NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS,
PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS
|
Overview
ANI Pharmaceuticals, Inc. and subsidiary, ANIP Acquisition
Company (together, the “Company,” “we,” or “us”) is an integrated specialty pharmaceutical
company developing, manufacturing, and marketing branded and generic prescription pharmaceuticals. Our targeted areas of product
development currently include narcotics, oncolytics (anti-cancers), hormones and steroids, and complex formulations involving
extended release and combination products. We have two pharmaceutical manufacturing facilities located in Baudette, Minnesota,
which are capable of producing oral solid dose products, as well as liquids and topicals, narcotics, and potent products that
must be manufactured in a fully-contained environment. Our strategy is to continue to use these manufacturing assets to develop,
produce, and distribute niche generic pharmaceutical products.
On June 19, 2013, pursuant to a merger agreement
dated as of April 12, 2013, ANIP Acquisition Company d/b/a ANI Pharmaceuticals, Inc. ("ANIP") became a wholly-owned
subsidiary of BioSante Pharmaceuticals, Inc. (“BioSante”) in an all-stock, tax-free reorganization (the "Merger").
The Merger was accounted for as a reverse acquisition, pursuant to which ANIP was considered the acquiring entity for accounting
purposes. BioSante was renamed ANI Pharmaceuticals, Inc. We now operate under the leadership of the ANIP management team and our
board of directors is comprised of two former BioSante directors and five former ANIP directors. As such, ANIP's historical results
of operations replace BioSante's historical results of operations for all periods prior to the Merger. The results of operations
of both companies are included in our consolidated financial statements for all periods after completion of the Merger.
Basis of Presentation
The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”). In our opinion, the accompanying unaudited interim condensed consolidated financial statements include
all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial position, results
of operations and cash flows. The condensed consolidated balance sheet at December 31, 2013, has been derived from audited financial
statements of that date. The interim condensed consolidated results of operations are not necessarily indicative of the results
that may occur for the full fiscal year. Certain information and footnote disclosure normally included in financial statements
prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules and regulations prescribed by the United States Securities and Exchange Commission. We believe that the disclosures
provided herein are adequate to make the information presented not misleading when these unaudited interim condensed consolidated
financial statements are read in conjunction with the audited financial statements and notes previously distributed in our annual
report on Form 10-K for the year ended December 31, 2013. Certain prior period information has been reclassified to conform to
the current period presentation.
Principles of Consolidation
The condensed consolidated financial statements
include the accounts of ANI Pharmaceuticals, Inc. and its wholly owned subsidiary, ANIP. All significant inter-company accounts
and transactions are eliminated in consolidation.
ANI PHARMACEUTICALS, INC.
and
subsidiary
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS,
PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS – continued
|
Use of Estimates
The preparation of financial statements in conformity
with U.S. GAAP requires us 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 amount of revenues and expenses
during the reporting period. In the accompanying unaudited condensed consolidated financial statements, estimates are used for,
but not limited to, stock-based compensation, allowance for doubtful accounts, accruals for chargebacks, returns and other allowances,
allowance for inventory obsolescence, allowances for contingencies and litigation, fair value of long-lived assets, deferred taxes
and valuation allowance, and the depreciable lives of long-lived assets. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In July 2013, the
Financial
Accounting Standards Board (“FASB”) issued guidance
for the presentation of an unrecognized
tax benefit when a net operating loss ("NOL") carryforward, a similar tax loss, or a tax credit carryforward exists.
The guidance requires an entity to present in the financial statements an unrecognized tax benefit, or a portion of an unrecognized
tax benefit, as a reduction to a deferred tax asset for an NOL carryforward, a similar tax loss, or a tax credit carryforward.
If the NOL carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax
law of the jurisdiction or the tax law of the jurisdiction does not require the entity to use, and the entity does not intend
to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as
a liability and will not be combined with deferred tax assets. This guidance does not require any additional recurring disclosures
and
is effective for fiscal years beginning after December 15, 2013.
T
he adoption of
this guidance did not have a material impact on our financial statements.
We have evaluated all issued and unadopted Accounting
Standards Updates and believe the adoption of these standards will not have a material impact on our results of operations, financial
position, or cash flows.
|
2.
|
Revenue
Recognition AND RELATED ALLOWANCES
|
Revenue Recognition
Revenue is recognized for product sales and contract
manufacturing product sales upon passing of risk and title to the customer, when estimates of the selling price and discounts,
rebates, promotional adjustments, price adjustments, returns, chargebacks, and other potential adjustments are reasonably determinable,
collection is reasonably assured, and we have no further performance obligations. Contract manufacturing arrangements are typically
less than two weeks in duration, and therefore the revenue is recognized upon completion of the aforementioned factors rather
than using a proportional performance method of revenue recognition. The estimates for discounts, rebates, promotional adjustments,
price adjustments, returns, chargebacks, and other potential adjustments reduce gross revenues to net revenues in the accompanying
unaudited condensed consolidated statements of operations, and are presented as current liabilities or reductions in accounts
receivable in the accompanying unaudited condensed consolidated balance sheets (see “Accruals for Chargebacks, Returns,
and Other Allowances”). Historically, we have not entered into revenue arrangements with multiple elements.
Occasionally,
we engage in contract services, which include product development services, laboratory services, and royalties on net sales of
certain contract manufactured products. For these services, revenue is recognized according to the terms of the agreement with
the customer, which sometimes include substantive, measurable risk-based milestones, and when
we have a contractual right
to receive such payment, the contract price is fixed or determinable, the collection of the resulting receivable is reasonably
assured, and we have no further performance obligations under the agreement
.
ANI PHARMACEUTICALS, INC.
and
subsidiary
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
2.
|
Revenue
Recognition AND RELATED ALLOWANCES -
continued
|
Accruals for Chargebacks, Returns and
Other Allowances
Our generic and branded product revenues are typically
subject to agreements with customers allowing chargebacks, product returns, administrative fees, and other rebates and prompt
payment discounts. We accrue for these items at the time of sale and continually monitor and re-evaluate the accruals as additional
information becomes available. We adjust the accruals at the end of each reporting period, to reflect any such updates to the
relevant facts and circumstances. Accruals are relieved upon receipt of payment from the customer or upon issuance of credit to
the customer.
The following table summarizes activity in the balance
sheet for accruals and allowances for the three-month periods ended March 31, 2014 and 2013, respectively:
(in thousands)
|
|
Accruals for Chargebacks, Returns and Other Allowances
|
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
Prompt
|
|
|
|
|
|
|
|
|
|
Fees and Other
|
|
|
Payment
|
|
|
|
Chargebacks
|
|
|
Returns
|
|
|
Rebates
|
|
|
Discounts
|
|
Balance at December 31, 2012
|
|
|
5,662
|
|
|
|
411
|
|
|
|
231
|
|
|
|
242
|
|
Accruals/Adjustments
|
|
|
5,579
|
|
|
|
120
|
|
|
|
559
|
|
|
|
199
|
|
Credits Taken Against Reserve
|
|
|
(7,903
|
)
|
|
|
(155
|
)
|
|
|
(516
|
)
|
|
|
(244
|
)
|
Balance at March 31, 2013
|
|
$
|
3,338
|
|
|
$
|
376
|
|
|
$
|
274
|
|
|
$
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
4,076
|
|
|
|
736
|
|
|
|
735
|
|
|
|
332
|
|
Accruals/Adjustments
|
|
|
7,090
|
|
|
|
258
|
|
|
|
970
|
|
|
|
347
|
|
Credits Taken Against Reserve
|
|
|
(7,357
|
)
|
|
|
(145
|
)
|
|
|
(853
|
)
|
|
|
(370
|
)
|
Balance at March 31, 2014
|
|
$
|
3,809
|
|
|
$
|
849
|
|
|
$
|
852
|
|
|
$
|
309
|
|
Credit Concentration
Our customers are primarily wholesale distributors,
chain drug stores, group purchasing organizations, and pharmaceutical companies.
During the three month period ended March 31, 2014,
three customers represented 23%, 18%, and 15% of net revenues. As of March 31, 2014, accounts receivable from these customers
totaled $8.0 million. During the three month period ended March 31, 2013, three customers represented 26%, 17%, and 14% of net
revenues.
ANI PHARMACEUTICALS, INC.
and
subsidiary
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Summary
On June 19, 2013, BioSante acquired ANIP in an all-stock,
tax-free reorganization. We are operating under the leadership of the ANIP management team and the board of directors is comprised
of two former directors from BioSante and five former ANIP directors.
BioSante issued to ANIP stockholders shares of BioSante
common stock such that the ANIP stockholders owned 57% of the combined company’s shares outstanding, and the former BioSante
stockholders owned 43%. In addition, immediately prior to the Merger, BioSante distributed to its then current stockholders contingent
value rights (“CVR”) providing payment rights arising from a future sale, transfer, license or similar transaction(s)
involving BioSante’s LibiGel
®
(female testosterone gel).
The Merger was accounted for as a reverse acquisition
pursuant to which ANIP was considered the acquiring entity for accounting purposes. As such, ANIP's historical results of operations
replace BioSante's historical results of operations for all periods prior to the Merger. BioSante, the accounting acquiree, was
a publicly-traded pharmaceutical company focused on developing high value, medically-needed products. ANIP entered into the Merger
to secure additional capital and gain access to capital market opportunities as a public company.
The results of operations of both companies
are included in our consolidated financial statements for all periods after completion of the Merger. Former BioSante
operations did not generate any revenue or expense during the three months ended March 31, 2014.
Transaction Costs
In conjunction with the Merger, we incurred approximately
$7.1 million in transaction costs, which were expensed in the periods in which they were incurred. These costs include:
Category
|
|
(in thousands)
|
|
Legal fees
|
|
$
|
1,227
|
|
Accounting fees
|
|
|
122
|
|
Consulting fees
|
|
|
119
|
|
Monitoring and advisory fees
|
|
|
390
|
|
Transaction bonuses
|
|
|
4,801
|
|
Other
|
|
|
429
|
|
Total transaction costs
|
|
$
|
7,088
|
|
Of the total expenses, $0.1 million was incurred
and expensed in the three months ended March 31, 2013 as selling, general and administrative expense. No transaction-related expenses
were incurred in the three months ended March 31, 2014.
ANI PHARMACEUTICALS, INC.
and
subsidiary
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
3.
|
BUSINESS COMBINATION – continued
|
Purchase Consideration and Net Assets Acquired
The fair value of BioSante’s common stock
used in determining the purchase price was $1.22 per share, the closing price on June 19, 2013, which resulted in a total purchase
consideration of $29.8 million. The fair value of all additional consideration, including the vested BioSante stock options and
CVRs, was immaterial. The following presents the preliminary allocation of the purchase consideration to the assets acquired and
liabilities assumed on June 19, 2013:
|
|
(in thousands)
|
|
Total purchase consideration
|
|
$
|
29,795
|
|
|
|
|
|
|
Assets acquired
|
|
|
|
|
Cash and cash equivalents
|
|
|
18,198
|
|
Restricted cash
|
|
|
2,260
|
|
Teva license intangible asset
|
|
|
10,900
|
|
Other tangible assets
|
|
|
79
|
|
Deferred tax assets, net
|
|
|
-
|
|
Goodwill
|
|
|
1,838
|
|
Total assets
|
|
|
33,275
|
|
Liabilities assumed
|
|
|
|
|
Accrued severance
|
|
|
2,965
|
|
Other liabilities
|
|
|
515
|
|
Total liabilities
|
|
|
3,480
|
|
Total net assets acquired
|
|
$
|
29,795
|
|
Any changes in the estimated fair values of the
net assets recorded for this business combination upon the finalization of more detailed analyses of the facts and circumstances
that existed at the date of the transaction will change the allocation of the purchase price. Any subsequent changes to the purchase
allocation during the measurement period that are material will be adjusted retrospectively.
The Teva license is related to a generic male testosterone
gel product and is being amortized on a straight-line basis over its estimated useful life of 11 years. Goodwill, which is not
tax deductible since the transaction was structured as a tax-free exchange, is considered an indefinite-lived asset and relates
primarily to intangible assets that do not qualify for separate recognition. As a result of purchase accounting related to the
Merger, we established deferred tax assets of $9.6 million, deferred tax liabilities of $3.9 million, and a valuation allowance
of $5.7 million, netting to deferred tax assets of $0.
ANI PHARMACEUTICALS, INC.
and
subsidiary
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
3.
|
BUSINESS
COMBINATION – continued
|
Pro Forma Condensed Combined Financial Information
(unaudited)
The following unaudited pro forma condensed combined
financial information summarizes the results of operations for the periods indicated as if the Merger had been completed as of
January 1, 2012. Pro forma information reflects adjustments relating to (i) elimination of the interest on ANIP’s senior
and convertible debt, (ii) elimination of monitoring and advisory fees payable to two ANIP investors, (iii) elimination of transaction
costs, and (iv) amortization of intangibles acquired. The pro forma amounts do not purport to be indicative of the results that
would have been obtained if the Merger had occurred as of January 1, 2012 or that may be obtained in the future.
(in thousands)
|
|
Three months ended
March 31,
|
|
|
|
2013
|
|
Net revenues
|
|
$
|
5,707
|
|
Net loss
|
|
$
|
(1,601
|
)
|
|
4.
|
Earnings/(LOSS)
per Share
|
Basic
earnings/(loss) per share is
computed
by
dividing net income
available to common shareholders
by
the weighted-average number of shares of common stock outstanding during the period.
Our unvested restricted shares and certain of our
outstanding warrants contain non-forfeitable rights to dividends, and therefore are considered to be participating securities;
the calculation of basic and diluted earnings/(loss) per share excludes net income (but not net loss) attributable to the unvested
restricted shares and to the participating warrants from the numerator and excludes the impact of those shares from the denominator.
The numerator for earnings per share for the three months ended March
31, 2014 is calculated for basic and diluted earnings per share as follows:
(in thousands)
|
|
Three months ended March 31, 2014
|
|
|
|
Basic
|
|
|
Diluted
|
|
Net income
|
|
$
|
3,359
|
|
|
$
|
3,359
|
|
Net income allocated to warrants
|
|
|
(19
|
)
|
|
$
|
(19
|
)
|
Net income allocated to restricted stock
|
|
|
(15
|
)
|
|
$
|
(15
|
)
|
Net income allocated to common shares
|
|
$
|
3,325
|
|
|
$
|
3,325
|
|
For
periods of net income, and when the effects are not anti-dilutive, we calculate diluted earnings per share by dividing net income
available to common shareholders by the weighted-average number of shares outstanding plus the impact of all potential dilutive
common shares,
consisting primarily of common stock options, unvested restricted stock awards, and stock purchase warrants,
using the treasury stock method.
The number of anti-dilutive shares, which have been
excluded from the computation of diluted earnings/(loss) per share, was 0.7 million and 4.9 million for the three month periods
ended March 31, 2014 and 2013. Anti-dilutive shares consist of Class C Special stock, out-of-the-money common stock options, out-of-the-money
warrants exercisable for common stock, and certain participating securities, if the effect of including both the income allocated
to the participating security and the impact of the potential common shares would be anti-dilutive. Prior to the Merger (Note
3), anti-dilutive shares included equity-linked securities, convertible preferred stock, and stock purchase warrants exercisable
for preferred stock.
ANI PHARMACEUTICALS, INC.
and
subsidiary
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
4.
|
Earnings/(Loss)
per Share
– continued
|
For periods prior to the Merger, earnings/(loss) per share
cannot be calculated, as ANIP common shareholders did not receive consideration in the Merger. In a reverse merger, the weighted
average shares outstanding used to calculate basic earnings per share for periods prior to the merger is the weighted average
shares outstanding of the common shares of the accounting acquirer (in this case, ANIP) multiplied by the exchange ratio. In the
Merger, only holders of ANIP’s Series D preferred stock received consideration. Because ANIP‘s common shareholders
did not receive any consideration in the Merger, their exchange ratio is zero, creating a weighted average shares outstanding
of zero for periods prior to the Merger.
As of March 31, 2014, we had 90 thousand
options to purchase common stock, 50 thousand unvested restricted stock awards, and 555 thousand warrants to purchase common
stock outstanding.
Inventories consist of the following as of:
(in thousands)
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
Raw materials
|
|
$
|
3,483
|
|
|
$
|
1,480
|
|
Packaging materials
|
|
|
732
|
|
|
|
766
|
|
Work-in-progress
|
|
|
200
|
|
|
|
162
|
|
Finished goods
|
|
|
709
|
|
|
|
1,152
|
|
|
|
|
5,124
|
|
|
|
3,560
|
|
Reserve for excess/obsolete inventories
|
|
|
(34
|
)
|
|
|
(42
|
)
|
Inventories, net
|
|
$
|
5,090
|
|
|
$
|
3,518
|
|
Vendor Concentration
We source the raw materials for our products, including active
pharmaceutical ingredients (“API”), from both domestic and international suppliers. Generally, only a single source
of API is qualified for use in each product due to the costs and time required to validate a second source of supply. As a result,
we are dependent upon our current vendors to supply reliably the API required for ongoing product manufacturing. During the three
months ended March 31, 2014, we purchased approximately 49% of our inventory from two suppliers. As of March 31, 2014, amounts
payable to these suppliers was immaterial. During the three months ended March 31, 2013, we purchased approximately 43% of our
inventory from three suppliers.
|
6.
|
PROPERTY,
PLANT, AND EQUIPMENT
|
Property, plant, and equipment consist
of the following as of:
(in thousands)
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
Land
|
|
$
|
87
|
|
|
$
|
87
|
|
Buildings
|
|
|
3,682
|
|
|
|
3,682
|
|
Machinery, furniture and equipment
|
|
|
4,017
|
|
|
|
3,736
|
|
Construction in progress
|
|
|
66
|
|
|
|
229
|
|
|
|
|
7,852
|
|
|
|
7,734
|
|
Less: accumulated depreciation
|
|
|
(3,334
|
)
|
|
|
(3,197
|
)
|
Property, Plant and Equipment, net
|
|
$
|
4,518
|
|
|
$
|
4,537
|
|
Depreciation expense for the three month periods
ended March 31, 2014 and 2013 totaled $137 thousand and $132 thousand, respectively. During the three month periods ended March
31, 2014 and 2013, there was no material interest capitalized into construction in progress.
ANI PHARMACEUTICALS, INC.
and
subsidiary
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
7.
|
GOODWILL
AND INTANGIBLE ASSETS
|
Goodwill
As a result of the Merger (Note
3), we recorded goodwill of $1.8 million in our one reporting unit. We assess the recoverability of the carrying value of goodwill
as of October 31 of each year, and whenever events occur or circumstances changes that would, more likely than not, reduce the
fair value of our reporting unit below its carrying value. There have been no events or changes in circumstances that would have
reduced the fair value of our reporting unit below its carrying value from the most recent assessment on October 31, 2013, through
March 31, 2014. No impairment losses were recognized during the three months ended March 31, 2014.
Acquisition of Abbreviated
New Drug Applications
On December 26, 2013
,
we entered into an agreement to purchase (the “Teva Purchase Agreement”) Abbreviated New Drug
Applications (“ANDAs”) to produce 31 generic drug products from Teva Pharmaceuticals (“Teva”) for
$12.5 million in cash an
d a percentage of future gross profits from product sales
.
According to the terms of the Teva Purchase Agreement, Teva was required to provide soft copy materials and transfer
ownership of the ANDAs to us within five business days of signing the Teva Purchase Agreement, and we were required to pay
the first installment of $8.5 million upon receipt thereof. Teva provided the soft copy materials and transferred ownership
of the ANDAs to us on January 2, 2014 and we paid the first installment of $8.5 million to Teva on January 2, 2014. Teva was
also required to provide hard copy materials to us within 90 days of signing the Teva Purchase Agreement. Teva provided the
hard copy materials on March 5, 2014 and we paid the $4.0 million
balance on March 6, 2014.
The drug products include 20 solid-oral immediate
release products, four extended release products and seven liquid products. We performed an assessment of the assets purchased
and determined that this transaction was an asset purchase and not a business combination. The ANDAs are being amortized in full
over their useful lives, averaging 10 years.
Definite-Lived
Intangible Assets
The components of our definite-lived intangible
assets are as follows:
(in thousands)
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Amortization
Period
|
Acquired ANDA intangible assets
|
|
$
|
12,577
|
|
|
$
|
(373
|
)
|
|
$
|
60
|
|
|
$
|
(55
|
)
|
|
3-10 years
|
Reglan
®
intangible asset
|
|
|
100
|
|
|
|
(100
|
)
|
|
|
100
|
|
|
|
(100
|
)
|
|
2 years
|
Teva license intangible asset
|
|
|
10,900
|
|
|
|
(744
|
)
|
|
|
10,900
|
|
|
|
(496
|
)
|
|
11 years
|
|
|
$
|
23,577
|
|
|
$
|
(1,217
|
)
|
|
$
|
11,060
|
|
|
$
|
(651
|
)
|
|
|
Our acquired ANDAs and Reglan
®
intangible assets consist of the exclusive rights, including all of the applicable technical data and other relevant
information, to produce certain pharmaceutical products that we acquired from various companies, including those acquired pursuant to the Teva Purchase Agreement. The Teva license was acquired as part of the Merger (Note 3).
Definite-lived intangible assets are stated at the lower of cost or fair value, net of amortization using the straight line
method over the expected useful lives of the product rights. Amortization expense was $0.6 million and $13 thousand for the
three months ended March 31, 2014 and 2013, respectively.
ANI PHARMACEUTICALS, INC.
and
subsidiary
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
7.
|
GOODWILL
AND INTANGIBLE ASSETS – continued
|
We test for impairment of definite-lived
intangible assets when events or circumstances indicate that the carrying value of the assets may not be recoverable. No such
triggering events were identified during the three months ended March 31, 2014 and 2013 and therefore no impairment loss was
recognized in the three months ended March 31, 2014 or 2013.
Expected future amortization expense is
as follows:
(in thousands)
|
|
|
|
2014 (remainder of the year)
|
|
$
|
1,682
|
|
2015
|
|
|
2,243
|
|
2016
|
|
|
2,243
|
|
2017
|
|
|
2,243
|
|
2018
|
|
|
2,243
|
|
2019 and thereafter
|
|
|
11,706
|
|
Total
|
|
$
|
22,360
|
|
|
8.
|
STOCK-BASED
COMPENSATION
|
All stock options and restricted stock are granted
under the ANI Pharmaceuticals, Inc. Amended and Restated 2008 Stock Incentive Plan (the “2008 Plan”). As of March
31, 2014, 154 thousand shares of our common stock remained available for issuance under the 2008 Plan.
On April 1, 2014, the Board of Directors
approved grants of options to purchase 59 thousand shares of common stock and 30 thousand shares of restricted stock to our
officers and options to purchase 16 thousand shares of common stock to non-employee directors. While the stock options were
granted with no restrictions, the restricted stock was granted subject to shareholder approval of an increase in the total
restricted stock that can be granted under the 2008 Plan.
On July 12, 2013, our Board of Directors approved
grants of stock options to employees under the 2008 Plan, subject to shareholder approval of an increase in the total shares available
for issuance under the 2008 Plan. As of March 31, 2014, we had 325 thousand common stock options outstanding pending shareholder
approval. Expense related to these stock options and the restricted stock granted on April 1, 2014 will begin to be recognized
upon shareholder approval.
In 2013, the Board of Directors granted options
to purchase 21 thousand shares of common stock and 50 thousand shares of restricted stock to non-officer directors under the
2008 Plan. Total expense related to these options and shares of restricted stock was $47 thousand during the three
months ended March 31, 2014.
Options to purchase 30 thousand shares
of common stock were exercised and no options expired during the three month period ended March 31, 2014. No options were
exercised and no options expired during the three months ended March 31, 2013. No restricted stock vested or was forfeited
during the three months ended March 31, 2014 or 2013.
On March 10, 2014, we completed a
follow-on public offering of 1.6 million shares of our common stock at a public offering price of $31.00 per share (the
“March 2014 Offering”). We received gross proceeds of $50.0 million, or net proceeds of $46.7 million after
deducting costs of $3.3 million, including the underwriters’ fees and commissions, as well as expenses directly related
to the March 2014 Offering
. The number of shares sold in the March 2014 Offering includes the
exercise in full by the underwriters of their option to purchase an additional
0.2 million
shares
of common stock.
ANI PHARMACEUTICALS, INC.
and
subsidiary
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
9.
|
STOCKHOLDER’S
EQUITY – continued
|
In January 2014, warrants to purchase an aggregate
of 20 thousand shares of common stock were exercised at $9.00 per share. During the three months ended March 31, 2014, warrants
to purchase an aggregate of 112 thousand shares of common stock expired unexercised.
We use the asset and liability method of
accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to
be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that such tax rate changes are enacted. The measurement of a deferred tax asset is
reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax
asset will not be realized. Based upon historical losses and uncertainty of future taxable income, we have fully reserved for
all our deferred tax assets as of March 31, 2014 and December 31, 2013. For interim periods, we recognize an income tax
provision/(benefit) based on our estimated annual effective tax rate expected for the entire year. We calculate income tax
benefits related to stock-based compensation arrangements using the with and without approach.
We use a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return,
as well as guidance on derecognition, classification, interest and penalties and financial statement reporting disclosures. For
those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
We have not identified any uncertain income tax positions that could have a material impact on the financial statements. We are
subject to taxation in various jurisdictions and remain subject to examination by taxing jurisdictions for the years 1998 and
all subsequent periods due to the availability of
NOL
carryforwards.
We recognize interest and penalties accrued on any
unrecognized tax exposures as a component of income tax expense. We did not have any amounts accrued relating to interest and
penalties as of March 31, 2014 and December 31, 2013.
The effective tax rate for the three months ended
March 31, 2014 was 4.6% of net income reported in the period, calculated based on the estimated annual effective rate anticipated
for the year ending December 31, 2014. The effective tax rate for the period was primarily impacted by the use of the NOL carryforwards.
The utilization of these NOL carryforwards will be limited in future years as prescribed by Section 382 of the U.S. Internal Revenue
Code. For the comparable three month period ended March 31, 2013, we did not have a tax provision due to the projected loss
for the year, accumulated losses, which resulted in NOL carryforwards, and a full valuation allowance.
|
11.
|
COMMITMENTS
AND CONTINGENCIES
|
Operating Leases
We lease equipment under operating
leases that expire in May 2017. We also lease office space under operating leases that expire beginning in February 2016 through
September 2018. Future minimum lease payments due under these leases total $261 thousand as of March 31, 2014.
Rent expense for the three month periods ended March
31, 2014 and 2013 totaled $17 thousand and $5 thousand, respectively.
ANI PHARMACEUTICALS, INC.
and
subsidiary
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
11.
|
COMMITMENTS
AND CONTINGENCIES – continued
|
Government Regulation
Our products and facilities are subject to regulation
by a number of federal and state governmental agencies. The Food and Drug Administration (“FDA”), in particular, maintains
oversight of the formulation, manufacture, distribution, packaging and labeling of all of our products. The Drug Enforcement Administration
(“DEA”) maintains oversight over our products that are controlled substances.
Unapproved Products
Two of our products, Esterified Estrogen with Methyltestosterone
tablets (“EEMT”) and Opium Tincture, are marketed without approved New Drug Applications (“NDAs”) or ANDAs.
In March 2014, we formally requested a pre-IND meeting with the FDA to discuss applying for an NDA for our Opium Tincture product.
During the three month periods ended March 31, 2014 and 2013, net revenues for these products totaled $6.7 million and $1.5 million,
respectively.
The FDA’s policy with respect to the continued
marketing of unapproved products is stated in the FDA’s September 2011 compliance policy guide,
Marketed New Drugs without
Approved NDAs or ANDAs
. Under this policy, the FDA has stated that it will follow a risk-based approach with regard to enforcement
against such unapproved products. The FDA evaluates whether to initiate enforcement action on a case-by-case basis, but gives
higher priority to enforcement action against products in certain categories, such as those marketed as unapproved drugs with
potential safety risks or that lack evidence of effectiveness. We believe that, so long as we comply with applicable manufacturing
and labeling standards, the FDA will not take action against us under the current enforcement policy. There can be no assurance,
however, that the FDA will continue this policy or not take a contrary position with any individual product or group of products.
If the FDA were to take a contrary position, we may be required to seek FDA approval for these products or withdraw such products
from the market. If we decide to withdraw the products from the market, our net revenues for generic pharmaceutical products
would decline materially, and if we decide to seek FDA approval, we would face increased expenses and might need to suspend sales
of the products until such approval was obtained, and there are no assurances that we would receive such approval.
In addition, one group of products that we manufacture
on behalf of a contract customer is marketed by that customer without an FDA-approved NDA. If the FDA took enforcement action
against such customer, the customer may be required to seek FDA approval for the group of products or withdraw them from the market.
Our contract manufacturing revenues for these unapproved products for the three month periods ended March 31, 2014 and 2013 were
$0.4 million and $0.5 million, respectively.
We receive royalties on the net sales of a group
of contract-manufactured products, which are marketed by the contract customer without an FDA-approved NDA. If the FDA took enforcement
action against such customer, the customer may be required to seek FDA approval for the group of products or withdraw them from
the market. Our royalties on the net sales of these unapproved products for each of the three month periods ended March 31, 2014
and 2013 were $0.1 million.
In October 2012, we received a telephone call requesting
a meeting with the FDA representatives from the Minneapolis district of the FDA to discuss continued manufacturing and distribution
of the Opium 10mg/mL Solution 118mL product (“Opium Tincture”), which is a non-NDA Product. That meeting was held
on October 25, 2012 by conference telephone call and included FDA representatives from the Office of Compliance at the Center
for Drug Evaluation and Research. Our counsel sent a letter to the FDA on November 9, 2012 in support of our position. On April
2, 2014, we received communication from the FDA confirming that the inspection was closed.
ANI PHARMACEUTICALS, INC.
and
subsidiary
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
11.
|
COMMITMENTS
AND CONTINGENCIES – continued
|
Shareholder Class Action and Derivative Lawsuits
On February 3, 2012, a purported class action lawsuit
was filed in the United States District Court for the Northern District of Illinois under the caption Thomas Lauria, on behalf
of himself and all others similarly situated v. BioSante Pharmaceuticals, Inc. and Stephen M. Simes, naming BioSante Pharmaceuticals,
Inc. and our former President and Chief Executive Officer, Stephen M. Simes, as defendants. The complaint alleges that certain
of our disclosures relating to the efficacy of LibiGel
®
and its commercial potential were false and/or misleading
and that such false and/or misleading statements had the effect of artificially inflating the price of our securities resulting
in violations of Section 10(b) of the Exchange Act, Rule 10b-5 and Section 20(a) of the Exchange Act.
Although a substantially similar complaint was filed
in the same court on February 21, 2012, such complaint was voluntarily dismissed by the plaintiff in April 2012. The plaintiff
sought to represent a class of persons who purchased our securities between February 12, 2010 and December 15, 2011, and sought
unspecified compensatory damages, equitable and/or injunctive relief, and reasonable costs, expert fees and attorneys’ fees
on behalf of such purchasers. On November 6, 2012, the plaintiff filed a consolidated amended complaint. On December 28, 2012,
we and Mr. Simes filed motions to dismiss the consolidated amended complaint. On September 11, 2013, the Illinois district court
judge granted defendants’ motions to dismiss, without prejudice, and gave plaintiffs 28 days to file an amended complaint.
The plaintiffs did not file an amended complaint and the matter has been concluded.
On May 7, 2012, Jerome W. Weinstein, a purported
stockholder of BioSante, filed a shareholder derivative action in the United States District Court for the Northern District of
Illinois under the caption Weinstein v. BioSante Pharmaceuticals, Inc. et al., naming our directors as defendants and BioSante
as a nominal defendant. A substantially similar complaint was filed in the same court on May 22, 2012 and another substantially
similar complaint was filed in the Circuit Court for Cook County, Illinois, County Department, Chancery Division, on June 27,
2012. The suits generally related to the same events that are the subject of the class action litigation described above. The
complaints allege breaches of fiduciary duty, abuse of control, gross mismanagement and unjust enrichment as causes of action
occurring from at least February 2010 through December 2011. The complaints seek unspecified damages, punitive damages, costs
and disbursements, and unspecified reforms and improvements in our corporate governance and internal control procedures.
On
September 24, 2012, the United States District Court consolidated the two shareholder derivative cases before it and on November
20, 2012, the plaintiffs filed their consolidated amended complaint. On January 11, 2013, the defendants filed a motion to dismiss
the amended complaint. On September 11, 2013, the Illinois district court judge granted defendants’ motions to dismiss,
without prejudice, and gave plaintiffs 28 days to file an amended complaint. The plaintiffs did not file an amended complaint
and the district court matter has been concluded
.
On November 27, 2012, the plaintiff in the shareholder
derivative action pending in Illinois state court filed an amended complaint. On January 18, 2013, the defendants filed a motion
to dismiss the amended complaint. On July 1, 2013, the Illinois state court judge granted defendants’ motions to dismiss,
without prejudice, and gave plaintiffs until July 31, 2013 to file an amended complaint. On September 9, 2013, the Illinois state
court judge granted defendants’ motion to dismiss, with prejudice. On October 9, 2013, the plaintiffs filed a notice of
appeal to Illinois state appellate court. We believe the state court complaint is without merit and will continue to defend the
action vigorously.
We are unable to predict the outcome of the remaining
lawsuit and the possible loss or range of loss, if any, associated with its resolution or any potential effect the lawsuit may
have on our operations. Depending on the outcome or resolution of the remaining lawsuit, it could have a material effect on our
operations, including our financial condition, results of operations, or cash flows. No amounts have been accrued related to this
legal action as of March 31, 2014.
ANI PHARMACEUTICALS, INC.
and
subsidiary
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
11.
|
COMMITMENTS AND CONTINGENCIES – continued
|
Louisiana Medicaid Lawsuit
On September 11, 2013, the Attorney General
of the State of Louisiana filed a lawsuit in Louisiana state court against numerous pharmaceutical companies, including us, under
various state laws, alleging that each defendant caused the state’s Medicaid agency to provide reimbursement for drug products
that allegedly were not approved by the FDA and therefore allegedly not reimbursable under the federal Medicaid program. The lawsuit
relates to three cough and cold prescription products manufactured and sold by our former Gulfport, Mississippi operation, which
was sold in September 2010. Through its lawsuit, the state seeks unspecified damages, statutory fines, penalties, attorneys’
fees and costs. On October 15, 2013, the defendants removed the lawsuit to the U.S. District Court. On November 14,
2013, the state filed a motion to remand the lawsuit to the Louisiana state court. While we cannot predict the outcome of the
lawsuit at this time, it could be subject to material damages, penalties and fines. We intend to vigorously defend against all
claims in the lawsuit.
Other Commitments and Contingencies
All manufacturers of the drug Reglan
®
and its generic equivalent metoclopramide, including us, are facing allegations from plaintiffs in various states claiming bodily
injuries as a result of ingestion of metoclopramide or its brand name Reglan
®
prior to the FDA's February 2009
Black Box warning requirement. We have been named and served in 92 separate complaints, including three in Pennsylvania, nine
in New Jersey, and 80 in California, covering 2,944 plaintiffs in total. In August 2012, we were dismissed with prejudice from
all New Jersey cases. We consider our exposure to this litigation to be limited due to several factors: (1) the only generic metoclopramide
manufactured by us prior to the implementation of the FDA's warning requirement was an oral solution introduced after May 28,
2008; (2) our market share for the oral solution was a very small portion of the overall metoclopramide market; and (3) once we
received a request for change of labeling from the FDA, we submitted our proposed changes within 30 days, and such changes were
subsequently approved by the FDA. At the present time, we are unable to assess the likely outcome of the remaining cases. Our
insurance company has assumed the defense of this matter. In addition, our insurance company renewed our product liability insurance
on September 1, 2012 and 2013 with absolute exclusions for claims related to Reglan
®
and metoclopramide. We are
unable to predict the outcome of these matters and the possible loss or range of loss, if any, associated with their resolution
or any potential effect the legal action may have on our operations. Furthermore, we cannot provide assurances that the outcome
of these matters will not have an adverse effect on our business, results of operations, financial condition, and cash flow. Like
all pharmaceutical manufacturers, we in the future may be exposed to other product liability claims, which could harm our business,
results of operations, financial condition, and cash flows.
|
12.
|
FAIR
VALUE DISCLOSURES
|
Fair value is the price that would be received from
the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement
date. U.S. GAAP establishes a hierarchical disclosure framework that prioritizes and ranks the level of observability of
inputs used in measuring fair value.
Financial Assets and Liabilities Measured at
Fair Value on a Recurring Basis
The inputs used in measuring the fair value of cash
and cash equivalents are considered to be level 1 in accordance with the three-tier fair value hierarchy. The fair market
values are based on period-end statements supplied by the various banks and brokers that held the majority of our funds. The fair
value of short-term financial instruments (primarily accounts receivable, prepaid expenses, accounts payable, accrued expenses,
borrowings under line of credit, and other current liabilities) approximate their carrying values because of their short-term
nature.
ANI PHARMACEUTICALS, INC.
and
subsidiary
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
12.
|
FAIR
VALUE DISCLOSURES – continued
|
Our CVRs, which were granted coincident with the Merger (Note 3), are considered contingent consideration and are
classified as liabilities. As such, the CVRs were recorded as purchase consideration at their estimated fair value, using
level 3 inputs, and are marked to market each reporting period until settlement. The fair value of CVRs is estimated using
the present value of our projection of the expected payments pursuant to the terms of the CVR agreement, which is the primary
unobservable input. If our projection or expected payments were to increase substantially, the value of the CVRs could
increase as a result. The present value of the liability was calculated using a discount rate of 15%. We determined that the
fair value of the CVRs, and the changes in such fair value, was immaterial as of and for the three months ended March 31,
2014.
Prior to the Merger, ANIP’s warrants to purchase
common and preferred stock were classified as derivative liabilities and were measured at fair value using level 3 inputs.
The fair value of stock purchase warrants was determined using a two-step process that included valuing ANIP's equity using both
market and discounted cash flow methods, and then apportioning that value, using an equity allocation model, to each of ANIP's
classes of stock. These models require the use of unobservable inputs such as fair value of ANIP's common and preferred stock,
expected term, anticipated volatility, future interest and interest rates, expected cash flows and the number of outstanding common
and preferred shares as of a future date. We determined that the fair value of the derivative liabilities, and the changes in
such fair value, was immaterial as of and for the three months ended March 31, 2013. All such stock purchase warrants expired
in connection with the Merger.
The following table presents our financial
assets and liabilities accounted for at fair value on a recurring basis as of March 31, 2014 and December 31, 2013, by level
within the fair value hierarchy:
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Fair Value at
March 31, 2014
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVRs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Description
|
|
Fair Value at
December 31, 2013
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVRs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Non-Financial Assets and Liabilities Measured
at Fair Value on a Recurring Basis
We do not have any non-financial assets and
liabilities that are measured at fair value on a recurring basis.
Non-Financial Assets and Liabilities Measured
at Fair Value on a Non-Recurring Basis
We measure our long-lived assets, including property,
plant and equipment, intangible assets and goodwill, at fair value on a non-recurring basis. These assets are recognized at fair
value when they are deemed to be other-than-temporarily impaired. No such fair value impairment was recognized in the three months
ended March 31, 2014 and 2013.
In April 2014, we entered into a collaboration agreement
with Sofgen Pharmaceuticals to develop an oral soft gel prescription product (the “April 2014 Sofgen Agreement”). The
product will be subject to an ANDA filing once developed. In general, Sofgen will be responsible for the development, manufacturing
and regulatory submission of the product, including preparation of the ANDA, and we will provide payments based on the completion
of certain milestones. Upon approval, Sofgen will manufacture the drug and we will be responsible for the marketing and distribution,
under our label, of the product in the United States, providing a percentage of profits from sales of the drug to Sofgen.
Under the April 2014 Sofgen Agreement, Sofgen will
own all the rights, title and interest in the product. During the term of the April 2014 Sofgen Agreement, both parties are prohibited
from developing, selling or distributing any product in the United States that is identical or bioequivalent to
the product covered under the April 2014 Sofgen Agreement. The April 2014 Sofgen Agreement can be terminated or amended under certain
specified circumstances. The April 2014 Sofgen Agreement has an initial term of ten years from the launch of the product, which
term will automatically renew for two year terms until either party terminates the agreement.