UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
March 31, 2015
| ¨ | 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
IGI Laboratories, Inc.
(Exact name of registrant as specified in
its charter)
Delaware |
01-0355758 |
(State or other Jurisdiction of |
(I.R.S. Employer Identification No.) |
incorporation or organization) |
|
|
|
105 Lincoln Avenue |
|
Buena, New Jersey |
08310 |
(Address of Principal Executive Offices) |
(Zip Code) |
(856) 697-1441
(Registrant's telephone number, including
area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No
¨
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2
of the Exchange Act.
|
Large accelerated filer |
¨ |
Accelerated filer |
þ |
|
Non-accelerated filer |
¨ |
Smaller reporting company |
¨ |
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 is
52,860,453 shares as of May 4, 2015.
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
IGI LABORATORIES, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
For the three months ended March 31, 2015 and 2014 |
(in thousands, except shares and per share information) |
(Unaudited) |
| |
March 31, | | |
March 31, | |
| |
2015 | | |
2014 | |
Revenues: | |
| | | |
| | |
Product sales, net | |
$ | 10,510 | | |
$ | 6,383 | |
Research and development income | |
| 51 | | |
| 313 | |
Licensing, royalty and other revenue | |
| 110 | | |
| 157 | |
Total revenues | |
| 10,671 | | |
| 6,853 | |
| |
| | | |
| | |
Costs and Expenses: | |
| | | |
| | |
Cost of revenues | |
| 5,043 | | |
| 3,987 | |
Selling, general and administrative expenses | |
| 1,900 | | |
| 1,282 | |
Product development and research expenses | |
| 2,630 | | |
| 1,365 | |
Total costs and expenses | |
| 9,573 | | |
| 6,634 | |
Operating income | |
| 1,098 | | |
| 219 | |
| |
| | | |
| | |
Other Income (Expense): | |
| | | |
| | |
Change in the fair value of derivative liability | |
| 8,625 | | |
| - | |
Interest and other expense, net | |
| (3,168 | ) | |
| (52 | ) |
Income before income tax expense | |
| 6,555 | | |
| 167 | |
| |
| | | |
| | |
Income tax expense | |
| - | | |
| - | |
| |
| | | |
| | |
Net income | |
$ | 6,555 | | |
$ | 167 | |
| |
| | | |
| | |
Basic earnings per share | |
$ | 0.12 | | |
$ | 0.00 | |
Diluted earnings per share | |
$ | 0.01 | | |
$ | 0.00 | |
| |
| | | |
| | |
Weighted average shares of common stock outstanding: | |
| | | |
| | |
Basic | |
| 52,841,900 | | |
| 46,826,733 | |
Diluted | |
| 67,210,177 | | |
| 48,529,603 | |
The accompanying notes are an integral part of the condensed consolidated financial statements. |
IGI LABORATORIES, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED BALANCE SHEETS |
(in thousands, except share and per share information) |
| |
March 31, 2015 | | |
December 31, | |
| |
(Unaudited) | | |
2014* | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 157,031 | | |
$ | 158,883 | |
Accounts receivable, net | |
| 16,305 | | |
| 14,366 | |
Inventories | |
| 3,722 | | |
| 2,784 | |
Prepaid expenses and other receivables | |
| 1,336 | | |
| 1,185 | |
Total current assets | |
| 178,394 | | |
| 177,218 | |
Property, plant and equipment, net | |
| 3,355 | | |
| 3,262 | |
Product acquisition costs, net | |
| 12,074 | | |
| 10,604 | |
Debt issuance costs, net | |
| 4,946 | | |
| 5,132 | |
Other | |
| 834 | | |
| 862 | |
Total assets | |
$ | 199,603 | | |
$ | 197,078 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 2,551 | | |
$ | 1,643 | |
Accrued expenses | |
| 6,591 | | |
| 5,141 | |
Payable for product acquisition costs | |
| 6,000 | | |
| 6,000 | |
Deferred income, current | |
| 27 | | |
| 87 | |
Capital lease obligation, current | |
| 129 | | |
| 131 | |
Total current liabilities | |
| 15,298 | | |
| 13,002 | |
| |
| | | |
| | |
Convertible 3.75% senior notes, net of debt discount (face of $143,750) | |
| 101,901 | | |
| 100,311 | |
Fair value of derivative liability - convertible 3.75% senior notes | |
| 32,775 | | |
| 41,400 | |
Note payable, bank | |
| 3,160 | | |
| 3,160 | |
Other long term liabilities | |
| 40 | | |
| 71 | |
Total liabilities | |
| 153,174 | | |
| 157,944 | |
| |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Series A Convertible Preferred stock, $0.01 par value, 100 shares authorized; 0 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively | |
| - | | |
| - | |
Series C Convertible Preferred stock, $0.01 par value, 1,550 shares authorized; 0 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively | |
| - | | |
| - | |
Common stock, $0.01 par value, 60,000,000 shares authorized; 52,859,953 and 52,819,787 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively | |
| 548 | | |
| 548 | |
Additional paid-in capital | |
| 78,912 | | |
| 78,172 | |
Accumulated deficit | |
| (33,031 | ) | |
| (39,586 | ) |
Total stockholders’ equity | |
| 46,429 | | |
| 39,134 | |
Total liabilities and stockholders' equity | |
$ | 199,603 | | |
$ | 197,078 | |
*Derived from the audited December 31, 2014 financial statements |
The accompanying notes are an integral part of the condensed consolidated financial statements. |
IGI LABORATORIES, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
For the three months ended March 31, 2015 and 2014 |
(in thousands) |
(Unaudited) |
| |
March 31, | | |
March 31, | |
| |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net income | |
$ | 6,555 | | |
$ | 167 | |
Reconciliation of net income to net cash (used in) provided by operating activities | |
| | | |
| | |
Depreciation and amortization of fixed assets | |
| 118 | | |
| 93 | |
Amortization of license fee | |
| 25 | | |
| 25 | |
Stock based compensation | |
| 378 | | |
| 259 | |
Amortization of debt issuance costs | |
| 195 | | |
| 8 | |
Amortization of product acquisition costs | |
| 30 | | |
| 30 | |
Provision for write down of inventory | |
| - | | |
| 14 | |
Amortization of debt discount on convertible 3.75% senior notes | |
| 1,590 | | |
| - | |
Change in the fair value of derivative liability | |
| (8,625 | ) | |
| - | |
Changes in operating assets and liabilities | |
| | | |
| | |
Accounts receivable | |
| (1,939 | ) | |
| 827 | |
Inventories | |
| (938 | ) | |
| 194 | |
Prepaid expenses and other assets | |
| (148 | ) | |
| (50 | ) |
Accounts payable and accrued expenses | |
| 2,705 | | |
| (1,095 | ) |
Deferred income | |
| (60 | ) | |
| (409 | ) |
| |
| | | |
| | |
Net cash (used in) provided by operating activities | |
| (114 | ) | |
| 63 | |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Product acquisition costs | |
| (1,500 | ) | |
| - | |
Capital expenditures | |
| (211 | ) | |
| (68 | ) |
| |
| | | |
| | |
Net cash used in investing activities | |
| (1,711 | ) | |
| (68 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from exercise of common stock options and warrants | |
| 15 | | |
| 327 | |
Principal payments on capital lease obligations | |
| (33 | ) | |
| (6 | ) |
Debt issuance costs | |
| (9 | ) | |
| | |
Costs related to stock issuance | |
| - | | |
| (3 | ) |
| |
| | | |
| | |
Net cash (used in) provided by financing activities | |
| (27 | ) | |
| 318 | |
| |
| | | |
| | |
Net (decrease) increase in cash and cash equivalents | |
| (1,852 | ) | |
| 313 | |
Cash and cash equivalents at beginning of period | |
| 158,883 | | |
| 2,101 | |
| |
| | | |
| | |
Cash and cash equivalents at end of period | |
$ | 157,031 | | |
$ | 2,414 | |
| |
| | | |
| | |
Supplemental Cash flow information: | |
| | | |
| | |
Cash payments for interest | |
$ | 49 | | |
$ | 54 | |
Cash payments for income taxes | |
| 45 | | |
| 7 | |
| |
| | | |
| | |
Non cash investing and financing transactions: | |
| | | |
| | |
Issuance of restricted stock | |
$ | 347 | | |
$ | - | |
The accompanying notes are an integral part of the condensed consolidated financial statements. |
IGI LABORATORIES, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY |
For the three months ended March 31, 2015 |
(in thousands, except share information) |
(Unaudited) |
| |
| | |
| | |
Additional | | |
| | |
Total | |
| |
Common
Stock | | |
Paid-In | | |
Accumulated | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| |
Balance, December 31, 2014 | |
| 52,819,787 | | |
$ | 548 | | |
$ | 78,172 | | |
$ | (39,586 | ) | |
$ | 39,134 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Stock based compensation expense | |
| | | |
| | | |
| 378 | | |
| | | |
| 378 | |
Stock options exercised | |
| 7,666 | | |
| | | |
| 15 | | |
| | | |
| 15 | |
Issuance of restricted stock | |
| 32,500 | | |
| | | |
| 347 | | |
| | | |
| 347 | |
Net income | |
| - | | |
| - | | |
| - | | |
| 6,555 | | |
| 6,555 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, March 31, 2015 | |
| 52,859,953 | | |
$ | 548 | | |
$ | 78,912 | | |
$ | (33,031 | ) | |
$ | 46,429 | |
The accompanying notes are an integral part of the condensed consolidated financial statements. |
IGI LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The accompanying
unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”,) for interim financial information and with the instructions to Form 10-Q and
Article 8-03 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2014, 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, 2014 has been
derived from those audited consolidated financial statements. Operating results for the three month period ended March 31,
2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.
| 1. | Organization and Business |
IGI Laboratories, Inc. is a Delaware
corporation incorporated in 1977. The Company’s office, laboratories and manufacturing facilities are located at 105 Lincoln
Avenue, Buena, New Jersey. The Company is a specialty generic pharmaceutical company. The Company’s mission is to become
a leader in the specialty generic pharmaceutical market. Under its own label, the Company currently sells generic topical pharmaceutical
products that are bioequivalent to their brand name counterparts. The Company also provides development, formulation and manufacturing
services to the pharmaceutical, over-the-counter, or (“OTC”) and cosmetic markets.
The Company’s
principal sources of liquidity are cash and cash equivalents of approximately $157 million at March 31, 2015, the $6.8
million available under the $10 million credit facility detailed below and cash from operations. The Company will be required
to pay up to an additional aggregate of $6 million, payable at the time of the Company’s first filling with the FDA
related to any asset purchased from AstraZeneca (see Note 14).
On December 10, 2014, the Company
entered into a purchase agreement (the “Purchase Agreement”), pursuant to which the Company agreed to sell its 3.75%
Convertible Senior Notes due 2019 (the “Notes”) The Company received net proceeds of approximately $139 million after
expenses of approximately $4.8 million upon completion of the transaction. (See Note 6)
The Company may require additional
funding and this funding will depend, in part, on the timing and structure of potential business arrangements. If necessary, the
Company may continue to seek to raise additional capital through the sale of its equity or through a strategic alliance with a
third party. There may also be additional acquisition and growth opportunities that may require external financing. There can be
no assurance that such financing will be available on terms acceptable to the Company, or at all. The Company also has the ability
to defer certain product development and other programs, if necessary. The Company believes that our existing capital resources
will be sufficient to support its current business plan and operations beyond May 2016.
| 3. | Summary of Significant Accounting Policies |
Use of Estimates
The preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America (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 valuation of the derivative liability, sales returns
and allowances (“SRA”), allowances for excess and obsolete inventories, allowances for doubtful accounts, provisions for income
taxes and related deferred tax asset valuation allowances, stock based compensation and accruals for environmental
cleanup and remediation costs.
Fair Value of Financial
Instruments
The carrying amounts of cash and
cash equivalents, trade receivables, restricted cash, notes payable, accounts payable, capital leases and other accrued liabilities
at March 31, 2015 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.
The Company measures its derivative
liability at fair value. The derivative convertible option related to Convertible Notes issued December 16, 2014 was valued using
the “with” and “without” analysis. A “with” and “without” analysis is a standard
valuation technique for valuing embedded derivatives by first considering the value of the Convertible Notes with the option and
then considering the value of the Convertible Notes without the option. The difference is the fair value of the embedded derivatives.
The convertible note derivative is classified within Level 3 because it is valued using the “with” and “without”
method, which does utilize inputs that are unobservable in the market.
The following table presents the
Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2015:
| |
| | |
Fair
value measurement at reporting date using | |
| |
| | |
(in thousands) | |
Derivative liabilities
on account of convertible notes | |
Balance | | |
Quoted
prices in active markets
for identical assets (Level
1) | | |
Significant
other observable inputs
(Level 2) | | |
Significant
unobservable inputs
(Level 3) | |
As of March 31, 2015 | |
$ | 32,775 | | |
| - | | |
| - | | |
$ | 32,775 | |
Based on the closing price of the
Company’s common stock as of March 31, 2015, the fair value of the Notes was approximately $132.9 million compared to their
face value of $143.75 million as of March 31, 2015. However, this variance is due to the conversion feature in the Notes rather
than to changes in market interest rates. The Notes carry a fixed interest rate and therefore do not subject the Company to interest
rate risk. As a result in the change in fair value, the Company recorded an $8.6 million change in the fair value of the derivative
liability on the consolidated statements of operations.
Net Earnings Per Share
Basic net income per share of common
stock is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted net income
per share of common stock is computed using the weighted average number of shares of common stock and potential dilutive common
stock equivalents outstanding during the period. Potential dilutive common stock equivalents include shares issuable upon the conversion
of the convertible 3.75% senior Notes and the exercise of options and warrants.
For the three months ended March 31, 2015 and 2014 |
(in thousands except shares and per share data) |
| |
2015 | | |
2014 | |
Basic earnings per share computation: | |
| | | |
| | |
Net income - basic | |
$ | 6,555 | | |
$ | 167 | |
Weighted average common shares - basic | |
| 52,841,900 | | |
| 46,826,733 | |
Basic earnings per share | |
$ | 0.12 | | |
$ | 0.00 | |
| |
| | | |
| | |
Dillutive earnings per share computation: | |
| | | |
| | |
Net income - basic | |
$ | 6,555 | | |
$ | 167 | |
Interest expense related to convertible 3.75% senior notes | |
| 1,348 | | |
| - | |
Amortization of discount related to convertible 3.75% senior notes | |
| 1,590 | | |
| - | |
Change in the fair value of derivative liability | |
| (8,625 | ) | |
| - | |
Net income - diluted | |
$ | 868 | | |
$ | 167 | |
| |
| | | |
| | |
Share Computation: | |
| | | |
| | |
Weighted average common shares - basic | |
| 52,841,900 | | |
| 46,826,733 | |
Effect of convertible 3.75% senior notes | |
| 12,732,168 | | |
| - | |
Effect of dilutive stock options and warrants | |
| 1,636,109 | | |
| 1,702,870 | |
Weighted average common shares outstanding - dilluted | |
| 67,210,177 | | |
| 48,529,603 | |
Dilluted earnings per share | |
$ | 0.01 | | |
$ | 0.00 | |
Revenue Recognition
The Company considers revenue realized
or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred or contractual services rendered,
the sales price is fixed or determinable, and collection is reasonably assured in conformity with ASC 605, “Revenue Recognition".
The Company derives its revenues
from three basic types of transactions: sales of its own generic pharmaceutical topical products, sales of manufactured product
for its customers included in product 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.
Product Sales: Product Sales includes IGI
Product Sales and Contract Manufacturing Sales.
IGI Product Sales: The Company
records revenue from IGI product sales when title and risk of ownership have been transferred to the customer, which is typically
upon delivery of products to the customer.
Revenue and Provision for Sales Returns and
Allowances
As customary in the
pharmaceutical industry, the Company’s gross product sales from IGI label products are subject to a variety of
deductions in arriving at reported net product sales. When the Company recognizes revenue from the sale of products, an
estimate of SRA is recorded, which reduces product sales. Accounts receivable
and/or accrued expenses are also reduced and/or increased by the SRA amount. These adjustments include estimates for
chargebacks, rebates, cash discounts and returns and other allowances. 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 estimation process used to determine our SRA provision has been applied on a
consistent basis and no material adjustments have been necessary to increase or decrease our reserves for SRA as a result of
a significant change in underlying estimates. The Company will use a variety of methods to assess the adequacy of our SRA
reserves to ensure that our financial statements are fairly stated. These will include periodic reviews of customer inventory
data, customer contract programs, subsequent actual payment experience, and product pricing trends to analyze and validate
the SRA reserves.
The provision for chargebacks is
our most significant sales allowance. A chargeback represents an amount payable in the future to a wholesaler for the difference
between the invoice price paid to the Company by our 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 will validate the chargeback accrual quarterly through a review of the inventory reports obtained from our largest wholesale
customers. This customer inventory information is used to verify the estimated liability for future chargeback claims based on
historical chargeback and contract rates. These large wholesalers represent 90% - 95% 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.
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.
Gross-To-Net Sales Deductions | |
| | |
| |
| |
| | |
| |
| |
Three months ended March 31, | |
| |
2015 | | |
2014 | |
| |
(in thousands) | |
| |
| | |
| |
Gross IGI product sales | |
$ | 22,307 | | |
$ | 5,025 | |
| |
| | | |
| | |
Reduction to gross product sales: | |
| | | |
| | |
Chargebacks and billbacks | |
| 12,512 | | |
| 1,584 | |
Sales discounts and other allowances | |
| 1,699 | | |
| 498 | |
Total reduction to gross product sales | |
$ | 14,211 | | |
$ | 2,082 | |
| |
| | | |
| | |
Net IGI product sales | |
$ | 8,096 | | |
$ | 2,943 | |
Net IGI product sales of $8.1
million and $2.9 million for the three months ended March 31, 2015 and 2014, respectively are included in Product sales,
net in the Condensed Consolidated Statements of Operations. Accounts receivable are presented net of SRA balances of
$6.1 million and $1.5 million at March 31, 2015 and 2014, respectively. Accounts payable and accrued expenses include $2.9
million and $0.2 million at March 31, 2015 and 2014, respectively, for certain fees related to services provided by
the wholesalers. Wholesale fees of $1.6 million and $0.2 million for the three month periods ended March 31, 2015 and
2014, respectively, were included in cost of goods sold. In addition, in connection with four of the six products the
Company currently manufactures, markets and distributes in its own label, in accordance with an agreement entered into in
December of 2011, the Company is required to pay a royalty calculated based on net sales to one of its pharmaceutical
partners. The royalty is calculated based on contracted terms of 40% of net sales for the four products which is to be paid
quarterly to the pharmaceutical partner. In accordance with the agreement, net sales excludes fees related to services
provided by the wholesalers. Accounts payable and accrued expenses include $0.9 million and $0.9 million at March 31, 2015
and 2014, respectively, related to these royalties. Royalty expense of $0.9 million and $1.3 million was included in cost
of goods sold for the three months ended March 31, 2015 and 2014, respectively. The Company includes significant estimates
to arrive at net product sales arising from wholesaler chargebacks, Medicaid and Medicare rebates, allowances and other
pricing and promotional programs.
Contract Manufacturing Sales:
The Company recognizes revenue when title transfers to its customers, which is generally upon shipment of products. These shipments
are made in accordance with sales commitments and related sales orders entered into with customers either verbally or in written
form. The revenues associated with these transactions, net of appropriate cash discounts, product returns and sales reserves, are
recorded upon shipment of the products.
Research and Development Income:
The Company establishes agreed upon product development agreements with its customers to perform product development services.
Product development revenues are recognized in accordance with the product development agreement upon the completion of the phases
of development and when the Company has no future performance obligations relating to that phase of development. Revenue recognition
requires the Company to assess progress against contracted obligations to assure completion of each stage. These payments are generally
non-refundable and are reported as deferred until they are recognizable as revenue. If no such arrangement exists, product development
fees are recognized ratably over the entire period during which the services are performed.
In making such assessments, judgments
are required to evaluate contingencies such as potential variances in schedule and the costs, the impact of change orders, liability
claims, contract disputes and achievement of contractual performance standards. Changes in total estimated contract cost and losses,
if any, are recognized in the period they are determined. Billings on research and development contracts are typically based upon
terms agreed upon by the Company and customer and are stated in the contracts themselves and do not always align with the revenues
recognized by the Company.
Major Customers
Major customers of the Company are
defined as having revenue greater than 10% of total gross revenue. For
the three months ended March 31, 2015, three of the Company’s customers accounted for 69% of the Company’s revenue.
For the three months ended March 31, 2014, three of the Company’s customers accounted for 50% of the Company’s revenue.
One of these customers is the same for both periods. Accounts receivable related to the Company’s major customers
comprised 64% of all accounts receivable as of March 31, 2015. The loss of one
or more of these customers could have a significant impact on our revenues and harm our business
and results of operations.
The Company had net revenue from
one product, econazole nitrate cream, which accounted for 53% and 15% of total revenues for the three months ended March 31, 2015
and 2014, respectively.
Derivatives
The Company accounts for its derivative
instruments in accordance with ASC 815-10, “Derivatives and Hedging”. ASC 815-10 establishes
accounting and reporting standards requiring that derivative instruments, including derivative instruments embedded in other contracts,
be recorded on the balance sheet as either an asset or liability measured at its fair value. ASC 815-10 also requires that changes
in the fair value of derivative instruments be recognized currently in results of operations unless specific hedge accounting criteria
are met. The Company has not entered into hedging activities to date. The Company's derivative liability is the embedded convertible
option of its Convertible Notes issued December 16, 2014 (see Note 6), all of which have been recorded as a liability
at fair value, and are revalued at each reporting date, with changes in the fair value of the instruments included in the consolidated
statements of operations as non-operating income (expense).
Recent Accounting Pronouncements
In May 2014, FASB issued Accounting
Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”. This ASU is a comprehensive
new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer
at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective
for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will
adopt this ASU on January 1, 2017. Companies may use either a full retrospective or modified retrospective approach to adopt this
ASU and management is currently evaluating which transition approach to use. The Company is currently evaluating the impact of
ASU 2014-09.
In August 2014,
FASB issued ASU 2014-15, “Presentation of Financial Statements — Going Concern: Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern”. This ASU requires management to evaluate, in connection with
preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered
in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after
the date that the financial statements are issued (or within one year after the date that the financial statements are available
to be issued when applicable) and provide related disclosures. ASU 2014-15 is effective for the annual period ending after December
15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating
the impact of ASU 2014-15.
In April 2015,
the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs
to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent
with the presentation of debt discounts or premiums. The ASU is effective for fiscal years beginning after December 15, 2015, and
interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued.
The Company is currently evaluating the impact of ASU 2015-03.
On
December 12, 2005, the Company extended its license agreement with Novavax, Inc. for an additional ten years for $1 million.
This extension entitles the Company to the exclusive use of
the Novasome® lipid vesicle encapsulation and certain other technologies (each a “Microencapsulation
Technology”, and collectively, the “Technologies”) in the fields of (i) animal pharmaceuticals, biologicals
and other animal health products; (ii) foods, food applications, nutrients and flavorings; (iii) cosmetics, consumer products
and dermatological over-the-counter and prescription products (excluding certain topically delivered hormones); (iv)
fragrances; and (v) chemicals, including herbicides, insecticides, pesticides, paints and coatings, photographic chemicals
and other specialty chemicals, and the processes for making the same (collectively, the “IGI Field”) through
2015. This payment is being amortized ratably over the ten-year period. The Company recorded amortization expense of
$25,000 related to this agreement for each of the three month periods ended March 31, 2015 and 2014. Remaining
amortization of this license fee will amount to $75,000 in 2015.
Inventories
are valued at the lower of cost or market, using the first-in-first-out method.
Inventories
at March 31, 2015 and December 31, 2014 consist of:
| |
March
31, 2015 | | |
December
31, 2014 | |
| |
(Unaudited) | | |
(Audited) | |
| |
(amounts in thousands) | |
Raw materials | |
$ | 2,957 | | |
$ | 2,299 | |
Work in progress | |
| 53 | | |
| 140 | |
Finished goods | |
| 712 | | |
| 345 | |
Total | |
$ | 3,722 | | |
$ | 2,784 | |
| 6. | Convertible 3.75% Senior Notes |
On December 16, 2014, the Company
issued $125 million aggregate principal amount of 3.75% Convertible Senior Notes due 2019, or the Notes. On December 22, 2014,
the Company announced the closing of the initial purchasers’ exercise in full of their option to purchase an additional $18.75
million aggregate principal amount. The Notes were offered and sold only to qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the sale of the Notes were
approximately $139 million, after deducting underwriting fees and other related expenses of approximately $4.8 million. Accrued
interest in the amount of $1.6 million related to the Notes was included in accrued expenses.
The Notes bear interest at a
fixed rate of 3.75% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15,
2015 and mature on December 15, 2019, unless earlier repurchased, redeemed or converted. The Notes are convertible into
shares of the Company’s common stock, cash or a combination thereof. However, if the Company has not received
stockholder approvals to increase the number of authorized shares of the Company’s common stock and comply with certain
listing standards of the NYSE MKT, the Company would be required to satisfy any conversion obligations solely in cash or, at
the Company’s option subject to certain conditions and limitations, in shares of the Company’s common stock. The
Notes are convertible at an initial conversion price of approximately $11.29 per share, which is equivalent to an initial
conversion rate of 88.5716 shares per $1,000 principal amount of Notes, subject to adjustment in certain events, such as
distributions of dividends or stock splits. Holders may convert their Notes at their option prior to September 15, 2019, when
or if certain conditions have been met or circumstances have occurred, such as the Company’s stock price exceeds 130%
of the conversion price under the Notes for a designated period of time, or the trading price of the Notes is, for a
designated period of time, less than 98% of the closing sale price of the Company’s common stock multiplied by the
then-current conversion rate of the Notes, or the Company calls Notes for redemption, or certain specified corporate events
occur. Holders may also convert their Notes at their option at any time on or after September 15, 2019 and prior to the
close of business on the business day immediately preceding the stated maturity date. In addition, following the occurrence
of certain changes of control of the Company described in the Indenture governing the Notes or termination of trading of the
Company’s common stock or other securities into which the Notes are convertible (a “make-whole fundamental
change”) or the delivery by the Company of a notice of redemption, the conversion rate for a holder who elects to
convert its Notes in connection with such make-whole fundamental change or such notice of redemption will increase.
Additionally, if certain conditions have been met or circumstances have occurred, such as the Company’s stock price
exceeds 150% of the conversion price under the Notes for a designated period of time, or the trading of the Notes is, for a
designated period of time, less than 98% of the closing sale price of the Company’s stock multiplied by
the then-current conversion rate of the Notes, or the Company calls Notes for redemption, the Company may redeem for cash
any or all outstanding Notes on or after December 19, 2017 in an amount equal to the outstanding principal amount of such
Notes, plus accrued and unpaid interest.
The Notes and any common stock issuable
upon conversion of the Notes have not been registered under the Securities Act, applicable state securities laws or the securities
laws of any other jurisdiction, and may not be offered or sold in the United States without registration or an applicable exemption
from registration requirements. The Company does not intend to file a registration statement for the resale of the Notes or any
common stock issuable upon conversion of the Notes, nor shall there be any sale of these securities in any jurisdiction in which
such offer, solicitation, or sale would be unlawful.
Since the Company does not have sufficient
authorized shares available to share-settle the conversion option in full, the embedded conversion option does not qualify for
equity classification and instead is separately valued and accounted for as a derivative liability. On December 16, 2014, the initial
value allocated to the derivative liability was $43.7 million of the $143.75 million principal amount of the Notes, which represents
a discount to the debt to be amortized through interest expense using the effective interest method through the maturity of the
Notes. Accordingly, the effective interest rate used to amortize the debt discount on the Notes is 12.94%. During each reporting
period, the derivative liability is marked to fair value through the statement of operations. As of March 31, 2015, the derivative
liability, which is classified in long-term liability, had a fair value of $32.8 million. This resulted in a change in the fair
value of the derivative liability of $8.6 million for the three months ended March 31, 2015. If the Company receives shareholder
approval for the increase in the number of shares of common stock authorized and available for issuance upon conversion of the
Notes so the conversion option can be share-settled in full, the conversion option may qualify for equity classification and the
bifurcated derivative liability would no longer need to be accounted for as a separate derivative on a prospective basis from the
date of reassessment. Any remaining debt discount that arose at the date of debt issuance from the original bifurcation will continue
to be amortized through interest expense.
The Notes are being accounted for
in accordance with ASC 470-20. Under ASC 470-20, issuers of convertible debt instruments that may be settled in cash
upon conversion, including partial cash settlement, are required to separately account for the liability (debt) and equity (conversion
option) components.
The application of ASC 470-20 resulted
in the recognition of $32.8 million as the value for the liability at March 31, 2015. The remaining unamortized discount
and unamortized debt financing costs will be amortized over the remaining term of 4.71 years. At March 31, 2015 the net carrying
amount of the liability component and the remaining unamortized debt discount were as follows:
| |
March 31, | |
| |
2015 | |
| |
(in thousands) | |
| |
| |
Face Amount of the Notes | |
$ | 143,750 | |
Unamortized discount of the liability component | |
| 41,849 | |
Carrying Amount of the Notes | |
$ | 101,901 | |
Deferred financing costs associated
with the Notes, include fees of $4.6 million at March 31, 2015. The assumptions used in connection with the valuation of the convertible
option of the Notes issued December 16, 2014 utilizing the "with” and “without” method, discussed in Note
3 was as follows:
| |
Initial Measurement | | |
Measurement | | |
Measurement | |
| |
December 16, | | |
December 31, | | |
March 31, | |
| |
2014 | | |
2014 | | |
2015 | |
Issue date | |
| 12/17/2014 | | |
| 12/17/2014 | | |
| 12/17/2014 | |
Maturity date | |
| 12/15/2019 | | |
| 12/15/2019 | | |
| 12/15/2019 | |
Term | |
| 4.99 | | |
| 4.92 | | |
| 4.71 | |
Principal (millions) | |
| 143.75 | | |
| 143.75 | | |
| 143.75 | |
Coupon | |
| 3.75 | % | |
| 3.75 | % | |
| 3.75 | % |
Seniority | |
| Senior unsecured | | |
| Senior unsecured | | |
| Senior unsecured | |
Conversion shares | |
| 88.572 | | |
| 88.572 | | |
| 88.572 | |
Conversion price | |
$ | 11.29 | | |
$ | 11.29 | | |
$ | 11.29 | |
| |
| | | |
| | | |
| | |
Stock price | |
$ | 9.45 | | |
$ | 8.80 | | |
$ | 8.16 | |
Risk free rate | |
| 1.61 | % | |
| 1.64 | % | |
| 1.30 | % |
| |
| | | |
| | | |
| | |
Volatility (rounded) | |
| 40.00 | % | |
| 40.00 | % | |
| 42.00 | % |
The table below provides a reconciliation
of beginning and ending balances for the liability measured at fair value using significant observable and unobservable inputs
(Level 3). The table reflects the gain for the three months ended March 31, 2015 associated with the decrease in fair value.
| |
Initial Measurement | | |
| | |
| | |
| | |
| |
| |
December 16, | | |
Decrease in | | |
December 31, | | |
Decrease in | | |
March 31, | |
| |
2014 | | |
Fair Value | | |
2014 | | |
Fair Value | | |
2015 | |
Fair value of convertible feature of convertible 3.75% senior notes | |
$ | 43,700 | | |
$ | 2,300 | | |
$ | 41,400 | | |
$ | 8,625 | | |
$ | 32,775 | |
For the three months ended
March 31, 2015, the Company recorded the following expenses in relation to the Notes:
| |
March 31, | |
| |
2015 | |
| |
(in thousands) | |
| |
| |
Interest Expense at 3.75% coupon rate (1) | |
$ | 1,348 | |
Debt discount amortization (1) | |
| 1,590 | |
Amortization of deferred financing costs (1) | |
| 173 | |
| |
$ | 3,111 | |
| (1) | Included within “Interest and other expense, net” on the Condensed Consolidated Statements of Operations |
| 7. | Note Payable - General Electric Capital Corporation |
On November 18, 2014, the Company
entered into an asset-based revolving senior secured credit facility (the “Credit Agreement”) with General Electric
Capital Corporation, as agent (the “Agent”), and GE Capital Bank and the other financial institutions
party thereto, as lenders (the “Lenders”), pursuant to which the Lenders agreed to extend credit facilities
to the Company (the “Financing”).
To secure payment of the amounts
financed under the Credit Agreement, the Company and the Agent entered into a Guaranty and Security Agreement (the “Guaranty
and Security Agreement”). Under the terms of the Guaranty and Security Agreement, the Company granted to the Agent,
for the benefit of the Lenders and other secured parties, a continuing security interest in and against substantially all of its
tangible and intangible assets, except intellectual property, and each of the Company’s direct and indirect future subsidiaries
shall guarantee the Company’s’ obligations under the Credit Agreement.
Under the Credit Agreement, the Company
can request revolving loan advances up to an aggregate total amount of $10 million, which may be increased to $15 million at the
request of the Company if certain conditions are met. The Company may also request an incremental facility for revolving loan commitments
of up to $10 million. Borrowings under the Credit Agreement may be made as prime rate loans with an applicable margin of 3.0% per
annum or 1, 2, 3 or 6 month LIBOR loans with an applicable margin of 4.0% per annum. At March 31, 2015, the interest rate in effect
was 4.2%. Availability under the Credit Agreement is calculated as 85% of the book value of eligible accounts at such time multiplied
by a liquidity factor, less any reserves established by the Agent. As of March 31, 2015, the outstanding balance of the credit
facility was $3.2 million. In accordance with the Credit Agreement, the Company is required to provide the Lenders information
related to working capital by which the Lenders will calculate the available line of credit, defined in the agreement as the Borrowing
Base Certificate. As of March 31, 2015, the Company had a remaining availability of $6.8 million.
The term of the Credit Agreement
is up to five years from November 18, 2014. The Credit Agreement contains customary representations and warranties and customary
affirmative and negative covenants, including, among others, covenants that limit or restrict the Company’s ability to incur
indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions
with affiliates, pay dividends or make distributions, or repurchase stock, in each case, subject to customary exceptions for a
loan facility of this size and type. In addition, the Credit Agreement contains customary events of default (subject to customary
cure periods for certain events of default), including, among others, non-payment, inaccuracy of representations and warranties,
covenant defaults, cross-default to material agreements, cross-default to material indebtedness, bankruptcy and insolvency and
material judgment defaults. The Company must meet certain financial reporting and audit requirements, as defined by the credit
agreement. The Company was in compliance with all covenants of the Credit Agreement as of March 31, 2015.
In connection with this
Financing, the Company paid in full its existing credit facility with Square 1 Bank (see Note 8) and executed a Release and
Termination Note and Credit Agreement with Square 1 Bank to release the Company from any future obligations under the Credit
Agreement executed on August 31, 2012, as amended July 26, 2013.
| 8. | Note Payable - Square 1 Bank |
On August 31, 2012, as amended on
July 26, 2013, the Company entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Square
1 Bank (the “Lender”) pursuant to which the Lender agreed to extend credit facilities to the Company.
On November 18, 2014, the Company
paid in full its existing credit facility with the Lender under the Loan and Security Agreement. The Company recorded amortization
expense in the amount of $42,000 to write-off the remaining unamortized debt issuance costs during the year ended December 31,
2014.
| 9. | Stock-Based Compensation |
Stock Options
The 1999 Director Stock Option Plan,
as amended (the “Director Plan”), provides for the grant of stock options to non-employee directors of the Company
at an exercise price equal to the fair market value per share on the date of the grant. An aggregate of 1,975,000 shares have been
approved and authorized for issuance pursuant to this plan. A total of 2,514,798 options have been granted to non-employee directors
through March 31, 2015 and 807,782 of those have been forfeited through March 31, 2015 and returned to the option pool. The options
granted under the Director Plan vest in full one year after their respective grant dates and have a maximum term of ten years.
The 1999 Stock Incentive Plan, as
amended (“1999 Plan”), replaced all previously authorized employee stock option plans, and no additional options may
be granted under those previous plans. Under the 1999 Plan, options or stock awards may be granted to all of the Company's employees,
officers, directors, consultants and advisors to purchase a maximum of 3,200,000 shares of common stock. However, pursuant to the
terms of the 1999 Plan, no awards may be granted after March 16, 2009. A total of 2,892,500 options, having a maximum term of ten
years, have been granted at 100% of the fair market value of the Company's common stock at the date of grant. Options outstanding
under the 1999 Plan are generally exercisable in cumulative increments over four years commencing one year from date of grant.
On June 26, 2009, the Board of
Directors adopted, and the Company’s stockholders subsequently approved by partial written consent, the IGI
Laboratories, Inc. 2009 Equity Incentive Plan (the “2009 Plan”). The 2009 Plan became effective on July 29, 2009.
The 2009 Plan allows the Company to continue to grant options and restricted stock, as under the 1999 Plan, but also
authorizes the Board of Directors to grant a broad range of other equity-based awards, including stock appreciation rights,
restricted stock units and performance awards. The 2009 Plan has been created, pursuant to and consistent with the
Company’s current compensation philosophy, to assist the Company in attracting, retaining and rewarding designated
employees, directors, consultants and other service providers of the Company and its subsidiaries and affiliates, in a manner
that will be cost efficient to the Company from both an economic and financial accounting perspective. On
April 12, 2010, the Board of Directors adopted, and the Company’s stockholders subsequently approved, an amendment of
the 2009 Plan to increase the number of shares of Common Stock available for grant under such plan by adding 2,000,000 shares
of Common Stock. On May 29, 2014, the Board of Directors adopted and the Company’s stockholders approved a further
amendment of the 2009 Plan to increase the number of shares of common stock available for grant under such plan by adding
1,000,000 shares of common stock. The 2009 Plan, as amended on May 29, 2014, authorizes up to 5,000,000 shares of the
Company’s common stock for issuance pursuant to the terms of the 2009 Plan. The maximum number of shares that may be
subject to awards made to any individual in any single calendar year under the 2009 Plan is 1,000,000 shares. As of March 31,
2015, options to purchase 2,434,334 shares of common stock were outstanding under the 2009 Plan. As of March 31, 2015,
112,750 restricted stock units (“RSUs”) were outstanding under the 2009 Plan. As of March 31, 2015, 1,506,248
shares of restricted stock had been granted under the 2009 Plan and 230,420 of those have been forfeited through March 31,
2015 and returned to the pool.
In summary, there are 3,009,168 options
outstanding under the 1999 Plan, the Director Plan and the 2009 Plan, collectively as of March 31, 2015.
There are 1,361,070 options available
for issuance under the Director Plan and the 2009 Plan collectively as of March 31, 2015.
The fair value of each option award
is estimated on the date of grant using the Black-Scholes option-pricing formula that uses assumptions noted in the following table.
Expected volatilities and risk-free interest rates are based upon the expected life of the grant. The interest rates used are the
U.S. Treasury yield curve in effect at the time of the grant.
| |
For the three months ended | |
| |
March 31, 2015 | |
| |
| |
Expected volatility | |
| 52.7% - 55.2% | |
Expected term (in years) | |
| 3.2 -3.3 years | |
Risk-free rate | |
| 0.89% - 1.14% | |
Expected dividends | |
| 0% | |
A summary of option activity under the 1999 Plan, the
Director Plan and the 2009 Plan as of March 31, 2015 and changes during the period are presented below:
| |
| | |
Weighted | |
| |
Number of | | |
Average | |
| |
Options | | |
Exercise Price | |
Outstanding as of January 1, 2015 | |
| 2,436,834 | | |
$ | 1.79 | |
Issued | |
| 590,500 | | |
$ | 10.12 | |
Exercised | |
| (7,666 | ) | |
$ | 2.07 | |
Forfeited | |
| (10,500 | ) | |
$ | 3.06 | |
Expired | |
| - | | |
| - | |
Outstanding as of March 31, 2015 | |
| 3,009,168 | | |
$ | 3.42 | |
| |
| | | |
| | |
Exercisable as of March 31, 2015 | |
| 1,736,997 | | |
$ | 1.20 | |
Based upon application of the Black-Scholes option-pricing
formula described above, the weighted-average grant-date fair value of options granted during the three months ended March 31,
2015 was $3.84.
The following table summarizes information regarding
options outstanding and exercisable at March 31, 2015:
Outstanding: | |
| | |
| |
| |
| | |
| | |
Weighted | |
| |
Stock | | |
Weighted | | |
Average | |
| |
Options | | |
Average | | |
Remaining | |
Range of Exercise Prices | |
Outstanding | | |
Exercise Price | | |
Contractual Life | |
$0.55 - $1.00 | |
| 95,000 | | |
$ | 0.78 | | |
| 2.83 | |
$1.01 - $1.50 | |
| 1,883,500 | | |
$ | 1.07 | | |
| 6.89 | |
$1.51 - $10.67 | |
| 1,030,668 | | |
$ | 7.96 | | |
| 9.23 | |
Total | |
| 3,009,168 | | |
$ | 3.42 | | |
| 7.57 | |
Exercisable: | |
| | |
| |
| |
| | |
| |
| |
Stock | | |
Weighted | |
| |
Options | | |
Average | |
Range of Exercise Prices | |
Exercisable | | |
Exercise Price | |
| |
| | |
| |
$0.55 - $1.00 | |
| 95,000 | | |
$ | 0.78 | |
$1.01 - $1.50 | |
| 1,446,664 | | |
$ | 1.08 | |
$1.51 - $10.67 | |
| 195,333 | | |
$ | 2.33 | |
Total | |
| 1,736,997 | | |
$ | 1.20 | |
As of March 31, 2015, the
intrinsic value of the options outstanding is $15.5 million and the intrinsic value of the options exercisable is
$12.1 million. The intrinsic value of options exercised during the three months ended March 31, 2015 was $46,664. As of March
31, 2015, there was approximately $2.6 million of total unrecognized compensation cost that will be recognized through March
2018 related to non-vested share-based compensation arrangements granted under the Plans.
Restricted Stock and RSUs
The Company periodically grants restricted
stock and RSU awards to certain officers and other employees that typically vest one to three years from their grant date. The
Company recognized $99,000 and $183,300 of compensation expense during the three months ended March 31, 2015 and 2014, respectively,
related to restricted stock and RSU awards. Stock compensation expense is recognized over the vesting period of the restricted
stock and RSUs. At March 31, 2015, the Company had approximately $1.2 million of total unrecognized compensation cost related
to non-vested restricted stock and RSUs, all of which will be recognized through February 2018.
| |
Number of | | |
Weighted Average | |
| |
Restricted Stock | | |
Exercise Price | |
Non-vested balance at January 1, 2015 | |
| 108,334 | | |
$ | 2.86 | |
| |
| | | |
| | |
Changes during the period: | |
| | | |
| | |
Shares granted | |
| 32,500 | | |
| 10.67 | |
Shares vested | |
| (32,500 | ) | |
| 10.67 | |
Shares forfeited | |
| - | | |
| - | |
| |
| | | |
| | |
Non-vested balance at March 31, 2015 | |
| 108,334 | | |
$ | 2.86 | |
| |
Number of | | |
Weighted Average | |
| |
RSUs | | |
Exercise Price | |
Non-vested balance at January 1, 2015 | |
| - | | |
$ | - | |
| |
| | | |
| | |
Changes during the period: | |
| | | |
| | |
Shares granted | |
| 145,250 | | |
| 10.67 | |
Shares vested | |
| (32,500 | ) | |
| 10.67 | |
Shares forfeited | |
| - | | |
| - | |
| |
| | | |
| | |
Non-vested balance at March 31, 2015 | |
| 112,750 | | |
$ | 10.67 | |
Stock Warrant activity for the quarters ended
March 31, 2015 and 2014 consisted of:
| |
2015 | | |
2014 | |
| |
| | |
Weighted | | |
| | |
Weighted | |
| |
Number of | | |
Average | | |
Number of | | |
Average | |
| |
Warrants | | |
Exercise Price | | |
Warrants | | |
Exercise Price | |
Balance at January 1, | |
| 84,000 | | |
$ | 1.21 | | |
| 354,546 | | |
$ | 1.21 | |
| |
| | | |
| | | |
| | | |
| | |
Changes during the period: | |
| | | |
| | | |
| | | |
| | |
Stock warrants granted | |
| - | | |
| - | | |
| - | | |
| - | |
Stock warrants expired | |
| - | | |
| - | | |
| - | | |
| - | |
Stock warrants exercised | |
| - | | |
| - | | |
| (270,546 | ) | |
| 1.21 | |
| |
| | | |
| | | |
| | | |
| | |
Balance at March 31, | |
| 84,000 | | |
$ | 1.21 | | |
| 84,000 | | |
$ | 1.21 | |
In connection with the private placement
of the Company’s common stock on December 8, 2010, the Company granted common stock warrants to purchase up to 338,182 and
16,364 shares, respectively, to each of its two placement agents for $1.21 per share which expire on December 8, 2015. On March
7, 2014, 270,546 of the 338,182 warrants were exercised.
The Company’s ability to use
net operating loss carry forwards is subject to substantial limitation in future periods under certain provisions of Section 382
of the Internal Revenue Code, which limit the utilization of net operating losses upon a more than 50% change in ownership of the
Company’s stock that is held by 5% or greater stockholders. The Company examined the application of Section 382 with respect
to an ownership change that took place during 2010, as well as the limitation on the application of net operating loss carry forwards.
The Company believes that operating losses subsequent to the change date in 2010 (aggregating $7.8 million) are not subject to
Section 382 limitations. The Company has estimated that the annual limitation starting in 2010 aggregates from $1.0 million to
$2.3 million per year including the effect of amortization of built in gains.
The Company is subject to the provisions
of ASC 740-10-25, Income Taxes (ASC 740). ASC 740 prescribes a more likely-than-not threshold for the financial statement
recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are
in accordance with ASC 740 guidance on uncertain tax positions. The Company has not recorded a significant tax provision at March
31, 2015, as it has estimated its effective tax rate for 2015 (after considering utilization of existing net operating losses)
to be insignificant. For federal purposes, post 1998 tax years remain open to examination as a result of net operating loss
carryforwards. The Company is currently open to audit by the appropriate state income taxing authorities for tax years 2011 to
2014.
The Company is involved from time
to time in claims which arise in the ordinary course of business. In the opinion of management, the Company has made adequate provision
for potential liabilities, if any, arising from any such matters. However, litigation is inherently unpredictable, and the costs
and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings
(whether civil or criminal), settlements, judgments and investigations, claims and changes in any such matters, and developments
or assertions by or against the Company relating to intellectual property rights and intellectual property licenses, could have
a material adverse effect on its business, financial condition and operating results.
On June 27, 2014, the Company entered
into an underwriting agreement with Roth Capital Partners, LLC and Oppenheimer & Co., as representatives of the several underwriters
named therein (the “Underwriters”), relating to the underwritten public offering and sale of up to an aggregate of
4,650,000 shares of the Company’s common stock, par value $0.01 (the “shares”), at a price to the public of $5.00
per share (the “Offering”). The Company also granted the underwriters a 30-day option to purchase up to an aggregate
of 697,500 shares to cover over-allotments, if any.
The Offering was made pursuant to
the Company’s shelf registration statement on Form S-3 (Registration No. 333-196543), filed on June 5, 2014 with the Securities
and Exchange Commission (the “SEC”) and declared effective by the SEC on June 16, 2014, as well as the prospectus supplement
describing the terms of the Offering, dated June 27, 2014.
On July 2, 2014, the Company closed
the Offering, and after giving effect to the underwriters’ exercise of the over-allotment option, the Company sold an aggregate
of 5,347,500 shares of common stock in the Offering at a public offering price of $5.00 per share. The net proceeds of the Offering
were approximately $24.9 million, after deducting underwriting discounts and commissions and other offering expenses paid by the
Company.
| 14. | Asset Purchase Agreements |
Astra Zeneca
On September 24, 2014, the Company
entered into an Asset Purchase Agreement (the “AZ Purchase Agreement”) with AstraZeneca Pharmaceuticals LP, a Delaware
corporation (“AstraZeneca”), pursuant to which the Company acquired all rights, titles and interests of AstraZeneca
and its affiliates in Abbreviated New Drug Applications and New Drug Applications associated with eighteen products (collectively
the “ Purchased Regulatory Approvals”) and certain documents relating thereto (together with the Purchased Regulatory
Approvals, the “Purchased Assets”).
In consideration for the purchase
of the Purchased Assets, the Company paid AstraZeneca $500,000 in cash and will be required to pay up to an additional aggregate
of $6 million upon the occurrence of a certain milestone event. The $6 million is accrued at March 31, 2015 in the payable for
product acquisition costs. In addition, the Company has agreed to pay, for each product manufactured by the Company pursuant to
a Purchased Regulatory Approval, a royalty on future gross profits from product sales. Notwithstanding the foregoing, at any time
prior to December 1, 2015, the Company may satisfy in full its royalty obligations with a single payment of $3 million. The transaction
is accounted for as a purchase of the product and product rights, and as such the initial payment, milestone payment and related
costs to acquire the asset are included as part of product acquisition costs totaling $6.9 million. The Company and will
amortize the costs over fifteen years, the useful life of the acquired products and product rights, commencing when the product
can be sold.
Valeant
On September 30, 2014, the Company
entered into two Asset Purchase Agreements (each, a “Valeant Purchase Agreement” and together, the “Valeant Asset
Purchase Agreements”) one with Valeant Pharmaceuticals North America LLC and one with Valeant Pharmaceuticals Luxembourg
SARL (together, “Valeant”), pursuant to which the Company acquired all rights, titles and interests of Valeant and
their respective affiliates in Abbreviated New Drug Applications and New Drug Applications associated with two products (collectively,
the “Valeant Purchased Regulatory Approvals”) and certain documents relating thereto (together with the Valeant Purchased
Regulatory Approvals, the “Valeant Purchased Assets”). Pursuant to the terms of the Valeant Asset Purchase Agreements,
the Company also acquired the option (each, an “Option” and, collectively, the “Options”) to purchase Abbreviated
New Drug Applications and New Drug Applications associated with three additional products (the “Additional Assets”).
In consideration for the purchase
of the Valeant Purchased Assets, the Company paid Valeant an aggregate of $1.5 million in cash. In consideration for the purchase
of the Additional Assets, the Company may exercise any Option, in its sole discretion, and pay $750,000 for each of two additional
products and $500,000 for one additional product, for a total aggregate of $2 million if all Options are exercised. The Company
purchased the one additional product for $500,000 on November 18, 2014. On March 27, 2015, the Company purchased the two additional
products for a total of $1.5 million in cash. The transaction is accounted for as a purchase of the product and product rights,
and as such the initial payment and related costs to acquire the Valeant Purchased Assets are included as part of product acquisition
costs totaling $3.5 million. The Company will amortize the costs over fifteen years, the useful life of the acquired product
and product rights, commencing when the product can be sold.
ITEM 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
This
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section and other sections of
this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995, that are based on current expectations, estimates,
forecasts and projections about the industry and markets in which the Company operates and on management's beliefs and assumptions.
In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of the
Company. Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking
statements. These statements are based on current expectations of management and are not guarantees of future performance,
and involve certain risks, uncertainties and assumptions, which are difficult to predict.
These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry,
the general economic conditions in the markets in which the Company operates, levels of industry research and development spending,
the Company’s ability to continue to attract and retain qualified personnel, the fixed price nature of product development
agreements or the loss of customers and other factors described in the Company’s
filings with the Securities and Exchange Commission, including the “Risk Factors”
section as set forth in our Annual Report on Form 10-K for the year ended December 31, 2014, as updated below in this Quarterly
Report on Form 10-Q. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such
forward-looking statements. The forward-looking statements set forth herein speak only as of the date of this report. The
Company undertakes no obligation to update publicly any forward-looking statements, whether
as a result of new information, future events or otherwise, except as may be required by applicable law.
Company Overview
Strategic Overview
IGI Laboratories, Inc. is a
Delaware corporation incorporated in 1977. The Company’s office, laboratories and manufacturing facilities are
located at 105 Lincoln Avenue, Buena New Jersey. The Company is a specialty generic pharmaceutical company. The
Company’s mission is to become a leader in the specialty generic pharmaceutical market. Under its own label, the
Company currently sells generic topical pharmaceutical products that are bioequivalent to their brand name counterparts. The
Company also provides development, formulation, and manufacturing services to the pharmaceutical, over-the-counter (OTC)
and cosmetic markets.
Currently, we have two platforms for growth:
| § | Developing, manufacturing and marketing a portfolio of generic pharmaceutical
products in our own label in topical, injectable, complex and ophthalmic dosage forms; and, |
| § | Managing our current contract manufacturing and formulation services
business. |
We currently operate and generate
revenue in one segment, which includes the manufacture and development of topical pharmaceutical, OTC and cosmetic products. We
have been in the contract manufacturing and development of topical products business since the early 1990s, but our strategy since
2010 has been focused on the growth of our own generic pharmaceutical business. Since 2010, we have focused on transitioning our
business to include more customers in the topical pharmaceutical industry. In 2014, we focused on the transformation of a business
that was working toward being a leader in the topical generic pharmaceutical industry into becoming a leader in the broader specialty
generic pharmaceutical markets. We believe that expanding our development and commercial base beyond topical generics, historically
the cornerstone of our expertise, to include injectable generics, complex generics and ophthalmic generics (what we call our TICO
Strategy), will leverage existing expertise and capabilities, and broaden our platform for strategic growth.
To date, we have filed 26 Abbreviated
New Drug Applications, or ANDAs, with the United States Food and Drug Administration, or FDA for additional pharmaceutical products.
We expect to continue to expand our presence in the generic topical pharmaceutical market through the filing of additional ANDAs
with the FDA and the subsequent launch of products as these applications are approved. Our target is to file at least 20 ANDAs
in 2015 through our internal research and development program. We will also seek to license or acquire further products, intellectual
property, or ANDAs to expand our portfolio.
The manufacturing and commercialization
of generic specialty pharmaceutical markets is competitive, and there are established manufacturers, suppliers and distributors
actively engaged in all phases of our business. We currently only manufacture and sell topical generic pharmaceutical products
under our own label. As we continue to execute our TICO strategy, we will compete in other markets, including the injectable and
ophthalmic generic pharmaceutical markets, and expect to face other competitors.
For the three months ended March
31, 2015, 62% of our total product sales, net were to one of the three large wholesale drug distributors noted below.
For the three months ended March 31, 2014, 25% of our total product sales, net were to one of the three large wholesale drug distributors
noted below. The three large wholesale drug distributors are: AmericsourceBergen Corporation, (“ABC”), Cardinal Health, Inc.,
(“Cardinal”), and McKesson Drug Company, (“McKesson”).
ABC accounted for approximately
45% and 79% of our accounts receivable as of March 31, 2015 and 2014, respectively.
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 speaking, 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. Furthermore, ABC, Cardinal and McKesson have recently entered into strategic alliances with Walgreens,
CVS Caremark and Rite-Aid, respectively. Since Walgreens, CVS Caremark and Rite-Aid are customers for several of our
products, the loss of our distributor relationship with any of the three large wholesalers could result in a reduction to our revenues.
We consider our business relationships
with ABC, Cardinal and McKesson to be in good standing and have fee for services contracts with each of them. However, a change
in purchasing patterns, a decrease in inventory levels, an increase in returns of our products, delays in purchasing products and
delays in payment for products by one or more of these distributors could have a material negative impact on our revenue, business,
financial condition and results of operations. We experienced a change in purchasing patterns at ABC in April 2015. We are currently
evaluating the financial impact of this change on our business, and are analyzing the market for other opportunities to expand
our current relationships with other customers. We continue to seek to diversify our existing portfolio of specialty generic drug
products through internal research and development, adding to the 26 ANDAs we have filed with the FDA, as we expect to file an additional
18 ANDAs in 2015. In addition, we continue to explore business development opportunities to add additional products and or capabilities
to our existing portfolio.
Our customers in the contract manufacturing
business generally consist of pharmaceutical companies, as well as cosmetic and OTC product marketers, who require product development/manufacturing
support. For the three months ended March 31, 2015, approximately 79% of our revenue was derived from pharmaceutical customers,
as compared to 71% of total contract manufacturing revenue for the three months ended March 31, 2014. One of our contract manufacturing
services customers represented 11% of total revenue in for the three months ended March 31, 2015 and two of our contract manufacturing
services customers represented 35% of total revenue for the three months ended March 31, 2014. We do not expect any contract manufacturing
or formulation services customers to exceed 10% of revenue in 2015 and beyond.
Recent Events
On March 23, 2015, we appointed John
Celentano to our Board of Directors. Mr. Celentano also serves on the Company's Audit Committee.
On March 26, 2015 and April 28, 2015,
we filed our first two ANDAs in 2015. On April 28, 2015, we announced that believe our current pipeline of twenty-four submissions,
exclusive of partnered submissions, pending approval by the FDA now has a combined addressable market of over $702 million based
on February 2015 data from IMS Health.
On March 27, 2015, we
acquired ANDAs and NDAs associated with two injectable products from Valeant, as part of Valeant Asset Purchase Agreements
which we executed on September 30, 2014.
Results of Operations
Three months ended March 31, 2015 compared
to March 31, 2014
We
had net income of $6,555,000, or $0.12 per share, for the three months ended March 31, 2015, compared to $167,000, or $0.00 per
share, for the three months ended March 31, 2014, which resulted from the following:
Revenues (in thousands):
| |
Three Months Ended March 31, | | |
| |
Components of Revenue: | |
2015 | | |
2014 | | |
$ Change | | |
% Change | |
Product sales, net | |
$ | 10,510 | | |
$ | 6,383 | | |
$ | 4,127 | | |
| 65 | % |
Research and development income | |
| 51 | | |
| 313 | | |
| (262 | ) | |
| (84 | )% |
Licensing, royalty and other revenue | |
| 110 | | |
| 157 | | |
| (47 | ) | |
| (30 | )% |
Total Revenues | |
$ | 10,671 | | |
$ | 6,853 | | |
$ | 3,818 | | |
| 56 | % |
The
increase in product sales for the three months ended March 31, 2015 as compared to the same period in 2014 was primarily due to
increased revenue from our own generic pharmaceutical product line that was launched in the first quarter of 2013, including the
launch of two additional IGI label products in June 2014. This increase was partially offset by a decrease in product sales in
our contract manufacturing services, however revenue within contract manufacturing services related to pharmaceutical customers
increased for the three months ended March 31, 2015 as compared to the same period in 2014. Research and development income will
not be consistent and will vary, from period to period, depending on the required timeline of each development project. Licensing,
royalty and other revenue decreased slightly due to a decrease in other revenue while licensing and royalty revenue remained the
same.
Costs and Expenses
(in thousands):
| |
Three Months Ended March 31, | | |
| |
| |
2015 | | |
2014 | | |
$ Change | | |
% Change | |
Cost of sales | |
$ | 5,043 | | |
$ | 3,987 | | |
$ | 1,056 | | |
| 26 | % |
Selling, general and administrative | |
| 1,900 | | |
| 1,282 | | |
| 618 | | |
| 48 | % |
Product development and research | |
| 2,630 | | |
| 1,365 | | |
| 1,265 | | |
| 93 | % |
Totals
costs and expenses | |
$ | 9,573 | | |
$ | 6,634 | | |
$ | 2,939 | | |
| 44 | % |
Cost of sales increased for the three
months ended March 31, 2015 as a result of the increase in total revenue. Cost of sales as a percentage of total revenue was 47%
for the three months ended March 31, 2015 as compared to 58% for the three months ended March 31, 2014. The decrease in cost of
sales as a percentage of product sales for 2015 was attributable to increased revenue from our own
generic pharmaceutical product line, which has higher margins, and a shift in the mix of our contract manufacturing product
sales to include greater higher margin pharmaceutical products. During the three months ended March 31, 2015, 79% of our revenue
in contract manufacturing was from pharmaceutical customers as compared to 71% for the same period in 2014. Our research and development
income results primarily from services rendered under contractual agreements, and therefore cost of sales as a percentage of our
research and development income is relatively low. Consistent with our strategy, we expect cost of sales as a percentage of total
revenue to decline over time.
Selling, general and administrative
expenses for the three months ended March 31, 2015 increased by $618,000 as compared to the same period in 2014. There were increases
of $169,000 in salaries, bonuses and related costs, $91,000 in the expense from the issuance of stock based compensation related
to options and restricted stock, $157,000 in professional fees, $57,000 in travel related, $51,000 in contributions, $20,000 in
overhead costs and $56,000 in other corporate expenses.
Product development and research
expenses for the three months ended March 31, 2015 increased by $1,265,000 as compared to the same period in 2014. Consistent with
our strategy to expand our portfolio of generic prescription pharmaceutical products, we increased spending on clinical studies
by $651,000, pilot batch expense by $146,000, outside testing and supplies by $230,000, consulting fees by $123,000, professional
fees by $32,000, overhead costs by $26,000 and salaries, bonuses and related costs by $88,000. These increases were partially offset
by a decrease of $46,000 in fees related to the Generic Drug User Fee Act and the associated filing of our applications with the
FDA.
Other Income (Expense)
(in thousands):
| |
Three Months Ended March 31, | | |
| |
| |
2015 | | |
2014 | | |
$ Change | | |
% Change | |
Interest expense | |
$ | 3,168 | | |
$ | 52 | | |
$ | 3,116 | | |
| 5,992 | % |
Change in the fair value of derivative liability | |
| (8,625 | ) | |
| - | | |
| (8,625 | ) | |
| - | |
Interest expense increased for the
three months ended March 31, 2015 as compared to the same period in 2014 due to the inclusion of approximately $3,111,000 of interest
expense, amortization of debt discount and amortization of debt issuance costs related to the Convertible 3.75% Senior Notes (see
Note 6 to the Company’s Consolidated Financial Statements) in the three months ended March 31, 2015. We also recorded an $8,625,000
change in the fair value of the derivative liability as a result of the change in the fair value of our derivative liability, caused
primarily by the decrease in the price of our common stock in the three months ended March 31, 2015.
Net Income (in thousands,
except per share numbers):
| |
Three Months Ended March 31, | | |
| |
| |
2015 | | |
2014 | | |
$ Change | | |
% Change | |
Net income | |
$ | 6,555 | | |
$ | 167 | | |
$ | 6,388 | | |
| 3,825 | % |
Basic earnings per share | |
$ | 0.12 | | |
$ | 0.00 | | |
$ | 0.12 | | |
| - | |
Net income for the three months ended
March 31, 2015 was $6,555,000 as compared to $167,000 in the same period last year. The increase is due to the change in the fair
value of derivative liability, partially offset by the increases in revenues and the increases in costs and expenses noted above.
Liquidity and Capital Resources
The Company's
operating activities used $114,000 of cash during the three months ended March 31, 2015, compared to $63,000 of cash provided by
operating activities during the three months ended March 31, 2014. The cash used by operating activities for the three months ended
March 31, 2015 was a result of the net income, offset by the change in the fair value of derivative liability and the non-cash
expenses for the period. The cash provided by operating activities for the three months ended March 31, 2014 was a result of the
net income and the changes in operating assets and liabilities, particularly a significant increase in accounts receivable and
accounts payable and accrued expenses related to our IGI label products.
The Company’s investing activities
used $1,711,000 during the three months ended March 31, 2015, compared to $68,000 of cash used in investing activities during the
three months ended March 31, 2014. The funds used for the three months ended March 31, 2015 were for the purchase of two additional
products (see Note 14 to the Company’s Condensed Consolidated Financial Statements) and capital expenditures related to additional
equipment for the compounding and packaging areas and additional IT equipment. The funds used for the period ended March 31, 2014
were for additional IT equipment and equipment and improvements for the compounding area and the warehouse.
The Company's financing activities
used $27,000 of cash during the three months ended March 31, 2015, compared to $318,000 of cash provided during the three months
ended March 31, 2014. The cash used in the three months ended March 31, 2015 was mainly the $33,000 principal payments on capital
lease obligations offset by the $15,000 proceeds from the exercise of common stock options and the cash provided for the three
months ended March 31, 2014 was mainly the $327,000 proceeds from the exercise of common stock warrants.
The Company’s principal sources
of liquidity are cash and cash equivalents of approximately $157,031,000 at March 31, 2015, the $6,840,000 available on the $10,000,000
credit facility detailed in Note 7 and future cash from operations. The Company had working capital of $163,096,000 at March 31,
2015.
The Company may require additional
funding and this funding will depend, in part, on the timing and structure of potential business arrangements. If necessary, the
Company may continue to seek to raise additional capital through the sale of its equity or through a strategic alliance with a
third party. There may also be additional acquisition and growth opportunities that may require external financing. There can be
no assurance that such financing will be available on terms acceptable to the Company, or at all. We believe that our existing
capital resources will be sufficient to support our current business plan beyond May 2016.
Off Balance Sheet Arrangements
The Company does not have any off balance
sheet arrangements as of the date of this report.
Critical Accounting Policies and Estimates
IGI’s condensed consolidated
financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to
make estimates and assumptions about future events that affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from these estimates.
Please refer to the Company’s
Form 10-K for the year ended December 31, 2014 for a complete list of all
Critical Accounting Policies and Estimates. See also Note 3 to the Company’s Consolidated Financial Statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk
As of March 31, 2015, our principal
debt obligation was related to our Notes. Interest accrues at a fixed rate of 3.75% on the outstanding principal amount
of the Notes and is paid semi-annually every June 15 and December 15 until the Notes mature on December 15, 2019. Since
the interest rate is fixed, we have no market risk related to the Notes.
Our revolving Credit and Security
Agreement with GECC calls for interest to accrue based on a premium above either the current prime rate or current LIBOR rates. Therefore,
borrowings pursuant to this revolving credit facility would be subject to market risk. However, as of March 31, 2015,
we had no outstanding loans and therefore no market risk related to this revolving credit facility.
Our financial instruments include
cash and cash equivalents, accounts receivable, accounts payable and the Notes. The fair values of cash and cash equivalents, accounts
receivable and accounts payable approximate book value because of the short maturity of these instruments. Based on
the closing price of our common stock as of March 31, 2015, the fair value of our Notes was approximately $113.7 million compared
to their face value of $143.75 million as of March 31, 2015. However, this variance is due to the conversion feature
in the Notes rather than to changes in market interest rates. As noted above, the Notes carry a fixed interest rate
and therefore do not subject us to interest rate risk. As a result in the change in fair value, we recorded an $8.6 million
change in the fair value of the derivative liability on our consolidated statements of operations.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls
and Procedures
Our management, with the participation
of our Chief Executive Officer and Principal Financial and Accounting Officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2015. Based on that evaluation,
our Chief Executive Officer and Principal Financial and Accounting Officer concluded that, as of March 31, 2015, the Company’s
disclosure controls and procedures were effective.
Changes in Internal Control over Financial
Reporting
There was no change in our internal
control over financial reporting during our first quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
We are involved from time to time in claims
which arise in the ordinary course of business. In the opinion of management, we have made adequate provision for potential liabilities,
if any, arising from any such matters. However, litigation is inherently unpredictable, and the costs and other effects of pending
or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal),
settlements, judgments and investigations, claims and changes in any such matters, and developments or assertions by or against
us relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on our business,
financial condition and operating results.
ITEM 1A. Risk Factors.
Part I, Item 1A, “Risk Factors,”
of our Annual Report on Form 10-K for the year ended December 31, 2014 includes a detailed discussion of risks and uncertainties
which could adversely affect our future results. Except as set forth below, the risks described in our Annual Report on Form 10-K
for the year ended December 31, 2014 have not materially changed.
Risks Related to Our Business
We rely on a limited number of customers for a large portion
of our revenues.
We depend on a limited number of customers
for a large portion of our revenue. Three of our customers accounted for 69% of our revenue for the three months ended March 31,
2015 and three of our customers accounted for 50% of our revenue for the three months ended March 31, 2014. The loss of one or
more of these customers could have a significant impact on our revenues and harm our business and results of operations.
We had net revenue from one product, econazole
nitrate cream, which accounted for 53% and 15% of total revenues for the three months ended March 31, 2015 and 2014, respectively.
We have a history of losses and cannot assure
you that we will become profitable, and as a result, we may have to cease operations and liquidate our business.
Prior to 2014, our expenses have exceeded our
revenue in each of the last nine years, and no net income has been available to common stockholders during each of these years.
As of March 31, 2015, our stockholders’ equity was $46.4 million and we had an accumulated deficit of $33 million. Our future
profitability depends on revenue exceeding expenses, but we cannot assure you that this will occur. If we do not become profitable
or continue to raise external financing, we could be forced to curtail operations and sell or liquidate our business, and you could
lose some or all of your investment.
Risks Related to the Notes
We may not have the ability to raise
the funds necessary to settle conversions of the Notes, purchase the Notes as required pursuant to the terms of the indenture
governing the Notes or pay the redemption price for any Notes we redeem, and our future debt may contain limitations on our
ability to pay cash upon conversion or repurchase of the notes.
On December 16, 2014, we completed the sale
of $125 million aggregate principal amount of our 3.75% Convertible Senior Notes due 2019 (the “Notes”) to Deutsche
Bank Securities Inc. and J.P. Morgan Securities LLC as the initial purchasers and on December 22, 2014, we issued to the initial
purchasers an additional $18.75 million aggregate principal amount of the Notes. Pursuant to the terms of the indenture governing
the Notes, following a certain events, holders of notes will have the right to require us to purchase their notes for cash. Such
event may also constitute an event of default or prepayment under, and result in the acceleration of the maturity of, our then-existing
indebtedness. We cannot assure you that we will have sufficient financial resources, or will be able to arrange financing, to pay
the purchase price in cash with respect to any notes surrendered by holders for purchase at that time, make cash payments upon
conversions or pay the redemption price for any notes we redeem. In addition, restrictions in our then existing credit facilities
or other indebtedness, if any, may not allow us to purchase the notes (even if required pursuant to the terms of the indenture),
make cash payments upon conversions of the notes or pay the redemption price for any notes we redeem would result in an event of
default with respect to the notes which could, in turn, constitute a default under the terms of our other indebtedness, if any.
If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have
sufficient funds to repay the indebtedness and purchase the notes, make cash payments upon conversions thereof or pay the redemption
price for any notes we redeem.
Servicing our debt requires a significant
amount of cash, and we may not have sufficient cash flow from our business to pay our debt.
Our ability to make scheduled payments of the
principal of, to pay interest on, to pay any cash due upon conversion of or to refinance our indebtedness, including the Notes,
depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our
business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary
capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as
selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our
ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be
able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on
our debt obligations.
Until we obtain the necessary stockholder
approvals, our ability to settle any conversions of the Notes with shares of our common stock will be limited by certain listing
standards of the NYSE MKT and the number of available authorized shares of our common stock.
Upon conversion, we will pay or deliver, as
the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. However,
our ability to settle any conversions with shares of our common stock will be limited by certain listing standards of the NYSE
MKT and the number of authorized shares that we have available for such purpose. Accordingly, unless and until we obtain stockholder
approval (i) for issuances of our shares of common stock in excess of the NYSE MKT limitations in accordance with its listing standards
and/or (ii) for an increase in the number of authorized shares of our common stock, we will settle conversions by paying cash or,
subject to certain conditions if we so elect with respect to conversions prior to September 15, 2019, by delivering shares of our
common stock.
Risks Related to Our Securities
Shares of our common stock are relatively illiquid which may
affect the trading price of our common stock.
For the three months ended March 31, 2015,
the average daily trading volume of our common stock on the NYSE MKT was approximately 1,005,000 shares. As a result of our relatively
small public float, our common stock may be less liquid than the stock of companies with broader public ownership. Among other
things, trading of a relatively small volume of our common stock may have a greater impact on the trading price for our shares
than would be the case if our public float were larger.
ITEM 2. Unregistered Sales of Equity
Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
Exhibit |
|
|
Number |
|
Description |
|
|
|
31.1* |
|
Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2* |
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1* |
|
Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2* |
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101* |
|
The following financial information from this Quarterly Report on Form 10-Q for the period ended March 31, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Balance Sheets; (iii) the Condensed Consolidated Statements of Cash Flows; and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text. |
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
IGI Laboratories, Inc. |
|
|
|
Date: May 11, 2015 |
By: |
/s/ Jason Grenfell-Gardner |
|
|
Jason Grenfell-Gardner |
|
|
President and Chief Executive Officer |
|
|
|
Date: May 11, 2015 |
By: |
/s/ Jenniffer Collins |
|
|
Jenniffer Collins |
|
|
Chief Financial Officer |
Exhibit Index
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
31.1* |
|
Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2* |
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1* |
|
Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2* |
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101* |
|
The following financial information from this Quarterly Report on Form 10-Q for the period ended March 31, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Balance Sheets; (iii) the Condensed Consolidated Statements of Cash Flows; and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text. |
* Filed herewith.
Exhibit 31.1
CERTIFICATION
OF
JASON GRENFELL-GARDNER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OF
IGI LABORATORIES, INC.
I, Jason Grenfell-Gardner, President and Chief Executive Officer
of IGI Laboratories, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q
of IGI Laboratories, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such
disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b Designed such internal
control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee
of the registrant's board of directors:
a) All significant
deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud,
whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 11, 2015
|
/s/ Jason Grenfell-Gardner |
|
Jason Grenfell-Gardner |
|
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
OF
JENNIFFER COLLINS
CHIEF FINANCIAL OFFICER
OF
IGI LABORATORIES, INC.
I, Jenniffer Collins, Chief Financial Officer of IGI Laboratories,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of IGI Laboratories,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such
disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal
control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee
of the registrant's board of directors:
a)All significant
deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud,
whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 11, 2015
|
/s/ Jenniffer Collins |
|
Jenniffer Collins |
|
Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
In connection with the Quarterly Report of IGI Laboratories, Inc.
(the “Company”) on Form 10-Q for the period ending March 31, 2015, as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jason Grenfell-Gardner, President
and Chief Executive Officer of the Company, state and certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: May 11, 2015
|
/s/ Jason Grenfell-Gardner |
|
Jason Grenfell-Gardner |
|
President and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of IGI Laboratories, Inc.
(the “Company”) on Form 10-Q for the period ending March 31, 2015,
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jenniffer Collins, Chief
Financial Officer of the Company, state and certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: May 11, 2015
|
/s/ Jenniffer Collins |
|
Jenniffer Collins |
|
Chief Financial Officer |
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