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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q


 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________________ to_______________________
 
Commission File Number 001-08568
 
Teligent, Inc.
(Formerly IGI Laboratories, Inc.)
(Exact name of registrant as specified in its charter)
Delaware01-0355758
(State or other Jurisdiction of(I.R.S. Employer Identification No.)
incorporation or organization)
105 Lincoln Avenue
Buena, New Jersey
08310
(Address of Principal Executive Offices)(Zip Code)

 
(856) 697-1441
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act: 

Title of each classTrading symbol(s)Name of each exchange on
Common Stock, Par Value $0.01 Per ShareTLGTThe Nasdaq Stock Market


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ     No ¨
 
1


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filerSmaller reporting company
Emerging growth company
¨
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). ☐

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

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

The number of shares outstanding of the issuer's common stock was 21,754,223 shares as of December 24, 2020.






2


OTHER INFORMATION
 
When used in this report, the terms, “we,” the “Company,” “our,” and “us” refer to Teligent, Inc., a Delaware corporation (formerly IGI Laboratories, Inc.), and its consolidated subsidiaries.
3


PART I
FINANCIAL INFORMATION
ITEM 1.    Financial Statements
TELIGENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
September 30, 2020 (unaudited)December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents$9,698 $15,508 
Restricted cash206 206 
Accounts receivable, net of allowance for doubtful accounts of $2,422 and $2,208, as of September 30, 2020 and December 31, 2019, respectively
16,394 20,374 
Inventories26,917 23,031 
Assets held for sale133  
Other prepaid expenses and receivables976 2,525 
Total current assets54,324 61,644 
Property, plant and equipment, net96,305 96,349 
Intangible assets, net35,329 44,645 
Goodwill479 491 
Other assets3,816 3,776 
Total assets$190,254 $206,905 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable$8,794 $6,875 
Accrued expenses9,236 9,285 
Government Grant Advance3,378  
Capital lease obligation, current477 446 
Total current liabilities21,885 16,606 
Series A Senior Convertible Notes, net of debt discount and debt issuance costs (face of $0 and $66,090 as of September 30, 2020 and December 31, 2019, respectively)
 53,093 
Series B Senior Convertible Notes, net of debt discount and debt issuance costs (face of $0 and $34,405 as of September 30, 2020 and December 31, 2019, respectively)
 21,824 
Series C Senior Secured Convertible Notes, net of debt discount and debt issuance costs (face of $50,323 and 0 as of September 30, 2020 and December 31, 2019, respectively)
30,992  
Series D Senior Convertible Notes, net of debt discount and debt issuance costs (face of $26,396 and $0 as of September 30, 2020 and December 31, 2019, respectively)
47,419  
Revolver, net of debt issuance costs (face of $25,000 and $25,000 as of September 30, 2020 and December 31, 2019, respectively)
25,000 25,000 
2023 Term Loans, net of debt issuance costs (face of $99,209 and $88,464 as of September 30, 2020 and December 31, 2019, respectively )
95,407 86,452 
Derivative liabilities6,726 6,776 
Deferred tax liability274 205 
Other long term liabilities2,641 2,256 
Total liabilities230,344 212,212 
Commitments and Contingencies
Stockholders’ deficit:
Common stock, $0.01 par value, 100,000,000 shares authorized; 6,391,569 and 5,385,043 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
66 56 
Additional paid-in capital126,282 118,469 
Accumulated deficit(163,152)(121,474)
Accumulated other comprehensive loss(3,286)(2,358)
Total stockholders’ deficit(40,090)(5,307)
Total liabilities and stockholders' deficit$190,254 $206,905 
 The accompanying notes are an integral part of the condensed consolidated financial statements.
4




TELIGENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share information)
(Unaudited)
 
Three months ended September 30,Nine months ended September 30,
2020201920202019
Revenue, net$14,339 $18,466 $35,372 $49,929 
Costs and expenses:
Cost of revenues14,225 11,186 33,919 28,346 
Selling, general and administrative expenses6,543 5,007 18,249 15,707 
Impairment charges  8,373  
Product development and research expenses2,370 2,064 6,050 7,721 
Total costs and expenses23,138 18,257 66,591 51,774 
Operating income/(loss)(8,799)209 (31,219)(1,845)
Other Expense:
Foreign currency exchange gain/(loss)1,856 (2,167)2,384 (2,458)
Debt partial extinguishment of 2019 Notes   (185)
Interest and other expense, net(8,056)(5,160)(21,452)(15,262)
Gain on debt restructuring10,882  10,882  
Inducement loss(701) (701) 
  Change in the fair value of derivative liabilities4,326  (1,523) 
Loss before income tax expense/(benefit)(492)(7,118)(41,629)(19,750)
Income tax expense/(benefit)18 (5)49 76 
Net loss attributable to common shareholders$(510)$(7,113)$(41,678)$(19,826)
Basic and diluted loss per share$(0.08)$(1.32)$(7.32)$(3.68)
Weighted average shares of common stock outstanding:
Basic and diluted shares6,082,517 5,385,041 5,690,164 5,383,531 


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

.
5



TELIGENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited) 
 
Three months ended September 30,Nine months ended September 30,
2020201920202019
Net loss$(510)$(7,113)$(41,678)$(19,826)
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustment(496)36 (928)331 
Other comprehensive income/(loss), net of tax(496)36 (928)331 
Comprehensive loss$(1,006)$(7,077)$(42,606)$(19,495)

The accompanying notes are an integral part of the condensed consolidated financial statements.
6



TELIGENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
(in thousands, except share information)

 
AdditionalAccumulated
Other
Total
Common StockPaid-InAccumulatedComprehensiveStockholders’
Shares (*)Amount (*)Capital (*)DeficitLossDeficit
Balance, December 31, 2019 (audited)5,385,043 $56 $118,469 $(121,474)$(2,358)$(5,307)
Stock based compensation expense— — 807 — — 807 
Issuance of stock for vested restricted stock units4,906 — — — — — 
Reclassification of derivative liabilities to equity— — 8,460 — — 8,460 
Warrant issuance— — 329 — — 329 
APIC related to Series C Convertible Notes— — (2,528)— — (2,528)
Fair value of conversion feature on Convertible 2023 Series D Notes1,000,000 10 745 — — 755 
Cumulative translation adjustment— — — — (928)(928)
Net loss— — — (41,678)— (41,678)
Share rounding as a result of the reverse stock split1,620 — — — — — 
Balance, September 30, 2020 (unaudited)6,391,569 $66 $126,282 $(163,152)$(3,286)$(40,090)

(*) Adjusted to reflect the 1-for-10 reverse stock split effectuated at 12:01 a.m. Eastern Time on May 28, 2020.

The accompanying notes are an integral part of the condensed consolidated financial statements.
7


TELIGENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

Nine months ended September 30,
20202019
Cash flows from operating activities:
Net loss$(41,678)$(19,826)
Reconciliation of net loss to net cash (used in) provided by operating activities:
Depreciation of fixed assets and leases2,933 2,700 
Provision for bad debt214 (97)
Provision for write down of inventory5,074 (295)
Stock based compensation795 896 
Amortization of debt costs and debt discount6,254 4,657 
Amortization of intangible assets2,032 2,260 
Non cash lease expense320 308 
Deferred income taxes70  
Foreign currency exchange (gain)/loss (2,384)2,458 
Partial extinguishment of Convertible 3.75% Senior Notes
 185 
Write down of fixed assets398  
Loss on impairment of intangible assets8,373  
Non cash interest expense12,985 6,359 
Gain on debt restructuring(10,882) 
   Inducement loss701  
Change in the fair value of derivative liabilities1,523  
Changes in operating assets and liabilities:
Accounts receivable3,764 (4,018)
Inventories(8,906)(5,970)
Prepaid expenses, other current receivables, and assets1,581 1,666 
Accounts payable and accrued expenses1,540 2,747 
Operating liabilities(314)(265)
Deferred income (2,426)
Net cash used in operating activities(15,607)(8,661)
Cash flows from investing activities:
Capital expenditures(3,164)(6,082)
Net cash used in investing activities(3,164)(6,082)
Cash flows from financing activities:
Proceeds from exercise of common stock options  
Proceeds from Revolver 12,500 
Proceeds from 2023 Series C Senior Notes12,000  
Debt issuance costs(2,776)(269)
Repurchase of 3.75% senior notes
 (2,686)
Government grant advance3,378  
Principal paid on lease obligation(10)(9)
Net cash provided by financing activities12,592 9,536 
Effect of exchange rate on cash and cash equivalents369 (481)
Net decrease in cash, cash equivalents and restricted cash(5,810)(5,207)
Cash, cash equivalents and restricted cash at beginning of period16,182 13,069 
Cash, cash equivalents and restricted cash at end of period$10,372 $7,381 
Supplemental Cash flow information:
Cash payments for interest$2,795 $3,211 
Cash payments for income taxes64 68 
Non-cash operating, investing and financing transactions:
Acquisition of capital expenditures in accounts payable and accrued expenses220 938 
Capitalized stock compensation in capital expenditures12 23 
 The accompanying notes are an integral part of the condensed consolidated financial statements.
8


TELIGENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on its Form 10-K ('Original Form 10-K") for the year ended December 31, 2019, as updated by other reports we may file from time to time with the Securities and Exchange Commission ("SEC"). The condensed consolidated balance sheet as of December 31, 2019, has been derived from those audited consolidated financial statements. The Company filed an Amendment No. 1 Form 10-K/A to its Original Form 10-K solely to include the information required by Items 10 through 14 of Part III. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.





9


1. Nature of the Business and Going Concern

Nature of the Business

Teligent, Inc. and its subsidiaries (collectively the “Company”) is a specialty generic pharmaceutical company. Teligent’s mission is to become a leader in the specialty generic pharmaceutical market in alternate dosage forms. Under its own label, the Company markets and sells generic topical, branded generic, and generic injectable pharmaceutical products in the United States and Canada. In the United States, the Company currently markets thirty-eight generic topical pharmaceutical products and four branded generic pharmaceutical products. In Canada, the Company sells thirty-six 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”) and cosmetic markets. The Company operates its business under one segment. Its common stock is traded on the Nasdaq Global Select Market under the trading symbol “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, Mississauga, Canada, and Tallinn, Estonia.

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 result in social, economic, and labor 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 has 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 its 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 its products. The COVID-19 pandemic may also create delays in the review and approval of its regulatory submissions as well as its pending reinspection related to the Company'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 the date of this filing.

The Company has taken preventative measures to help ensure business continuity while maintaining safe and stable 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 manufacturing 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 entrance. The Company has also implemented a routine sanitization process of the facility. 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 year to date results and anticipated future results have been negatively impacted due to COVID-19. Under the provisions of ASC 360-10-55, the Company continues to review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying 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 $8.4 million in the first quarter of 2020 related to trademarks and technology of $4.9 million and product acquisition costs of $3.5 million (Note 10). There were no changes to the assumptions made at the first quarter of this year that would suggest further impairment. The Company did not have impairment triggers related to the long-lived assets after the first quarter of this year.

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The Company's financial performance has been adversely impacted by the unprecedented 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 September 30, 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 Condensed Consolidated Statement of Operations in the nine months ended September 30, 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 Advance matures in 2 years with accrued interest at an annual rate of 1.00%, being deferred for payments until the date of forgiveness or 24 weeks from the date when the fund was received by the Company. According to ASC 450-30, Gain Contingencies, the Company recorded the $3.4 million of proceeds in the Government Grant Advance line on its Condensed Consolidated Balance Sheet as of September 30, 2020. The Company will record the related earnings impact on its Condensed Consolidated Statement of Operations in the period when the associated conditions attached to the Advance are reasonably assured to be met.

In May 2020, the Company modified one 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 subsequently to wind-down its Estonia operation. In September of 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 (Note 6).

The Company markets a portfolio of FDA-approved medicines, including several generic alternatives in the United States. These products include both injectable and topical prescription medicines. From late March to the 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 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 is still extremely challenging to predict the pace of the anticipated increase and 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 negative conditions or events, when considered
11


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 negative conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern as of September 30, 2020 and as of December 31, 2020, the date these financial statements are available for issuance.

The Company has incurred significant losses and generated negative cash flows from operations in recent years and expects to continue to incur losses and generate negative cash flow for the foreseeable future. As a result, the Company had an accumulated deficit of $163.2 million, total principal amount of outstanding borrowings of $198.8 million, and limited capital resources to fund ongoing operations at September 30, 2020. These capital resources were comprised of cash and equivalents of $10.4 million at September 30, 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 including, but not limited to, making significant changes to its operating plan, pursuing a merger or other transaction involving a change of control, or restructuring its outstanding debt via out of court or in-court methods, including the pursuit of a plan of reorganization which would be filed under Chapter 11 of the U.S. Bankruptcy Code and/or ceasing its operations. 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 accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As disclosed in Note 8, 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 2023 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 2023 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. These amendments superseded the financial covenants included in the original and amended agreements as disclosed in Note 8. The Company reversed the event of default liability of $5.6 million in the third quarter of 2020 based on amendment 3 of the first lien and amendment 5 of the second lien which terminates the previous revenue covenant under the Senior Credit Facilities. The current covenants under the Senior Credit Facility includes a minimum liquidity test of $3 million at all times along with quarterly financial covenants of a minimum net revenue test and a quarterly minimum EBITDA test starting in Q2 2021. In the event that the Company is unable to comply with its covenants, or obtain a waiver from its lenders, the lender shall have the right, but not the obligation, to permanently reduce the commitment in whole or in part or to declare all or any portion of the outstanding balance due and payable. Furthermore, in the event that outstanding balances under the Ares Credit agreements are declared due and payable by the lender, the holders of the 2023 Series C Secured Convertible Notes and 2023 Series D Convertible Notes shall have the right, but not the obligation, to declare all of the outstanding balance due and payable as well. If the Company is unable to raise additional capital to meet these obligations, the Company will have to seek other strategic alternatives, including pursuing a merger or other transaction involving a change of control, restructuring its outstanding debt, seeking relief under the U.S. Bankruptcy Code, or ceasing its operations. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The Company was in compliance with its financial covenants as of September 30, 2020. However, the Company is at risk of failing the trailing twelve month Adjusted EBITDA covenant for the second quarter of 2021. If the Company fails to comply with its financial covenants, an event of default under the Credit Agreements would be triggered and its obligations under the Senior Credit Facilities (defined in Note 8) or other agreements (including as a result of cross-default provisions of the indentures relating to the 2023 Series C Secured Convertible Notes and the 2023 Series D Convertible Notes) may be accelerated.

12


In June 2019, the Company received a delisting notice from the NASDAQ due to its share price being below $1.00 for 30 consecutive trading days. The notice specified that the Company's share price must trade above $1.00 per share for ten consecutive trading days in order to avoid the Company's common stock from being delisted. Following a series of extensions to the Company's deadline to regain compliance on May 28, 2020, the Company effectuated a one-for-ten reverse stock split (Note 2) which resulted in the Company receiving on June 18, 2020, a written notice from the NASDAQ that it had regained compliance with the Bid Price Requirement.

On July 28, 2020, the Company received a new notice (the “Notice”) from The Nasdaq Stock Market stating that the Company was not in compliance with Nasdaq Listing Rule 5450(b)(3)(C) relating to the minimum Market Value of Publicly Held Shares (the “MVPHS Rule”). The notice stated that the Company failed to maintain a minimum market value of publicly held shares of $15.0 million for the 30 consecutive days preceding the date of the notice. The notice has no immediate effect on the Company’s Nasdaq listing or trading of the Company’s common stock. The Company has a compliance period for the MVPHS Rule of 180 calendar days, or until January 25, 2021, in which to regain compliance. To regain compliance, the Company’s minimum market value of publicly held shares must equal $15.0 million or more for a minimum of 10 consecutive business days. If the Company does not regain compliance by January 25, 2021, then Nasdaq will notify the Company that the Company’s common stock will be delisted from the Nasdaq Global Market, unless the Company requests a hearing before a Nasdaq Hearings Panel. In the event of the Company’s shares are de-listed from Nasdaq, the Company would likely have to seek some combination of waivers from its lenders and noteholders as the Series C and Series D Convertible Note holders can require the Company to repurchase the notes on this triggering event and the Company would have to 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 seeking relief under the U.S. Bankruptcy Code or ceasing operations. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

On November 24, 2020, the Company received a notice (the “Notice”) from The Nasdaq Stock Market stating that the Company was not in compliance with Nasdaq Listing Rule 5250(c)(1) (the “Filing Requirement”) as a result of the Company not having timely filed its Quarterly Report on Form 10-Q for the three months ended September 30, 2020 (“Form 10-Q”) with the Securities and Exchange Commission. The Notice has no immediate effect on the Company’s Nasdaq listing or trading of the Company’s common stock. The Company was unable to timely file the Form 10-Q due to the ongoing complex accounting analysis and evaluation of its New 2023 Notes, which were issued on September 22, 2020 during the third quarter of 2020 (as previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on September 23, 2020). The Company is working diligently to resolve these complex issues and the appropriate accounting treatment of the New 2023 Notes in order to file the Delinquent Filing as quickly as possible. The Company has 60 calendar days to submit a plan to regain compliance under the Nasdaq’s listing rules with respect to the failure to satisfy the Filing Requirement. If the plan is accepted by Nasdaq, we may be granted an exception of up to 180 calendar days, in which to regain compliance.

On December 4, 2020, the Company received a notice (the “Notice”) from The 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 until June 2, 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 by June 2, 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 a Hearings Panel.





13


2. Summary of Significant Accounting Policies
 
Basis of Presentation

The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the fiscal years ending December 31, 2020 and 2019. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements contained in the Company’s Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on April 13, 2020.

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 Condensed 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.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Teligent, Inc. and its wholly owned and majority-owned subsidiaries. The Company consolidated 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.

Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the valuation of derivative liabilities 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 property, plant and equipment), indefinite-lived assets (including, goodwill, intangibles, and In-Process research and development), and legal 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.

14



On September 8, 2020, the Company entered into a letter of intent to execute a Business Transfer Agreement with a related party (Note 15).

Cash Equivalents
 
The Company considers all highly liquid instruments purchased with the original maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes. Cash and cash equivalents include cash on hand and bank demand deposits used in the Company’s cash management program.

The Company has restricted cash, consisting of escrow accounts and letter of credits, which are included within other long-term assets on the Condensed Consolidated Balance Sheet. Pursuant 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. In the beginning 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 upon its maturity in December 2019 (Note 8).

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported in the Condensed Consolidated Balance Sheet to the total amounts in the Condensed Consolidated Statement of Cash Flows as follows:

September 30, 2020September 30, 2019
Cash and cash equivalents$9,698 $6,707 
Restricted cash206 206 
Restricted cash in other assets468 468 
Cash, cash equivalents and restricted cash in the statement of cash flows$10,372 $7,381 

Fair Value of Financial Instruments
 
The carrying amounts of cash and cash equivalents, trade receivables, restricted cash, accounts payable and other accrued liabilities at September 30, 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 the measurement date. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

As of September 30, 2020, the fair value and the respective net carrying value of the outstanding Convertible Notes are as follows:

(in thousands)



15


Fair ValueNet Carrying Value
2023 Series C Convertible Notes 27,531 30,992 
2023 Series D Convertible Notes10,500 47,419 

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 potentially dilutive common stock equivalents outstanding during the period. Potential dilutive common stock equivalents include shares issuable upon the conversion of the notes and the exercise of options and warrants. For the three and nine months ended September 30, 2020, the potential dilutive common stock equivalents have been excluded from the computation of diluted loss per share, as their effect would have been anti-dilutive.

(in thousands except shares and per share data) 

Three months ended September 30,Nine months ended September 30,
2020201920202019
Basic loss per share computation:
Net loss - basic and diluted$(510)$(7,113)$(41,678)$(19,826)
Weighted average common shares - basic and diluted6,082,517 (*)5,385,041 5,690,164 (**)5,383,531 
Basic and diluted loss per share$(0.08)$(1.32)$(7.32)$(3.68)

(*) In accordance with ASC 260-10-45-13, the Company includes the Warrants issued to its Term Loan lenders to purchase 134,667 shares of the Company’s common stock at an exercise price of $0.01 per share, from July 20, 2020 to September 30, 2020, in the number of outstanding shares used to calculate the basic and diluted loss per share for the three months ended September 30, 2020.

(**) In accordance with ASC 260-10-45-13, the Company includes the Warrants issued to its Term Loan lenders to purchase 134,667 shares of the Company's common stock at an exercise price of $0.01 per share from July 20, 2020 to September 30, 2020 and 538,995 shares of the Company’s common stock at an exercise of $0.01 per share from May 28, 2020 to September 30, 2020, in the number of outstanding shares used to calculate the basic and diluted loss per share for the nine months ended September 30, 2020.

Concentration of Credit Risk
 
Major customers of the Company are defined as those constituting greater than 10% of the Company's total revenue. For the three months ended September 30, 2020, three customers accounted for 47% of the Company’s revenue, consisting of 21%, 13%, and 13%, respectively. For the three months ended September 30, 2019, two of the Company’s customers accounted for 47% of the Company’s revenue, consisting of 35% and 12%, respectively. For the nine months ended September 30, 2020, two of the Company’s customers accounted for 34% of the Company’s revenue, consisting of 22% and 12%, respectively. For the nine months ended September 30, 2019, two of the Company’s customers accounted for 48% of the Company’s revenue, consisting of 29% and 19%, respectively. Accounts receivable related to the Company’s major customers comprised 46% of all accounts receivable as of September 30, 2020 and 47% as of September 30, 2019, respectively. The loss of one or more of these major customers could have a significant impact on our revenues, our business, and results of operations.
 
For the three months ended September 30, 2020, domestic net revenues were $12.7 million and foreign net revenues were $1.6 million. For the nine months ended September 30, 2020, domestic net revenues were $27.8 million and foreign net revenues were $7.6 million. As of September 30, 2020, domestic assets were $147.9 million and foreign assets were $42.4 million. For the three months ended September 30, 2019, domestic net revenues were $13.4 million and foreign net revenues were $5.1 million. For the nine months ended September 30, 2019, domestic net revenues were $36.5 million and foreign net revenues were $13.4 million. As of September 30, 2019, domestic assets were $142.5 million and foreign assets were $53.7 million.

Recently Adopted Accounting Pronouncements

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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 Condensed Consolidated Financial Statements or the related disclosures.

Recently Issued 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 an accounting standard update to simplify the accounting for income taxes. The standard’s amendments include 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 Condensed 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 means January 1, 2023. Based on the current status of the evaluation, the Company believes the adoption of the guidance will not have a material impact on its Condensed Consolidated Financial Statements and related disclosures. The Company expects to continue and finalize its evaluation and assessment as required by the guidance upon adoption.


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3. Revenues, Recognition and Allowances

Revenue Recognition

The Company derives its revenues from three types of transactions: sales of its own pharmaceutical products (Company product sales), sales of the manufactured products 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 a FOB destination basis and because of the inventory risk and risk of ownership pass 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 that the Company entered into with customers either verbally or in written form.

Contract manufacturing sales are recognized net of accruals for cash discounts which are established at the time of sale and are included in Revenue, net in the Company's Condensed Consolidated Statement of Operations.

Research and Development Services and Other Income

The Company establishes agreed-upon product development agreements with its customers to perform product development services. Revenues are recognized in accordance with the agreement upon the completion of the phases of development and when the Company has no future performance obligations relating to that phase of development. Other types of revenue include royalty or licensing revenue that would be recognized over time, at a point in time, or based upon the contractual term upon completion of the earnings process. Judgments are required to evaluate contingencies such as potential variances in the schedule or costs, the impact of change orders, liability claims, contract disputes, or the achievement of contractual performance standards.

Revenues by Transaction Type

The Company operates under one reportable segment and therefore the results of the Company's operations are reported on a consolidated basis, which is consistent with internal management reporting utilized by the chief decision maker.

Net revenues for the three and nine months ended September 30, 2020 and 2019 are as follows:

Three months ended September 30,Nine months ended September 30,
2020201920202019
Company product sales$13,933 $18,228 $34,097 $48,591 
Contract manufacturing sales306 167 813 1,097 
Research and development services and other income100 71 $462 $241 
Revenue, net$14,339 $18,466 $35,372 $49,929 
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Disaggregated information for the Company product sales revenue has been recognized in the accompanying unaudited interim Condensed Consolidated Statements of Operations and is presented below according to product type:

Three months ended September 30,Nine months ended September 30,
Company Product Sales2020201920202019
Topical$11,982 $13,271 $26,138 $35,240 
Injectables1,951 4,957 7,959 13,351 
Total$13,933 $18,228 $34,097 $48,591 

In the nine months ended September 30, 2020, the Company did not incur, and therefore did not defer, any material incremental costs to obtain contracts.

Sales Returns and Allowances

As is customary in the pharmaceutical industry, the Company’s product sales are subject to a variety of deductions, including chargebacks, rebates, cash discounts, other allowances, and returns. Product sales are recorded net of accruals for returns and allowances, which are established at the time of sale. The Company analyzes the adequacy of its accruals for returns and allowances quarterly. Amounts accrued for sales deductions are adjusted when trends or significant events indicate that an adjustment is appropriate. Accruals are also adjusted to reflect actual results. These provisions are estimates based on historical payment experience, historical relationship to revenues, estimated customer inventory levels and current contract sales terms with direct and indirect customers. The Company uses a variety of methods to assess the adequacy of its returns and allowances reserves to ensure that its financial statements are fairly stated. These include periodic reviews of customer inventory data, customer contract programs, subsequent actual payment experience, and product pricing trends to analyze and validate the return and allowances reserves.

Net revenue and accounts receivable balances in the Company’s condensed consolidated financial statements are presented net of sales returns and allowances (SRA). Accounts receivable were presented net of SRA estimates of $28.2 million and $30.5 million at September 30, 2020 and December 31, 2019, respectively. Certain SRA balances were included in accounts payable and accrued expenses.

The allowance for doubtful accounts was $2.4 million and $2.2 million at September 30, 2020 and December 31, 2019, respectively. The allowance for doubtful accounts was primarily related to one specific customer for $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 vary with changes in product mix, changes in customer pricing and changes to estimated wholesaler inventories. The provision for chargebacks 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 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 which can be programs or one-time events. The Company reviews the percentage of products sold through these programs by reviewing chargeback data and uses the appropriate percentages to calculate the rebate accrual. Rebates are invoiced monthly, quarterly, or annually and reviewed against the accruals. Other items that could be included in accrued rebates would be price protection fees, shelf stock adjustments (SSAs), or other various amounts that would serve as one-time discounts on specific products.

The Company's adjustments for the deductions to gross product sales are as follows:

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Three months ended September 30,Nine months ended September 30,
2020201920202019
Gross product sales$44,264 $41,814 $104,147 $108,550 
Deduction to gross product sales:
Chargebacks and billbacks24,585 14,573 54,091 37,285 
Wholesaler fees for service1,445 2,355 4,191 6,303 
Sales discounts and other allowances4,302 6,658 11,769 16,371 
Total reduction to gross product sales$30,332 $23,586 $70,051 $59,959 
Company product sales, net$13,933 $18,228 $34,097 $48,591 

Financing and Payment

The Company's payment terms vary by the type of the customer and the products or services offered. The term between invoicing and when payment is due is not significant. Generally, the Company does not incur incremental costs to obtain contracts. The Company does not adjust revenue for the effects of a significant financing component as the Company's customers generally pay within 100 days.

Costs to Obtain or Fulfill a Customer Contract

Costs related to shipping and handling are comprised of outbound freight and associated labor. The Company accounts for shipping and handling activities related to contracts with customers as fulfillment costs which are included in the cost of sales in the Condensed Consolidated Statements of Operations.

The Company is required to pay a 40% royalty on certain product net sales to a pharmaceutical partner. There are currently 4 products manufactured and distributed under the Company’s label in the U.S. which are subject to this agreement. Payments are made quarterly. Royalty expense of $0.3 million and $0.5 million was included in the cost of sales in the Condensed Consolidated Statements of Operations for the three months ended September 30, 2020 and 2019, respectively. Royalty expense of $0.5 million and $1.1 million was included in the cost of sales in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2020 and 2019, respectively.


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4. Inventories

Inventories are valued at the lower of cost or net realizable value and using the first-in-first-out method. Inventories as of September 30, 2020 and December 31, 2019 consisted of:

September 30, 2020December 31, 2019
Raw materials$14,069 $14,117 
Work in progress326 133 
Finished goods19,822 10,989 
Inventories reserve(7,300)(2,208)
Inventories, net$26,917 $23,031 

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5. Property, Plant and Equipment
 
Property, plant and equipment consists of the following:
September 30, 2020December 31, 2019
Land$401 $401 
Building and improvements58,997 58,959 
Machinery and equipment14,032 14,897 
Computer hardware and software4,867 4,771 
Furniture and fixtures677 705 
Construction in progress33,735 30,759 
112,709 110,492 
Less accumulated depreciation and amortization(16,404)(14,143)
Property, plant and equipment, net$96,305 $96,349 
 
The Company recorded depreciation expense of $1.0 million and $0.9 million for the three months ended September 30, 2020 and 2019, respectively. The Company recorded depreciation expense of $2.9 million and $2.7 million for the nine months ended September 30, 2020 and 2019, respectively.

The Company received the certificate of completion of its building in the fourth quarter of 2018. For the three months ended September 30, 2020 and September 30, 2019, there was $0.1 million and $0.3 million of payroll costs, respectively, capitalized as construction in progress. For the nine months ended September 30, 2020 and 2019, there was $0.5 million and $0.9 million of payroll costs, respectively, capitalized as construction in progress.


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6. Assets Held for Sale

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 subsequently to wind-down its Estonia operation. In September of 2020, the Company entered into a letter of intent, an arm's length transaction, 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 subsequently closed in the fourth quarter of 2020. In accordance with ASC 360, the Company determined the transaction meets the assets held for sale criteria that requires the assets be measured at the lower of the carrying value or fair value less costs to sell. The fair value calculation yielded a fair value of $133 thousand resulting in a write-down of $394 thousand. Assets held for sale are presented on the Condensed Consolidated Balance Sheet as of September 30, 2020 and the breakdown is as follows:

Book ValueFair ValueWrite-Down
Machinery & Equipment, net$512,232 $130,964 $381,269 
Furniture, net$15,148 $2,242 $12,906 
Total$527,380 $133,205 $394,175 


































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7. Leases

According to ASC Topic 842, Leases, the Company recognizes Right-of-Use ("ROU") assets and lease liabilities for all leases with terms greater than 12 months at the commencement date. The Company determines whether an agreement is a lease at its inception. The Company has operating and finance leases for its corporate, manufacturing, and international facilities as well as certain equipment. Its leases have remaining terms of less than 1 year to up to 9 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 the Company's 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 are as follows:

Three months ended September 30,Nine months ended September 30,
2020201920202019
Operating lease cost$159 $159 $475 $476 
Finance lease cost:
        Amortization of right-of-use assets4 5 11 11 
        Interest on lease liabilities1 1 4 5 
Total finance lease cost$5 $6 $15 $16 
Right-of-use assets obtained in exchange for new operating lease liabilities were zero and $1.0 million as of September 30, 2020 and 2019, respectively. Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended September 30, 2020 and 2019 was $0.1 million and $0.1 million, respectively. Cash paid for amounts included in the measurement of operating lease liabilities for the nine months ended September 30, 2020 and 2019 was $0.4 million and $0.4 million, respectively. Cash paid for amounts included in the measurement of finance lease liabilities for the three and nine months ended September 30, 2020 and 2019, respectively, was not material.
Supplemental balance sheet information related to leases as of the periods presented are as follows:

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September 30, 2020December 31, 2019
Operating Leases
Other assets$2,125 $2,453 
Capital lease obligation, current463 434 
Other long-term liabilities1,844 2,199 
Total operating lease liabilities2,307 2,633 
Finance Leases
Property, plant, and equipment81 81 
Accumulated depreciation(25)(12)
Property, plant, and equipment, net56 69 
Capital lease obligation, current14 12 
Other long-term liabilities47 57 
Total finance lease liabilities$61 $69 

The weighted average remaining lease terms as of September 30, 2020 for operating and financing leases were 5.8 years and 3.9 years, respectively. The weighted average discount rates for operating and finance leases as of September 30, 2020 were 8.3% and 8.0%, respectively.

As of September 30, 2020, maturities of lease liabilities are as follows:

Operating Financing
Year Ending December 31, LeasesLeases
2020 (excluding the three months ended December 31, 2020)$163 $5 
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