UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended June 30, 2016

OR

For the transition period from                 to                

Commission file number 1-35144

 

Sagent Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (847) 908-1600

(Former name, former address and former fiscal year, if changed since last report)

 

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  x    No  o

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  x    No  o

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. (Check one):

 

 

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

At July 29, 2016, there were 32,910,475 shares of the registrant’s common stock outstanding.

 

 

 

 

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Sagent Pharmaceuticals, Inc.

Table of Contents

 

 

In this report, “Sagent,” “we,” “us,” “our” and the “Company” refers to Sagent Pharmaceuticals, Inc. and subsidiaries, and “Common Stock” refers to Sagent’s common stock, $0.01 par value per share.

 

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Sagent Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

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Sagent Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

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Sagent Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands, except per share amounts)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

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Sagent Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

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Sagent Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except for share and per share information)

(Unaudited)

 

 

Note 1. Basis of presentation:

Our interim condensed consolidated financial statements are unaudited. We prepared the condensed consolidated financial statements following rules for interim reporting as prescribed by the U.S. Securities and Exchange Commission (“SEC”). As permitted under those rules, we have condensed or omitted a number of footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). It is management’s opinion that these financial statements include all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of our financial position, operating results and cash flows. Operating results for any interim period are not necessarily indicative of future or annual results.

The condensed consolidated financial statements include Sagent as well as our wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. We account for our investment in Sagent Agila LLC using the equity method of accounting, as our interest in the entity provides for joint financial and operational control.  

Management uses segment information to evaluate segment performance and allocate resources. Since the acquisition of Omega in the fourth quarter of 2014, we have operated in two reportable segments comprised of operations organized geographically in the United States (Sagent US segment) and Canada (Omega segment). Effective March 2016, we completed the disposal of the Sagent China Pharmaceuticals Co., Ltd. (“SCP”) manufacturing facility, which was a component of the Sagent US segment, reorganized our internal reporting responsibilities with our new EVP-Global Operations, and continued to align our strategic focus to integrate our Canadian business to support the manufacturing and sale of products.  Following these events, our Chief Executive Officer now focuses his review of financial performance and allocation of resources on the operations of the consolidated Company.  As a result, we began operating in a single reportable segment, which develops, sources, manufactures and markets affordable generic pharmaceutical products to the hospital market.  We continue to operate with two reporting units, which comprise the single reportable segment.

You should read these statements in conjunction with our consolidated financial statements and related notes for the year ended December 31, 2015, included in our most recent Annual Report on Form 10-K filed with the SEC on March 7, 2016.

 

 

Note 2: Recent Accounting Pronouncements

In May 2014, the FASB issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In July 2015, the FASB approved a one year deferral to the new revenue guidance, and we are therefore required to adopt the new guidance on January 1, 2018 using one of the two prescribed retroactive methods. We are evaluating the impact of the amended revenue recognition guidance on our financial statements and related disclosures.

In February 2015, the FASB issued amended guidance on the model used to evaluate whether certain legal entities should be consolidated. This guidance is effective for the Company in the first quarter of 2017. Early adoption is permitted. Adoption of this guidance is not expected to have a material impact on our financial statements.

In April 2015, the FASB issued amended guidance which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for annual and interim periods beginning after December 15, 2015. We have adopted this guidance in the current period.  There was no material impact of adoption.

In February 2016, the FASB issued lease guidance, which is intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In order to meet that objective, the new standard requires recognition of the assets and liabilities that arise from leases. A lessee will be required to recognize on the balance sheet the assets and liabilities for leases with lease terms of more than 12 months. Accounting by lessors will remain largely unchanged from current U.S. GAAP. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We are evaluating the impact of the lease guidance on our financial statements and related disclosures.

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In March 2016, the FASB issued amended guidance on employee share-based payment accounting. This update involves several aspects of the accounting for share-based payment transactions, including income tax effects, forfeitures and classifications on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted in an interim or annual period; however, all amendments must be adopted at the same time. We are evaluating the impact of this guidance on our financial statements.

 

 

Note 3. Sale of SCP:

On March 22, 2016, we completed the sale of all of the issued and outstanding shares of the capital stock of SCP to Hong Kong King-Friend Pharmaceutical Co., Ltd., a subsidiary of Nanjing King-Friend Pharmaceutical Co., Ltd., (“NKF”), in exchange for $500.  In connection with the closing of the transaction, we incurred additional charges related to employee severance, cumulative currency translation adjustments and transferred working capital, resulting in a loss of $6,341, net of the cash consideration we received.  

 

 

Note 4. Sale of Product Rights:

During March 2016, we completed the sale of two product rights to NKF for cash consideration of $2,000.  We recognized a gain on sale of $2,000 related to the transaction, as we have no further continuing involvement in the sale, marketing, or manufacturing process of the products.

 

During June 2016, we completed the sale of one product right for cash consideration of $1,800.  We recognized a gain on sale of $1,800 related to the transaction, as we have no further continuing involvement in the sale, marketing, or manufacturing process of the product.

 

 

Note 5. Investments:

Our investments at June 30, 2016 were comprised of the following:

 

 

Investments with continuous unrealized losses for less than twelve months and their related fair values at June 30, 2016 were as follows:

 

 

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Because we do not currently intend to sell these investments, and it is not more likely than not that we will be required to sell our investments before recovery of their amortized cost basis, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at June 30, 2016.

The original cost and estimated current fair value of our fixed-income securities at June 30, 2016 are set forth below.

 

 

 

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Note 6. Inventories:

Inventories at June 30, 2016 and December 31, 2015 were as follows:

 

  

In the first quarter of 2016, we acquired $3,248 of pre-launch API related to one of the products in our development pipeline.  This amount is included in Raw materials pending regulatory approval as we believe the approval and launch of the related product is probable.  

 

 

Note 7. Property, plant and equipment

Property, plant and equipment at June 30, 2016 and December 31, 2015 were as follows:

 

 

Depreciation expense was $504 and $1,067 for the three and six months ended June 30, 2016, respectively.  

 

 

Note 8. Goodwill and Intangible assets, net:

Goodwill at June 30, 2016 and December 31, 2015 was $26,556 and $25,184, respectively.  There were no goodwill impairment losses for the three or six months ended June 30, 2016 and 2015, respectively.

Movements in goodwill were due to the following:

 

 

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Intangible assets at June 30, 2016 and December 31, 2015 were as follows:

 

 

Movements in intangible assets were due to the following:

 

 

The weighted-average period prior to the next extension or renewal for the 20 products comprising our product licensing rights intangible asset was 46 months at June 30, 2016.

 

 

Note 9. Investment in Sagent Agila:

Changes in our investment in Sagent Agila during the six months ended June 30, 2016 were as follows:

 

 

Condensed statement of operations information of Sagent Agila is as follows:.

 

 

 

Note 10. Debt:

JPMorgan Chase Revolving Credit Loan Facility

On October 31, 2014, we entered into a credit agreement with JPMorgan Chase Bank, N.A., (the “Chase Agreement”). The Chase Agreement provides for an $80,000 asset based revolving credit loan facility, with availability subject to a borrowing base consisting of eligible cash, short-term investments, accounts receivable and inventory and the satisfaction of conditions precedent specified in the Chase Agreement. The Chase Agreement provides for an accordion feature, whereby we may increase the revolving commitment up to an additional $25,000, subject to certain customary terms and conditions, including pro-forma compliance with a fixed charge coverage ratio (as defined in the Chase Agreement) of 1.00 to 1.00. The Chase Agreement matures on October 31, 2019, at which time all amounts outstanding will be due and payable. Borrowings under the Chase Agreement may be used for general corporate purposes, including funding working capital. Amounts drawn bear an interest rate equal to, at our option, either a Eurodollar rate plus 2.00% per annum or an alternative base rate plus 1.00% per annum. We also incur a commitment fee on undrawn amounts equal to 0.25% per annum.

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The Chase Agreement includes customary covenants and also imposes a financial covenant requiring compliance with a minimum fixed charge coverage ratio of 1.00 to 1.00 during certain covenant testing times triggered if availability under the Chase Agreement is below the greater of 10% of the revolving commitment and $8,000.

On January 7, 2016, we amended and restated our Chase Agreement (the “Amended Chase Agreement”) by adding a Canadian tranche and joining Omega as a borrower. The Amended Chase Agreement adds a C$30,000 term loan (including a delayed draw term loan) to fund, among other things, Omega’s construction of a facility in Quebec. The Amended Chase Agreement also adds a C$10,000 revolving facility sublimit to the existing revolving facility, with the total revolving commitment amount remaining at $80,000. The applicable margins for the Canadian prime rate and Canadian Dollar Offered Rate (“CDOR”) revolving loans are the same as the base rate and Eurodollar rates for the U.S. revolving loans at 1.00% and 2.00%, respectively. The margins for the Canadian term loans are 1.25% and 2.25% for Canadian prime rate and CDOR, respectively. The commitment fee rate remains 0.25%. The fixed charge coverage ratio remains at 1.00 to 1.00. The Canadian term loans are to be repaid in certain increments pursuant to the Amended Chase Agreement as the facility in Quebec is completed.

As of June 30, 2016, there was $6,571 in term loan borrowings outstanding under our Amended Chase Agreement, no outstanding borrowings on the revolver, and we were in compliance with all covenants under the Amended Chase Agreement. Total availability under our Chase term loan facility was $16,584 (C$21,487) at June 30, 2016. Total availability under our Chase revolving loan facility was $79,900 at June 30, 2016, which is subject to adjustment on a monthly basis under our borrowing base calculation.

Credit facilities acquired under the Omega acquisition

In connection with the acquisition of Omega, we assumed a series of credit facilities and mortgages with the National Bank of Canada (“NBC”) and the Business Development Bank of Canada (“BDC”).

In January 2015, we paid off all amounts outstanding under the Omega operating credit facility, the Omega demand loan and the Omega decreasing revolving credit facility with available cash on hand.

Omega also had five mortgage loans with the BDC (collectively the “Omega mortgages”) which we assumed in connection with the acquisition. The Omega mortgages, which required monthly installments and which were secured by specific Omega buildings and equipment, ranged in amount from C$70 to C$1,250 ($62 to $1,114 as of the acquisition date) and bore interest at the lender’s prime rate (5% as of the acquisition date) plus a premium ranging from 0%—1.5%. The Omega mortgages had maturity dates at various times from August 2019 through November 2036. In January 2016, in connection with entering the Amended Chase Agreement, we repaid the Omega mortgages in full, and refinanced them under the Chase term loan.

 

 

Note 11. Accrued liabilities:

Accrued liabilities at June 30, 2016 and December 31, 2015 were as follows:

 

 

 

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Note 12. Fair value measurements:

 

 

Assets measured at fair value on a recurring basis as of June 30, 2016 consisted of the following:

 

 

The fair value of our Level 2 investments is based on a combination of quoted market prices of similar securities and matrix pricing provided by third-party pricing services utilizing securities of similar quality and maturity.   The fair value of our Level 3 contingent consideration is based upon a probability weighting approach that considered the possible outcomes based on assumptions related to the timing and probability of the product approval date.

 

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 consisted of the following:

 

 

There were no transfers of assets between Level 1, Level 2 or Level 3 during the periods presented.

The contingent consideration is fixed at $50 as product approval was not achieved by June 30, 2016.   As the consideration is now fixed, the fair value is equal to the carrying value, and valuation consideration is no longer required as of June 30, 2016.  The fair value of our Level 3 contingent consideration is based upon a probability weighting approach that considered the possible outcomes based on assumptions related to the timing and probability of the product approval date.

 

 

Note 13. Accumulated other comprehensive income (loss):

Accumulated other comprehensive income (loss) at June 30, 2016 and December 31, 2015 is comprised of the following:

 

 

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The table below presents the significant amounts reclassified out of each component of accumulated other comprehensive loss for the period ended June 30, 2016.

 

 

 

Note 14. Earnings per share:

Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Because of their anti-dilutive effect, the following common share equivalents, comprised of restricted stock and unexercised stock options, have been excluded from the calculation of diluted earnings per share for the three and six month periods ended June 30, 2016 and 2015, respectively:

 

 

The table below presents the computation of basic and diluted earnings per share for the three and six months ended June 30, 2016 and 2015:

 

 

 

Note 15. Stock-based compensation:

The following tables set forth stock option and restricted stock activity for the six months ended June 30, 2016:

 

 

The aggregate intrinsic value of stock options exercised during the three months ended June 30, 2016 and 2015, was $376 and $5,964, respectively. The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2016 and 2015, was $376 and $7,514, respectively.

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Note 16. Net revenue by product:

Net revenue by therapeutic class is as follows:

 

 

 

Note 17. Related party transactions:

As of June 30, 2016 and December 31, 2015, respectively, we had a receivable of $2,754 and $2,678 from Sagent Agila LLC, which is expected to offset future profit-sharing payments. As of June 30, 2016 and December 31, 2015, respectively, we had a payable of $15,992 and $13,754 to Sagent Agila LLC, principally for the acquisition of inventory and amounts due under profit-sharing arrangements.

 

 

 

Note 18. Income Taxes:

Our benefit for income taxes for the three and six months ended June 30, 2016 was $52 and $1,319, respectively.  Our provision for income taxes for the three and six months ended June 30, 2015 was $1,831 and $2,150, respectively.  Included within the six months ended June 30, 2016 tax benefit are $1,064 of discrete tax benefits related to the completion of the sale of SCP.  

 

 

Note 19. Commitments and contingencies:

From time to time, we are subject to claims and litigation arising in the ordinary course of business. These claims may include assertions that our products infringe existing patents and claims that the use of our products has caused personal injuries. We intend to vigorously defend any such litigation that may arise under all defenses that would be available to us. At this time, there are no proceedings of which we are aware that are considered likely to have a material adverse effect on our consolidated financial position or results of operations.

 

 

Note 20. Management transition costs:

In 2015, we incurred costs related to the transition of our senior management team, following the retirement of our founder and Chief Executive Officer and resignation of our President in March 2015, and the elimination of certain positions in the US as part of the ongoing review of our business. Costs associated with these matters for the three and six months ended June 30, 2015, primarily severance related charges, totaled $644 and $3,952, respectively.

Of the charges incurred in 2015, $723 were paid during the quarter ended June 30, 2016 related to ongoing severance obligations. There are no costs accrued within the Accounts Payable and Accrued liabilities captions of the balance sheet at June 30, 2016.   No costs were incurred in the six months ended June 30, 2016.

 

 

Note 21. Subsequent Events:

On June 15, 2016, we entered into an asset purchase agreement with Teva Pharmaceutical Industries Ltd. (Teva) and Actavis LLC to acquire a portfolio of five generic injectable pharmaceutical products., including Propofol Injectable Emulsion, 1%, for total consideration of $40 million.  The transaction closed on August 3, 2016.  Sagent has fully funded the transaction through borrowings on our revolver under the Amended Chase Agreement.  We intend to account for this transaction as a business combination.  Based on our preliminary estimates anticipate the purchase price will be primarily allocated to definite and indefinite lived intangible assets.

 

On July 10, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Nichi-Iko Pharmaceutical Co., Ltd., (“Parent”), and Shepard Vision, Inc., a wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will, on the terms and subject to the conditions set forth therein, conduct a tender offer (the “Offer”) for all of the Company’s common

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stock at a purchase price of $21.75 per share (the “Offer Price”), net to the seller in cash, without interest, less any required withholding taxes and, following acceptance of the tendered shares, merge with and into the Company.  

 

The Offer is subject to customary conditions, including, among other things, (i) that the number of shares of Company common stock validly tendered in accordance with the terms of the Offer and not validly withdrawn, together with the shares of Company common stock owned by Merger Sub, must equal one share more than 50% of the outstanding shares of Company common stock, including all shares of Company common stock that the Company may be required to issue prior to the end date (as defined in the Merger Agreement) upon the vesting (including vesting solely as a result of the consummation of the Offer), conversion, settlement or exercise of all then outstanding warrants, options, obligations or securities convertible or exchangeable into shares of Company common stock or other rights to acquire or be issued shares of Company common stock, (ii) that any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall have expired or otherwise been terminated and (iii) the absence of any legal restraint.

 

The transaction is expected to be consummated in the third quarter of 2016.

 

Additional information about our pending acquisition by Parent is available in the Solicitation/Recommendation Statement on Schedule 14D-9 filed by us with the SEC on August 1, 2016 (as amended, the “Schedule 14D-9”). The foregoing description of the Merger Agreement and the terms and conditions of the tender offer and merger do not purport to be complete and are qualified in their entirety by reference to our Schedule 14D-9, and to the Merger Agreement and Parent’s offer to purchase and other related documents, copies of which are filed as Exhibits (e)(1) and (a)(1)(A), respectively, of our Schedule 14D-9, all of which are incorporated herein by reference.

Important Information:

Nothing in this Quarterly Report on Form 10-Q shall constitute an offer to purchase or a solicitation of an offer to sell any securities. The Offer is being made pursuant to a Tender Offer Statement on Schedule TO filed by Parent with the SEC on August 1, 2016.  Sagent filed a Solicitation/Recommendation Statement on Schedule 14D-9 with the SEC with respect to the Offer on August 1, 2016.  STOCKHOLDERS OF THE COMPANY ARE ADVISED TO READ THE SCHEDULE TO (INCLUDING AN OFFER TO PURCHASE, A RELATED LETTER OF TRANSMITTAL AND OTHER OFFER DOCUMENTS) AND THE SCHEDULE 14D-9, AS EACH MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME, AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC WHEN THEY BECOME AVAILABLE, BEFORE MAKING ANY DECISION WITH RESPECT TO THE TENDER OFFER BECAUSE THESE DOCUMENTS CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION AND THE PARTIES THERETO.  The Offer, the related Letter of Transmittal and certain other tender offer documents, as well as the Solicitation/Recommendation Statement on Schedule 14D-9, are being made available to all holders of shares of Sagent common stock at no expense to them.  Investors and stockholders may obtain free copies of the Schedule TO and Schedule 14D-9, as each may be amended or supplemented from time to time, and other documents filed by the parties at the SEC’s web site at www.sec.gov or by contacting Michael Ward, Sagent’s Chief Legal Officer and Corporate Secretary either by telephone at (847) 908-1600 or by e-mail at legal@sagentpharma.com.

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report and with our audited financial statements and the notes found in our most recent Annual Report on Form 10-K filed with the SEC on March 7, 2016. Unless otherwise noted, all dollar amounts are in thousands.

Disclosure Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “could have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, our product pipeline and anticipated product approvals or the expected outcome or impact of pending or threatened litigation are forward-looking statements. In addition, this report contains forward-looking statements regarding the adequacy of our current cash balances to fund our ongoing operations; our utilization of our net operating loss carryforwards; and our ability to realize the expected benefits from our acquisition of Omega.

The forward-looking statements contained in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, and the cautionary statements set forth below, as well as elsewhere in this Quarterly Report on Form 10-Q, and those contained in Item 1A under the heading “Risk Factors” in our most recent Annual Report on Form 10-K filed with the SEC on March 7, 2016, identify important factors that could cause actual results to differ materially from those indicated by our forward-looking statements. Such factors, include, but are not limited to:

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In addition, forward-looking statements may be affected by risks and uncertainties associated with our pending transaction with Nichi-Iko Pharmaceutical Co., Ltd., including but not limited to the satisfaction of the conditions to the consummation of the proposed transaction, the timing of the completion of the proposed transaction and the potential impact of the announcement or consummation of the proposed transaction on our important relationships, including with employees, suppliers and customers.  See Note 21.  Subsequent Events.

We derive many of our forward-looking statements from our work in preparing, reviewing and evaluating our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, it is impossible for us to anticipate or accurately calculate the impact of all factors that could affect our actual results. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.

We cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation and do not intend to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

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Introduction

We are a leading provider of affordable pharmaceuticals to the hospital market, which we sell primarily throughout North America. Initially founded in 2006 as Sagent Holding Co., a Cayman Islands company, we reincorporated as Sagent Pharmaceuticals, Inc., a Delaware corporation, in connection with our initial public offering, on April 26, 2011.

With a primary focus on generic injectable pharmaceuticals, which provide customers a lower-cost alternative to branded products when applicable patents have expired or been declared invalid, or when the products are determined not to infringe the patents of others, we offer our customers a broad range of products across anti-infective, oncology and critical care indications in a variety of presentations, including single- and multi-dose vials and ready-to-use pre-filled syringes and premix bags. We generally seek to develop injectable products where the form or packaging of the product can be enhanced to improve delivery, product safety or end-user convenience. Our management team includes industry veterans who have served critical functions at other pharmaceutical companies or key customer groups and have long-standing relationships with customers, regulatory agencies, and suppliers. We have rapidly established a growing and diverse product portfolio and product pipeline as a result of our innovative business model. Our model combines an extensive network of international development, sourcing and manufacturing collaborations with our proven and experienced regulatory, quality assurance, business development, project management, and sales and marketing teams.

On June 4, 2013, we acquired the remaining 50% equity interest in Kanghong Sagent (Chengdu) Pharmaceutical Co. Ltd. from our former joint venture partner. In August 2013, we formally changed the name of this entity to Sagent (China) Pharmaceuticals Co., Ltd. (“SCP”). On December 29, 2015, our Board of Directors authorized the Company to proceed with a sale of all of the Company’s interests in SCP. On March 22, 2016, the Company completed the sale of all of the issued and outstanding shares of the capital stock of SCP to Hong Kong King-Friend Pharmaceutical Co., Ltd., a subsidiary of Nanjing King-Friend Pharmaceutical Co., Ltd., (“NKF”), at which time SCP ceased to be a subsidiary of the Company.

On October 1, 2014, we, through our wholly-owned subsidiary, Sagent Acquisition Corp., a Canadian company, acquired all of the issued and outstanding shares of the capital stock of 7685947 Canada Inc., and its subsidiary, Omega Laboratories Limited (collectively, “Omega”), a privately held Canadian pharmaceutical and specialty healthcare products company. Omega represents our first international market expansion, and the facility currently provides us with the ability to manufacture products for the Canadian and other international markets. In conjunction with the acquisition, we committed to a capital expansion project which would significantly increase Omega’s manufacturing capacity and enhance its quality systems to enable Omega to pursue FDA approval to manufacture injectable products for the US market.

Management uses segment information to evaluate segment performance and allocate resources. Since the acquisition of Omega in the fourth quarter of 2014, we have operated in two reportable segments comprised of operations organized geographically in the United States (Sagent US segment) and Canada (Omega segment). Effective March 2016, we completed the disposal of the SCP manufacturing facility, which was a component of the Sagent US segment, reorganized our internal reporting responsibilities with our new EVP-Global Operations, and continued to align our strategic focus to integrate our Canadian business to support the manufacturing and sale of products.  Following these events, our Chief Executive Officer now focuses his review of financial performance and allocation of resources on the operations of the consolidated Company.  As a result, we began operating in a single reportable segment, which develops, sources, manufactures and markets affordable generic pharmaceutical products to the hospital market.   We continue to operate with two reporting units, which comprise the single reportable segment.

On July 10, 2016, Sagent entered into a definitive merger agreement with Nichi-Iko Pharmaceutical Co., Ltd., and Shepard Vision, Inc., a wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will, on the terms and subject to the conditions set forth therein, conduct a tender offer for all of the Company’s common stock and, following acceptance of the tendered shares, merge with and into the Company.  See Note 21. Subsequent Events.

Non-GAAP Financial Measures

We report our financial results in accordance with accounting principles generally accepted in the United States (“GAAP”).

Adjusted Gross Profit

We use the non-GAAP financial measure “Adjusted Gross Profit” and corresponding ratios. We define Adjusted Gross Profit as gross profit plus our share of the gross profit earned through our Sagent Agila joint venture which is included in the Equity in net (income) loss of joint ventures line on the consolidated statements of operations and the impact of product-related non-cash charges arising from business combinations. We believe that Adjusted Gross Profit is relevant and useful supplemental information for our investors. Our management believes that the presentation of this non-GAAP financial measure, when considered together with our GAAP financial measures and the reconciliation to the most directly comparable GAAP financial measure, provides a more complete

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understanding of the factors and trends affecting Sagent than could be obtained absent these disclosures. Management uses Adjusted Gross Profit and corresponding ratios to make operating and strategic decisions and evaluate our performance. We have disclosed this non-GAAP financial measure so that our investors have the same financial data that management uses with the intention of assisting you in making comparisons to our historical operating results and analyzing our underlying performance. Our management believes that Adjusted Gross Profit provides a useful supplemental tool to consistently evaluate the profitability of our products that have profit sharing arrangements. The limitation of this measure is that it includes an item that does not have an impact on our GAAP reported gross profit. The best way that this limitation can be addressed is by using Adjusted Gross Profit in combination with our GAAP reported gross profit. Because Adjusted Gross Profit calculations may vary among other companies, the Adjusted Gross Profit figures presented below may not be comparable to similarly titled measures used by other companies. Our use of Adjusted Gross Profit is not meant to and should not be considered in isolation or as a substitute for, or superior to, any GAAP financial measure. You should carefully evaluate the following tables reconciling Adjusted Gross Profit to our GAAP reported gross profit for the periods presented (dollars in thousands).

 

 

 

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EBITDA and Adjusted EBITDA

We use the non-GAAP financial measures “EBITDA” and “Adjusted EBITDA” and corresponding growth ratios. We define EBITDA as net income (loss) less interest expense, net of interest income, provision for income taxes, depreciation and amortization. We define Adjusted EBITDA as net income (loss) less interest expense, net of interest income, provision for income taxes, depreciation and amortization, stock-based compensation expense, management transition related costs, acquisition-related costs, the impact of unrealized foreign currency gains or losses, the impact of product-related non-cash charges arising from business combinations, the impact of SCP operations while classified as held for sale, the loss on the sale of SCP, and the gain on the sale of product rights.  We believe that EBITDA and Adjusted EBITDA are relevant and useful supplemental information for our investors. Our management believes that the presentation of these non-GAAP financial measures, when considered together with our GAAP financial measures and the reconciliation to the most directly comparable GAAP financial measures, provides a more complete understanding of the factors and trends affecting Sagent than could be obtained absent these disclosures. Management uses EBITDA, Adjusted EBITDA and corresponding ratios to make operating and strategic decisions and evaluate our performance. We have disclosed these non-GAAP financial measures so that our investors have the same financial data that management uses with the intention of assisting you in making comparisons to our historical operating results and analyzing our underlying performance. Our management believes that EBITDA and Adjusted EBITDA are useful supplemental tools to evaluate the underlying operating performance of the company on an ongoing basis. The limitation of these measures is that they exclude items that have an impact on our GAAP reported net income (loss). The best way that these limitations can be addressed is by using EBITDA and Adjusted EBITDA in combination with our GAAP reported net income (loss). Because EBITDA and Adjusted EBITDA calculations may vary among other companies, the EBITDA and Adjusted EBITDA figures presented below may not be comparable to similarly titled measures used by other companies. Our use of EBITDA and Adjusted EBITDA is not meant to and should not be considered in isolation or as a substitute for, or superior to, any GAAP financial measure. You should carefully evaluate the following tables reconciling EBITDA and Adjusted EBITDA to our GAAP reported net income (loss) for the periods presented (dollars in thousands).

 

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Discussion and Analysis

Consolidated results of operations

The following compares our consolidated results of operations for the three months ended June 30, 2016 with those of the three months ended June 30, 2015:

 

 

Net revenue: Net revenue for the three months ended June 30, 2016 totaled $71.7 million, a decrease of $5.6 million, or 7%, as compared to $77.3 million for the three months ended June 30, 2015.  The launch of one new code since June 30, 2015 contributed $1.1 million of net revenue in the second quarter of 2016. Net revenue for products launched prior to June 30, 2015 decreased $6.7 million, or 10%, to $62.0 million in the second quarter of 2016, due primarily to the annualization of price declines on the base business.    

Cost of sales: Cost of goods sold for the three months ended June 30, 2016 totaled $54.4 million, a decrease of $4.5 million, or 8%, as compared to $58.9 million for the three months ended June 30, 2015.  Gross profit as a percentage of net revenues was 24.2% for the three months ended June 30, 2016 compared to 23.8% for the three months ended June 30, 2015.   Adjusted Gross Profit as a percentage of net revenue was 24.5% for the three months ended June 30, 2016 compared to 24.2% for the three months ended June 30, 2015.    The increase in gross profit as a percentage of net revenue is primarily due to lower expenses incurred in the current quarter as a result of the sale of SCP in the previous quarter offset by annualization of price declines on the base business.

Product development: Product development expense for the three months ended June 30, 2016 totaled $6.6 million, an increase of $1.2 million, or 22%, as compared to $5.4 million for the three months ended June 30, 2015. The increase in product development expense was primarily due to higher milestone expenses for products in our development pipeline.

As of June 30, 2016, our new product pipeline included 63 ANDAs which we had filed, or licensed rights to, that were under review by the FDA and nine ANDAs that have been recently approved and were pending commercial launch.  We also had an additional 31 products under initial development at June 30, 2016.

Selling, general and administrative: Selling, general and administrative expenses for the three months ended June 30, 2016, totaled $11.7 million, an increase of $0.3 million, or 3%, as compared to $11.4 million for the three months ended June 30, 2015.  Selling, general and administrative expense as a percentage of net revenue was 16% and 15% for the three months ended June 30, 2016 and 2015, respectively.

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Acquisition-related costs: Acquisition-related costs for the three months ended June 30, 2016 totaled $1.5 million, an increase of $1.4 million, as compared to $0.1 million for the three months ended June 30, 2015. Acquisition related costs increased primarily for legal costs associated with the evaluation of the acquisition of the Company by Nichi-Iko Pharmaceuticals Co., Ltd.

Management transition costs: No management transition costs were incurred in the three months ended June 30, 2016.  Management transition costs for the three months ended June 30, 2015 totaled $0.6 million.

Equity in net income of joint ventures: Equity in net income of joint ventures for the three months ended June 30, 2016 totaled $0.2 million, a decrease of $0.1 million as compared to $0.3 million for the three months ended June 30, 2015, related to an increase in costs of sales, specifically an increase in inventory reserve, of Sagent Agila products during the three months ended June 30, 2016.

Gain on the sale of product rights: We sold one product right during the three months ended June 30, 2016 for cash consideration of $1.8 million.  We recognized a gain on sale of $1.8 million related to the transaction.

Interest income and other income (expense), net:  Interest income and other income (expense), net for the three months ended June 30, 2016 totaled $0.0 million of income, as compared to $0.5 million of income in the three months ended June 30, 2015.  The decrease was predominately related to realized and unrealized foreign currency gains.  

Interest expense: Interest expense for the three months ended June 30, 2016 and June 30, 2015 totaled $0.1 million, respectively.

Provision for income taxes: Our provision for income taxes for the three months ended June 30, 2016 was a benefit of $0.1 million, an increase of $1.9 million as compared to expense of $1.8 million in the three months ended June 30, 2015.  

Net income (loss) and diluted net earnings (loss) per common share: The net loss for the three months ended June 30, 2016 was $0.5 million, as compared to net income of $0.3 million for the three months ended June 30, 2015. Diluted net earnings (loss) per common share decreased by $0.01. The decrease in diluted net earnings (loss) per common share is due to the following factors:

 

 

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The following compares our consolidated results of operations for the six months ended June 30, 2016 with those of the six months ended June 30, 2015:

 

 

Net revenue: Net revenue for the six months ended June 30, 2016 totaled $139.5 million, a decrease of $20.5 million, or 13%, as compared to $160.0 million for the six months ended June 30, 2015.  The launch of one new code since June 30, 2015 contributed $1.9 million of the net revenue increase in the first half of 2016. Net revenue for products launched prior to June 30, 2015 decreased $22.3 million, or 16%, to $121.4 million in the first half of 2016, due primarily to the annualization of price declines on the base business and reductions in demand for our anti-infective portfolio, given the weakness in the cold and flu related illness during the six month period.  

Cost of sales: Cost of goods sold for the six months ended June 30, 2016 totaled $105.3 million, a decrease of $14.3 million, or 12%, as compared to $119.6 million for the six months ended June 30, 2015.  Gross profit as a percentage of net revenue was 24.5% for the six months ended June 30, 2016 compared to 25.2% for the three months ended June 30, 2015.   Adjusted Gross Profit as a percentage of net revenue was 25.0% for the six months ended June 30, 2016, and 26.4% for the six months ended June 30, 2015.  The decrease in gross profit as a percentage of net revenue is primarily due to the impact of the annualization of price declines on the base business offset by lower expenses incurred in the second quarter as a result of the sale of SCP in the first quarter.

Product development: Product development expense for the six months ended June 30, 2016 totaled $13.4 million, an increase of $2.7 million, or 25%, as compared to $10.7 million for the six months ended June 30, 2015. The increase in product development expense was primarily due to higher milestone expenses for products in our development pipeline and a $2.7 million write-off of API inventory based upon an in-depth evaluation of our ANDA pipeline and termination of our current Iron Sucrose development initiative.

Selling, general and administrative: Selling, general and administrative expenses for the six months ended June 30, 2016, totaled $23.9 million, a decrease of $0.7 million, or 3%, as compared to $24.5 million for the six months ended June 30, 2015.  The decrease in selling, general and administrative expense was primarily due to lower employee related costs.  Selling, general and administrative expense as a percentage of net revenue was 17% and 15% for the six months ended June 30, 2016 and 2015, respectively.

Acquisition-related costs: Acquisition-related costs for the six months ended June 30, 2016 totaled $2.9 million, an increase of $1.5 million, as compared to $1.3 million for the six months ended June 30, 2015. Acquisition related costs in both periods were primarily for legal and financial advisory costs associated with the evaluation of potential transactions, as well as legal costs associated with the evaluation of the acquisition of the Company by Nichi-Iko Pharmaceutical Co., Ltd. for the six months ended June 30, 2016.

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Management transition costs: No management transition costs were incurred in the six months ended June 30, 2016.  Management transition costs for the six months ended June 30, 2015 totaled $4.0 million.

Equity in net income of joint ventures: Equity in net income of joint ventures for the six months ended June 30, 2016 totaled $0.7 million, a decrease of $0.4 million as compared to $1.2 million for the six months ended June 30, 2015, related to an increase in costs of sales, specifically an increase in inventory reserve, during the six months ended June 30, 2016.

Loss on the sale of SCP: We completed the sale of SCP to NKF in the first quarter of 2016, which resulted in a loss on sale of $6.3 million incurred in the six months ended June 30, 2016.

Gain on the sale of product rights: We sold the rights to three products during the first six months 2016 for total cash consideration of $3.8 million.  We recognized a gain on sale of $3.8 million related to the transactions.

Interest income and other income (expense), net:  Interest income and other income (expense), net for the six months ended June 30, 2016 totaled $1.1 million of income, as compared to $0.5 million of income in the three months ended June 30, 2015.  The increase in income primarily relates to unrealized foreign exchange gains on intercompany financing, primarily related to the valuation of the Canadian dollar versus the US dollar.

Interest expense: Interest expense for the six months ended June 30, 2016 totaled $0.2 million, a decrease of more than $0.2 million, or 50%, as compared to $0.5 million for the six months ended June 30, 2015.

Provision for income taxes: Our provision for income taxes for the six months ended June 30, 2016 was a benefit of $1.3 million, an increase of $3.5 million as compared to expense of $2.2 million in the six months ended June 30, 2015.    

Net income (loss) and diluted net earnings (loss) per common share: The net loss for the six months ended June 30, 2016 was $5.5 million, as compared to net income of $2.2 million for the six months ended June 30, 2015. Diluted net earnings (loss) per common share decreased by $0.10. The decrease in diluted net earnings (loss) per common share is due to the following factors:

 

 

Liquidity and Capital Resources

Our future capital requirements will depend on a number of factors, including the continued commercial success of our existing products, launching the products that have been recently approved and are pending commercial launch or are pending approval as of June 30, 2016, successfully identifying and sourcing other new product opportunities, capital expansion at our Omega facility and further business development activity.

Based on our existing business plan, we expect that cash, cash equivalents and short-term investments, together with operating cash flows and borrowings available under our existing Chase loan facilities, will be sufficient to fund our planned operations, the continued development of our product pipeline, investments in working capital, and capital expansion at our Omega facility, for at least the next 12 months. However, we may require additional funds in the event that we change our business plan, pursue additional strategic transactions, including the acquisition of businesses or products, or encounter unexpected developments, including unforeseen competitive conditions within our product markets, changes in the general economic climate, changes in the regulatory environment, the loss of or negative developments affecting key relationships with suppliers, group purchasing organizations or end-user customers or other unexpected developments that may have a material effect on the cash flows or results of operations of our business.

To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings or debt financings, which may not be available to us on terms we consider acceptable or at all. Our ability to raise additional funding, if necessary, is subject to a variety of factors that we cannot predict with certainty, including our future results of operations, our relative levels of debt and equity, the volatility and overall condition of the capital markets and the market prices of our securities. Debt financing, if available, may only be available to us on less favorable terms than our existing Chase loan facilities, including higher interest rates or greater exposure to interest rate risk. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders.

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If additional funding is not available, we may be required to terminate, significantly modify or delay the development or commercialization of new products and may not be able to achieve the expansion of our Omega facility. We may elect to raise additional funds even before we need them if we believe that the conditions for raising capital are favorable.

On July 10, 2016, Sagent entered into a definitive merger agreement with Nichi-Iko Pharmaceutical Co., Ltd., and Shepard Vision, Inc., a wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will, on the terms and subject to the conditions set forth therein, conduct a tender offer for all of the Company’s common stock and, following acceptance of the tendered shares, merge with and into the Company.  See Note 21. Subsequent Events.

Cash Flows

Overview

On June 30, 2016, cash, cash equivalents and short term investments totaled $35.7 million.  Working capital totaled $99.2 million and our current ratio (current assets to current liabilities) was approximately 2.2 to 1.0.

Sources and Uses of Cash

Operating activities: Net cash used in operating activities was $14.8 million for the six months ended June 30, 2016, compared with net cash used in operating activities of $1.7 million during the six months ended June 30, 2015. The decrease in cash used in operations was primarily due to incremental working capital investment during the second quarter of 2016.  

Investing activities: Net cash used in investing activities was $4.1 million for the six months ended June 30, 2016, primarily related to capital expenditures and net cash settlement in the sale of SCP, partially offset by the cash received for the sale of product rights.  Net cash used in investing activities of $5.7 million during the six months ended June 30, 2015 primarily related to capital expenditures and the net change in our short-term investments.  

Financing activities: Net cash provided by financing activities was $4.7 million for the six months ended June 30, 2016, primarily related to borrowings on our Amended Chase Agreement facilities, partially offset by the repayment of the revolver and the repayment of the then outstanding balance of the Omega mortgages.  Net cash provided by financing activities for the six months ended June 30, 2015 was $2.8 million, primarily related to the proceeds from stock option exercises, partially offset by the repayment of the then outstanding balance of our NBC Loans.

Asset based revolving credit loan facility

On October 31, 2014, we entered into a credit agreement with Chase, (the “Chase Agreement”). The Chase Agreement provides for an $80.0 million asset based revolving credit loan facility, with availability subject to a borrowing base consisting of eligible cash, short-term investments, accounts receivable and inventory and the satisfaction of conditions precedent specified in the Chase Agreement. The Chase Agreement provides for an accordion feature, whereby we may increase the revolving commitment up to an additional $25.0 million subject to certain customary terms and conditions including pro forma compliance with a fixed charge coverage ratio (as defined in the Chase Agreement) of 1.00 to 1.00. The Chase Agreement matures on October 31, 2019, at which time all amounts outstanding will be due and payable. Borrowings under the Chase Agreement may be used for general corporate purposes, including funding working capital. Amounts drawn bear an interest rate equal to, at our option, either a Eurodollar rate plus 2.00% per annum or an alternative base rate plus 1.00% per annum. We also incur a commitment fee on undrawn amounts equal to 0.25% per annum.

The Chase Agreement is guaranteed by us and is secured by a lien on substantially all of our and our principal domestic subsidiary’s assets and any future domestic subsidiary guarantors’ assets. The Chase Agreement includes customary covenants and also imposes a financial covenant requiring compliance with a minimum fixed charge coverage ratio of 1.00 to 1.00 during certain covenant testing times triggered if availability under the Chase Agreement is below the greater of 10% of the revolving commitment and $8.0 million.

Loans under the Chase Agreement are secured by a lien on substantially all of our and our principal domestic operating subsidiary’s assets.

On January 7, 2016, we amended and restated the Chase Agreement with Chase (the “Amended Chase Agreement”) by adding a Canadian tranche and joining Omega as a borrower. The Amended Chase Agreement adds a C$30.0 million term loan (including a delayed draw term loan) to fund, among other things, Omega’s construction of a facility in Quebec. The Amended Chase Agreement also adds a C$10.0 million revolving facility sublimit to the existing revolving facility, with the total revolving commitment amount remaining at $80.0 million. The applicable margins for the Canadian prime rate and Canadian Dollar Offered Rate (“CDOR”) revolving loans are the same as the base rate and Eurodollar rates for the U.S. revolving loans at 1.00% and 2.00%, respectively. The

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margins for the Canadian term loans are 1.25% and 2.25% for Canadian prime rate and CDOR, respectively. The commitment fee rate remains 0.25%. The fixed charge coverage ratio remains at 1.00 to 1.00. The Canadian term loans are to be repaid in certain increments pursuant to the Amended Chase Agreement as the facility in Quebec is completed.

As of June 30, 2016, there was $6,571 in term loan borrowings outstanding under our Amended Chase Agreement, no outstanding borrowings on the revolver, and we were in compliance with all covenants under the Amended Chase Agreement. Total availability under our Chase term loan facility was $16,584 (C$21,487) at June 30, 2016. Total availability under our Chase revolving loan facility was $79,900 at June 30, 2016, which is subject to adjustment on a monthly basis under our borrowing base calculation.

Omega credit facilities

In connection with the acquisition of Omega on October 1, 2014, we assumed a series of credit facilities and mortgages with the National Bank of Canada (“NBC”) and the Business Development Bank of Canada (“BDC”).

In January 2015, we paid off all amounts outstanding under the Omega operating credit facility, the Omega demand loan and the Omega decreasing revolving credit facility with available cash on hand.

Omega also had five mortgage loans with the BDC (collectively the “Omega mortgages”) which we assumed in connection with the acquisition. The Omega mortgages, which required monthly installments and which were secured by specific Omega buildings and equipment, ranged in amount from C$0.1 million to C$1.3 million ($0.1 million to $1.1 million as of the acquisition date) and bore interest at the lender’s prime rate (5% as of the acquisition date) plus a premium ranging from 0% - 1.5%. The Omega mortgages had maturity dates at various times from August 2019 through November 2036.  In January 2016, in connection with entering the Amended Chase Agreement, we repaid the Omega mortgages in full, and refinanced them under the Chase term loan.

Aggregate Contractual Obligations

As of June 30, 2016, there were no material changes to the contractual obligations information provided in Item 7 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, filed with the SEC on March 7, 2016.  

Off-Balance Sheet Arrangements

As of June 30, 2016, we were not party to any off-balance sheet arrangements, nor have we created any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business.  With the exception of operating leases, we do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into or disclosed on our financial statements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.  In addition, we do not engage in trading activities involving non-exchange traded contracts.

Critical Accounting Policies

We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. We have identified the following critical accounting policies:

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For a discussion of critical accounting policies affecting us, see the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” and under Note 1 to our consolidated financial statements for the year ended December 31, 2015 included in our Annual Report on Form 10-K filed with the SEC on March 7, 2016.

There have been no other material changes to the Company’s critical accounting policies and estimates since December 31, 2015.

New Accounting Guidance

In May 2014, the FASB issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In July 2015, the FASB approved a one year deferral to the new revenue guidance, and we are therefore required to adopt the new guidance on January 1, 2018 using one of the two prescribed retroactive methods. We are evaluating the impact of the amended revenue recognition guidance on our financial statements.

In February 2015, the FASB issued amended guidance on the model used to evaluate whether certain legal entities should be consolidated. This guidance is effective for the Company in the first quarter of 2017. Early adoption is permitted. Adoption of this guidance is not expected to have a material impact on our financial statements.

In April 2015, the FASB issued amended guidance, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for annual and interim periods beginning after December 15, 2015. We have adopted this guidance in the current period.  There was no material impact of adoption.

In February 2016, the FASB issued lease guidance, which is intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In order to meet that objective, the new standard requires recognition of the assets and liabilities that arise from leases. A lessee will be required to recognize on the balance sheet the assets and liabilities for leases with lease terms of more than 12 months. Accounting by lessors will remain largely unchanged from current U.S. GAAP. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.

In March 2016, the FASB issued amended guidance on employee share-based payment accounting. This update involves several aspects of the accounting for share-based payment transactions, including income tax effects, forfeitures and classifications on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted in an interim or annual period; however, all amendments must be adopted at the same time. We are currently evaluating the impact of this guidance on our financial statements.

Contingencies

See Note 19. Commitments and Contingencies, and Part II, Item 1. Legal Proceedings for a discussion of contingencies.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our market risks relate primarily to changes in interest rates and currency fluctuations between the Canadian dollar and US dollar, as the assets, liabilities and transactions of our international operations are generally recorded in the local currency of each of our legal entities.  As a result of the sale of SCP in the first quarter 2016, the Company is no longer exposed to the fluctuations between the Chinese Renminbi and the US dollar.

The revolving loan facility under our Amended Chase Agreement and substantially all of Omega’s debt facilities bear floating interest rates that are tied to LIBOR or an alternate rate, and therefore, our statements of operations and our cash flows are exposed to changes in interest rates. Based on the amounts outstanding at June 30, 2016, a one percentage point increase in LIBOR would increase our

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ongoing interest expense by less than $0.1 million per year, and a 10% strengthening of the Canadian dollar relative to the US dollar, would increase our ongoing interest expense by less than $0.1 million per year. We historically have not engaged in hedging activities related to our interest rate or foreign exchange risks.

At June 30, 2016, we had cash and cash equivalents and short-term investments of $15.5 million and $20.2 million, respectively. Our cash and cash equivalents are held primarily in cash and money market funds, and our short-term investments are held primarily in corporate debt securities and commercial paper. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.

We generally record sales and pay our expenses in the local currency of the legal entity that incurs the expense. Substantially all of our business partners that supply us with API, product development services and finished product manufacturing are located in a number of foreign jurisdictions, and we believe those business partners generally incur their respective operating expenses in local currencies. As a result, both we and our business partners may be exposed to currency rate fluctuations and experience an effective increase in operating expenses in the event local currencies appreciate against the U.S. dollar. In this event, such business partners may elect to stop providing us with these services or attempt to pass these increased costs back to us through increased prices for product development services, API sourcing or finished products that they supply to us. Historically we have not used derivatives to protect against adverse movements in currency rates.

We do not have any foreign currency or any other material derivative financial instruments.

 

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures (a) were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting.

Management, together with our Chief Executive Officer and our Chief Financial Officer, evaluated the changes in our internal control over financial reporting during the quarter ended June 30, 2016. We determined that there were no changes in our internal control over financial reporting during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we are subject to claims and litigation arising in the ordinary course of business. These claims may include assertions that our products infringe existing patents and claims that the use of our products has caused personal injuries. We intend to vigorously defend any such litigation that may arise under all defenses that would be available to us. At this time, there are no proceedings of which we are aware that are considered likely to have a material adverse effect on our consolidated financial position or results of operations.

Item 1A. Risk Factors.

There were no material changes during the three months ended June 30, 2016 to the risk factors previously disclosed under Item 1A entitled “Risk Factors” in our most recent Annual Report on Form 10-K filed with the SEC on March 7, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities during the Quarter ended June 30, 2016

There are currently no share repurchase programs authorized by our Board of Directors. We did not repurchase any shares of our common stock during the quarter ended June 30, 2016.

Recent Sales of Unregistered Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

On August 3, 2016, Sagent Pharmaceuticals, Inc., a Wyoming corporation (“Sagent WY”), and a wholly-owned subsidiary of Sagent Pharmaceuticals, Inc., a Delaware corporation (the “Company”) completed the transactions contemplated by  the Asset Purchase Agreement, dated as of June 15, 2016 , (the “APA”), among Sagent WY, the Company, Teva Pharmaceutical Industries Ltd., an Israeli corporation, acting directly or through its affiliates (“Teva”) and Actavis LLC, a Delaware limited liability company (“Allergan” and together with Teva, the “Sellers”). Pursuant to and subject to the terms and conditions in the APA, Sagent WY acquired all right, title and interest in and to five generic injectable pharmaceutical products, including Propofol Injectable Emulsion, 1%, and certain assets that relate solely and exclusively to the products, from the Sellers in exchange for total consideration of $40.0 million.

 

 

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Item 6. Exhibits.

 

 

 

 

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Signature

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.

 

 

 

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