock split previously approved by its stockholderswhich occurred on May 28, 2020 and will remain exercisable, in whole or in part, for a period of five years. 5 years from the issuance date. As of December 31, 2020, all 538,995 Warrants remain outstanding (Note 7).
The number of shares issuable upon the exercise of the Warrants is subject to customary adjustments upon the occurrence of certain events, including (i) payment of a dividend or distribution to holders of shares of the Company’s common stock payable in shares of the Company’s common stock, (ii) a subdivision, capital reorganization or reclassification of the Company’s common stock or (iii) a merger, sale or other change of control transaction.
On July 20, 2020, the Company entered into (i) a Consent and Amendment No. 3 to First Lien Revolving Credit Agreement (the “First Lien Amendment”), and (ii) a Consent and Amendment No. 5 to Second Lien Credit Agreement (the “Second Lien Amendment”). The First Lien Amendment amends the First Lien Credit Agreement to, among other things, (i) permit the issuance of the Series C Notes and the other transactions contemplated by the Indenture, (ii) modify the terms of certain mandatory prepayments, (iii) modify certain negative covenants and (iv) modify certain financial covenants. The Second Lien Amendment amends the Second Lien Credit Agreement to, among other things, (i) permit the issuance of the Series C Notes and the other transactions contemplated by the Indenture, (ii) modify the terms of certain mandatory prepayments, (iii) modify certain negative covenants, (iv) modify certain financial covenants and (v) extend the time period in which the Company may elect to pay interest in kind.
In connection with the transactions contemplated by the Second Lien Amendment, on July 20, 2020, the Company issued to the lenders party to the Second Lien Credit Agreement certain Warrants to purchase shares of the Company’s common stock. The Warrants are exercisable for up to, in the aggregate, 134,667 shares of the Company’s common stock at an exercise price of $0.01 per share of common stock. The Warrants are immediately exercisable upon issuance and will remain exercisable, in whole or in part, for a period of five years from the original issuance date. The number of shares issuable upon the exercise of the Warrants is subject to customary adjustments upon the occurrence of certain events, including (i) payment of a dividend or distribution to holders of shares of the Company’s common stock payable in shares of the Company’s common stock, (ii) a subdivision, capital reorganization or reclassification of the Company’s common stock or (iii) a merger, sale or other change of control transaction. Fair Value of the Warrants of $0.3 million was recorded as a debt discount with credit to additional paid in capital. As the Warrants are classified in equity, they are not subject to subsequent remeasurement. As of December 31, 2020, all 134,667 Warrants remain outstanding (Note 9).
The terms and assumptions used to determine the fair value of the Warrants were as follows:
| | | | | | Measurement Date | July 20. 2020 | Stock Price | $ | 2.45 | | Expected Life in Years | 5.00 | Annualized Volatility | 79.5 | % | Discount Rate - Bond Equivalent Yield | 0.3 | % |
At December 31, 2020 and December 31, 2019, the net carrying amount of the debt and the remaining unamortized debt discounts and debt issuance costs were as follows (in thousands): | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | Face amount of the 2023 Notes (due May 2023) | $ | 0 | | | $ | 66,090 | | Face amount of the Series B Notes (due May 2023) | — | | | 34,405 | | Face amount of the Series C Notes (due March 2023) | 50,323 | | | — | | Face amount of the Series D Notes (due May 2023) | 3,352 | | | — | | Face amount of the Revolver Credit Facility (due December 2022) | 25,000 | | | 25,000 | | Face amount of the 2023 Loan (due February 2023) | 102,905 | | | 88,464 | | Total carrying value | 181,580 | | | 213,959 | | Less unamortized discounts and debt issuance costs | (21,778) | | | (27,589) | | Deferred gain of the Series D Notes (due May 2023) | 2,444 | | | 0 | | Total net carrying value | $ | 162,246 | | | $ | 186,370 | |
Debt Maturities Schedule
Aggregate maturities of the Company’s debt are presented below (in thousands):
| | | | | | Year Ending December 31, | | 2022 | $ | 25,000 | | 2023 | 156,580 | | Total | $ | 181,580 | |
7. Derivatives
The Company accounts for its derivative instruments in accordance with ASC 815-10, “Derivatives and Hedging”. ASC 815-10 establishes accounting and reporting standards requiring that derivative instruments, including derivative instruments embedded in other contracts, be recorded on the balance sheet as either an asset or liability measured at its fair value. ASC 815-10 also requires that changes in the fair value of derivative instruments be recognized currently in results of operations unless specific hedge accounting criteria are met.
The Company has not entered into hedging activities to date. The Company's derivative liability associated with certain mandatory prepayment penalties and the recognition of future interest payments in the anticipation of a potential future default on its Senior Credit Facilities was remeasured from $5.3 million at March 31, 2020 to $5.6 million at June 30, 2020. The Company reversed the event of default liability in the third quarter of 2020 based on the Series C offering which terminated the previous revenue covenant under the Senior Credit Facilities.
The Company accounted for the put features associated with the Series C Notes as a derivative under ASC 815, which was valued at $5.5 million initially and subsequently remeasured at $7.5 million as of December 31, 2020 with a change of $0.8 million and $2.0 million loss recorded in the fair value of the derivative liability line on the Consolidated Statement of Operations for the three months and year ended December 31, 2020.
The Company's derivative liability at March 31, 2020 included the embedded convertible option of its Series B Notes issued on October 31, 2019. The derivative liability recorded at the issuance date was $13.5 million, including the $2.0 million accounted for in the TDR, which was subsequently remeasured to $2.8 million as of March 31, 2020, with a $4.0 million recognized as a gain on the change in fair value of the derivative in the Company's consolidated statement of operations mainly due to a share price decline during the first quarter of 2020 (Note 6). On May 28, 2020, the Company effectuated a one-for-ten Reverse Stock Split on its outstanding shares of common stock (Note 2), which allows the Company to have sufficient authorized shares to share-settle the embedded convertible option. The derivative liability had a fair value of $$6.3 million as of the reverse stock split date, with a $3.5 million mark-to-market loss recognized on the Consolidated Statement of Operations for the year ended December 31, 2020. On the reverse stock split date, the $6.3 million of the fair value of the derivative liability was reclassed to stockholder's equity without subsequent remeasurement required.
The terms and assumptions used in connection with the valuation of the convertible option of the Series B Notes are as follows:
| | | | | | | | | | | | | 12/31/2019 | 03/31/2020 | 05/28/2020 | Issuance date | 10/31/2019 | 10/31/2019 | 10/31/2019 | Maturity date | 5/1/2023 | 5/1/2023 | 5/1/2023 | Term (years) | 3.33 | 3.08 | 2.92 | Principal | $ | 34,405 | | $ | 34,405 | | $ | 34,405 | | | | | | Seniority | Senior unsecured | Senior unsecured | Senior unsecured | Conversion price | $ | 7.20 | | $ | 7.20 | | $ | 7.20 | | | | | | Stock price | $ | 4.30 | | $ | 2.80 | | $ | 4.03 | | Risk free rate | 1.6 | % | 0.3 | % | 0.2 | % | | | | | Volatility | 47.3 | % | 55.0 | % | 62.5 | % |
In connection with the Term Loan Amendments dated April 6, 2020, the Company issued to the Term Loan lenders certain Warrants to purchase up to, in the aggregate, 538,995 post reverse stock split shares of the Company’s common stock at an exercise price of $0.01 per share. The Warrants initially were recorded at fair value upon issuance and classified as a liability as the Company did not have sufficient authorized unissued shares for the Warrants’ exercise. The Warrants were then remeasured to fair value of $2.2 million up to the reverse stock split date and reclassified as equity with no further remeasurement required. The estimated fair value of the Warrants on the date of issuance of $1.4 million was recorded as a debt discount. As of December 31, 2020, all 538,995 Warrants remain outstanding (Note 6).
The terms and assumptions used to determine the fair value of the Warrants were as follows:
| | | | | | | | | Measurement date | 4/6/2020 | 5/28/2020 | Stock Price | 2.70 | | 4.03 | | Expected Life in Years | 5.00 | 4.86 | Annualized Volatility | 77.6 | % | 79.0 | % | Discount Rate- Bond Equivalent Yield | 0.4 | % | 0.3 | % |
The following table sets forth the Company’s derivative liabilities as presented on the Consolidated Balance Sheet that were measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2019 and December 31, 2020, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Quoted Prices in Active markets for Identical Assets and Liabilities | Significant Other Observable Inputs | Significant Unobservable Inputs | Balance as of | Quoted Prices in Active markets for Identical Assets and Liabilities | Significant Other Observable Inputs | Significant Unobservable Inputs | Balance as of | Descriptions | (Level 1) | (Level 2) | (Level 3) | December 31, 2019 | (Level 1) | (Level 2) | (Level 3) | December 31, 2020 | Derivative liabilities related to Series B Convertible Notes | 0 | | 0 | | 6,776 | | 6,776 | | 0 | | 0 | | 0 | | 0 | | Derivative liabilities related to the Series C Convertible Notes | 0 | | 0 | | 0 | 0 | | 0 | | 0 | | 7,507 | | 7,507 | | Derivative liabilities related to Warrants | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | Derivative liabilities | $ | 0 | | $ | 0 | | $ | 6,776 | | $ | 6,776 | | $ | 0 | | $ | 0 | | $ | 7,507 | | $ | 7,507 | |
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the year ended December 31, 2020. Any unrealized gains or losses on the derivative liabilities were recorded in the change in derivative liability line on the Company’s Consolidated Statement of Operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Descriptions | Balance as of 12/31/2019 | (Gain) or loss recognized in earnings from Change in Fair Value | Balance as of 3/31/2020 | Initial Measurement | (Gain) or loss recognized in earnings from Change in Fair Value | Reclassification to stockholder's equity | Balance as of 6/30/2020 | Initial Measurement | (Gain) or loss recognized in earnings from Change in Fair Value | Balance as of 9/30/2020 | (Gain) or loss recognized in earnings from Change in Fair Value | Balance as of 12/31/2020 | Fair value of convertible feature of Series B Convertible Notes | $ | 6,776 | | $ | (3,995) | | $ | 2,781 | | $ | 0 | | $ | 3,513 | | $ | (6,294) | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | Fair value of the derivative liabilities related to the Senior Credit Facilities | 0 | | 5,253 | | 5,253 | | 0 | | 318 | | 0 | | 5,571 | | 0 | | (5,571) | | 0 | | 0 | | 0 | | Fair value of convertible feature of Series C Convertible Notes | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 5,481 | | 1,245 | | 6,726 | | 781 | 7,507 | | Derivative liabilities related to Warrants | 0 | | 0 | | 0 | | 1,406 | | 760 | | (2,166) | | 0 | | 0 | 0 | 0 | | 0 | | 0 | | Change in the fair value of derivative liabilities | $ | 6,776 | | $ | 1,258 | | $ | 8,034 | | $ | 1,406 | | $ | 4,591 | | $ | (8,460) | | $ | 5,571 | | $ | 5,481 | | $ | (4,326) | | $ | 6,726 | | $ | 781 | | $ | 7,507 | |
8. Revenues, Recognition and Allowances
Revenues by Transaction Type
The Company operates in 1 operating segment and, therefore, the results of the Company's operations are reported on a consolidated basis, consistent with internal management reporting for the chief operating decision maker. Net Sales (in thousands) for the two years ended December 31, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | Years ended December 31, | | 2020 | | 2019 | | | Company product sales | $ | 43,604 | | | $ | 64,291 | | | | Contract manufacturing sales | 1,157 | | | 1,362 | | | | Research and development services and other income | 548 | | | 243 | | | | Revenue, net | $ | 45,309 | | | $ | 65,896 | | | | | | | | | |
Disaggregated information for the Company product sales revenue has been recognized in the accompanying Consolidated Statements of Operations, and is presented below according to contract type (in thousands):
| | | | | | | | | | | | | | | Years ended December 31, | Company Product Sales | 2020 | | 2019 | | | Topical | $ | 32,750 | | | $ | 46,150 | | | | Injectables | 10,854 | | | 18,141 | | | | Total | $ | 43,604 | | | $ | 64,291 | | | | | | | | | |
For the year ended December 31, 2020, the Company did not incur, and therefore did not defer, any material incremental costs to obtain contracts.
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.
Accounts receivable are presented net of returns and allowances of $28.9 million and $30.5 million at December 31, 2020 and 2019, respectively. The allowance for doubtful accounts was $2.4 million and $2.2 million at December 31, 2020 and 2019, respectively. These allowances are primarily related to one specific customer in the amount of $1.7 million at December 31, 2020 and 2019.
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 estimate 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 the 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 and rebates provided to customers. This account has been used for various one-time discounts given to customers. The Company reviews the percentage of products sold through these programs by reviewing chargeback data and uses the appropriate percentages to calculate the rebate accrual. Rebates are invoiced monthly or quarterly and reviewed against the accruals. Other items that could be included in accrued rebates would be price protection fees, shelf stock adjustments (SSAs), or other various amounts that would serve as one-time discounts on specific products.
Net revenue and accounts receivable balances in the Company’s consolidated financial statements are presented net of sales and returns and allowances (SRA) estimates. Certain SRA balances are included in accounts payable and accrued expenses.
The Company's adjustments for the deductions to gross product sales for the years ended December 31, 2020 and 2019 are as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | Years ended December 31, | | | 2020 | | 2019 | | | Gross product sales | | $ | 140,616 | | | $ | 156,301 | | | | | | | | | | | Reduction to gross product sales: | | | | | | | Chargebacks and billbacks | | 73,656 | | | 60,008 | | | | Wholesaler fees for service | | 5,745 | | | 9,000 | | | | Sales discounts and other allowances | | 17,611 | | | 23,002 | | | | Total reduction to gross product sales | | $ | 97,012 | | | $ | 92,010 | | | | | | | | | | | Total product sales, net | | $ | 43,604 | | | $ | 64,291 | | | |
9. Goodwill and Intangible Assets Goodwill The Company acquired the assets of Canadian pharmaceutical company Alveda Pharmaceuticals, Inc., in November 2015. As a result of the acquisition, goodwill of $0.4 million was recorded. The Company assesses the recoverability of the carrying value of goodwill on a reporting unit basis on October 1 of each year, or 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 have reduced the fair value of our reporting unit below its carrying value and therefore 0 impairment losses have been recognized pertaining to goodwill. Changes in goodwill during the years ended December 31, 2020 and December 31, 2019 were as follows (in thousands): | | | | | | | Goodwill | January 1, 2019 | $ | 470 | | | | | | Foreign currency translation | 21 | | December 31, 2019 | 491 | | | | | | Foreign currency translation | 10 | | December 31, 2020 | $ | 501 | |
Intangible Assets
The following sets forth the major categories of the Company’s intangible assets and the weighted-average remaining amortization period as of December 31, 2020 and 2019 for those assets that are not already fully amortized (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | | | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Amortization Period | Trademarks and Technology | | $ | 28,893 | | | $ | (8,172) | | | $ | 20,721 | | | 9.5 | Product acquisition costs | | 76 | | | — | | | 76 | | | N/A - See description below | In-process research and development (“IPR&D”) | | 337 | | | — | | | 337 | | | N/A - See description below | Customer relationships | | 3,689 | | | (1,859) | | | 1,830 | | | 4.9 | Total | | $ | 32,995 | | | $ | (10,031) | | | $ | 22,964 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | | | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Amortization Period | Trademarks and Technology | | $ | 39,943 | | | $ | (10,885) | | | $ | 29,058 | | | 10.8 | Product acquisition costs | | 13,103 | | | — | | | 13,103 | | | N/A - See description below | In-process research and development (“IPR&D”) | | 327 | | | — | | | 327 | | | N/A - See description below | Customer relationships | | 3,658 | | | (1,501) | | | 2,157 | | | 5.9 | Total | | $ | 57,031 | | | $ | (12,386) | | | $ | 44,645 | | | |
Changes in intangibles during the year ended December 31, 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Product Acquisition Costs | | Trademarks and Technology | | IPR&D | | Customer Relationships | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2019 | | $ | 13,103 | | | $ | 29,058 | | | $ | 327 | | | $ | 2,157 | | Amortization | | — | | | (2,351) | | | — | | | (358) | | | | | | | | | | | | | | | | | | | | Loss on impairment | | (13,560) | | | (8,090) | | | (74) | | | — | | Foreign currency translation | | 533 | | | 2,104 | | | 84 | | | 31 | | Balance at December 31, 2020 | | $ | 76 | | | $ | 20,721 | | | $ | 337 | | | $ | 1,830 | |
The Company recorded amortization expense of $2.7 million and $3.0 million in 2020 and 2019, respectively. The Company recorded an impairment loss of $8.1 million, $13.5 million and $0.1 million related to trademarks and technology, product acquisition costs and IPR&D, respectively, in 2020. There were 0 impairment losses pertaining to intangibles for the year ending December 31, 2019.
Assuming no additions, disposals or adjustments are made to the carrying values and/or useful lives of the intangible assets, annual amortization expense on trademarks and technology and customer relationships for each of the following years is estimated to be as follows (in thousands):
| | | | | | | | | Year ending December 31, | | Amortization Expense * | 2021 | | $ | 2,303 | | 2022 | | 2,303 | | 2023 | | 2,303 | | 2024 | | 2,303 | | 2025 | | 2,303 | | Thereafter | | 11,036 | | Total | | $ | 22,551 | |
*IPR&D and Product Acquisition Costs are not included in the table. The useful lives of the Company’s intangible assets are as follows: | | | | | | | | | Intangibles Category | | Amortizable Life | Product Acquisition Costs | | 10 years | Trademarks & 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.
10. Stock-Based Compensation Stock Options
The Company has recorded $0.7 million and $0.9 million related to its stock option based compensation expense in cost of sales, product development and research expenses, and selling, general and administrative expenses on the accompanying Consolidated Statements of Operations for the years ended December 31, 2020 and 2019, respectively.
The 1999 Director Stock Option Plan, as amended (the “Director Plan”), provides for the grant of stock options to non-employee directors of the Company at an exercise price equal to the fair market value per share on the date of the grant. As of May 25, 2016, this plan is no longer active for grants. There were 40,500 and 48,500 stock options outstanding as of December 31, 2020 and 2019, respectively.
On June 26, 2009, the Board of Directors adopted, and the Company’s stockholders subsequently approved by written consent, the IGI Laboratories, Inc. 2009 Equity Incentive Plan (the “2009 Plan”). The 2009 Plan became effective on July 29, 2009 and was no longer active for grants subsequent to May 25, 2016. The 2009 Plan allowed the Company to grant options and restricted stock, as well as the Board of Directors to authorize a broad range of other equity-based awards, including stock appreciation rights, restricted stock units ("RSUs") and performance awards to consultants, service providers, employees and board members. On April 12, 2010, the Board of Directors adopted, and the Company’s stockholders subsequently approved, an amendment and restatement of the 2009 Plan to increase the number of shares of Common Stock available for grant under such plan by adding 2,000,000 shares of Common Stock. The 2009 Plan, as amended on May 29, 2010, authorizes up to 5,000,000 shares of the Company’s common stock for issuance pursuant to the terms of the 2009 Plan. The maximum number of shares that may be subject to awards made to any individual in any single calendar year under the 2009 Plan is 1,000,000 shares. There were 30,984 stock options outstanding and 186,831 shares of stock outstanding as of December 31, 2020. There were 0 RSUs outstanding at December 31, 2020. There were 186,831 shares of stock outstanding and 184,761 stock options outstanding as of December 31, 2019. There were 0 RSU's outstanding at December 31, 2019. As of December 31, 2020, 298,681 options available were transferred from the 2009 Plan to the 2016 Plan. On May 25, 2016, the Board of Directors approved the Company's 2016 Equity Incentive Plan (the "2016 Plan"). On May 21, 2018, the Board of Directors adopted, and the Company's stockholders subsequently approved, an amendment and restatement of the 2016 Plan that increased the number of shares of Common Stock available for grant under such plan to 4,000,000 by adding 2,000,000 shares of Common Stock (the "Amended 2016 Plan"). The 4,000,000 shares of Common Stock available for issuance pursuant to the Amended 2016 Plan was reduced to 400,000 shares when the one-for-ten Reverse Stock Split effectuated on May 28, 2020. On July 15, 2020, the Board of Directors adopted and the Company's stockholders approved an amendment of its existing 2016 Equity Incentive Plan (the "July 2020 Amendment"). The July 2020 Amendment increased the number of shares available to be granted under the 2016 Plan from 400,000 shares to 4,400,000 shares, plus any shares of its
common stock that are represented by awards granted under its 1999 Director Plan and 2009 Equity Incentive Plan that are forfeited, expire or are cancelled without delivery of shares of common stock or which result in the forfeiture of shares of common stock back to the Company on or after May 25, 2016. Generally, shares of common stock reserved for awards under the 2016 Plan that lapse or are canceled will be added back to the share reserve available for future awards. However, shares of common stock tendered in payment for an award or shares of common stock withheld for taxes will not be available again for grant. The 2016 Plan provides that no participant may receive awards for more than 1,000,000 shares of common stock in any fiscal year.
As of December 31, 2020, there were 181 RSUs outstanding, 18,561 shares of common stock outstanding and 249,486 stock options under the 2016 Plan. As of December 31, 2019, there were 6,268 RSUs outstanding, 13,655 shares of common stock outstanding and 283,559 stock options outstanding under the 2016 Plan. As of December 31, 2020, there were a total of 4,430,447 options available under the 2016 Plan after the July 2020 Amendment and there were 233,416 options available under the Plan as of December 31, 2019.
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 then 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 December 31, 2020, 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 utilizing the Black-Scholes option-pricing formula and the assumptions noted in the following table. Expected volatilities and risk-free interest rates are based upon the expected life of the grant. | | | | | | | | | | | | | | | | Assumptions | | 2020 | | 2019 | | Expected dividends | | 0 | % | | 0 | % | | Risk free rate | | 0.18-1.6% | | 1.38 - 2.47% | | Expected volatility | | 78.56% - 159.61% | | 64.33 - 76.81% | | 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.
Stock option transactions in each of the past two years under the aforementioned plans in total were:
| | | | | | | | | | | | | | | | | | | | | | | Shares | | Exercise Price Per Share | | Weighted Average Exercise Price | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | January 1, 2019 shares issuable under options | | 435,228 | | | $7.90 - $106.70 | | $ | 46.06 | | Granted | | 246,872 | | | $5.50 - $18.00 | | 14.10 | | Exercised | | 0 | | | — | | | 0 | | Expired | | (76,158) | | | $10.20 - $106.70 | | 54.34 | | Forfeited | | (89,122) | | | $6.60 - $86.70 | | 23.87 | | December 31, 2019 shares issuable under options | | 516,820 | | | $5.50 - $106.70 | | $ | 33.40 | | Granted | | 373,612 | | | $0.69 - $4.40 | | 3.66 | | Exercised | | 0 | | | — | | | 0 | | Expired | | (248,455) | | | $5.50 - $106.70 | | 32.75 | | Forfeited | | (134,682) | | | $2.50 - $88.10 | | 8.91 | | December 31, 2020 shares issuable under options | | 507,295 | | | $0.69 - $106.70 | | $ | 18.31 | |
The following table summarizes information concerning outstanding and exercisable options as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options Outstanding | | Options Exercisable | Range of Exercise Price | | Number of Options | | Weighted Average Remaining Life (Years) | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price | $0.00 - $7.80 | | 299,822 | | | 8.39 | | $ | 3.62 | | | 10,077 | | | $ | 6.52 | | $7.81 - $15.00 | | 52,272 | | | 6.34 | | 10.29 | | | 48,967 | | | 10.37 | | $15.01 - $55.00 | | 85,076 | | | 6.96 | | 25.26 | | | 61,866 | | | 27.41 | | $55.01 - $106.70 | | 70,125 | | | 5.06 | | 78.69 | | | 70,125 | | | 78.69 | | Total | | 507,295 | | | 7.48 | | $ | 18.31 | | | 191,035 | | | $ | 40.77 | |
During 2020, the Company issued 2 inducement grants to executive management team members totaling 186,325 options. These inducement grants had a Fair Market Value of $0.4 million and are presented within the table above.
The following table summarizes information concerning outstanding and exercisable options as of December 31, 2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options Outstanding | | Options Exercisable | Range of Exercise Price | | Number of Options | | Weighted Average Remaining Life (Years) | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price | $0.00 - $7.80 | | 19,516 | | | 9.58 | | $ | 6.54 | | | 0 | | | $ | 0 | | $7.81 - $15.00 | | 178,186 | | | 4.52 | | 10.22 | | | 126,500 | | | 10.29 | | $15.01 - $55.00 | | 188,451 | | | 8.25 | | 22.74 | | | 48,208 | | | 31.68 | | $55.01 - $106.70 | | 130,667 | | | 5.75 | | 84.38 | | | 125,026 | | | 84.93 | | Total | | 516,820 | | | 6.44 | | $ | 33.40 | | | 299,734 | | | $ | 44.86 | |
The aggregate intrinsic value of options outstanding was $0.0 million at December 31, 2020 and $0.0 million at December 31, 2019. The aggregate intrinsic value of the options exercisable was $0.0 million at December 31, 2020 and $0.0 million at
December 31, 2019. The total intrinsic value of the options exercised during 2020 and 2019 was $0.0 million and $0.0 million, respectively. A summary of non-vested options at December 31, 2020 and changes during the year ended December 31, 2020 is presented below: | | | | | | | | | | | | | | | | | Options | | Weighted Average Grant Date Fair Value | Non-vested options at January 1, 2020 | | 217,086 | | | $ | 7.72 | | Granted | | 373,612 | | | 2.04 | | Vested | | (139,756) | | | 7.83 | | Forfeited | | (134,682) | | | 4.15 | | Non-vested options at December 31, 2020 | | 316,260 | | | $ | 2.48 | |
As of December 31, 2020, there was $0.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements under the Plan. The costs will be recognized through November 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 $0.1 million and $0.2 million respectively, of compensation expense during the years ended December 31, 2020 and 2019, related to restricted stock and RSU awards. Stock compensation expense is recognized over the vesting period of the restricted stock and RSUs. At December 31, 2020, the Company had approximately $47.9 thousand of total unrecognized compensation cost related to non-vested restricted stock and RSUs, all of which will be recognized through June 2023. There have been no restricted stock issuances in the years ended December 31, 2020 and 2019.
A summary of non-vested RSUs and changes during each of the past two years is as follows: | | | | | | | | | | | | | | | | | Number of RSUs | | Weighted Average Issuance Price | Non-vested balance at January 1, 2019 | | 17,561 | | | $47.83 | | | | | | Changes during the period: | | | | | Shares granted | | 0 | | | 0 | Shares vested | | (7,623) | | | 53.92 | Shares forfeited | | (3,670) | | | 47.37 | Non-vested balance at December 31, 2019 | | 6,268 | | | $40.69 | | | | | | Changes during the period: | | | | | Shares granted | | 23,505 | | | 2.34 | Shares vested | | (4,906) | | | 43.59 | Shares forfeited | | (1,181) | | | 29.54 | Non-vested balance at December 31, 2020 | | 23,686 | | | $2.59 | | | | | |
11. Accrued Expenses Accrued expenses represent various obligations of the Company including certain operating expenses and taxes payable.
For the fiscal years ended December 31, 2020, and 2019, the components of accrued expenses were (in thousands):
| | | | | | | | | | | | | | | | | 2020 | | 2019 | Inventory and Supplies | | $ | 3,055 | | | $ | 250 | | Interest Expense | | 2,898 | | | 1,539 | | Payroll | | 2,872 | | | 1,789 | | Medicaid and Medicare Rebates | | 1,616 | | | 987 | | Rebates | | 1,412 | | | 774 | | Professional Fees | | 1,363 | | | 1,881 | | Wholesaler Fees | | 477 | | | 747 | | Royalties | | 302 | | | 377 | | Clinical Studies | | 0 | | | 334 | | Capital Expenditures | | 0 | | | 23 | | Other | | 718 | | | 584 | | | | $ | 14,713 | | | $ | 9,285 | |
12. Income Taxes
The Company is subject to U.S. federal income tax and files a consolidated federal income tax return which includes all eligible U.S. subsidiary companies. The Company is also subject to tax in the states of Alabama, California, Illinois, Montana, New Jersey and Tennessee. The Company conducts operations in certain foreign countries and is, accordingly, subject to tax in those foreign jurisdictions consisting of Canada (including the province of Ontario), Estonia, and Luxembourg.
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES) providing nearly $2 trillion in economic relief to eligible businesses impacted by the coronavirus outbreak. Tax implications of the CARES Act applicable to the Company include expansion of the business interest expense deduction from 30% to 50% for the years 2019 and 2020 and the suspension of the 80% limitation on usage of Net Operating Losses incurred in the years 2018 through 2020. Additionally, the Company applied for and received a payroll protection plan loan of $3.4 million. The Company has recorded the full forgiveness of the loan in other income on the Consolidated Statement of Operations for the year ended December 31, 2020.
The Company’s net interest expense is subject to limitation under Section 163(j). The limitation serves to reduce the net operating loss and create an additional attribute for the disallowed net interest expense both of which are not subject to expiration. Therefore, there is no effect on earnings.
Loss before income tax for the years ended December 31, 2020 and 2019 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | 2020 | | 2019 | U.S. operations | | $ | (91,090) | | | $ | (20,212) | | Foreign operations | | (28,994) | | | (4,821) | | | | | | | Global Total | | $ | (120,084) | | | $ | (25,033) | |
The Company’s current tax expense was $1.9 million and $0.1 million for the years ended December 31, 2020 and 2019, respectively. The provision for income taxes attributable to continuing operations before income taxes for the years ended December 31, 2020 and 2019 is as follows (in thousands):
| | | | | | | | | | | | | | | | | 2020 | | 2019 | Current tax expense: | | | | | Federal | | $ | 1,645 | | | $ | 0 | | State and local | | 291 | | | 23 | | Foreign | | 21 | | | 87 | | Total current tax expense | | 1,957 | | | 110 | | Deferred tax benefit: | | | | | Federal | | 0 | | | 0 | | State and local | | 0 | | | 0 | | Foreign | | (19) | | | (19) | | Total deferred tax benefit | | (19) | | | (19) | | | | | | | Total income tax expense | | $ | 1,938 | | | $ | 91 | |
A comparison of income tax expense at the U.S. statutory rate of 21% in 2020 and 2019 to the Company's effective rate is as follows (in thousands):
| | | | | | | | | | | | | | | | | 2020 | | 2019 | Expected Statutory benefit | | $ | (25,218) | | | $ | (5,257) | | Other non-deductible expenses | | 230 | | | 133 | | PPP loan forgiveness | | (703) | | | 0 | | Change in valuation allowance | | 8,395 | | | 4,674 | | Debt conversions and issuances | | 4,394 | | | 0 | | Research credits | | (330) | | | (504) | | Tax rate differential - foreign vs. U.S. | | 5,403 | | | 1,073 | | State income taxes, net of federal benefit | | 265 | | | 18 | | Write-off of deferred tax assets | | 7,915 | | | 0 | | Uncertain tax positions | | 1,644 | | | 0 | | Prior year true-up | | (58) | | | (45) | | Exchange gain | | 1 | | | (1) | | | | $ | 1,938 | | | $ | 91 | |
Deferred tax balances included in the Consolidated Balance Sheets as of December 31, 2020 and 2019 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | 2020 | | 2019 | Deferred Tax Assets: | | | | | Sales allowances and doubtful accounts | | $ | 4,116 | | | $ | 2,991 | | Inventory reserve | | 2,357 | | | 652 | | Accrued expenses | | 585 | | | 206 | | Foreign exchange | | 41 | | | 0 | | Intangible assets | | 445 | | | 0 | | Property, plant and equipment | | 18,947 | | | 272 | | Tax operating loss carryforwards | | 2,145 | | | 10,851 | | Tax credit and other carryforwards | | 2,478 | | | 5,996 | | Stock compensation | | 574 | | | 566 | | Total deferred tax assets | | 31,688 | | | 21,534 | | Less valuation allowance | | (29,451) | | | (18,562) | | Net deferred tax assets | | 2,237 | | | 2,972 | | | | | | | Deferred Tax Liabilities: | | | | | Convertible debt conversion features | | (2,237) | | | (3,070) | | Foreign exchange | | 0 | | | (14) | | Intangible assets | | (190) | | | (93) | | Total deferred tax liabilities | | (2,427) | | | (3,177) | | Net deferred tax liability | | $ | (190) | | | $ | (205) | |
The Company evaluates the recoverability of its deferred tax assets based on its history of operating results, its expectations for the future, and the expiration dates of the net operating loss carry forwards. Based on the preponderance of the evidence, the Company has concluded that it is more likely than not that it will be unable to realize the net deferred tax assets in the immediate future and has established a full valuation allowance for substantially all deferred tax assets. Accordingly, the Company has provided a valuation allowance of $29.5 million and $18.6 million for the years ended December 31, 2020 and 2019, respectively, on its deferred tax assets. The valuation allowance increased $10.9 million during 2020. This increase was due to $14.8 million related to changes in deferred taxes offset by a $3.9 million decrease related to the 2020 net operating income. Operating loss, tax credit and other carry forwards as of December 31, 2020 and 2019 were as follows (in thousands):
| | | | | | | | | | | | | | | | | 2020 | | 2019 | Federal: | | | | | Net operating losses (see below) | | $ | 10,706 | | | $ | 48,531 | | Disallowed interest expense (no expiration) | | 11,802 | | | 17,783 | | Contributions (expiring through 2025) | | 0 | | | 658 | | Research tax credits (expiring through 2040) | | 0 | | | 1,342 | | | | | | | State: | | | | | New Jersey (expiring in 2039) | | 0 | | | 4,942 | | Other states (expiring through 2039) | | 0 | | | 3,266 | | New Jersey research credits (expiring in 2039) | | 0 | | | 764 | | | | | | | Foreign | | | | | Net operating losses (no expiration) | | $ | 0 | | | $ | 0 | |
At December 31, 2020, the Company’s U.S. federal net operating loss carryforwards will expire as follows (in thousands):
| | | | | | | | | Year | | Net Operating Loss | 2021 - 2029 | | $ | 0 | | 2030 - 2032 | | 0 | | 2033 - 2036 | | 0 | | 2037 | | 490 | | No expiration but subject to limitation | | 10,216 | | Total | | $ | 10,706 | |
Federal net operating losses arising during and after 2018 are not subject to expiration; however for tax years subsequent to 2020, their usage is limited to 80% of taxable income during the year of use.
At December 31, 2020, the Company’s U.S. federal net operating loss carryforwards totaled $10.7 million. The Company’s ability to use net operating loss carry forwards is subject to limitation in future periods under certain provisions of Section 382 of the Internal Revenue Code of 1986, as amended, which limit the utilization of net operating losses upon a more than 50% change in ownership of the Company’s stock. 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 has determined that additional ownership changes occured on August 19, 2020, October 31, 2020 and December 31, 2020. The Company has determined that the lowest limitation related to the dates of change limits the Company's usage of net operating losses, other carry forwards and credits as of the change of ownership date to an annual amount of $28 thousand. 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 2016 to 2019. Currently, the Company is under audit by the state of New Jersey for the period 2015 to 2020. The Company has not recorded any liability for uncertain tax positions.
For the tax year ended December 31, 2020, the Company recorded an unrecognized tax benefit of $2.3 million.
The following table is a reconciliation of the gross unrecognized tax benefits during the years ended December 31, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | 2020 | | 2019 | Gross unrecognized tax benefits as of January 1 | | $ | 0 | | | $ | 0 | | Increases from positions taken in prior periods | | 0 | | | 0 | | Decreases from positions taken in prior periods | | 0 | | | 0 | | Increases from positions taken in the current period | | 2,331 | | | 0 | | Gross unrecognized tax benefit as of December 31 | | $ | 2,331 | | | $ | 0 | |
The unrecognized tax benefits at December 31, 2020 of $2.3 million, if recognized in a period where there was not a full valuation allowance, would affect the effective tax rate.
The Company recognizes accrued interest expense and penalties related to the uncertain tax benefits that have resulted in a refund or reduction of income taxes paid to the extent that such uncertain tax positions would not reduce already existing net operating loss and tax credit carryforwards. Penalties and interest included in the above aggregate $0.5 million and are included in the selling, general and administrative expense line on the Consolidated Statement of Operations.
13. Commitments
The Company’s commitments and contingencies consisted of leases for warehouse, office space and equipment. See Note 5 Leases for future lease payments under non-cancellable leases.
14. Legal and U.S. Regulatory Proceedings
To date, 13 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 pharmaceuticals, including econazole nitrate. 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 pharmaceuticals from as early as July 1, 2009 until the time the defendants’ allegedly unlawful conduct ceased or will cease. The class plaintiffs seek treble damages for alleged overcharges during the alleged period of conspiracy, and certain of the class plaintiffs also seek injunctive relief against the defendants. The actions have been consolidated by the Judicial Panel on Multidistrict Litigation to the U.S. District Court, 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. On December 19, 2019 certain class plaintiffs filed a further complaint that included additional claims against the Company based on the Company’s sales of fluocinolone acetonide. On October 16, 2020 and October 21, 2020, class plaintiffs amended or moved to amend their complaints to add additional allegations, mooting the motion to dismiss.
“Opt-out” antitrust lawsuits have additionally been filed against the Company by various plaintiffs, including Humana Inc.; The Kroger Co. et al.; United HealthCare Services, Inc.; Molina Healthcare, Inc.; MSP Recovery Claims, Series LLC; Health Care Service Corp.; Harris County, Texas; Rite Aid Corporation; JM Smith Corporation; and Suffolk County, New York. These complaints have been consolidated into the In re Generic Pharmaceuticals Pricing Antitrust Litigation matter in the U.S. District Court, Eastern District of Pennsylvania by the Judicial Panel on Multidistrict Litigation. Each of the opt-out complaints names several dozen defendants (including the Company) and involves allegations regarding the pricing of econazole (and in some cases fluocinolone acetonide) along with up to 180 other drug products, most of which 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 some 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 and remains pending.
A complaint has also been filed by state Attorneys General based on pricing of topical drugs, and naming the Company as a defendant with respect to econazole nitrate. The Attorney General plaintiffs seek treble damages for alleged overcharges during the alleged period of conspiracy. This action has been consolidated by the Judicial Panel on Multidistrict Litigation to the U.S. District Court, Eastern District of Pennsylvania for pre-trial proceedings as part of the In re Generic Pharmaceuticals Pricing Antitrust Litigation matter.
In addition, on June 3, 2020, a putative class action lawsuit was filed in the Federal Court of Canada against the Company and its Canadian subsidiary, Teligent Canada, along with over fifty other pharmaceutical defendant companies. The Canadian lawsuit alleges that the generic drug manufacturer defendants conspired to allocate the Canadian market and customers, fix prices and maintain the supply of generic drugs in Canada to artificially maintain market share and higher generic drug prices in violation of Canada’s Competition Act. In terms of the Company and Teligent Canada, without limiting the general allegation of a general conspiracy over the generic drug market, the lawsuit specifically asserts allegations in relation to econazole dating back to September 2013 and continuing to the present. The representative individual plaintiff seeks to represent a class comprised of all persons and entities in Canada who, from January 1, 2012 to the present, purchased generic drugs in the private sector (i.e. purchases made by individuals out-of-pocket and by individuals and businesses through private drug plans). The plaintiff is alleging aggregate damages of CDN$2.75 billion for harm caused to class members being charged increased prices as a result of the alleged conspiracy. The Canadian lawsuit is at a very early stage and the Company is unable to form a judgment at this time as to whether an unfavorable outcome is probable or remote or to provide an estimate of the amount or range of potential loss. The Company believes this lawsuit is without merit and it intends to vigorously defend against the claim.
Due to the early stage of these cases, the Company is unable to form a judgment at this time as to whether an unfavorable outcome is either probable or remote or to provide an estimate of the amount or range of potential loss. The Company believes these cases are without merit and it intends 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 2
generic drug products, one a lotion and one a cream, containing 0.05% of the active pharmaceutical ingredient flurandrenolide. The Company developed the 2 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 2 of Stayma’s 3 claims against the Company. The third claim has proceeded to a damages phase, which is ongoing. The Company has argued that Stayma did not suffer any damages related to this claim and will vigorously pursue complete dismissal of the third claim. In addition, the arbitrator will determine money damages owed by Stayma to the Company relating to Stayma’s failure to pay several past due invoices of approximately $1.7 million.
On April 15, 2019 a federal class action was filed the Oklahoma Police Pension Fund and Retirement System against the Company and certain individual defendants in the U.S. District Court, Southern District of New York. The lawsuit was brought on behalf of persons or entities who purchased or otherwise acquired publicly-traded Teligent, Inc. securities from March 7, 2017 through November 6, 2017. The complaint alleges that defendants made false or misleading statements regarding the Company’s business, operational, and compliance policies in violation of U.S. securities laws. The plaintiff seeks to recover compensable damages. On June 17, 2020, the court, deeming pre-motion letters as a motion to dismiss, granted in part and denied in part the Company’s motion to dismiss.
On July 15, 2020, a derivative complaint was filed by George Gonzalez, purportedly a shareholder of the Company, against certain past and current officers and directors of the Company in the U.S. District Court, Southern District of New York, naming the Company as nominal Defendant. The lawsuit asserts a breach of fiduciary duty claim against the board members and a contribution claim against a former officer for allegedly participating in the alleged misstatements underlying the securities litigation discussed above.
Due to the early stage of these shareholder cases, the Company is unable to form a judgment at this time as to whether an unfavorable outcome is either probable or remote or to provide an estimate of the amount or range of potential loss. The Company believes these cases are without merit and it intends to vigorously defend against these claims.
On June 18, 2020, the State of New Mexico filed a lawsuit in the 1st Judicial District Court, County of Santa Fe, State of New Mexico against various brand drug manufacturers, generic drug manufacturers, and stores that manufactured, designed, distributed, supplied, marketed, promoted, advertised, and/or sold ranitidine and/or Zantac® to New Mexico residents. The lawsuit alleges that these products contain unsafe levels on N-Nitrosodimethylamine (NDMA), a known carcinogen. It further alleges that Defendants withheld the known dangers of the products from the U.S. Food and Drug Administration (“FDA”) and knew or should have known of various studies demonstrating that Zantac®/ranitidine products contained and/or produced levels of NDMA well above FDA’s daily acceptable limit of 90ng. As to the Company specifically, New Mexico states that the Company maintains an active pharmacy wholesaler license in New Mexico and manufactures injectable prescription Zantac which is sold into New Mexico through its aforementioned license. It asserts that the Company created a public nuisance and was also negligent in its sale of this product. As to the public nuisance claim, New Mexico seeks unspecified funding for a statewide medical monitoring program. As to the negligence claim, New Mexico seeks unspecified monetary damages. Due to the early stage of this case, the Company is unable to form a judgment at this time as to whether an unfavorable outcome is either probable or remote or to provide an estimate of the amount or range of potential loss, if any. The Company believes this case to be without merit and it intends to vigorously defend against these claims.
On November 12, 2020, the Mayor and City Council of Baltimore filed a lawsuit in the Circuit Court of Maryland for Baltimore City against various brand drug manufacturers, generic drug manufacturers, and stores that manufactured, designed, distributed, supplied, marketed, promoted, advertised, and/or sold ranitidine and/or Zantac® to Baltimore, MD residents. The lawsuit was transferred to MDL No. 2924, In Re Zantac (Ranitidine) Products Liability Litigation in the United States of Florida on February 1, 2021, and Plaintiffs have a pending motion to remand the case back to Maryland.The lawsuit alleges that these products contain unsafe levels on N-Nitrosodimethylamine (NDMA), a known carcinogen. It further alleges that Defendants withheld the known dangers of the products and/or knew or should have known of various studies demonstrating that Zantac®/ranitidine products posed serious health risks. As to the Company specifically, the Mayor and City Council of Baltimore state that the Company maintains an active pharmacy wholesaler license in Maryland and manufactures injectable prescription Zantac which was sold by retailers and supplied by distributors with Baltimore locations during the relevant period. It asserts that the Company created a public nuisance and was also negligent in its sale of this product. As to the common law public nuisance claim, the Mayor and City Council of Baltimore seek unspecified funding for a citywide medical monitoring program. As to the common law negligence claim, the Mayor and City Council of Baltimore seek unspecified monetary damages. Due to the early stage of this case, the Company is unable to form a judgment at this time as to whether an
unfavorable outcome is either probable or remote or to provide an estimate of the amount or range of potential loss, if any. The Company believes this case to be without merit and it intends to vigorously defend against these claims once it is served.
15. Employee Benefits The Company has a 401(k) contribution plan, pursuant to which employees may elect to contribute to the plan, in whole percentages, up to 100% of compensation. Employees’ contributions are subject to a maximum contribution of $19.5 thousand for 2020 and $19.0 thousand for 2019, plus a catch-up contribution of up to for $6.5 thousand for 2020 and $6.0 thousand for 2019, if a participant qualifies. The Company matches 100% of the first 3% of compensation contributed by participants and 50% of the next 2% of compensation contributed by participants. The Company contribution is in the form of cash, which is vested immediately. The Company has recorded charges to expense related to this plan of $424.8 thousand and $368.7 thousand in 2020 and 2019, respectively.
16. Quarterly Results (Unaudited) The following is a summary of certain quarterly financial information for the fiscal years 2020 and 2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total | | | (in thousands, except per share data) | Year Ended December 31, 2020 | | | | | | | | | | | Total revenues, net | | $ | 7,447 | | | $ | 13,586 | | | $ | 14,339 | | | $ | 9,937 | | | $ | 45,309 | | Gross profit | | (1,163) | | | 2,502 | | | 114 | | | (5,175) | | | (3,722) | | Operating loss | | (18,053) | | | (4,367) | | | (8,799) | | | (108,721) | | | (139,940) | | Net loss | | (26,836) | | | (14,332) | | | (510) | | | (80,344) | | | (122,022) | | Net loss attributable to common stockholders | | (26,836) | | | (14,332) | | | (510) | | | (80,344) | | | (122,022) | | Basic loss per share | | $ | (4.98) | | | $ | (2.56) | | | $ | (0.08) | | | $ | (4.67) | | | $ | (14.67) | | Diluted loss per share | | $ | (4.98) | | | $ | (2.56) | | | $ | (0.08) | | | $ | (4.67) | | | $ | (14.67) | | | | | | | | | | | | | Year Ended December 31, 2019 | | | | | | | | | | | Total revenues, net | | $ | 13,122 | | | $ | 18,341 | | | $ | 18,466 | | | $ | 15,967 | | | $ | 65,896 | | Gross profit | | 5,762 | | | 8,541 | | | 7,280 | | | 1,940 | | | 23,523 | | Operating income (loss) | | (2,740) | | | 686 | | | 209 | | | (6,175) | | | (8,020) | | Net loss | | (8,724) | | | (3,989) | | | (7,113) | | | (5,298) | | | (25,124) | | Net loss attributable to common stockholders | | (8,724) | | | (3,989) | | | (7,113) | | | (5,298) | | | (25,124) | | Basic loss per share | | $ | (1.62) | | | $ | (0.74) | | | $ | (1.32) | | | $ | (0.99) | | | $ | (4.67) | | Diluted loss per share | | $ | (1.62) | | | $ | (0.74) | | | $ | (1.32) | | | $ | (0.99) | | | $ | (4.67) | |
17. Subsequent Events
The Company has evaluated all subsequent events through the filing of this Annual Report on Form 10-K.
January 2021 Debt Exchange Transactions
On January 27, 2021, we completed a recapitalization and equitization transaction pursuant to an Exchange Agreement, dated January 27, 2021, among the Company, the Series C Noteholders (as defined below) and Ares (as defined below) (the “Exchange Agreement”). Under the Exchange Agreement, the holders (the “Series C Noteholders”) of all of our 9.5% Series C Senior Secured Convertible Notes due 2023 (the “Series C Notes”) exchanged an aggregate of approximately $50.3 million of outstanding principal under the Series C Notes, representing 100% of the outstanding principal under the Series C Notes, together with accrued interest thereon, for an aggregate of 29,862,641 shares (the “Series C Exchange Shares”) of our common stock (the “Series C Equitization”). The Series C Equitization resulted in the extinguishment of all of our obligations under the Indenture, dated as of July 20, 2020, between us and Wilmington Trust, National Association, as trustee and collateral agent (the “Series C Indenture”).
Additionally, under the Exchange Agreement, certain credit funds and accounts managed by affiliates of Ares Management Corporation (such funds and accounts, collectively, “Ares” and, together with the Series C Noteholders, the “Participating Parties”) that are lenders under our Second Lien Credit Agreement, dated December 13, 2018, by and among the Company, certain of its subsidiaries, the lenders from time to time party thereto, and Ares Capital Corporation as Administrative Agent (as amended, including by the Second Lien Amendment (as defined below), the “Second Lien Credit Agreement”) converted a portion of the outstanding term loans under the Second Lien Credit Agreement constituting 100% of the approximately $24.5 million in accrued PIK interest under the Second Lien Credit Agreement into an aggregate of approximately 85,412 shares of our newly created Series D Preferred Stock, par value $0.01 per share (the “Series D Preferred Stock”, and such transaction, the “PIK Interest Exchange” and, together with the Series C Equitization, the “January 2021 Debt Exchange Transactions”). Each share of Series D Preferred Stock is non-voting and, subject to an increase in the number of shares of our common stock available for issuance under our amended and restated certificate of incorporation, is convertible into 200 shares of our common stock. The shares of Series D Preferred Stock issued in connection with the PIK Interest Exchange are currently convertible into an aggregate of 17,082,285 shares of our common stock. The holders of shares of Series D Preferred Stock may not convert such shares of Series D Preferred Stock into shares of our common stock to the extent such a conversion would result in a holder thereof, together with its affiliates, collectively owning more than 15% of the number of shares of our common stock then outstanding.
Our current amended and restated certificate of incorporation authorizes 100,000,000 shares of common stock for issuance. As of the date of this Form 10-K filing, we have 86,543,845 shares of common stock issued and outstanding. In addition, after giving effect to the January 2021 Debt Exchange Transactions, there are approximately 85,412 shares of Series D Preferred Stock outstanding, which are convertible into, in the aggregate, 17,082,285 shares of our common stock as of the date of this 10-K filing. As a result, there are presently an insufficient number of shares authorized and available for issuance under our amended and restated certificate of incorporation to effect the conversion of all outstanding shares of Series D Preferred Stock into common stock pursuant to the terms of such Series D Preferred Stock. Pursuant to the terms of the Exchange Agreement, we are required to seek the requisite approval of our stockholders to an amendment to our amended and restated certificate of incorporation to allow for the conversion in full of all shares of Series D Preferred Stock into shares of our common stock (either by an increase in the number of authorized shares of our common stock, the effectuation of a reverse stock split, or otherwise) (the “Stockholder Approval”). The Exchange Agreement provides that, if we are unable to obtain the Stockholder Approval on or before July 1, 2021, we will issue to each holder of Series D Preferred Stock, on a quarterly basis, additional shares of Series D Preferred Stock equal to 2.5% of the number of shares of Series D Preferred Stock originally issued to such holder until the Stockholder Approval is obtained (with a prorated amount of Series D Preferred Stock to be issued in the event the Stockholder Approval is obtained during any such calendar quarter). We intend to seek Stockholder Approval at our Annual Meeting of Stockholders scheduled to be held on May 26, 2021.
ATM Offering
On January 27, 2021, the Company entered into an At Market Issuance Sales Agreement with B. Riley Securities, pursuant to which the Company sold an aggregate of 38,712,036 shares (the “Shares”) of its common stock between January 28, 2021 and March 31, 2021. The Shares were sold at an average price of approximately $0.993 per Share resulting in aggregate gross proceeds of approximately $38.5 million and aggregate net proceeds of approximately $37 million after deducting commissions due on the sale of Shares.
Amendments to First Lien Credit Agreement and Second Lien Credit Agreement
Also in connection with the January 2021 Debt Exchange Transactions, we entered into (i) Amendment No. 4 to First Lien Revolving Credit Agreement (the “First Lien Amendment”), amending the First Lien Credit Agreement, dated December 13, 2018, by and among the Company, certain of its subsidiaries, the lenders from time to time party thereto, and ACF Finco I LP as Administrative Agent (as amended by the First Lien Amendment, the “First Lien Credit Agreement”), and (ii) Amendment No. 6 to Second Lien Credit Agreement (the “Second Lien Amendment”), pursuant to which all identified defaults and events of default thereunder were waived and certain amendments were made to the First Lien Credit Agreement and Second Lien Credit Agreement, respectively, including those described below.
The First Lien Amendment amended the First Lien Credit Agreement to, among other things, (i) permit borrowings under the revolving credit facility under the First Lien Credit Agreement, subject to availability (which is $0 as of the date of this Form 10-K filing) and the other terms and conditions of the First Lien Credit Agreement, provided, that such borrowings are only available until the commitments of the lenders under the Second Lien Credit Agreement under the Second Lien Delayed Draw Term Loan C Facility (as defined below) have been reduced to $0, (ii) reduce from $10.0 million to $3.0 million (from and after the first draw of the Second Lien Delayed Drawn Term Loan C Facility described below) the maximum amount of cash that we and our subsidiaries that are credit parties under the First Lien Credit Agreement are permitted to maintain prior to triggering a mandatory prepayment of the revolving credit facility (without a permanent reduction of the revolving credit commitments), which $3.0 million threshold automatically increased by the net proceeds received from the ATM Offering and any other equity offering, (iii) from and after March 31, 2022, increase the minimum liquidity covenant from $3.0 million to $4.0 million on a consolidated basis and (iv) suspend testing of the minimum consolidated adjusted EBITDA covenant until March 31, 2022, at which time such minimum consolidated adjusted EBITDA covenant levels will resume to the levels in effect prior to the closing of the First Lien Amendment.
The Second Lien Amendment amended the Second Lien Credit Agreement to (i) permit, among other things, the January 2021 Debt Exchange Transactions, (ii) provide for a new multiple-draw delayed draw term loan facility in the aggregate principal amount of up to $4.6 million (the “Second Lien Delayed Draw Term Loan C Facility”) which is available to us until December 31, 2021, subject to satisfaction of the conditions to borrowing, including a pro forma maximum liquidity test of $4.0 million, the proceeds of which may be used to pay expenses specified in a budget approved by the administrative agent under the Second Lien Credit Agreement, (iii) from and after March 31, 2022, increase from $3.0 million to $4.0 million the minimum liquidity (as defined in the Second Lien Credit Agreement) required to be maintained by us and our subsidiaries that are credit parties under the Second Lien Credit Agreement on a consolidated basis, (iv) suspend testing of the minimum consolidated adjusted EBITDA covenant until March 31, 2022, at which time such minimum consolidated adjusted EBITDA covenant levels will resume to the levels in effect prior to the closing of the Second Lien Amendment and (v) extend the date on which we may elect to pay interest in kind. Loans made under the Second Lien Delayed Draw Term Loan C Facility will be pari passu with, and have the same interest and payment terms (including maturity) as those applicable to, the existing loans under the Second Lien Credit Agreement.
TELIGENT, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (in thousands) | | | | | | Additions | | | | | | | | | | Additions | | | | | | | Balance at Beginning of Year | | Charged to Costs and Expenses | | Charged other Accounts | | Deductions | | Balance at End of Year | | Balance at Beginning of Year | | Charged to Costs and Expenses | | Charged other Accounts | | Deductions | | Balance at End of Year | Year Ended December 31, 2018 | | | | | | | | | | | | Change in Tax Valuation Allowance | | $ | 13,309 | | | 67 | | | (1,256) | | | — | | | $ | 12,120 | | | Allowance for Doubtful Accounts | | $ | 2,185 | | | 451 | | | — | | | — | | | $ | 2,636 | | | Reserve for Inventory Obsolescence | | $ | 1,304 | | | 3,343 | | | — | | | 1,980 | | | $ | 2,667 | | | Year Ended December 31, 2019 | Year Ended December 31, 2019 | | | | | | | | | | | Year Ended December 31, 2019 | | | | | | | | | | | Change in Tax Valuation Allowance | Change in Tax Valuation Allowance | | $ | 12,120 | | | (19) | | | 6,461 | | | — | | | $ | 18,562 | | Change in Tax Valuation Allowance | | $ | 12,120 | | | (19) | | | 6,461 | | | 0 | | | $ | 18,562 | | Allowance for Doubtful Accounts | Allowance for Doubtful Accounts | | $ | 2,636 | | | 208 | | | — | | | 636 | | | $ | 2,208 | | Allowance for Doubtful Accounts | | $ | 2,636 | | | 208 | | | 0 | | | 636 | | | $ | 2,208 | | Reserve for Inventory Obsolescence | Reserve for Inventory Obsolescence | | $ | 2,667 | | | 2,297 | | | — | | | 2,754 | | | $ | 2,210 | | Reserve for Inventory Obsolescence | | $ | 2,667 | | | 2,297 | | | 0 | | | 2,754 | | | $ | 2,210 | | Year Ended December 31, 2020 | | Year Ended December 31, 2020 | | | | | | | | | | | Change in Tax Valuation Allowance | | Change in Tax Valuation Allowance | | $ | 18,562 | | | (20) | | | 10,909 | | | 0 | | | $ | 29,451 | | Allowance for Doubtful Accounts | | Allowance for Doubtful Accounts | | $ | 2,208 | | | 341 | | | 0 | | | 150 | | | $ | 2,399 | | Reserve for Inventory Obsolescence | | Reserve for Inventory Obsolescence | | $ | 2,210 | | | 11,309 | | | 0 | | | 1,517 | | | $ | 12,002 | |
|