NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
1.
|
BUSINESS, PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS
|
Overview
ANI Pharmaceuticals, Inc. and its consolidated subsidiaries
(together, “ANI,” the “Company,” “we,” “us,” or “our”) is an integrated
specialty pharmaceutical company developing, manufacturing, and marketing branded and generic prescription pharmaceuticals. Our
targeted areas of product development currently include controlled substances, anti-cancer (oncolytics), hormones and steroids,
and complex formulations involving extended release and combination products. We have two pharmaceutical manufacturing facilities
located in Baudette, Minnesota that are capable of producing oral solid dose products, as well as liquids and topicals, controlled
substances, and potent products that must be manufactured in a fully-contained environment. Our strategy is to use our assets to
develop, acquire, manufacture, and market branded and generic specialty prescription pharmaceuticals. By executing this strategy,
we believe we will be able to continue to grow the business, expand and diversify our product portfolio, and create long-term value
for our investors.
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 consolidated balance sheet at December 31, 2015, has been derived from audited financial statements
of that date. The unaudited 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, 2015.
Principles of Consolidation
The unaudited interim condensed consolidated financial
statements include the accounts of ANI Pharmaceuticals, Inc. and its subsidiaries. All inter-company accounts and transactions
are eliminated in consolidation.
Foreign Currency
The company has subsidiaries located outside of the
U.S. All existing subsidiaries currently conduct substantially all their transactions denominated in U.S. dollars, or are otherwise
dependent upon the U.S. parent for funding. Accordingly, these subsidiaries use the U.S. dollar as their functional currency. Unless
otherwise noted, all references to “$” or “dollar” refer to the U.S. dollar.
Foreign currency transaction gains and losses are
included in the determination of net income.
ANI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
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 interim condensed consolidated financial statements, estimates are used for,
but not limited to, stock-based compensation, allowance for doubtful accounts, accruals for chargebacks, Medicaid rebates, returns
and other allowances, allowance for inventory obsolescence, valuation of financial instruments and intangible assets, accruals
for contingent liabilities, 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 March 2016, the Financial Accounting Standards
Board (“FASB”) issued guidance simplifying the accounting for and financial statement disclosure of stock-based compensation
awards. Under the guidance, all excess tax benefits and tax deficiencies related to stock-based compensation awards are to be recognized
as income tax expenses or benefits in the income statement and excess tax benefits should be classified along with other income
tax cash flows in the operating activities section of the statement of cash flows. Under the guidance, companies can also elect
to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. In addition, the guidance
amends some of the other stock-based compensation awards guidance to more clearly articulate the requirements and cash flow presentation
for withholding shares for tax-withholding purposes. The guidance is effective for reporting periods beginning after December 15,
2016 and early adoption is permitted, though all amendments of the guidance must be adopted in the same period. The adoption
of certain amendments of the guidance must be applied prospectively, and adoption of the remaining amendments must be applied either
on a modified retrospective basis or retrospectively to all periods presented. We are currently evaluating the impact that this
guidance will have on our consolidated financial statements.
In March 2016, the
FASB issued guidance to clarify the requirements for assessing whether contingent call or put options that can accelerate the payment
of principal on debt instruments are clearly and closely related to their debt hosts. The amendments of this
guidance
are
effective for reporting periods beginning after December 15, 2016, and early adoption is permitted. Entities are required to apply
the guidance to existing debt instruments using a modified retrospective transition method as of beginning of the fiscal year of
adoption. We adopted this guidance for the year ending December 31, 2016, on a modified retrospective basis. The adoption of this
new guidance did not have a material impact on our consolidated financial statements.
In February 2016, the FASB issued guidance for
accounting for leases. The guidance requires lessees to recognize assets and liabilities related to long-term leases on the
balance sheet and expands disclosure requirements regarding leasing arrangements. The guidance is effective for reporting
periods beginning after December 15, 2018 and early adoption is permitted. The guidance must be adopted on a modified
retrospective basis and provides for certain practical expedients. We are currently evaluating the impact that this guidance
will have on our consolidated financial statements.
In November 2015, the FASB issued guidance simplifying
the balance sheet classification of deferred taxes. The new guidance requires that all deferred taxes be presented as noncurrent,
rather than separated into current and noncurrent amounts. The guidance is effective for reporting periods beginning after December
15, 2016 and early adoption is permitted. In addition, the adoption of guidance can be applied either prospectively or retrospectively
to all periods presented. We adopted this guidance for the year ended December 31, 2015 on a retrospective basis, and all periods
are presented under this guidance.
ANI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
1.
|
BUSINESS, PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS – continued
|
In July 2015, the FASB issued guidance for
inventory. Under the guidance, an entity should measure inventory within the scope of this guidance at the lower of cost
and net realizable value, except when inventory is measured using the last in first out (“LIFO”) method or the
retail inventory method. Net realizable value is the estimated selling price in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and transportation. In addition, the FASB has amended some of the other
inventory guidance to more clearly articulate the requirements for the measurement and disclosure of inventory. The guidance
is effective for reporting periods beginning after December 15, 2016. The guidance should be applied prospectively, with
earlier application permitted. We adopted this guidance for the year ending December 31, 2016, on a prospective basis. The
adoption of this new guidance did not have a material impact on our consolidated financial statements.
In April 2015, the FASB issued guidance as to
whether a cloud computing arrangement (e.g., software as a service, platform as a service, infrastructure as a service, and
other similar hosting arrangements) includes a software license and, based on that determination, how to account for such
arrangements. If a cloud computing arrangement includes a software license, then the customer should account for the software
license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing
arrangement does not include a software license, the customer should account for the arrangement as a service contract. The
guidance is effective for reporting periods beginning after December 15, 2015, and can be adopted on either a
prospective or retrospective basis. We adopted this guidance for the year ending December 31, 2016, on a prospective basis.
The adoption of this new guidance did not have a material impact on our consolidated financial statements.
In April 2015, the FASB issued guidance to simplify
the balance sheet disclosure for debt issuance costs. Under the guidance, debt issuance costs related to a recognized debt liability
are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, in the same manner as
debt discounts, rather than as an asset. The guidance is effective for reporting periods beginning after December 15, 2015 and
must be adopted on a retrospective basis. Early adoption is permitted. We adopted this guidance for the year ended December
31, 2015 on a retrospective basis, and all periods are presented under this guidance.
In May 2014, the FASB issued guidance for
revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing
industry-specific guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2)
identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize
revenue. The new standard will result in enhanced disclosures regarding the nature, amount, timing, and uncertainty of
revenue arising from contracts with customers. In August 2015, the FASB issued guidance approving a one-year deferral, making
the standard effective for reporting periods beginning after December 15, 2017, with early adoption permitted only for
reporting periods beginning after December 15, 2016. In March 2016, the FASB issued guidance to clarify the implementation
guidance on principal versus agent considerations for reporting revenue gross rather than net, with the same deferred
effective date. In April 2016, the FASB issued guidance to clarify the implementation guidance on identifying performance
obligations and the accounting for licenses of intellectual property, with the same deferred effective date. We are currently
evaluating the impact, if any, that this guidance will have on our consolidated financial statements.
We have evaluated all other issued unadopted Accounting
Standards Updates and believe the adoption of these standards will not have a material impact on our consolidated statements of
earnings, balance sheets, or cash flows.
ANI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
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 interim condensed consolidated statements of earnings, and are presented as current liabilities or reductions in accounts
receivable in the accompanying unaudited interim condensed consolidated balance sheets (see “Accruals for Chargebacks, Rebates,
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.
Accruals for Chargebacks, Rebates, Returns, and
Other Allowances
Our generic and branded product revenues are typically
subject to agreements with customers allowing chargebacks, Medicaid rebates, 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 consolidated
balance sheets for accruals and allowances for the three month periods ended March 31, 2016 and 2015, respectively:
(in thousands)
|
|
Accruals for Chargebacks, Rebates, Returns and Other Allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
Prompt
|
|
|
|
|
|
|
Medicaid
|
|
|
|
|
|
Fees and Other
|
|
|
Payment
|
|
|
|
Chargebacks
|
|
|
Rebates
|
|
|
Returns
|
|
|
Rebates
|
|
|
Discounts
|
|
Balance at December 31, 2014
|
|
$
|
6,865
|
|
|
$
|
2,264
|
|
|
$
|
1,445
|
|
|
$
|
1,487
|
|
|
$
|
471
|
|
Accruals/Adjustments
|
|
|
10,260
|
|
|
|
953
|
|
|
|
566
|
|
|
|
1,472
|
|
|
|
609
|
|
Credits Taken Against Reserve
|
|
|
(10,526
|
)
|
|
|
(1,140
|
)
|
|
|
(194
|
)
|
|
|
(1,825
|
)
|
|
|
(602
|
)
|
Balance at March 31, 2015
|
|
$
|
6,599
|
|
|
$
|
2,077
|
|
|
$
|
1,817
|
|
|
$
|
1,134
|
|
|
$
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
11,381
|
|
|
$
|
4,631
|
|
|
$
|
2,648
|
|
|
$
|
1,653
|
|
|
$
|
674
|
|
Accruals/Adjustments
|
|
|
14,778
|
|
|
|
2,607
|
|
|
|
1,637
|
|
|
|
2,089
|
|
|
|
813
|
|
Credits Taken Against Reserve
|
|
|
(15,256
|
)
|
|
|
(3,814
|
)
|
|
|
(1,619
|
)
|
|
|
(1,470
|
)
|
|
|
(835
|
)
|
Balance at March 31, 2016
|
|
$
|
10,903
|
|
|
$
|
3,424
|
|
|
$
|
2,666
|
|
|
$
|
2,272
|
|
|
$
|
652
|
|
ANI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
2.
|
REVENUE RECOGNITION AND RELATED ALLOWANCES – continued
|
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,
2016, three customers represented 29%, 20%, and 16% of net revenues, respectively, and accounts receivable from
these customers totaled 67% of accounts receivable, net as of March 31, 2016. During the three month period ended March 31,
2015, three customers represented 28%, 24%, and 19% of net revenues, respectively.
Convertible Senior Notes
In December 2014, we issued $143.8 million of our
Convertible Senior Notes due 2019 (the “Notes”) in a registered public offering. The Notes pay 3.0% interest semi-annually
in arrears starting on June 1, 2015 and are due December 1, 2019. The initial conversion price was $69.48 per share. Simultaneous
with the issuance of the Notes, we entered into “bond hedge” (or purchased call) and “warrant” (or written
call) transactions with an affiliate of one of the offering underwriters in order to synthetically raise the initial conversion
price of the Notes to $96.21 per share and reduce the potential common stock dilution that may arise from the conversion of the
Notes.
The Notes are convertible at the option of the holder
under certain circumstances and upon conversion we may elect to settle such conversion in shares of our common stock, cash, or
a combination thereof. As a result of our cash conversion option, we separately accounted for the value of the embedded conversion
option as a debt discount (with an offset to Additional Paid in Capital (“APIC”)) of $33.6 million. Deferred financing
costs are recorded as a reduction of long-term debt in the consolidated balance sheets and are being amortized as additional non-cash
interest expense over the term of the debt, since this method was not significantly different from the effective interest method.
The carrying value of the Notes
is as follows as of:
(in thousands)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Principal amount
|
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Unamortized debt discount
|
|
|
(25,455
|
)
|
|
|
(27,016
|
)
|
Deferred financing costs
|
|
|
(3,096
|
)
|
|
|
(3,307
|
)
|
Net carrying value
|
|
$
|
115,199
|
|
|
$
|
113,427
|
|
We had accrued interest of $1.4 million and $0.4
million related to the Notes recorded in Accrued expenses, other in our consolidated balance sheets at March 31, 2016 and December
31, 2015, respectively.
ANI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
3.
|
INDEBTEDNESS – continued
|
The following table sets forth the components of
total interest expense related to the Notes recognized in the accompanying unaudited interim condensed consolidated statements
of earnings for the three months ended March 31, 2016 and 2015:
|
|
Three Months Ended
|
|
(in thousands)
|
|
March 31,
2016
|
|
|
March 31,
2015
|
|
Contractual coupon
|
|
$
|
1,078
|
|
|
$
|
1,078
|
|
Amortization of debt discount
|
|
|
1,562
|
|
|
|
1,481
|
|
Amortization of finance fees
|
|
|
211
|
|
|
|
211
|
|
Capitalized interest
|
|
|
(47
|
)
|
|
|
(9
|
)
|
|
|
$
|
2,804
|
|
|
$
|
2,761
|
|
As of March 31, 2016, the effective interest rate
on the Notes was 7.8%, on an annualized basis.
Basic earnings 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.
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, stock purchase warrants, and any conversion gain on our Notes (Note 3), using the treasury stock
method. For periods of net loss, diluted loss per share is calculated similarly to basic loss per share.
Our unvested restricted shares contain non-forfeitable
rights to dividends, and therefore are considered to be participating securities; in periods of net income, the calculation of
basic and diluted earnings per share excludes from the numerator net income attributable to the unvested restricted shares, and
excludes the impact of those shares from the denominator.
For purposes of determining diluted earnings per
share, we have elected a policy to assume that the principal portion of the Notes (Note 3) is settled in cash. As such, the principal
portion of the Notes has no effect on either the numerator or denominator when determining diluted earnings per share. Any conversion
gain is assumed to be settled in shares and is incorporated in diluted earnings per share using the treasury method. The warrants
issued in conjunction with the issuance of the Notes (Note 3) are considered to be dilutive when they are in-the-money relative
to our average stock price during the period; the bond hedge purchased in conjunction with the issuance of the Notes is always
considered to be anti-dilutive.
ANI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
4.
|
EARNINGS PER SHARE – continued
|
Earnings per share for the three months ended March
31, 2016 and 2015 are calculated for basic and diluted earnings per share as follows:
|
|
Basic
|
|
|
Diluted
|
|
(in thousands, except per share amounts)
|
|
Three Months Ended
March 31,
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income
|
|
$
|
1,346
|
|
|
$
|
4,369
|
|
|
$
|
1,346
|
|
|
$
|
4,369
|
|
Net income allocated to restricted stock
|
|
|
(7
|
)
|
|
|
(23
|
)
|
|
|
(7
|
)
|
|
|
(23
|
)
|
Net income from continuing operations allocated to common shares
|
|
$
|
1,339
|
|
|
$
|
4,346
|
|
|
$
|
1,339
|
|
|
$
|
4,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted-Average Shares Outstanding
|
|
|
11,395
|
|
|
|
11,326
|
|
|
|
11,395
|
|
|
|
11,326
|
|
Dilutive effect of stock options
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
236
|
|
Diluted Weighted-Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
11,489
|
|
|
|
11,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
$
|
0.12
|
|
|
$
|
0.38
|
|
|
$
|
0.12
|
|
|
$
|
0.38
|
|
The number of anti-dilutive shares, which have been
excluded from the computation of diluted earnings per share, including the shares underlying the Notes, was 4.5 million and 4.6
million for the three months ended March 31, 2016 and 2015, respectively. Anti-dilutive shares consist of out-of-the-money Class
C Special stock, out-of-the-money common stock options, common stock options that are anti-dilutive when calculating the impact
of the potential dilutive common shares using the treasury stock method, and out-of-the-money warrants exercisable for common stock.
Inventories consist of the following as of:
(in thousands)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Raw materials
|
|
$
|
10,648
|
|
|
$
|
10,192
|
|
Packaging materials
|
|
|
784
|
|
|
|
998
|
|
Work-in-progress
|
|
|
503
|
|
|
|
456
|
|
Finished goods
|
|
|
2,232
|
|
|
|
1,897
|
|
|
|
|
14,167
|
|
|
|
13,543
|
|
Reserve for excess/obsolete inventories
|
|
|
(245
|
)
|
|
|
(156
|
)
|
Inventories, net
|
|
$
|
13,922
|
|
|
$
|
13,387
|
|
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 cost and time required to validate a second source of supply. As
a result, we are dependent upon our current vendors to reliably supply the API required for ongoing product manufacturing. During
the three months ended March 31, 2016, we purchased approximately 50% of our inventory from three suppliers. As of March 31, 2016,
amounts payable to these three suppliers totaled $0.1 million. During the three months ended March 31, 2015, we purchased approximately
62% of our inventory from four suppliers.
ANI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
6.
|
PROPERTY, PLANT, AND EQUIPMENT
|
Property, plant, and equipment consist of the following
as of:
(in thousands)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Land
|
|
$
|
87
|
|
|
$
|
87
|
|
Buildings
|
|
|
3,682
|
|
|
|
3,682
|
|
Machinery, furniture, and equipment
|
|
|
6,649
|
|
|
|
5,623
|
|
Construction in progress
|
|
|
2,664
|
|
|
|
2,189
|
|
|
|
|
13,082
|
|
|
|
11,581
|
|
Less: accumulated depreciation
|
|
|
(4,667
|
)
|
|
|
(4,450
|
)
|
Property, Plant, and Equipment, net
|
|
$
|
8,415
|
|
|
$
|
7,131
|
|
Depreciation expense was $0.2 million for each of
the three month periods ended March 31, 2016 and 2015. During the three month periods ended March 31, 2016 and 2015, there was
$47 thousand and $9 thousand of interest capitalized into construction in progress, respectively.
7.
|
GOODWILL AND INTANGIBLE ASSETS
|
Goodwill
As a result of our 2013 merger with BioSante Pharmaceuticals,
Inc. (“BioSante”), 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 change 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, 2015, through March 31, 2016. No impairment losses were recognized during the three month periods ended March 31,
2016 or 2015.
Definite-lived Intangible Assets
Acquisition of Abbreviated New Drug
Applications
In July 2015, we purchased the Abbreviated New Drug
Applications (“ANDAs”) for 22 previously marketed generic drug products from Teva Pharmaceuticals (“Teva”)
for $25.0 million in cash and a percentage of future gross profits from product sales. We accounted for this transaction as an
asset purchase. The ANDAs are being amortized in full over their estimated useful lives of 10 years.
In March 2015 we purchased an ANDA from Teva for
Flecainide, for $4.5 million in cash and a percentage of future gross profits from product sales. We accounted for this transaction
as an asset purchase. The ANDA is being amortized in full over its estimated useful life of 10 years.
In the first quarter of 2014, we purchased the ANDAs
to produce 31 previously marketed generic drug products from Teva for $12.5 million in cash and a percentage of future gross profits
from product sales. We accounted for this transaction as an asset purchase. The ANDAs are being amortized in full over their estimated
useful lives of 10 years.
ANI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
7.
|
GOODWILL AND INTANGIBLE ASSETS – continued
|
Acquisition of New Drug Applications
and Product Rights
In September 2015, we entered into an agreement to
purchase the New Drug Applications (“NDAs”) for Corticotropin and Corticotropin-Zinc from Merck Sharp & Dohme B.V.
for $75.0 million in cash and a percentage of future net sales. The transaction closed in January 2016, and we made the $75.0 million
cash payment using cash on hand. In addition, we capitalized $0.3 million of costs directly related to the transaction. We accounted
for this transaction as an asset purchase. The $75.3 million NDA assets are being amortized in full over their estimated useful
lives of 10 years.
As part of our 2013 merger with BioSante, we acquired
a testosterone gel product that was licensed to Teva (the “Testosterone Gel NDA”). In May 2015, we acquired from Teva
the approved NDA for the previously-licensed product. Pursuant to the terms of the purchase agreement, upon commercialization,
we will pay Teva a royalty of up to $5.0 million, at a rate of 5% of the consideration we receive as a result of commercial sale
of the product. The $10.9 million Testosterone Gel NDA asset is being amortized in full over its estimated useful life of 11 years.
In August 2014, we entered into an agreement to purchase
(the “Vancocin Purchase Agreement”) the product rights to Vancocin from Shire ViroPharma Incorporated for $11.0 million
in cash. Pursuant to the terms of the Vancocin Purchase Agreement, we acquired the U.S. intellectual property rights and NDA associated
with Vancocin, two related ANDAs, and certain equipment and inventory. We accounted for this transaction as an asset purchase.
The $10.5 million product rights intangible asset is being amortized in full over its estimated useful life of 10 years.
In July 2014, we entered into an agreement to purchase
(the “Lithobid Purchase Agreement”) the product rights to Lithobid from Noven Therapeutics, LLC for $11.0 million in
cash at closing, and $1.0 million in cash if certain approvals were received from the FDA on or before June 30, 2015. This $1.0
million contingent payment was paid in January 2015. Pursuant to the terms of the Lithobid Purchase Agreement, we acquired the
intellectual property rights and NDA associated with Lithobid, as well as a small amount of raw material inventory. We accounted
for this transaction as an asset purchase. The $12.0 million product rights intangible asset is being amortized in full over its
estimated useful life of 10 years.
Marketing and Distribution Rights
In January 2016, we purchased from
H2-Pharma, LLC the rights to market, sell, and distribute the authorized generic of Lipofen® and a generic hydrocortisone
rectal cream product, along with the rights to an early-stage development project, for total consideration of $10.0 million.
The consideration consisted of a cash payment of $8.8 million and the assumption of $1.2 million in existing royalties owed
on the acquired rights. We capitalized $42 thousand of costs directly related to the purchase. We accounted for this
transaction as an asset purchase. No value was ascribed to the early-stage development project because the development is
still at the preliminary stage, with no expenses incurred or research performed to date. The $10.0 million marketing and
distribution rights assets are being amortized in full over their average estimated useful lives of approximately four
years.
In August 2015, we entered into a distribution agreement
with IDT Australia Limited (“IDT”) to market several products in the U.S. The products, all of which are approved ANDAs,
require various FDA filings and approvals prior to commercialization. In general, IDT will be responsible for regulatory submissions
to the Food and Drug Administration (“FDA”) and the manufacturing of certain products. We made an upfront payment to
IDT of $1.0 million and will make additional milestone payments upon FDA approval for commercialization of certain products. Upon
approval, IDT will manufacture some of the products and we will manufacture the other products. We will market and distribute all
the products under our label in the United States, remitting a percentage of profits from sales of the drugs to IDT. We accounted
for this transaction as an asset purchase. The $1.0 million upfront payment was recorded as a marketing and distribution rights
intangible asset and is being amortized in full over its estimated useful life of seven years.
ANI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
7.
|
GOODWILL AND INTANGIBLE ASSETS – continued
|
The components of net definite-lived intangible assets
are as follows:
(in thousands)
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
Weighted Average
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Amortization
Period
|
Acquired ANDA intangible assets
|
|
$
|
42,076
|
|
|
$
|
(5,238
|
)
|
|
$
|
42,076
|
|
|
$
|
(4,287
|
)
|
|
10.0 years
|
NDAs and product rights
|
|
|
108,761
|
|
|
|
(8,545
|
)
|
|
|
33,422
|
|
|
|
(5,754
|
)
|
|
10.1 years
|
Marketing and distribution rights
|
|
|
11,042
|
|
|
|
(710
|
)
|
|
|
1,000
|
|
|
|
(60
|
)
|
|
4.7 years
|
|
|
$
|
161,879
|
|
|
$
|
(14,493
|
)
|
|
$
|
76,498
|
|
|
$
|
(10,101
|
)
|
|
|
Definite-lived intangible assets are stated at cost,
net of amortization using the straight line method over the expected useful lives of the intangible assets. Amortization expense
was $4.4 million and $1.2 million for the three months ended March 31, 2016 and 2015, respectively.
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, 2016 and 2015 and therefore no impairment loss was recognized in the three
months ended March 31, 2016 or 2015.
Expected future amortization expense is as follows:
(in thousands)
|
|
|
|
|
2016 (remainder of the year)
|
|
$
|
13,178
|
|
2017
|
|
|
17,394
|
|
2018
|
|
|
17,039
|
|
2019
|
|
|
17,039
|
|
2020
|
|
|
16,557
|
|
2021 and thereafter
|
|
|
66,179
|
|
Total
|
|
$
|
147,386
|
|
8.
|
STOCK-BASED COMPENSATION
|
All equity-based service awards are granted under
the ANI Pharmaceuticals, Inc. Amended and Restated 2008 Stock Incentive Plan (the “2008 Plan”). As of March 31, 2016,
0.5 million shares of our common stock remained available for issuance under the 2008 Plan.
The following table summarizes stock-based
compensation expense, net of forfeitures, included in our accompanying unaudited interim condensed consolidated statements of
earnings:
(in thousands)
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cost of sales
|
|
$
|
(10
|
)
|
|
$
|
17
|
|
Research and development
|
|
$
|
27
|
|
|
$
|
16
|
|
Selling, general, and administrative
|
|
$
|
1,088
|
|
|
$
|
536
|
|
ANI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8.
|
STOCK-BASED COMPENSATION – continued
|
A summary of stock option and restricted stock activity
under the Plan during the three months ended March 31, 2016 and 2015 is presented below:
(in thousands)
|
|
Options
|
|
|
RSAs
|
|
Outstanding December 31, 2014
|
|
|
458
|
|
|
|
63
|
|
Granted
|
|
|
50
|
|
|
|
-
|
|
Options Exercised/RSAs Vested
|
|
|
(2
|
)
|
|
|
-
|
|
Forfeited
|
|
|
(53
|
)
|
|
|
(3
|
)
|
Outstanding March 31, 2015
|
|
|
453
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2015
|
|
|
474
|
|
|
|
63
|
|
Granted
|
|
|
10
|
|
|
|
-
|
|
Options Exercised/RSAs Vested
|
|
|
(22
|
)
|
|
|
-
|
|
Forfeited
|
|
|
(7
|
)
|
|
|
-
|
|
Outstanding March 31, 2016
|
|
|
455
|
|
|
|
63
|
|
Stock Repurchase Program
In October 2015, our Board of Directors authorized
a program to repurchase up to $25.0 million of our outstanding common stock through December 31, 2016. The authorization allows
for repurchases to be conducted through open market or privately negotiated transactions. Shares acquired under the stock repurchase
program are returned to the status of authorized but unissued shares of common stock. The stock repurchase program may be suspended,
modified, or discontinued at any time at our discretion.
In January 2016, we purchased 65 thousand shares
under the stock repurchase program for $2.5 million.
Warrants
No warrants to purchase shares of common stock were
granted, exercised, or expired unexercised during the three month periods ended March 31, 2016 and 2015.
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. As of both March 31, 2016 and December 31, 2015, we had provided a valuation allowance against certain state net operating
loss (“NOL”) carryforwards of approximately $0.1 million. 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 method.
ANI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10.
|
INCOME TAXES – continued
|
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 consolidated financial statements. We are subject to taxation in various
jurisdictions and all of our income tax returns remain subject to examination by tax authorities 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 such amounts accrued as of March 31, 2016 and December 31, 2015.
We have elected to exclude the impacts from significant
pre-tax non-recognized subsequent events from our estimated annual effective rate. The utilization of our NOL carryforwards will
be limited in future years as prescribed by Section 382 of the U.S. Internal Revenue Code.
The effective tax rate for the three month
period ended March 31, 2016 was 53.4% of pre-tax income reported in the period, calculated based on the estimated annual
effective rate anticipated for the year ending December 31, 2016. The effective tax rate for the period was primarily driven
by estimated temporary and permanent differences, as well as the impact of current quarter exercises of incentive stock
options and disqualifying dispositions of incentive stock options. For the comparable three month period ended March 31,
2015, the effective tax rates was 36.8% of pre-tax income reported in the period, respectively, calculated based on the
estimated annual effective rate anticipated for the year ended December 31, 2015.
11.
|
COMMITMENTS AND CONTINGENCIES
|
Asset Acquisition of New Drug Applications
In March 2016, we entered into an asset purchase
agreement with Cranford Pharmaceuticals, LLC to purchase the rights, title, and interest in the NDA for Inderal LA, as well as
certain documentation, trademark rights, and finished goods for $60.0 million upon closing and milestone payments based on future
gross profits from sales of products under the NDA. The asset acquisition closed in April 2016 (Note 13). In addition, at closing,
we transferred $5.0 million to an escrow account as security for future milestone payments.
Operating Leases
We lease equipment under operating leases that
expire in September 2018 and February 2021. We also lease office space under operating leases that expire in September 2018 and
April 2021. Future minimum lease payments due under these leases total $0.4 million as of March 31, 2016.
Rent expense for the three months ended March 31,
2016 and 2015 totaled $19 thousand and $18 thousand, respectively.
Government Regulation
Our products and facilities are subject to regulation
by a number of federal and state governmental agencies. The 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 NDAs or ANDAs. During the three months ended March
31, 2016 and 2015, net revenues for these products totaled $9.0 million and $10.3 million, respectively.
ANI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
11.
|
COMMITMENTS AND CONTINGENCIES – continued
|
The FDA's policy with respect to the continued marketing
of unapproved products is stated in the FDA's September 2011 Compliance Policy Guide Sec. 440.100 titled “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
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 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 each of the three months ended March 31, 2016 and 2015 were $0.3
million.
We receive royalties on the net sales of a group
of contract-manufactured products, which are marketed by the contract customer without an 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 months ended March 31, 2016 and 2015
were $0.1 million.
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. While we cannot predict the outcome of the lawsuit at this time, we 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 ANI, are facing allegations from plaintiffs in various states, including California, New Jersey,
and Pennsylvania, 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. 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 that we manufactured
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.
ANI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
11.
|
COMMITMENTS AND CONTINGENCIES – continued
|
At the present time, we are unable to assess the
likely outcome of the cases in the remaining states. Our insurance company has assumed the defense of this matter. We cannot provide
assurances that the outcome of these matters will not have an adverse effect on our business, financial condition, and operating
results. Furthermore, like all pharmaceutical manufacturers, we may be exposed to other product liability claims in the future,
which could further limit our coverage under future insurance policies or cause those policies to become more expensive, which
could harm our business, financial condition, and operating results.
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.
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.
While our Notes are recorded on our accompanying unaudited interim condensed consolidated balance sheets at their net carrying
value of $115.2 million as of March 31, 2016, the Notes are being traded on the bond market and their full fair value is $128.5
million, based on their closing price on March 31, 2015, a Level 1 input.
Financial Assets and Liabilities Measured at Fair
Value on a Recurring Basis
Our contingent value rights (“CVRs”),
which were granted coincident with our merger with BioSante, 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 March 31, 2016 and December 31, 2015, and for the three months ended March 31, 2016 and 2015.
The following table presents our financial assets
and liabilities accounted for at fair value on a recurring basis as of March 31, 2016 and December 31, 2015, by level within the
fair value hierarchy:
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
Fair Value at
March 31, 2016
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVRs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Description
|
|
|
Fair Value at
December 31, 2015
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVRs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
ANI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
12.
|
FAIR VALUE DISCLOSURES – continued
|
Financial Assets and Liabilities Measured
at Fair Value on a Non-Recurring Basis
We do not have any financial assets and liabilities
measured at fair value on a non-recurring basis.
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, 2016 and 2015.
Acquired Non-Financial Assets Measured at Fair
Value
In January 2016, we purchased from Merck Sharp &
Dohme B.V. the NDAs for two previously marketed generic drug products for $75.0 million in cash and a percentage of future net
sales from product sales (Note 7). In addition, we capitalized $0.3 million in legal costs directly related to the transaction.
We accounted for this transaction as an asset purchase. In order to determine the fair value of the NDAs, we used the present value
of the estimated cash flows related to the product rights, using a discount rate of 10%. The NDAs will be amortized in full over
their 10 year useful lives, and will be tested for impairment when events or circumstances indicate that the carrying value of
the assets may not be recoverable. No such triggering events were identified during the period from the date of acquisition to
March 31, 2016 and therefore no impairment loss was recognized for the three months ended March 31, 2016.
In January 2016, we purchased from
H2-Pharma, LLC the rights to market, sell, and distribute the authorized generic of Lipofen® and a generic hydrocortisone
rectal cream product, along with the rights to an early-stage development project, for total consideration of $10.0 million
(Note 7). The consideration consisted of a cash payment of $8.8 million and the assumption of $1.2 million in existing
royalties owed on the acquired rights. In addition, we capitalized $42 thousand of costs directly related to the transaction.
We accounted for this transaction as an asset purchase. In order to determine the fair value of the rights for purposes of
purchase price allocation, we used the present value of the estimate cash flows related to the product rights, using a
discount rate of 10%. No value was ascribed to the early-stage development project because the development is still at
the preliminary stage, with no expenses incurred or research performed to date. The marketing and distribution rights will be
amortized in full over their average estimated useful lives of approximately four years, and will be tested for impairment
when events or circumstances indicate that the carrying value of the assets may not be recoverable. No such triggering events
were identified from the date of acquisition and March 31, 2016 and therefore no impairment loss was recognized for the
three months ended March 31, 2016.
In March 2016, we entered into an asset purchase
agreement with Cranford Pharmaceuticals, LLC to purchase the rights, title, and interest in the NDA for Inderal LA, as well as
certain documentation, trademark rights, and finished goods for $60.0 million in cash and milestone payments based on future gross
profits from sales of products under the NDA. The asset acquisition closed in April 2016, and we made the $60.0 million cash payment
using cash on hand. In addition, at closing, we transferred $5.0 million to an escrow account as security for future milestone
payments.