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 The leading web portal for pharmacy resources, news, education and careers June 27, 2017
Pharmacy Choice - Pharmaceutical News - TELIGENT, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - June 27, 2017

Pharmacy News Article

 3/15/17 - TELIGENT, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements


This "Management's Discussion and Analysis of Financial Condition and Results of
Operation" section and other sections of this Annual Report on Form 10-K contain
forward-looking statements that are based on current expectations, estimates,
forecasts and projections about the industry and markets in which the Company
operates and on management's beliefs and assumptions. In addition, other written
or oral statements, which constitute forward-looking statements, may be made by
or on behalf of the Company. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance, and involve certain risks,
uncertainties and assumptions, which are difficult to predict. See "Item 1A:
Risk Factors" above. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law.

Company Overview

Strategic Overview


Teligent, Inc. is a specialty generic pharmaceutical company. All references to
"Teligent," the "Company," "we," "us," and "our" refer to Teligent, Inc. Our
mission is to become a leader in the specialty generic pharmaceutical market.
Under our own label, we currently market and sell generic topical and branded
generic injectable pharmaceutical products in the United States and Canada. 

In

the United States we are currently marketing 16 generic topical pharmaceutical products and four branded generic pharmaceutical products. Through the completion of an acquisition, we now sell a total of 30 generic and branded generic injectable products and medical devices in Canada. Generic pharmaceutical products are bioequivalent to their brand name counterparts.

We

also provide development, formulation, and manufacturing services to the
pharmaceutical, over-the-counter, or OTC, and cosmetic markets.  We operate our
business under one segment. Effective October 23, 2015, we changed our name from
IGI Laboratories, Inc. to Teligent, Inc.  On October 26, 2015, our common stock,
which was previously listed on the NYSE MKT, began trading on the NASDAQ Global
Select Market under the trading symbol "TLGT."  Our principal executive office,
laboratories and manufacturing facilities are located at 105 Lincoln Avenue,
Buena, New Jersey. We have additional offices located in Iselin, New Jersey,
Toronto, Canada, and Tallinn, Estonia.

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 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 broadened our target product focus from
topical pharmaceuticals to include a wider specialty pharmaceutical approach. 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 our existing expertise and capabilities, and broaden
our platform for more diversified strategic growth.

As of the date of this report, we have acquired 25 drug products that have been
previously approved by the United States Food and Drug Administration, or FDA.
Our pipeline includes 34 Abbreviated New Drug Applications, or ANDAs filed with
the FDA, for additional pharmaceutical products. In addition, we have five
abbreviated new drug submissions, or ANDSs, on file with Health Canada. We have
an additional 34 product candidates at various stages of our development
pipeline, ten of which are in stability testing. In December 2015, we announced
the approval by the FDA of Cefotan (Cefotan for Injection). This was our first
product approved from the portfolio of discontinued and withdrawn new drug
applications, or NDAs, and ANDAs that we purchased from AstraZeneca on September
25, 2014. We have also experienced an increased rate of review by the FDA of
applications filed in Generic Drug User Fee Amendments, or GDUFA, Year 3 and
Year 4, which began October 1, 2014, and October 1, 2015, respectively. We
submitted 12 topical ANDAs in 2016. We expect to continue to expand our presence
in the generic topical

                                       42



pharmaceutical market through the filing of additional ANDAs with the FDA and
the subsequent launch of products as these applications are approved. We
received nine approvals from our internally developed pipeline of topical
general products in 2016. We intend to continue to submit further ANDAs to the
FDA and ANDSs to Health Canada in 2017. We will also seek to license or acquire
further products, intellectual property, or pending applications to expand our
portfolio.

Effective October 26, 2015, we transferred the listing of our common stock from
the NYSE MKT to the NASDAQ Global Select Market. Our common stock ceased trading
on the NYSE MKT under the symbol "IG" at the close of business on October 23,
2015 and began trading on the NASDAQ Global Select Market under the symbol
"TLGT" on October 26, 2015.

On November 13, 2015, we acquired all of the rights, title and interest in the
development, production, marketing, import and distribution of all
pharmaceutical products of Alveda Pharmaceuticals Inc., or Alveda, pursuant to
two asset purchase agreements, one relating to the acquisition of all of the
intellectual property-related assets of Alveda and the other relating to the
acquisition of all other assets of Alveda.

We also develop, manufacture, fill, and package topical semi-solid and liquid
products for branded and generic pharmaceutical customers, as well as the OTC
and cosmetic markets. These products are used in a wide range of applications
from cosmetics and cosmeceuticals to the prescription treatment of conditions
like dermatitis, psoriasis, and eczema.

Results of Operations

Fiscal Year 2016 Compared to Fiscal Year 2015

We had a net loss of $12.0 million, or $0.23 per share, in 2016 compared to net income of $6.7 million, or $0.13 per share, in 2015.


Revenues (in thousands):

                                  Year Ended December 31,                  Increase/(Decrease)
Components of Revenue:             2016              2015                   $                    %
Product sales, net            $      65,904     $     43,497     $       22,407                     52 %
Research and development
services and other income               977              753                224                     30 %
Total Revenues                $      66,881     $     44,250     $       22,631                     51 %



The increase in product sales for the year ended December 31, 2016 as compared
to the same period in 2015 was primarily due to the increased revenue from our
own generic pharmaceutical product line and our entry into the specialty generic
injectable market in the U.S. and Canada. In addition, our contract
manufacturing revenues increased over the same period in the prior year,
primarily due to our acquisition of two new customers, one in the fourth quarter
of 2015 and one in the first six months of 2016, for which we manufactured one
of our generic topical products in a private label, offset by a slight decline
in purchase orders. We do not expect revenue from these two contract
manufacturing customers in 2017 and beyond.

Research and development services and other income will not be consistent and
will vary, from period to period, depending on the required timeline of each
development project and/or agreement.

Costs and expenses (in thousands):

                                  Year Ended December 31,                  Increase/(Decrease)
                                   2016              2015                   $                    %
Cost of revenues                     32,194     $     22,935     $        9,259                     40 %
Selling, general and
administrative                       15,005           11,336              3,669                     32 %
Product development and
research                             17,140           13,171              3,969                     30 %
Totals costs and
expenditures                  $      64,339     $     47,442     $       16,897                     36 %




                                       43


Cost of revenues increased for the year ended December 31, 2016 as compared to
the same period in 2015 as a result of the increase in total revenue. Cost of
revenues decreased as a percentage of total revenue to 48% for the year ended
December 31, 2016 as compared to 52% for the same period in 2015. The decrease
in cost of revenue as a percentage of sales was primarily due to the increased
revenue from our own generic pharmaceutical product line driven by new product
launches and our entry in to the specialty generic injectable market. Sales
related to our own label products generally have lower cost of revenues
percentages than our contract manufacturing product revenues; however, sales to
one new contract manufacturing customer, where we sold more of our generic
products in a private label, did reduce cost of revenues as a percentage of
sales. In addition, our costs of revenue include the provision for the
write-down of inventory of $1.4 million. This write-down includes the write-down
of the inventory step up in basis in the amount of $0.5 million. The inventory
step-up was initially recorded in connection with our acquisition of Alveda
Pharmaceuticals, Inc. in November 2015. Our research and development income
results primarily from services rendered under contractual agreements and,
therefore, cost of revenues as a percentage of our research and development
income is relatively low. Consistent with our strategy, we expect cost of
revenues as a percentage of total revenue to decline over time.

Selling, general and administrative expenses for the year ended December 31,
2016 increased by $3.7 million as compared to the same period in 2015. In 2016,
there were increases of $2.3 million in amortization expense related to assets
acquired in the fourth quarter of 2015, $1.3 million in expenses related to our
Canadian operations, $0.8 million in salaries and related costs, $0.5 million in
expenses related to our Estonia operations, $0.4 million in recruiting fees,
other corporate expenses of $0.3 million, bad debt expense of $0.3 million, $0.1
million from the issuance of stock-based compensation related to options and
restricted stock, $0.1 million in conferences and seminars and $0.1 million in
board of directors fees, offset by a decrease of $2.5 million in professional
fees.

Product development and research expenses for the year ended December 31, 2016
increased by $4.0 million as compared to the same period in 2015. Consistent
with our strategy to expand our portfolio of generic prescription pharmaceutical
products, we increased headcount, which resulted in an increase of $1.8 million
in salaries and related costs, $1.4 million in exhibit and pilot batch costs,
$0.7 million in clinical studies, $0.5 million in expenses related to Canadian
operations, $0.4 million in stock based compensation related to options and
restricted stock and $0.3 million in overhead costs. These were partially offset
by decreases in consulting fees of $0.9 million, $0.1 million in fees related to
Generic Drug User Fee Act, or GDUFA, and the associated filing of our
applications with the FDA and technology license fees of $0.1 million.

Interest and Other Expense, net (in thousands):


                                    Year Ended December 31,                Increase/(Decrease)
                                    2016               2015                $                 %
Interest and other expense,
net                           $      (13,304 )    $     (13,358 )   $           54               -  %
Foreign exchange (loss) /
gain                          $         (936 )    $         109     $       (1,045 )           100  %
Change in the fair value of
derivative liability          $            -      $      23,144     $      (23,144 )          (100 )%



Interest expense increased for the year ended December 31, 2016 as compared to
the same period in 2015. The increase is related to the interest expense,
amortization of debt discount and amortization of debt issuance costs of the
Notes (see Note 6), partially offset by capitalized interest related to our
facility expansion. Foreign exchange loss of $0.9 million was recorded for the
year ended December 31, 2016, primarily related to the foreign currency
translation of our intercompany loans denominated in U.S. dollars to our foreign
subsidiaries. These loans are to be repaid in November 2022. Depending on the
changes in foreign currency exchange rates, we will continue to record a
non-cash gain or loss on translation for the remainder of the term of these
loans. Due to the nature of this transaction, there is no economic benefit to
the Company to hedge this transaction. During the year ended December 31, 2015,
we recorded a $23.1 million 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. Due to the approval
of the sufficient shares at the Company's annual shareholder meeting, the
liability for the embedded derivative was reclassified to equity on May 20,
2015, and as such there is no change in the fair value of the derivative
liability recorded for the year ended December 31, 2016.

Net (loss) income attributable to common stockholders (in thousands, except per share numbers):



                                       44

                                    Year Ended December 31,                 Increase/(Decrease)
                                    2016                2015                $                 %
Net (loss) income
attributable to common
stockholders                  $      (11,985 )     $       6,668     $      (18,653 )          (280 )%
Basic (loss) income per
share                         $        (0.23 )     $        0.13     $        (0.36 )          (277 )%
Diluted loss per share        $        (0.23 )     $       (0.07 )   $        (0.16 )           229  %



Net loss for the year ended December 31, 2016 was $12.0 million as compared to
net income of $6.7 million for the year ended December 31, 2015. The decrease is
due to increases in costs and expenses in 2016, foreign currency exchange loss
of $0.9 million, and the absence of change in the fair value of the derivative
liability that occurred in 2015 in the amount of $23.1 million, partially offset
by increases in revenues in 2016.

Fiscal Year 2015 Compared to Fiscal Year 2014


We had net income of $6.7 million in 2015 compared to net income of $5.3 million
in 2014. Net income attributable to common stockholders was $6.7 million, or
$0.13 per share in 2015, and net income applicable to common stockholders was
$5.3 million, or $0.11 per share, in 2014:

Revenues (in thousands):


                                   Year Ended December 31,                Increase/(Decrease)
Components of Revenue:              2015              2014                 $                 %
Product sales, net            $       43,497     $      32,104     $       11,393               35  %
Research and development
services and other income                753             1,636               (883 )            (54 )%
Total Revenues                $       44,250     $      33,740     $       10,510               31  %



The increase in product sales for the year ended December 31, 2015 as compared
to the same period in 2014 was primarily due to the increased revenue from our
own generic pharmaceutical product line that was launched in the first quarter
of 2013, the launch of an additional Company label product in July 2015, the
purchase of three commercialized injectable products in October 2015 and the
launch of two additional Company label products in June 2014. There was a
decrease in product sales in our contract services business to three of our
pharmaceutical customers and one cosmetic customer, which was only partially
offset by increased sales to three of our pharmaceutical customers. 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):

                                            Year Ended December 31,               Increase/(Decrease)
                                              2015             2014                  $                  %
Cost of revenues                         $      22,935     $   16,948     $        5,987                  35 %
Selling, general and administrative             11,336          5,976              5,360                  90 %
Product development and research                13,171          6,910              6,261                  91 %
Totals costs and expenditures            $      47,442     $   29,834     $       17,608                  59 %



Cost of revenues increased for the year ended December 31, 2015 as compared to
the same period in 2014 as a result of the increase in total revenue. Cost of
revenues as a percentage of total revenue was 52% for the year ended
December 31, 2015 as compared to 50% for 2014. During 2015, approximately 86% of
our revenue from contract and formulation services came from pharmaceutical
customers as compared to 79% in 2014. Our research and development income
results primarily from services rendered under contractual agreements and,
therefore, cost of revenues as a percentage of our research and development
income is relatively low. Consistent with our strategy, we expect cost of
revenues as a percentage of total revenue to decline over time.


                                       45



Selling, general and administrative expenses for the year ended December 31,
2015 increased by $5.4 million as compared to the same period in 2014. During
the fourth quarter of 2015, the Company recorded acquisition related costs in
the amount of $2.3 million. In addition, in 2015 there were increases of $1.1
million from the issuance of stock-based compensation related to options and
restricted stock, other corporate expenses of $0.5 million, professional fees of
$0.4 million, amortization of product acquired in 2015 of $0.4 million, expenses
related to Canadian operations of $0.2 million, travel-related costs of $0.2
million, website expenses of $0.1 million, overhead costs of $0.1 million,
recruiting and human resources expenses of $0.1 million, contributions of $0.1
million and stockholder relations expense of $44,000 during the year ended
December 31, 2016 as compared to the same period in 2015. These increases were
partially offset by a decrease of $47,000 in salaries and related costs.

Product development and research expenses for the year ended December 31, 2015
increased by $6.3 million as compared to the same period in 2014. Consistent
with our strategy to expand our portfolio of generic prescription pharmaceutical
products, we increased headcount, including hiring our Chief Scientific Officer
in October of 2015, which resulted in an increase of $0.8 million in salaries
and related costs; we increased spending on clinical studies by $2.7 million,
costs related to our exhibit batches by $1.0 million, contract research by $0.9
million, professional fees by $0.3 million, $0.2 million in expenses related to
Canadian operations, stock based compensation related to options and restricted
stock of $0.2 million, consulting fees by $0.1 million and overhead costs by
$0.1 million. In addition, fees related to GDUFA, and the associated filing of
our applications with the FDA, increased by $0.1 million.


Interest and Other Expense, net (in thousands):

                                   Year Ended December 31,               Increase/(Decrease)
                                    2015               2014               $                %
Interest and other expense,
net                           $     (13,358 )     $       (782 )   $     (12,576 )         1,608 %
Foreign exchange gain         $         109       $          -     $         109             100 %
Change in the fair value of
derivative liability          $      23,144       $      2,300     $      20,844             906 %



Interest expense increased for the year ended December 31, 2015 as compared to
the same period in 2014, primarily due to the inclusion in 2015 of approximately
$12.8 million 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). Gain on
foreign exchange in 2015 resulted from the change in exchange rates applied to
funds due from Teligent Canada at December 31, 2015. We also recorded a $23.1
million change in the fair value of the derivative liability as a result in the
change in the fair value of our derivative liability, caused primarily by the
decrease in the price of our common stock in 2015.


Net income attributable to common stockholders (in thousands, except per share
numbers):

                                              Year Ended December 31,             Increase/(Decrease)
                                              2015               2014              $                %
Net income attributable to common
stockholders                             $      6,668       $      5,251     $     1,417             27  %
Basic income per share                   $       0.13       $       0.11     $      0.02             18  %

Diluted (loss) income per share $ (0.07 ) $ 0.09

$ (0.16 ) (178 )%

Net income for the year ended December 31, 2015 increased as compared to the year ended December 31, 2014 due to the change in the fair value of the derivative liability, partially offset by the increase in revenues and the increase in costs and expenses noted above.

Liquidity and Capital Resources


Our principal sources of liquidity were cash and cash equivalents of
approximately $66.0 million at December 31, 2016 and cash from operations. The
Company terminated its $10 million credit facility with General Electric Capital
Corporation, as agent, and GE Capital Bank and certain other institutions, as
lenders, in February 2016. We had working capital of $88.3 million at
December 31, 2016. We may require additional funding and this funding will
depend, in part, on the timing and structure of potential business arrangements.
If necessary, we may continue to seek to raise additional capital through the
sale of our equity

                                       46



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
us, or at all. We believe that our existing capital resources will be sufficient
to support our current business plan beyond March 2018.

On December 10, 2014, we entered into a purchase agreement, pursuant to which we
agreed to sell our 3.75% Convertible Senior Notes due 2019, or the Notes, to
Deutsche Bank Securities Inc. and J.P. Morgan Securities LLC, as the initial
purchasers. We received net proceeds of approximately $139 million, after
expenses of $4.8 million, upon completion of the transaction. The sale was
completed on December 16, 2014. See Note 6.

On June 27, 2014, we announced the pricing of our underwritten public offering
of 4,650,000 shares of our common stock at a price to the public of $5.00 per
share. The offering closed on July 2, 2014, and, after giving effect to the
underwriters' exercise of the over-allotment option in full, we sold an
aggregate of 5,347,500 shares of common stock. The net proceeds of the offering
were approximately $24.9 million, after deducting the underwriters' commission
and offering expenses.

Our operating activities provided $1.1 million of cash during the year ended
December 31, 2016 compared to $15.5 million and $3.9 million of cash used during
the years ended December 31, 2015 and 2014, respectively. The cash provided for
the year ended December 31, 2016 was mostly due to the collection of the
Canadian goods and services tax, or GST, and the harmonized sales tax, or HST,
of $5.2 million, in addition to other changes in operating assets and
liabilities, offset by $7.6 million of interest expense related to our Notes.
The use of cash for the year ended December 31, 2015 was a result of $5.2
million paid related to Canadian GST and HST and interest expense in the amount
of $6.7 million related to our Notes. In connection with the acquisition of
Alveda, we paid $2.2 million in acquisition costs. The remaining use of cash was
primarily a result of the $3.8 million in changes in operating assets and
liabilities, which included a $6.0 million payment related to the AstraZeneca
assets acquired in September of 2015, offset by the net income for the year. The
use of cash for the year ended December 31, 2014 was substantially a result of
the changes in operating assets and liabilities offset by the net income for the
year.

Our investing activities used $22.0 million during the year ended December 31,
2016 compared to $53.1 million of cash used in the year ended December 31, 2015
and $3.8 million of cash used in the year ended December 31, 2014. The funds
used for the year ended December 31, 2016 included $18.6 million in capital
expenditures, for which the majority were for the facility expansion in Buena,
as well as expenditures for the Estonian lab, and $3.4 million in product
acquisition costs including Sebela and the buyout of the royalty stream related
to AstraZeneca (See Note 16). The funds used for the year ended December 31,
2015 included $35.4 million in cash paid to acquire the assets of Alveda in
November 2015. We completed the acquisition of five products, which used $11.7
million in cash in 2015. We also used $6.0 million for the purchase of capital
expenditures related to additional scientific and manufacturing equipment and
costs related to the planning phase of our expansion. The funds used during the
year ended December 31, 2014 were for the purchase of products (see Note 7 to
the Company's Condensed Consolidated Financial Statements) and capital
expenditures related to additional computer equipment and scientific equipment
and improvements incurred to expand our R&D.

Our financing activities used $10,000 of cash during the year ended December 31,
2016 compared to $3.1 million of cash used in financing activities in the year
ended December 31, 2015 and $164.5 million of cash provided by financing
activities in the year ended December 31, 2014. The cash used during the year
ended December 31, 2016 was mainly $70,000 of principal payments on capital
lease obligations offset by $96,000 in proceeds from the exercise of common
stock warrants and options. The cash used during the year ended December 31,
2015 in the amount of $3.1 million was used to pay down debt. The cash provided
for the year ended December 31, 2014 was mainly $139 million net proceeds from
the Notes, $24.9 million net proceeds from the public offering of common stock
and $0.8 million net proceeds from the exercise of common stock warrants and
options.

Off-Balance Sheet Arrangements


We have no significant off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to our
shareholders.

Contractual Obligations

As more fully described under Item 2, Properties, we lease a warehouse in Vineland, New Jersey, office space in Iselin, New Jersey, office space in Toronto, Canada and office and laboratory space in Tallinn, Estonia. Our remaining obligations under these leases are summarized in the table below.

As of December 31, 2016, our principal outstanding debt obligation related to our Notes is a total of $143.75 million and are due in December of 2019.

                                       47


                                                            Payments Due by Period
                                                                (in thousands)
                                                                                                    More than 5
Contractual Obligations    Total           Less than 1 Year      1-3 Years        3-5 Years         Years
Convertible Senior Notes   $   143,750     $               -     $    143,750     $           -     $           -
Capital Lease                        -                     -                -                 -                 -
Operating Lease                  2,987                   548              879               818               742

Total                      $   146,737     $             548     $    144,629     $         818     $         742


Critical Accounting Policies and Estimates


Our consolidated financial statements were prepared in accordance with U.S.
generally accepted accounting principles, which require us to make subjective
decisions, assessments and estimates about the effect of matters that are
inherently uncertain. As the number of variables and assumptions affecting the
judgment increases, such judgments become even more subjective. While we believe
our assumptions are reasonable and appropriate, actual results may be materially
different than estimated.

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 December 31, 2016 approximate their fair value for all periods
presented. The Company measures fair value in accordance with ASC 820-10, Fair
Value Measurements and Disclosures (formerly SFAS 157, Fair Value Measurements).
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 the aggregate of $143.75 million in principal
notes issued on December 16, 2014, to Deutsche Bank Securities Inc. and J.P.
Morgan Securities LLC, as the initial purchasers, or the Notes, 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 Notes with the option and then considering the value of the Notes
without the option. The difference is the fair value of the embedded
derivatives. The embedded 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.

On May 20, 2015, the Company received approval to increase its authorized shares
sufficiently to allow for the conversion of the Notes into equity at the annual
shareholders meeting. Therefore, the derivative liability of $18.3 million was
reclassified into stockholders equity. The Company recorded a change in the fair
value of the derivative liability through May 20, 2015 of $23.1 million for the
year ended December 31, 2015. On May 20, 2015, the Company reclassified the fair
value of the derivative liability into stockholders equity due to the approval
of sufficient shares. Based on the closing price of the Company's common stock
as of December 31, 2016, the net carrying value of the Notes was approximately
$111.4 million compared to their face value of $143.75 million as of
December 31, 2016. 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.

                                       48

Allowance for Doubtful Accounts


The Company extends credit to its contract services customers, based upon credit
evaluations, in the normal course of business, primarily with 30-day terms. The
Company does not require collateral from its customers. Bad debt provisions are
provided for on the allowance method based on historical experience and
management's evaluation of outstanding accounts receivable. The Company reviews
the allowance for doubtful accounts regularly, and past due balances are
reviewed individually for collectability. The Company charges off uncollectible
receivables against the allowance when the likelihood of collection is remote.

The Company extends credit to wholesaler and distributor customers and national
retail chain customers, based upon credit evaluations, in the normal course of
business, primarily with 90-day terms. The Company maintains customer-related
accruals and allowances that consist primarily of chargebacks, rebates, sales
returns, shelf stock allowances, administrative fees and other incentive
programs. Some of these adjustments relate specifically to the generic
prescription pharmaceutical business. Typically, the aggregate gross-to-net
adjustments related to these customers can exceed 50% of the gross sales through
this distribution channel. Certain of these accruals and allowances are recorded
in the balance sheet as current liabilities and others are recorded as a
reduction to accounts receivable.

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 pharmaceutical products, sales of manufactured product for its
customers included in product sales, and research and product development
services and other 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, net, include Company Product Sales and Contract Manufacturing Sales.


Company Product Sales: The Company records revenue from Company 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 is customary in the pharmaceutical industry, the Company's gross product
sales from Company 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 sales returns and allowances, or 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.


                                       49

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.


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 included
in product sales, net in the Company's Condensed Consolidated Statement of
Operations.

Research and Development Services and Other Income: The Company establishes
agreed upon product development agreements with its customers to perform product
development services. 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. Other types of revenue include royalty or licensing
revenue, and would be recognized based upon the contractual agreement upon
completion of the earnings process.

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.

Derivatives


The Company accounts for its derivative instruments in accordance with ASC
815-10, Derivatives and Hedging, or ASC 815-10. 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 was the embedded convertible option of its
Notes issued December 16, 2014 (see Note 6), which has been recorded as a
liability at fair value until May 20, 2015, and was revalued at each reporting
date, with changes in the fair value of the instruments included in the
consolidated statements of operations as non-operating income (expense). Due to
the approval of the sufficient shares at the Company's annual shareholder
meeting, the liability for the embedded derivative was reclassified to equity on
May 20, 2015. The Company has no derivatives at December 31, 2016 and December
31, 2015.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, or GAAP, requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include derivatives, SRA
allowances, 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. Actual results could differ from those estimates.

Recent Accounting Pronouncements


In December 2016, the FASB issued ASU 2016-20, Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with Customers". The update
provides users with classification guidance on thirteen specific areas of
correction or improvement topics as follows: 1) Loan Guarantee Fees, 2) Contract
Costs - Impairment Testing, 3) Contract Costs - Interaction of Impairment
Testing with Guidance in Other Topics, 4) Provisions for Losses on
Construction-Type and Production-Type Contracts, 5) Scope of Topic 606, 6)
Disclosure of Remaining Performance Obligations, 7) Disclosure of Prior-Period
Performance Obligations, 8) Contract Modifications Example, 9) Contract Asset
versus Receivable, 10) Refund Liability, 11) Advertising Costs, 12) Fixed-Odds
Wagering Contracts in the Casino Industry and 13) Cost Capitalization for
Advisors to Private Funds and Public Funds. The amendments affect the guidance
in update 2014-09, which is effective for fiscal years beginning after December
15, 2017 for public business entities, including interim periods within those
fiscal years.

                                       50

For us, the amendments are effective January 1, 2018. We are currently evaluating the impact of this ASU on our consolidated financial statements.


In December 2016, the FASB issued ASU 2016-19, Technical Corrections and
Improvements. The update is to address suggestions received from stakeholders on
the Accounting Standards Codification and to make other incremental improvements
to GAAP. It contains amendments that affect a wide variety of Topics in the
Accounting Standards Codification and applies to all reporting entities within
the scope of the affected accounting guidance. Most of the amendments are
effective upon issuance of the update. We are currently evaluating the impact of
this ASU on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic
230): "Restricted Cash (a consensus of the FASB Emerging Issues Task Force)".
The update addresses the diversity in the industry with respect to
classification and presentation of changes in restricted cash on the statement
of cash flows. These amendments require that a statement of cash flows explain
the restricted cash change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. It affects those reporting entities that are required to
evaluate whether they should consolidate a VIE. The amendments in this update
are effective for fiscal years beginning after December 15, 2017 for public
business entities, including interim periods within those fiscal years. For us,
the amendments are effective January 1, 2018. We are currently evaluating the
impact of this ASU on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810):
"Interests Held through Related Parties That Are Under Common Control". The
update was issued to amend the consolidation guidance on how a reporting entity
that is a single decision maker of a variable interest entity ("VIE") should
treat indirect interests in the entity held through related parties that are
under common control with the reporting entity when determining whether it is
the primary beneficiary of that VIE. It affects those reporting entities that
are required to evaluate whether they should consolidate a VIE. The amendments
in this update are effective for fiscal years beginning after December 15, 2017
for public business entities, including interim periods within those fiscal
years. For us, the amendments are effective January 1, 2018. We are currently
evaluating the impact of this ASU on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740):
"Intra-Entity Transfers of Assets Other Than Inventory". The update addresses
income tax consequences of intra-entity transfers of assets other than
inventory. It seeks to clarify the authoritative guidance about the prohibition
of the recognition of current and deferred income taxes for intra-entity asset
transfers until the asset has been sold to an outside party. Instead, this
update now eliminates that prohibition and states that an entity should
recognize the income tax consequences when the transfer occurs. The amendments
in this update are effective for fiscal years beginning after December 15, 2017
for public business entities, including interim periods within those fiscal
years. For us, the amendments are effective January 1, 2018. We are currently
evaluating the impact of this ASU on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic
230): "Classification of Certain Cash Receipts and Cash Payments (a Consensus of
the Emerging Issues Task Force)". The update provides users with classification
guidance on eight specific cash flow topics as follows: 1) Debt Prepayment or
Debt Extinguishment Costs, 2) Settlement of Zero-Coupon Debt Instruments or
Other Debt Instruments with Coupon Interest Rates That Are Insignificant in
Relation to the Effective Interest Rate of the Borrowing, 3) Contingent
Consideration Payments Made after a Business Combination, 4) Proceeds from the
Settlement of Insurance Claims, 5) Proceeds from the Settlement of
Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance
Policies, 6) Distributions Received from Equity Method Investees, 7) Beneficial
Interests in Securitization Transactions and 8) Separately Identifiable Cash
Flows and Application of the Predominance Principle. The amendments in this
update are effective for fiscal years beginning after December 15, 2017 for
public business entities, including interim periods within those fiscal years.
For us, the amendments are effective January 1, 2018. We are currently
evaluating the impact of this ASU on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses
(Topic 326): "Measurement of Credit Losses on Financial Instruments". The update
provides users with more useful information for decision making regarding
expected credit losses on financial instruments/commitments to extend credit
held by a reporting entity at each reporting date. The amendments affect loans,
debt securities, trade receivables, net investments in leases, off-balance-sheet
credit exposures, reinsurance receivables, and any other financial assets not
excluded from the scope that have the contractual right to receive cash. Credit
quality of the entity's assets now plays a key role in this update. The
amendments in this update are effective for fiscal years beginning after
December 15, 2019 for public business entities, including interim periods within
those fiscal years. For us, the amendments are effective January 1, 2020. We are
currently evaluating the impact of this ASU on our consolidated financial
statements.


                                       51



In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers
(Topic 606): "Narrow-Scope Improvements and Practical Expedients". The update
addresses issues identified by the FASB-IASB Joint Transition Resource Group
(TRG), a group formed in June, 2014 in order to inform the Boards about
potential implementation issues that could arise as a result of organizations
implementing the May, 2014 revenue guidance. It affects entities that enter into
contracts with customers to transfer goods or services within an entity's
ordinary activities in exchange for consideration. We are currently evaluating
the impact of this ASU on our consolidated financial statements.

In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and
Derivatives and Hedging (Topic 815): "Rescission of SEC Guidance Because of
Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements
at the March 3, 2016 EITF Meeting (SEC Update)". The update is a result of
adoption of Topic 606, Revenue from Contracts with Customers. SEC Staff Observer
comments found in Topic 605 are therefore not recommended to be relied upon and
have been superseded. The comments are found in the following topics: 1) Revenue
and Expense Recognition for Freight Services in Process, 2) Accounting for
Shipping and Handling Fees and Costs, 3) Accounting for Consideration Given by a
Vendor to a Customer (including Reseller of the Vendor's Products), and 4)
Accounting for Gas-Balancing Arrangements. As these amendments require changes
to the U.S. GAAP Financial Reporting Taxonomy, they will be incorporated into
the proposed 2017 Taxonomy and finalized as part of the annual release process.
We are currently evaluating the impact of this ASU on our consolidated financial
statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation
(Topic 718): "Improvements to Employee Share-Based Payment Accounting". The
update includes multiple provisions intended to simplify various aspects of the
accounting for share-based payments, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on
the statement of cash flows. The amendments in this update are effective for
public companies for annual periods beginning after December 15, 2016, and
interim periods within those annual periods. Early adoption is permitted for any
interim or annual period. We have evaluated the impact of this ASU on our
consolidated financial statements and as a result, will adjust retained earnings
in 2017 for the amounts previously recognized as windfall tax benefits in
additional paid in capital.

In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02,
Leases (Topic 842): "Recognition and Measurement of Financial Assets and
Financial Liabilities". The update supersedes Topic 840, Leases and requires the
recognition of lease assets and lease liabilities by lessees for those leases
classified as operating leases under previous GAAP. Topic 842 retains a
distinction between finance leases and operating leases, with cash payments from
operating leases classified within operating activities in the statement of cash
flows. The amendments in this update are effective for fiscal years beginning
after December 15, 2018 for public business entities, which for us means January
1, 2019. We are currently evaluating the impact of this ASU on our consolidated
financial statements

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic
805): "Simplifying the Accounting for Measurement-Period Adjustments". The
update eliminates the requirement to retrospectively adjust the provisional
amounts recognized at the acquisition date with a corresponding adjustment to
goodwill during the measurement period when new information is obtained about
the facts and circumstances that existed as of the acquisition date, that if
known, would have affected the measurement of the amounts initially recognized
or would have resulted in the recognition of additional assets or liabilities.
The amendments in this update are effective for fiscal years beginning after
December 15, 2015, which for the Company means January 1, 2016, and should be
applied prospectively to adjustments to provisional amounts that occur after the
effective date of this update. Early application is permitted for financial
statements that have not been issued. We have concluded that the adoption of
this ASU will not have any significant impact on our consolidated financial
statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): "Simplifying
the Measurement of Inventory". ASU 2015-11 requires inventory measured using any
method other than last-in, first out ("LIFO") or the retail inventory method to
be subsequently measured at the lower of cost or net realizable value, rather
than at the lower of cost or market. Under this ASU, subsequent measurement of
inventory using the LIFO and retail inventory method is unchanged. ASU 2015-11
is effective prospectively for fiscal years, and for interim periods within
those years, beginning after December 15, 2016. Early application is permitted.
We do not expect the adoption of this ASU will have any significant impact on
its consolidated financial statements.



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