Exhibit 99.2
Kanghong Sagent (Chengdu) Pharmaceutical Co., Ltd.
(a development stage company)
Balance Sheets
(Amounts in thousands of U.S. Dollars)
(Unaudited)
March 31, 2013 | December 31, 2012 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,055 | $ | 2,372 | ||||
Prepaid expenses and other current assets | 259 | 380 | ||||||
Inventory | 1,560 | 965 | ||||||
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Total current assets | 2,874 | 3,717 | ||||||
Non-current assets: | ||||||||
Property, plant and equipment, net | 52,154 | 51,894 | ||||||
Intangible assets, net | 1,827 | 1,834 | ||||||
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Total non-current assets | 53,981 | 53,728 | ||||||
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Total assets | $ | 56,855 | $ | 57,445 | ||||
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Liabilities and shareholders’ equity | ||||||||
Current liabilities: | ||||||||
Accrued employee benefits | 938 | 1,140 | ||||||
Other payables | 1,293 | 1,813 | ||||||
Amount due to related parties | 1,647 | 197 | ||||||
Current portion of long-term bank loans | 1,595 | 1,591 | ||||||
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Total current liabilities | 5,473 | 4,741 | ||||||
Non-current liabilities: | ||||||||
Long-term bank loans | 17,228 | 17,182 | ||||||
Government grants | 1,117 | 1,114 | ||||||
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Total non-current liabilities | 18,345 | 18,296 | ||||||
Total liabilities | 23,818 | 23,037 | ||||||
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Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
Paid-in capital (no par value) | 50,000 | 50,000 | ||||||
Additional paid-in capital | 1,509 | 1,491 | ||||||
Deficit accumulated during the development stage | (23,558 | ) | (22,080 | ) | ||||
Accumulated other comprehensive income | 5,086 | 4,997 | ||||||
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Total shareholders’ equity | 33,037 | 34,408 | ||||||
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Total liabilities and shareholders’ equity | $ | 56,855 | $ | 57,445 | ||||
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The accompanying notes are an integral part of these financial statements
Kanghong Sagent (Chengdu) Pharmaceutical Co., Ltd.
(a development stage company)
Statements of Loss
(Amounts in thousands of U.S. Dollars)
(Unaudited)
Period from | ||||||||||||
December 29, 2006 | ||||||||||||
(date of | ||||||||||||
inception) to | ||||||||||||
Three months ended March 31, | March 31, | |||||||||||
2013 | 2012 | 2013 | ||||||||||
Operating expenses: | ||||||||||||
Pre-production expenses | $ | (583 | ) | $ | (632 | ) | $ | (9,727 | ) | |||
General and administrative expenses | (897 | ) | (848 | ) | (14,098 | ) | ||||||
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Loss from operations | (1,480 | ) | (1,480 | ) | (23,825 | ) | ||||||
Other income / (expense) | — | (2 | ) | 19 | ||||||||
Interest income | 2 | — | 248 | |||||||||
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Loss before income taxes | (1,478 | ) | (1,482 | ) | (23,558 | ) | ||||||
Income tax expense | — | — | — | |||||||||
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Net loss | $ | (1,478 | ) | $ | (1,482 | ) | $ | (23,558 | ) | |||
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The accompanying notes are an integral part of these financial statements
Kanghong Sagent (Chengdu) Pharmaceutical Co., Ltd.
(a development stage company)
Statements of Comprehensive Loss
(Amounts in thousands of U.S. Dollars)
(Unaudited)
Period from | ||||||||||||
December 29, 2006 | ||||||||||||
(date of | ||||||||||||
inception) to | ||||||||||||
Three months ended March 31, | March 31, | |||||||||||
2013 | 2012 | 2013 | ||||||||||
Net loss | $ | (1,478 | ) | $ | (1,439 | ) | $ | (23,558 | ) | |||
Other comprehensive income (loss), net of tax | ||||||||||||
Foreign currency translation adjustments | 89 | (56 | ) | 5,086 | ||||||||
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Total other comprehensive income (loss), net of tax | 89 | (56 | ) | 5,086 | ||||||||
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Comprehensive loss | $ | (1,389 | ) | $ | (1,495 | ) | $ | (18,472 | ) | |||
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The accompanying notes are an integral part of these financial statements
Kanghong Sagent (Chengdu) Pharmaceutical Co., Ltd.
(a development stage company)
Statements of Cash Flows
(Amounts in thousands of U.S. Dollars)
(Unaudited)
Period from | ||||||||||||
December 29, 2006 | ||||||||||||
Three months ended March 31 | (date of inception) to | |||||||||||
2013 | 2012 | March 31, 2013 | ||||||||||
Operating activities | ||||||||||||
Net loss | $ | (1,479 | ) | $ | (1,482 | ) | $ | (23,559 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation | 193 | 150 | 1,581 | |||||||||
Share based payments | 18 | 25 | 293 | |||||||||
Salary expense of certain employee paid by a shareholder | — | — | 1,216 | |||||||||
Amortization | 7 | 18 | 248 | |||||||||
Loss on disposal of property, plant and equipment | — | — | 2 | |||||||||
Pre-production expenses offset by government grants received | — | — | (31 | ) | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Inventories | (592 | ) | — | (1,557 | ) | |||||||
Prepaid expenses and other current assets | 122 | 45 | (342 | ) | ||||||||
Amount due to a related party | 1,448 | (44 | ) | 1,601 | ||||||||
Accrued employee benefits and other payables | (729 | ) | (856 | ) | 1,185 | |||||||
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Net cash used in operating activities | (1,012 | ) | (2,144 | ) | (19,363 | ) | ||||||
Investing activities | ||||||||||||
Purchases of property, plant and equipment | (314 | ) | (1,629 | ) | (48,061 | ) | ||||||
Proceeds from sale of property, plant and equipment | — | — | 1 | |||||||||
Purchases of intangible assets | — | — | (1,573 | ) | ||||||||
Government grants received | — | — | 1,054 | |||||||||
Restricted cash | — | — | — | |||||||||
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Net cash used in investing activities | (314 | ) | (1,629 | ) | (48,579 | ) | ||||||
Financing activities | ||||||||||||
Repayment of short-term bank loans | — | — | (317 | ) | ||||||||
Proceeds from long-term bank loans | — | — | 18,579 | |||||||||
Capital contribution from shareholders | — | — | 50,000 | |||||||||
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Net cash provided by financing activities | — | — | 68,262 | |||||||||
Net (decrease)/ increase in cash and cash equivalents | (1,326 | ) | (3,773 | ) | 320 | |||||||
Effect of foreign exchange rate changes on cash | 9 | (51 | ) | 735 | ||||||||
Cash and cash equivalents, at beginning of year/period | 2,372 | 12,601 | — | |||||||||
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Cash and cash equivalents, at end of year/period | $ | 1,055 | $ | 8,777 | $ | 1,055 | ||||||
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Supplemental disclosures of cash flow information: | ||||||||||||
Acquisition of property, plant and equipment included in other payables | $ | — | $ | 239 | $ | 1,050 | ||||||
Interest paid | $ | 305 | $ | 332 | $ | 2,342 | ||||||
Noncash financing activity | ||||||||||||
Capital contribution from a shareholder | $ | 18 | $ | 25 | $ | 1,509 |
The accompanying notes are an integral part of these financial statements
Kanghong Sagent (Chengdu) Pharmaceutical Co., Ltd.
(a development stage company)
Statements of Shareholders’ Equity
(Amounts in thousands of U.S. Dollars)
(Unaudited)
Paid-in Capital | Additional Paid in Capital | Deficit accumulated during the development stage | Other comprehensive income | Total | ||||||||||||||||
Balance as of December 29, 2006 and January 1, 2007 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Net loss | — | — | (196 | ) | — | (196 | ) | |||||||||||||
Other comprehensive income, net | — | — | — | 365 | 365 | |||||||||||||||
Capital contribution from shareholders | 10,200 | — | — | — | 10,200 | |||||||||||||||
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Balance as of December 31, 2007 | 10,200 | — | (196 | ) | 365 | 10,369 | ||||||||||||||
Net loss | — | — | (760 | ) | — | (760 | ) | |||||||||||||
Other comprehensive income, net | — | — | 890 | 890 | ||||||||||||||||
Capital contribution from shareholders | 14,501 | — | — | — | 14,501 | |||||||||||||||
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Balance as of December 31, 2008 | 24,701 | — | (956 | ) | 1,255 | 25,000 | ||||||||||||||
Net loss | — | — | (1,685 | ) | — | (1,685 | ) | |||||||||||||
Other comprehensive income, net | — | — | 23 | 23 | ||||||||||||||||
Capital contribution from shareholders | 16,000 | — | — | — | 16,000 | |||||||||||||||
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Balance as of December 31, 2009 | 40,701 | — | (2,641 | ) | 1,278 | 39,338 | ||||||||||||||
Net loss | — | — | (3,810 | ) | — | (3,810 | ) | |||||||||||||
Other comprehensive income, net | — | — | 1,429 | 1,429 | ||||||||||||||||
Capital contribution from shareholders | 9,299 | — | — | — | 9,299 | |||||||||||||||
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Balance as of December 31, 2010 | 50,000 | — | (6,451 | ) | 2,707 | 46,256 | ||||||||||||||
Net loss | — | — | (8,581 | ) | — | (8,581 | ) | |||||||||||||
Other comprehensive income, net | — | — | 2,191 | 2,191 | ||||||||||||||||
Capital contribution from a shareholder | — | 1,178 | — | — | 1,178 | |||||||||||||||
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Balance as of December 31, 2011 | 50,000 | 1,178 | (15,032 | ) | 4,901 | 41,047 | ||||||||||||||
Net loss | — | — | (7,048 | ) | — | (7,048 | ) | |||||||||||||
Other comprehensive income, net | — | — | — | 96 | 96 | |||||||||||||||
Capital contribution from a shareholder | — | 313 | — | — | 313 | |||||||||||||||
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Balance as of December 31, 2012 | 50,000 | 1,491 | (22,080 | ) | 4,997 | 34,408 | ||||||||||||||
Net loss | — | — | (1,478 | ) | — | (1,478 | ) | |||||||||||||
Other comprehensive income, net | — | — | — | 89 | 89 | |||||||||||||||
Capital contribution from a shareholder | — | 18 | — | — | 18 | |||||||||||||||
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Balance as of March 31, 2013 | $ | 50,000 | $ | 1,509 | $ | (23,558 | ) | $ | 5,086 | $ | 33,037 | |||||||||
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The accompanying notes are an integral part of these financial statements
Kanghong Sagent (Chengdu) Pharmaceutical Co., Ltd.
(a development stage company)
Notes to Financial Statements
(amounts in thousands)
1. | Basis of Presentation |
The interim condensed financial statements are unaudited. The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). It is management’s opinion that these financial statements include all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of our financial position, operating results, and cash flows. Operating results for any interim period are not necessarily indicative of future or annual results.
On April 30, 2013, one of our owners, Sagent Pharmaceuticals, Inc., a Delaware corporation (“Sagent”) entered into a Share Purchase Agreement, with Chengdu Kanghong Pharmaceuticals (Group) Co. Ltd. (“Kanghong”) pursuant to which Sagent agreed to acquire Kanghong’s 50% interest in KSCP in exchange for $25,000, payable in installments through September 2015. The acquisition was subject to customary closing conditions, including approval by the Chengdu Hi-Tech Industrial Development Zone Bureau of Investment Services (“BIS”). On June 4, 2013, Sagent received final approval for the transaction from the BIS. Accordingly, the transaction has been completed. As a result of the completion of the transaction, we are now a wholly-owned subsidiary of Sagent.
You should read these statements in conjunction with our financial statements and related notes for the year ended December 31, 2012, included on Pages S-2 through S-19 of the Sagent Pharmaceuticals, Inc., Annual Report on Form 10-K, filed on March 18, 2013.
2. | Inventory |
Inventory consists of the following:
March 31, 2013 | December 31, 2012 | |||||||
Raw materials | $ | 1,237 | $ | 965 | ||||
Finished goods | 403 | — | ||||||
Inventory reserve | (80 | ) | — | |||||
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$ | 1,560 | $ | 965 | |||||
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Kanghong Sagent (Chengdu) Pharmaceutical Co., Ltd.
(a development stage company)
Notes to Financial Statements
(amounts in thousands)
3. | Property, Plant and Equipment |
Property, plant and equipment consists of the following:
March 31, 2013 | December 31, 2012 | |||||||
At cost: | ||||||||
Building | $ | 1,101 | $ | 1,098 | ||||
Machinery | 3,920 | 2,395 | ||||||
Office equipment | 363 | 1,874 | ||||||
Vehicles | 143 | 143 | ||||||
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5,527 | 5,510 | |||||||
Less accumulated depreciation | (1,599 | ) | (1,406 | ) | ||||
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3,928 | 4,104 | |||||||
Construction in progress | 48,226 | 47,790 | ||||||
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$ | 52,154 | $ | 51,894 | |||||
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For the three months ended March 31, 2013 and 2012, and for the period from December 29, 2006 (date of inception) to March 31, 2013, depreciation expense was $193, $150, and $1,581, respectively. The amount of depreciation expense included in pre-production expenses was $189, $146, and $1,218 for the respective periods, and the amount included in general and administrative expenses was $4, $4, and $358 for the respective periods. As of March 31, 2013, the net book values of property, plant and equipment pledged as collateral for bank loans was $49,360. Construction in progress included capitalized interest of $301, $332, and $2,338 for the months ended March 31, 2013 and 2012 and for the period from December 29, 2006 (date of inception) to March 31, 2013, respectively.
4. | Intangible Assets |
Intangible assets consist of the following:
March 31, 2013 | Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||
(In years) | ||||||||||||||||
Purchased software | 2 | $ | 71 | $ | (67 | ) | $ | 4 | ||||||||
Land use right | 50 | 2,016 | (193 | ) | 1,823 | |||||||||||
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Total | $ | 2,087 | $ | (260 | ) | $ | 1,827 | |||||||||
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Kanghong Sagent (Chengdu) Pharmaceutical Co., Ltd.
(a development stage company)
Notes to Financial Statements
(amounts in thousands)
December 31, 2012 | Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||
(In years) | ||||||||||||||||
Purchased software | 2 | $ | 71 | $ | (65 | ) | $ | 6 | ||||||||
Land use right | 50 | 2,016 | (188 | ) | 1,828 | |||||||||||
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Total | $ | 2,087 | $ | (253 | ) | $ | 1,834 | |||||||||
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Amortization expenses of intangible assets for the three months ended March 31, 2013, and 2012 and for the period from December 29, 2006 (date of inception) to March 31, 2013 were $7, $12 and $253, respectively, and were recorded in general and administrative expenses.
The future amortization of intangible assets is as follows:
Year Ending March 31, | ||||
2014 | 45 | |||
2015 | 40 | |||
2016 | 40 | |||
2017 | 40 | |||
2018 | 40 | |||
Thereafter | 1,617 | |||
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$ | 1,822 | |||
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5. | Long-Term Bank Loans |
The Company obtained two credit facilities in the amount of RMB37,000 ($5,902) and RMB83,000 ($13,239) in June 2011 and August 2010, respectively, each with a five year term. Both credit facilities are secured by certain fixed assets of the Company. The interest rate of the credit facilities is the prevailing interest rate of People’s Bank of China on the date of the draw downs. Repayment will be accelerated if the liabilities to assets ratio of the Company exceeds 70% and 80% during the term of the RMB 37,000 and RMB83,000 credit facilities, respectively, or if the Company is unable to achieve 50% of its projected revenues when the Company commences commercial activities. During the three months ended and as of March 31, 2013, the Company was in compliance with these covenants. All interest costs were capitalized in all periods presented as the funds were used to finance the build-out of the Company’s manufacturing facility (see Note 3).
Principal payments due on the long-term bank loans are as follows:
Year ending March 31, | ||||
2014 | $ | 1,595 | ||
2015 | 7,976 | |||
2016 | 9,252 | |||
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$ | 18,823 | |||
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Kanghong Sagent (Chengdu) Pharmaceutical Co., Ltd.
(a development stage company)
Notes to Financial Statements
(amounts in thousands)
6. | Shareholder Contribution |
Sagent granted stock options to one of the Company’s employees and also provided cash compensation to one of these employees for the three months ended March 31, 2013 and 2012. Twenty-five percent of these options are to be vested on each anniversary date from the vesting commencement date of the respective grants over a four year period. These stock options are accounted for as non-employee stock options given these stock options were granted to employees of an investee by a non-controlling shareholder. Therefore, these grants are recorded at fair value at each reporting date during the vesting period. The Company recorded $18, $25 and $1,509 as a shareholder contribution and recognized the associated stock-based and cash compensation expense in the general and administrative expense for the three months ended March 31, 2013 and 2012 and for the period from December 29, 2006 (date of inception) to March 31, 2013.
7. | Commitment and Contingencies |
Purchase Commitments
As of March 31, 2013, the Company had outstanding purchase commitments related to property, plant and equipment in the amount of $59, which are all due within one year.
8. | Fair Value Measurement |
The Company applies ASC topic 820,Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 requires disclosures to be provided around fair value measurement.
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Includes other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs which are supported by little or no market activity.
ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach; and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
In accordance with ASC 820, the Company measures cash equivalents at fair value. Cash equivalents are classified within Level 1 as the cash equivalents are valued using either quoted market prices.
9. | Related Party Transactions |
Name and Related Party Relationship:
Name of related party | Relationship with the Company | |
Sagent Pharmaceuticals, Inc. | Joint venture shareholder | |
Chengdu Kanghong Pharmaceutical (Group) Co., Ltd. | Joint venture shareholder |
Kanghong Sagent (Chengdu) Pharmaceutical Co., Ltd.
(a development stage company)
Notes to Financial Statements
(amounts in thousands)
As of March 31, 2013, we had a related party payable of $1,647 to Sagent. The amounts were for raw material purchased on our behalf and a $1,000 advanced payment of a finished goods inventory. As of December 31, 2012, we had a related party payable of $280 that was for raw material purchases on our behalf. All balances with related parties were unsecured, non-interest bearing and payable on demand.
10. | Subsequent Events |
In accordance with ASC 855, “Subsequent Events”, as amended by ASU 2010-09, we evaluated subsequent events through August 5, 2013, which was also the date the financial statements were available to be issued, and there is a subsequent event requiring disclosure. For more details, please see Note 1, “Basis of Presentation”.