Forward-Looking Statements
This "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and other sections of this Annual Report on Form 10-K contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates and on management's beliefs and -------------------------------------------------------------------------------- assumptions. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of the Company. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance, and involve certain risks, uncertainties and assumptions, which are difficult to predict. See "Item 1A: Risk Factors" above. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Company Overview Strategic OverviewTeligent, Inc. and its subsidiaries (collectively (the "Company") is a generic pharmaceutical company. All references to "Teligent ," the "Company," "we," "us," and "our" refer toTeligent, Inc. and its subsidiaries. Our mission is to become a leader in the high-barrier to entry generic pharmaceutical market. Our platform for growth is centered around the development, manufacturing and marketing of a portfolio of generic pharmaceutical products under our own label and private label for other pharmaceutical companies in topical, injectable, complex and other high-barrier dosage forms. We believe that expanding our development and commercial base beyond topical generics, historically the cornerstone of our expertise, to include injectable generics and other high-barrier generics, will leverage our existing expertise and capabilities, and broaden our platform for more diversified strategic growth. We currently market and sell generic topical and generic and branded generic injectable pharmaceutical products inthe United States andCanada . Inthe United States , we currently market thirty-seven generic topical pharmaceutical products and two branded injectable pharmaceutical products. We have received FDA approvals for thirty-six topical generic products from our internally developed pipeline, and we have seven Abbreviated New Drug Applications, ("ANDAs") and three New Drug Application ("NDA") Prior Approval Supplements ("PASs") submitted to the FDA that are awaiting approval. InCanada , we market 25 generic injectable, three generic topical, and three generic ophthalmic products. We have one Abbreviated New Drug Submission ("ANDS") pending atHealth Canada . Generic pharmaceutical products are bioequivalent to their brand name counterparts. Inthe United States , approved ANDA generic drugs are usually interchangeable with the innovator drug. This means that the generic version may generally be substituted for the branded product by either a physician or pharmacist when dispensing a prescription. We also provide contract development and manufacturing services to the prescription and over-the-counter ("OTC") pharmaceutical and cosmetic markets. We operate our business under one operating segment. Our common stock is traded on the Nasdaq Global Select Market under the trading symbol "TLGT." Our principal executive office, laboratories and manufacturing facilities are located at105 Lincoln Avenue ,Buena, New Jersey . We have additional offices located inIselin, New Jersey , andMississauga, Canada . In late 2020, we decided to reposition the research and development operation mainly performed at ourTallinn, Estonia office to our US manufacturing site atBuena, New Jersey and consequently we are in the process of working to dissolve ourEstonia operations. The manufacturing and commercialization of generic high-barrier pharmaceutical products is competitive, and there are established manufacturers, suppliers and distributors actively engaged in all phases of our business. We currently manufacture and sell topical, injectable and ophthalmic generic pharmaceutical products under our own label in both the US andCanada . Inthe United States , the three large wholesale drug distributors are Amerisource Bergen Corporation ("ABC"); Cardinal Health, Inc. ("Cardinal"); andMcKesson Drug Company , ("McKesson").ABC , Cardinal and McKesson are key distributors of our products, as well as a broad range of health care products for many other companies. None of these distributors is an end user of our products. Generally, if sales to any one of these distributors were to diminish or cease, we believe that the end users of our products would likely find little difficulty obtaining our products either directly from us or from another distributor. However, the loss of one or more of these distributors, together with a delay or inability to secure an alternative distribution source for end users, could have a material negative impact on our revenue, business, financial condition and results of operations. There are generally three major negotiating entities in the US market.Walgreens Boots Alliance Development (WBAD) consists of Walgreens and Amerisource Bergen's PRxO Generics program. Red Oak Sourcing consists of CVS and Cardinal's source programs. Finally, ClarusOne consists of Walmart,RiteAid and McKesson's OneStop program. A loss of any of these major entities could result in a significant reduction in revenue. We consider our business relationships withABC , Cardinal and McKesson to be in good standing, and we have fee for services contracts with each of them. However, a change in purchasing patterns, a decrease in inventory levels, an increase in returns of our products, delays in purchasing products and delays in payment for products by one or more of these distributors could have a material negative impact on our revenue, business, financial condition and results of operations. We continue to explore --------------------------------------------------------------------------------
business development opportunities to add additional products and/or capabilities to our existing portfolio and to expand our private label and contract manufacturing service opportunities.
We have two platforms for growth:
•Developing, manufacturing and marketing a portfolio of generic pharmaceutical products under our own or a private label in topical, injectable and other high-barrier forms; and
•Managing and expanding our current private label and contract development and manufacturing business.
Since 2010, the primary focus of our strategy has been on the growth of our own generic prescription pharmaceutical business particularly within the generic topical pharmaceutical product market, while moderating our contract development and manufacturing to the prescription and OTC pharmaceutical and cosmetic markets. In 2014, we broadened our primary target product focus from topical pharmaceuticals to include a wider approach focused on high-barrier generic prescription pharmaceutical products and generic and branded generic injectable pharmaceutical products. We believed that expanding our development and commercial base beyond topical generics, historically the cornerstone of our expertise, to include injectable generics and other high-barrier dosage forms would leverage our existing expertise and capabilities, and broaden our platform for diversified strategic growth. While we experienced some success in that regard, during the last year, as we have experienced the unfavorable impacts of the COVID-19 pandemic on our business, we have begun to reexamine all of our expertise and assets in order to reinvigorate and bolster our business. This has resulted in our placing additional emphasis on the development of our private label business as well as our contract development and manufacturing business. Following five approvals from our internally developed pipeline of topical generic products in 2019, there were no approvals from our internally developed pipeline of topical generic products in 2020. We continue to be opportunistic in efforts to license or acquire further products, intellectual property, or pending applications to expand our portfolio. We expect to accelerate our growth through the creation of unique opportunities based on the acquisition of additional intellectual property and/or the expansion of the use of our existing intellectual property. We are also exploring the options to monetize certain of our non-core assets. Based on IQVIA (NYSE: IQV) data, the addressable market for the seven ANDA topical filings and three NDAs that we have pending with the FDA is estimated to total over$140 million per annum. We expect to continue to expand our presence in the generic topical and generic injectable pharmaceutical markets through the submission of additional ANDAs to the FDA and the subsequent launch of products if and when these applications are approved by the FDA.
Product and Pipeline Approvals
There were no significant approvals announced in 2020.
The following is a summary of significant approvals announced in 2019:
On
OnJanuary 24, 2019 , we announced approval of an ANDA for Clobetasol Propionate Ointment USP, 0.05%. This was our first approval for 2019, and our thirty-third approval from our internally developed pipeline of topical generic pharmaceutical medicines. We launched this product in the first quarter of 2019. OnMarch 14, 2019 , we announced approval of an ANDA for Desonide ointment, 0.05%. This was our second approval of 2019, and our thirty-fourth approval from our internally developed pipeline of topical generic pharmaceutical medicines. We launched this product in the second quarter of 2019. OnMarch 19, 2019 , we announced approval of an ANDA for Fluocinonide Topical Solution USP, 0.05%. This was our third approval of 2019, and our thirty-fifth approval from our internally developed pipeline of topical generic pharmaceutical medicines. We launched this product in the early third quarter of 2019.
-------------------------------------------------------------------------------- OnApril 4, 2019 , we announced approval of an ANDA for Fluocinonide Cream USP, 0.1%. This was our fourth approval of 2019, and our thirty-sixth approval from our internally developed pipeline of topical generic pharmaceutical medicines. We expect to launch this product in the second half of 2021. OnOctober 18, 2019 , we announced approval of an ANDA for Gentamicin Sulfate Cream USP, 0.1% (gentamicin base). This was our fifth approval of 2019, and our thirty-seventh approval from our internally developed pipeline of topical generic pharmaceutical medicines. We launched this product in the fourth quarter of 2019. Results of Operations
Fiscal year ended
We had a net loss of$122.0 million , or$14.67 per share, during the year endedDecember 31, 2020 ("Current Year") compared to a net loss of$25.1 million , or$4.67 per share, during the year endedDecember 31, 2019 ("Prior Year"). Product Sales, net, include Company Product Sales and Contract Manufacturing Sales, as follows: Revenues (in thousands): Year Ended December 31, Increase/(Decrease) Components of Revenue: 2020 2019 $ % Product sales, net$ 43,604 $ 64,291 $ (20,687) (32) % Contract manufacturing sales 1,157 1,362 (205) (15) % Research and development services and other income 548 243 305 126 % Total Revenues$ 45,309 $ 65,896 $ (20,587) (31) %
Total revenues were
Research and development services and other income will not be consistent and will vary, from period to period, depending on the required timeline of each development project and/or agreement.
Costs and expenses (in thousands):
Year Ended December 31, Increase/(Decrease) 2020 2019 $ % Cost of revenues$ 49,031 $ 42,373 $ 6,658 16 % Selling, general and administrative 27,011 20,785 6,226 30 % Impairment charges 101,533 - 101,533 100 % Product development and research 7,674 10,758 (3,084) (29) % Totals costs and expenditures$ 185,249 $ 73,916 $ 111,333 151 % Total costs and expenditures increased 151%, or$111.3 million to$185.2 million in the Current Year from$73.9 million in the Prior Year. Cost of revenues increased as a percentage of total revenue to 108% in the Current Year as compared to 64% in the Prior Year. Cost of revenues increased$6.7 million in the Current Year mainly due to (i) lower sales volume increased absorption expense (ii) additional quality expenses (iii) excess inventory reserve. Selling, general and administrative expenses in the Current Year increased by$6.2 million as compared to the Prior Year. The increase was primarily due to (i) increased professional fees of$2.0 million , (ii) increased bad debt expenses of$1.2 million , (iii) increased personnel costs of$1.4 million , and (iv) increased legal, audit fees and all other of$2.7 million , partially offset by (v) reduced ANDA filing fees of$0.5 million , (vi) a write off to clinical studies of$0.3 million and (vii) reduced travel expenses of$0.3 million . -------------------------------------------------------------------------------- Impairment charges of$101.5 million were recorded in the Current Year. A property, plant and equipment impairment charge of$79.8 million was recorded in the Current Year. An intangible assets impairment charge of$21.7 million was recorded in the Current Year related to product acquisition costs of$13.5 million , trademark and technology of$8.1 million and IPR&D of$0.1 million . There were no impairment charges in the Prior Year. Product development and research expenses decreased by$3.1 million as compared to the Prior Year. The decrease in product development and research expenses was primarily due to (i) a$1.7 million decrease in personnel costs, (ii) a$1.0 million decrease in outside testings, (iii) an$0.8 million decrease in clinical studies, (iv) a decrease in GDUFA fees, ANDA filings and lab supplies aggregating$1.0 million , partially offset by (v) a$1.4 million increase in write off of material costs associated with research and development activities.
Other (Expense) Income, net (in thousands):
Year Ended December 31, (Increase)/Decrease 2020 2019 $ % Other income$ 3,349 $ - $ 3,349 100 % Foreign exchange gain/(loss)$ 4,961 $ (1,523) $ 6,484 (426) % Debt partial extinguishment of 2019 Notes - (185) 185 (100) % Interest and other expense, net (28,824) (21,154) (7,670) (36) % Gain/(loss) on debt restructuring 51,858 (920) 52,778 (5737) % Inducement loss (9,183) - (9,183) 100 % Change in the fair value of derivative liabilities$ (2,305) $ 6,769 (9,074) (134) %
Other income of
Foreign exchange gain of$5.0 million in the Current Year is related to the foreign currency translation of our intercompany loans denominated inU.S. dollars to our foreign subsidiaries to be repaid inNovember 2022 . Depending on the changes in foreign currency exchange rates, we will continue to record a non-cash gain or loss on translation for the remaining term of these loans.
Debt partial extinguishment on the 2019 Notes was
The net increase in interest and other expense in the Current Year of
The gain on debt restructuring and inducement loss of$42.7 million in the Current Year is due to the exchange of Series A and Series B Convertible Notes for Series C and Series D Convertible Notes in the amount of$8.2 million as well as the conversion of Series D Convertible Notes in the amount of$34.5 million . The change in the fair value of derivatives of$2.3 million included a$2.0 million loss on the derivative liability pertaining to the Series C Notes and a$0.8 million loss on the Warrants, partially offset by a$0.5 million gain on the 2023 Series B Notes. The change in fair value of derivative liabilities of$6.8 million in the Prior Year included a$6.8 million loss on the derivative liability pertaining to the Series B Notes. Net loss attributable to common stockholders (in thousands, except per share numbers): Year Ended December 31, Increase/(Decrease) 2020 2019 $ % Net loss attributable to common stockholders$ (122,022) $ (25,124) $ 96,898 386 % Basic and diluted loss per share$ (14.67) $ (4.67) $ 10.00 214 %
-------------------------------------------------------------------------------- Net loss for the Current Year was$122.0 million as compared to net loss of$25.1 million for the Prior Year. The increase in net loss for the Current Year was due primarily to (i) a decrease in revenues of$20.6 million , (ii) an increase in costs and expenses of$111.3 million , (iii) an increase in interest expense of$7.7 million , and (iv) the derivative liability increase of$9.1 million offset by (v) the gain on debt restructuring and inducement loss of$43.6 million , (vi) a$6.5 million increase in foreign exchange gain, and (vii) gain of$3.4 million in other income from government grant as stated above.
Liquidity and Capital Resources
The Company has incurred significant losses and generated negative cash flows from operations in recent years and expects to continue to incur losses and generate negative cash flow for the foreseeable future. As a result, we had an accumulated deficit of$243.5 million , total principal amount of outstanding borrowings of$181.6 million , and limited capital resources to fund ongoing operations atDecember 31, 2020 . These capital resources were comprised of cash and equivalents of$6.7 million atDecember 31, 2020 and the generation of cash inflows from working capital. The Company is not currently generating revenues from operations that are sufficient to cover its operating expenses, and its available capital resources are not sufficient for it to continue to meet its obligations as they become due. As a result, the Company has engaged financial and legal advisors to assist it in, among other things, analyzing all available strategic alternatives to address its liquidity and capital structure. However, the Company cannot provide assurances that additional capital will be available when needed or that any strategic alternatives or restructuring pursued will be on acceptable terms. The Company's liquidity needs have typically arisen from the funding of its new manufacturing facility, product manufacturing costs, research and development programs, and the launch of new products. In the past, the Company has met these cash requirements through cash inflows from operations, working capital management, and proceeds from borrowings. Although the construction of the Company's new manufacturing facility was substantially completed inOctober 2018 , additional investment was made in order to prepare the facility and the Company's employees for a prior approval inspection from the FDA for the new injectable line. The Company's liquidity was negatively impacted in 2020 as a result of the COVID-19 pandemic, and the Company believes its liquidity will be negatively impacted during 2021 by disruptions with respect to certain of its products and the diversion of resources to remediate the product quality issues identified in connection with the Company's response to theFDA's warning letter. In addition, the Company expects to continue to incur significant expenditures for the development of new products in its pipeline, and the manufacturing, sales and marketing of its existing products. As described above, notwithstanding the Company's significant current liquidity needs, the Company cannot provide assurances that additional capital will be available on acceptable terms or at all. The$9.5 million decrease in our cash during the twelve months endedDecember 31, 2020 was mainly to support our operational activities, which included continued inventory management/build to help avoid failure-to-supply fees and normal timing differences in working capital balances. In addition, we had an accumulated deficit of$243.5 million as ofDecember 31, 2020 , inclusive of a$122.0 million net loss in this year.
Series A 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 Convertible 3.75% Senior Notes (the "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 Condensed 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 inDecember 2019 . Following the issuance of the Series D Notes described below, all amounts owing with respect to the Series A Notes were extinguished through exchange of Series C Notes and Series D Notes (see below).
Series B Notes
OnOctober 31, 2019 , the Company closed its offering of the Series B Notes. The Series B Notes were scheduled to mature inMay 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
The gross cash proceeds of approximately$29.3 million on from the financing were used to extinguish the Company's existing 2019 Notes inDecember 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 total of$2.3 million of the initial purchasers' discounts and professional fees associated with the transaction. The Series B Notes bore interest at a rate of 7.00% per annum if paid in cash, semiannually in arrears onMay 1 andNovember 1 of each year, beginning onMay 1, 2020 . The Company also had an option, and agreed with its senior lender, to PIK the interest at 8.00% per annum, to defer cash payments. The Company elected the paid-in-kind interest option and increased the principal balance of the Series B Notes by$2.0 million for the year endedDecember 31, 2020 . 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 and Series D Notes (see below).
Series C Notes
OnJuly 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 also 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 Company's outstanding Series B Notes, giving effect to a 10% 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% 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 is payable in kind and capitalized with principal semiannually in arrears onMarch 1 andSeptember 1 of each year, beginning onSeptember 1, 2020 . The Series C Notes will mature onMarch 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 endedDecember 31, 2020 . The Company has 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 did not obtain such stockholder approval at an annual or special meeting of its stockholders on or beforeOctober 31, 2020 , holders of a majority in aggregate principal amount of outstanding Series C Secured Convertible Notes may elect to increase the interest rate payable on the 2023 Series C Secured Convertible Notes to 18.0% per annum until such stockholder approval is obtained, which will 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 datedNovember 2, 2020 , the holders of a majority in principal amount of the outstanding 2023 Series C Secured Convertible Notes elected to increase the interest rate payable on the 2023 Series C Secured Convertible Notes from 9.5% to 18.0%. The Company convened and adjourned a special meeting of stockholders onOctober 22, 2020 , and further adjourned such special meeting onNovember 11, 2020 andNovember 25, 2020 due to a lack of quorum. The special meeting of stockholders was held onDecember 16, 2020 , pursuant to which the stockholders of the Company approved the holders of the 2023 Series C Secured Convertible 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 2023 Series C Secured Convertible Notes was decreased to 9.5%.
Series D Notes
OnSeptember 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.
Senior Credit Facilities
OnNovember 12, 2018 , the Company secured a credit agreement for$120.0 million . The facility includes three tranches of funding, an asset based revolving credit facility of$25.0 million dueNovember 2022 ("Revolver"), a term loan of$80.0 million dueFebruary 2023 ("2023 Term Loan"), and a delayed draw term loan of$15.0 million also due inFebruary 2023 ("2023 Delayed Draw Term Loan"). The interest rate under the Revolver was calculated, at the option of the Company, at either the one, two, three or six-month LIBOR plus 3.75% or the base rate plus 2.75%. The interest rate on the 2023 Term Loan and the 2023 Delayed Draw Term Loan bore interest, at the option of the Company, at either the one, two, three or six-month LIBOR plus 8.75% or the base rate plus 7.75%, with a 24-month paid-in-kind interest option available to the Company should it choose to defer cash payments in order to maintain the liquidity needed to continue launching new products, build inventory, and prepare for the FDA prior approval inspection. The Initial Term Loan of$50.0 million and$15.0 million of the Revolver were drawn by the Company onDecember 13, 2018 . OnDecember 21, 2018 , the Company drew$20.0 million of the Delayed Draw Term Loan A. InJanuary 2019 , the Company drew$5.0 million and subsequently the remaining$5.0 million under the Revolver were drawn down by the Company inApril 2019 . OnSeptember 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 Obligation under the First Lien Credit Agreement and bears interest at the rate applicable to the Revolver. The Protective Advance was subsequently repaid inNovember 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 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$14.4 million and$22.9 million for the twelve months and since inception through the period endedDecember 31, 2020 respectively. OnApril 6, 2020 , the Company entered (i) Amendment No. 2 of the Revolver and Amendment No. 4 of the Term Loans (the "Amendment 4"), effective as ofDecember 31, 2019 (together, the "April 2020 Amendments"). TheApril 2020 Amendments together, 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 endedDecember 31, 2019 . The additions and changes to financial covenants set forth in theApril 2020 Amendments: (i) add a new minimum net revenue covenant that is tested on the last day of each fiscal quarter fromMarch 31, 2020 until the quarter endingDecember 31, 2020 , (ii) reset a minimum consolidated adjusted EBITDA covenant that is tested on the last day of each fiscal quarter ending during the period fromMarch 31, 2021 to maturity, (iii) eliminate a total net leverage covenant and (iv) add a minimum liquidity covenant tested at all times during the term of the Senior Credit Facilities. The associated increases in interest rates were effective as ofApril 6, 2020 . 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% or a rate based on the prime rate plus a margin of 12.0%, 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 throughDecember 13, 2021 but only if the following occurs: (1) the Company receives a "warning letter close-out letter" from theFederal Drug Administration in response to corrective actions taken by the Company since receipt of the warning letter inNovember 2019 and (2) the Company receives a written recommendation from theFederal 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'sNew Jersey facility. If only one of those items occurs byDecember 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 untilDecember 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. BothApril 2020 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.
After giving effect to the April Amendments, 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 Term Loan Amendments datedApril 6, 2020 , the Company issued to the Term Loan lenders certain Warrants to purchase up to, in the aggregate, 538,995 of 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 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 not 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 reverse stock split which occurred onMay 28, 2020 and will remain exercisable, in whole or in part, for a period of 5 years from the issuance date. As ofDecember 31, 2020 , all 538,995 Warrants remain outstanding (Note 9). 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. OnJuly 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 amended 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 related thereto, (ii) modify the terms of certain mandatory prepayments, (iii) modify certain negative covenants and (iv) modify certain financial covenants. TheJuly 2020 Second Lien Amendment amended 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 related thereto, (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 theJuly 2020 Second Lien Amendment, the Company issued to the lenders party to the SecondLien 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. As ofDecember 31, 2020 , all 134,667 Warrants remain outstanding. The Company was in compliance with its financial covenants as ofDecember 31, 2020 . However, the Company is at risk of failing the trailing twelve month Adjusted EBITDA covenant for the first quarter of 2022. If the Company fails to comply with its trailing twelve months revenue covenant, events of default under the First Lien Credit Agreement and the Second Lien Credit Agreement would be triggered and its obligations under the Senior Credit Facilities or other agreements (including as a result of cross-default provisions of the indentures relating to the Series C Notes and Series D Notes) may be accelerated. As such, 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 of in the third quarter of 2020 based on the Series C Notes offering which terminates the previous revenue covenant under the Senior Credit Facilities, according to which the Company recognized a$5.6
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million gain in change in the fair value of the derivative liability line on the
Condensed Consolidated Statement of Operations for twelve months ended
Government Grant Advance
OnMay 15, 2020 , the Company received$3.4 million of proceeds from theU.S. Small Business Administration (the "SBA") Paycheck Protection Program (the "Government Grant Advance") and utilized 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 endedDecember 31, 2020 . Nasdaq Delisting Notice OnApril 9, 2021 , the Company received a notice (the "Notice") fromThe Nasdaq Stock Market informing the Company that for the last 30 consecutive business days, the bid price of the Company's securities had closed below$1.00 per share, which is the minimum required closing bid price for continued listing on Nasdaq pursuant to Listing Rule 5450(a)(1) (the "Bid Price Requirement"). The Notice has no immediate effect on the Company's Nasdaq listing or trading of the Company's common stock. The Company has 180 calendar days, or untilOctober 6, 2021 , to regain compliance. 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 business days. If the Company does not regain compliance byOctober 6, 2021 , the Company may be eligible for additional time to regain compliance or if the Company is otherwise not eligible, the Company may request a hearing before aHearings Panel . The negative financial conditions described above raise substantial doubt about our ability to continue as a going concern as ofDecember 31, 2020 . To that end, and as described above, the Company is not currently generating revenues from operations that are sufficient to cover its operating expenses, and its available capital resources are not sufficient for it to continue to meet its obligations as they become due. As a result, the Company has engaged financial and legal advisors to assist it in, among other things, analyzing all available strategic alternatives to address its liquidity and capital structure. However, the Company cannot provide assurances that additional capital will be available when needed or that any strategic alternatives or restructuring pursued will be on acceptable. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Operating Activities
Our operating activities used$16.8 million of cash during the year endedDecember 31, 2020 compared to$18.4 million during the year endedDecember 31, 2019 . The cash used for the year endedDecember 31, 2020 was mostly due to an increase in inventories of$9.8 million , and a reduction in deferred income of$2.4 million , in addition to$3.3 million of interest paid on our Notes, Revolver, and Term Loans. The cash used for the year endedDecember 31, 2019 was mostly due to an increase in accounts receivable of$3.7 million and inventories of$6.1 million , and a reduction in deferred income of$2.4 million , in addition to$5.6 million of interest paid on our Notes, Revolver and Term Loans.
Investing Activities
Our investing activities used$3.9 million during the year endedDecember 31, 2020 compared to$8.2 million for the year endedDecember 31, 2019 . The funds used for the year endedDecember 31, 2020 included$4.0 million in capital expenditure, the majority of which were for the continued facility expansion inBuena, NJ . The funds used for the year endedDecember 31, 2019 included$8.2 million in capital expenditure, the majority of which were for the continued facility expansion inBuena, NJ .
Financing Activities
Our financing activities provided$9.0 million of cash during the year endedDecember 31, 2020 compared to$30.4 million of cash provided by in the year endedDecember 31, 2019 . The cash provided during the year endedDecember 31, 2020 primarily consisted of$12.0 million of proceeds from the Series C Notes. The cash provided during the year endedDecember 31, 2019 consisted of proceeds from the Series B Notes net of issuance costs of$26.9 million as well as net borrowing from the Company's Senior Credit Facility of$19.2 million , offset by the settlement of our 2019 Notes of$15.7 million .
Off-Balance Sheet Arrangements
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We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our shareholders. Contractual Obligations Our contractual obligations and commitments as ofDecember 31, 2020 are presented below. Outstanding debt and interest obligation are discussed in Note 6 of our Consolidated Financial Statements. As more fully described under Item 2 - Properties, we lease a warehouse inVineland, New Jersey , office space inIselin, New Jersey , office space inMississauga, Canada . Our remaining obligations under these leases are summarized below. Obligations Due by Period (in thousands) Less than 1 More than 5 Contractual Obligations Total Year 1-3 Years 3-5 Years Years Short term debt obligations $ - $ -
$ - $ - $ - Long term debt obligations
181,580 - 181,580 - - Interest on debt obligations 49,306 22,740 26,566 - - Operating Lease 2,776 587 1,338 851 - Total$ 233,662 $ 23,327 $ 209,484 $ 851 $ -
Critical Accounting Policies and Estimates
Our consolidated financial statements were prepared in accordance withU.S. generally accepted accounting principles, which require us to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgment increases, such judgments become even more subjective. While we believe our assumptions are reasonable and appropriate, actual results may be materially different than estimated. Impairment The Company assesses the recoverability of its long-lived assets, which include property and equipment and definite-lived intangible assets, whenever significant events or changes in circumstances indicate impairment may have occurred. If indicators of impairment exist, projected future undiscounted cash flows associated with the asset are compared to its carrying amount to determine whether the asset's value is recoverable. Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and a charge to operating results. For the twelve months endedDecember 31, 2020 , the Company determined that there was an impairment of$101.5 million to its long-lived assets.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade receivables, restricted cash, accounts payable and other accrued liabilities atDecember 31, 2020 approximate their fair value for all periods presented. The Company measures fair value in accordance with ASC 820-10, "Fair Value Measurements and Disclosures". ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820-10 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
-------------------------------------------------------------------------------- Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair Value Net Carrying Value 2023 Series C Convertible Notes$ 30,148 $ 31,922 2023 Series D Convertible Notes 1,459 5,796
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 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.
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 are excluded from revenues.
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
InMay 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 inU.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 ofJanuary 1, 2018 following the 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 onJanuary 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.
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 takes into account an estimate of the expected wholesaler sell-through levels to indirect customers at contract prices. The Company validates the chargeback accrual quarterly through a review of the inventory reports obtained from its largest wholesale customers. This customer inventory information is used to establish the estimated liability for future chargeback claims based on historical chargeback and contract rates. These large wholesalers represent a majority of the Company's chargeback payments. The Company continually monitors current pricing trends and wholesaler inventory levels to ensure the liability for future chargebacks is fairly stated. Rebates are used for various discounts and rebates provided to customers. The Company reviews the percentage of products sold through these programs by reviewing chargeback data and applies the appropriate percentages to calculate the rebate accrual. Rebates invoices and/or payments are 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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America , or 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 liability associated with certain Notes, sales returns and allowances, allowances for excess and obsolete inventories, allowances for doubtful accounts, provisions for income taxes and related valuation allowances, stock based compensation, the assessment for the impairment of long-lived assets (including intangibles, goodwill and property, plant and equipment), property, plant and equipment and legal accruals. 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.
Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for Recently Adopted Accounting Pronouncements and Recently Issued Accounting Pronouncements.
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