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. Certain prior period information has been reclassified to conform to the current period presentation.
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
have been eliminated in consolidation.
Foreign Currency
The company has subsidiaries located outside of the
U.S. All existing subsidiaries currently conduct substantially all their transactions 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, administrative fees and
rebates, 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,
purchase price allocations, and the depreciable lives of long-lived assets. Because of the uncertainties inherent in such estimates,
actual results may differ from those estimates. Management periodically evaluates estimates used in the preparation of the financial
statements for reasonableness.
Recent Accounting Pronouncements
Recent Accounting Pronouncements Not
Yet Adopted
In August 2016, the Financial Accounting Standards
Board (“FASB”) issued guidance on the classification of certain cash receipts and cash payments in the statement of
cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after
a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life
insurance, and distributions received from equity method investees. The guidance is effective for public business entities for
fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. If an entity adopts the guidance in an interim period, any adjustments should be reflected
as of the beginning of the fiscal year that includes that interim period. The guidance must be adopted on a retrospective basis
and must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable.
We are currently evaluating the impact, if any, that the adoption of this guidance will have on our consolidated statements of
cash flows.
In June 2016, the FASB issued guidance with respect
to measuring credit losses on financial instruments, including trade receivables. The guidance eliminates the probable initial
recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss
estimate can now reflect an entity's current estimate of all future expected credit losses. Under the previous guidance, an entity
only considered past events and current conditions. The guidance is effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. We are currently evaluating the impact, if any, that the adoption
of this guidance will have on our consolidated financial statements.
ANI PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS,
PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS – continued
|
In March 2016, the FASB issued guidance
simplifying the accounting for and financial statement disclosure of stock-based compensation awards. Under the guidance,
companies can 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. Finally, 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. We reported excess tax benefits of $0.3 million and
$0.2 million in the financing activities section of our statements of cash flows for the nine months ended September 30, 2016
and 2015, respectively. 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. Previously-reported excess tax benefits may not
be indicative of future excess tax benefits that will be recorded in our consolidated statements of earnings after the
guidance is adopted, and we are currently evaluating the impact that the adoption of this guidance will have 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 the adoption of this guidance will have on our consolidated
financial statements.
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. In May 2016, the FASB issued guidance rescinding SEC paragraphs related to revenue recognition,
pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force meeting. In May 2016, the FASB also issued
guidance to clarify the implementation guidance on assessing collectability, presentation of sales tax, noncash consideration,
and contracts and contract modifications at transition, with the same effective date. We are currently evaluating the impact, if
any, that the adoption of this guidance will have on our consolidated financial statements.
Recently Adopted Accounting Pronouncements
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 the beginning of the fiscal year
of adoption. We adopted this guidance in the first quarter of 2016, effective as of January 1, 2016, on a modified retrospective
basis. The adoption of this new guidance did not have a material impact on our consolidated financial statements.
ANI PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS,
PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS – continued
|
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.
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 in the first quarter
of 2016, effective as of January 1, 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
in the first quarter of 2016, effective as of January 1, 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. In August 2015, the FASB issued guidance clarifying debt issuance costs related to line-of-credit
arrangements, which guidance states that the SEC does not object to an entity deferring and presenting debt issuance costs as an
asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless
of whether there are any outstanding borrowings on the line-of-credit. 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.
We have evaluated all other issued and unadopted
Accounting Standards Updates and believe the adoption of these standards will not have a material impact on our condensed 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.
We record revenue related to marketing
and distribution agreements with third parties in which we sell products under Abbreviated New Drug Applications (“ANDAs”)
or New Drug Applications (“NDAs”) owned or licensed by these third parties. We have assessed and determined that we
are the principal for sales under each of these marketing and distribution agreements and recognize the revenue on a gross basis.
Under these agreements, we pay these third parties a specified percentage of the gross profit earned on sales of the products.
These profit-sharing percentages are recognized in Cost of sales in our consolidated statements of earnings and are accrued in
Accrued royalties in our consolidated balance sheets until payment has occurred.
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 nine months ended September 30, 2015 and 2016, 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
|
|
|
34,516
|
|
|
|
4,785
|
|
|
|
1,402
|
|
|
|
4,187
|
|
|
|
1,942
|
|
Credits Taken Against Reserve
|
|
|
(32,973
|
)
|
|
|
(2,621
|
)
|
|
|
(958
|
)
|
|
|
(4,570
|
)
|
|
|
(1,813
|
)
|
Balance at September 30, 2015
|
|
$
|
8,408
|
|
|
$
|
4,428
|
|
|
$
|
1,889
|
|
|
$
|
1,104
|
|
|
$
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
11,381
|
|
|
$
|
4,631
|
|
|
$
|
2,648
|
|
|
$
|
1,653
|
|
|
$
|
674
|
|
Accruals/Adjustments
|
|
|
74,373
|
|
|
|
8,013
|
|
|
|
5,840
|
|
|
|
8,559
|
|
|
|
3,743
|
|
Credits Taken Against Reserve
|
|
|
(67,449
|
)
|
|
|
(6,193
|
)
|
|
|
(4,389
|
)
|
|
|
(7,225
|
)
|
|
|
(3,023
|
)
|
Balance at September 30, 2016
|
|
$
|
18,305
|
|
|
$
|
6,451
|
|
|
$
|
4,099
|
|
|
$
|
2,987
|
|
|
$
|
1,394
|
|
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 months ended September 30, 2016,
three customers represented 31%, 18%, and 17% of net revenues, respectively. During the nine months ended September 30, 2016,
these same three customers represented 27%, 21%, and 17% of net revenues, respectively, and accounts receivable from these customers
totaled 72% of accounts receivable, net as of September 30, 2016. During the three months ended September 30, 2015, four customers
represented 25%, 19%, 17%, and 11% of net revenues, respectively. During the nine months ended September 30, 2015, these same
four customers represented 21%, 21%, 19%, and 14% 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)
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Principal amount
|
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Unamortized debt discount
|
|
|
(22,269
|
)
|
|
|
(27,016
|
)
|
Deferred financing costs
|
|
|
(2,674
|
)
|
|
|
(3,307
|
)
|
Net carrying value
|
|
$
|
118,807
|
|
|
$
|
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 September 30, 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 and nine months ended September 30, 2016 and 2015:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(in thousands)
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
Contractual coupon
|
|
$
|
1,078
|
|
|
$
|
1,078
|
|
|
$
|
3,234
|
|
|
$
|
3,234
|
|
Amortization of debt discount
|
|
|
1,604
|
|
|
|
1,521
|
|
|
|
4,748
|
|
|
|
4,502
|
|
Amortization of finance fees
|
|
|
211
|
|
|
|
211
|
|
|
|
633
|
|
|
|
633
|
|
Capitalized interest
|
|
|
(58
|
)
|
|
|
(11
|
)
|
|
|
(158
|
)
|
|
|
(26
|
)
|
|
|
$
|
2,835
|
|
|
$
|
2,799
|
|
|
$
|
8,457
|
|
|
$
|
8,343
|
|
As of September 30, 2016, the effective interest
rate on the Notes was 7.8%, on an annualized basis.
Line of Credit
In May 2016, we entered into
a credit arrangement (the “Line of Credit”) with Citizens Bank Capital, a division of Citizens Asset Finance, Inc.
(the “Citizens Agreement”). The Citizens Agreement provides for a $30.0 million asset-based revolving credit loan
facility, with availability subject to a borrowing base consisting of eligible accounts receivable and inventory and the satisfaction
of conditions precedent specified in the Citizens Agreement. The Citizens Agreement provides for an accordion feature, whereby
we may increase the revolving commitment up to an additional $10.0 million subject to certain terms and conditions. The Citizens
Agreement matures on May 12, 2019, at which time all amounts outstanding will be due and payable. Borrowings under the Citizens
Agreement may be used for general corporate purposes, including financing possible future acquisitions and funding working capital.
Amounts drawn bear an interest rate equal to, at our option, either a LIBOR rate plus 1.25%, 1.50%, or 1.75% per annum, depending
upon availability under the Citizens Agreement, or an alternative base rate plus either 0.25%, 0.50%, or 0.75% per annum, depending
upon availability under the Citizens Agreement. We incur a commitment fee on undrawn amounts equal to 0.25% per annum.
The Citizens Agreement is secured
by a lien on substantially all of ANI Pharmaceutical Inc.’s and its principal domestic subsidiary’s assets and any
future domestic subsidiary guarantors’ assets. The Citizens Agreement includes covenants, subject to certain exceptions,
including covenants that restrict our ability to incur additional indebtedness, acquire or dispose of assets, and make and incur
capital expenditures. The Citizens Agreement also imposes a financial covenant requiring compliance with a minimum fixed charge
coverage ratio of 1.10 to 1.00 during certain covenant testing that is triggered if availability under the Citizens Agreement
is below the greater of 12.5% of the revolving commitment and $3.75 million for three consecutive business days.
As of September 30, 2016, we
had no outstanding balance on the Line of Credit. In the second quarter of 2016, we deferred $0.3 million of debt issuance costs
related to the Line of Credit, which will be amortized over the three year life of the Line of Credit. The $0.3 million of deferred
debt issuance costs are included in prepaid expenses and other current assets in the accompanying unaudited interim condensed consolidated
balance sheet at September 30, 2016. During the period from when we entered into the Line of Credit through September 30, 2016,
we recorded $41 thousand of interest expense related to the Line of Credit.
ANI PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
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,
shares to be purchased under our Employee Stock Purchase Plan (“ESPP”), 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.
Earnings per share for the three and nine months
ended September 30, 2016 and 2015 are calculated for basic and diluted earnings per share as follows:
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
(in thousands, except per share amounts)
|
|
Three Months Ended
September 30,
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income
|
|
$
|
2,543
|
|
|
$
|
4,559
|
|
|
$
|
2,543
|
|
|
$
|
4,559
|
|
|
$
|
5,014
|
|
|
$
|
12,499
|
|
|
$
|
5,014
|
|
|
$
|
12,499
|
|
Net income allocated to restricted stock
|
|
|
(17
|
)
|
|
|
(30
|
)
|
|
|
(17
|
)
|
|
|
(30
|
)
|
|
|
(34
|
)
|
|
|
(82
|
)
|
|
|
(34
|
)
|
|
|
(82
|
)
|
Net income allocated to common shares
|
|
$
|
2,526
|
|
|
$
|
4,529
|
|
|
$
|
2,526
|
|
|
$
|
4,529
|
|
|
$
|
4,980
|
|
|
$
|
12,417
|
|
|
$
|
4,980
|
|
|
$
|
12,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted-Average Shares Outstanding
|
|
|
11,465
|
|
|
|
11,384
|
|
|
|
11,465
|
|
|
|
11,384
|
|
|
|
11,421
|
|
|
|
11,352
|
|
|
|
11,421
|
|
|
|
11,352
|
|
Dilutive effect of stock options and ESPP
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
207
|
|
Diluted Weighted-Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
11,625
|
|
|
|
11,563
|
|
|
|
|
|
|
|
|
|
|
|
11,552
|
|
|
|
11,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
$
|
0.22
|
|
|
$
|
0.40
|
|
|
$
|
0.22
|
|
|
$
|
0.39
|
|
|
$
|
0.44
|
|
|
$
|
1.09
|
|
|
$
|
0.43
|
|
|
$
|
1.07
|
|
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 for each
of the three month periods ended September 30, 2016 and 2015 and was 4.5 million and 4.6 million for the nine months ended September
30, 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, underlying shares related to out-of-the-money bonds issued as convertible debt, and out-of-the-money
warrants exercisable for common stock.
ANI PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Inventories consist of the following as of:
(in thousands)
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Raw materials
|
|
$
|
14,538
|
|
|
$
|
10,192
|
|
Packaging materials
|
|
|
1,118
|
|
|
|
998
|
|
Work-in-progress
|
|
|
685
|
|
|
|
456
|
|
Finished goods
|
|
|
12,083
|
|
|
|
1,897
|
|
|
|
|
28,424
|
|
|
|
13,543
|
|
Reserve for excess/obsolete inventories
|
|
|
(163
|
)
|
|
|
(156
|
)
|
Inventories, net
|
|
$
|
28,261
|
|
|
$
|
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 September 30, 2016, we purchased approximately 28% of our inventory from one supplier. During the nine months
ended September 30, 2016, we purchased approximately 23% of our inventory, exclusive of inventory acquired in an asset purchase,
from the same supplier. As of September 30, 2016, the amount payable to this supplier was immaterial. During the three months ended
September 30, 2015, we purchased approximately 35% of our inventory from two suppliers. During the nine months ended September
30, 2015, we purchase approximately 44% of our inventory from three suppliers.
|
6.
|
PROPERTY,
PLANT, AND EQUIPMENT
|
Property, plant, and equipment consist of the following
as of:
(in thousands)
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Land
|
|
$
|
87
|
|
|
$
|
87
|
|
Buildings
|
|
|
3,682
|
|
|
|
3,682
|
|
Machinery, furniture, and equipment
|
|
|
7,430
|
|
|
|
5,623
|
|
Construction in progress
|
|
|
3,652
|
|
|
|
2,189
|
|
|
|
|
14,851
|
|
|
|
11,581
|
|
Less: accumulated depreciation
|
|
|
(5,135
|
)
|
|
|
(4,450
|
)
|
Property, Plant, and Equipment, net
|
|
$
|
9,716
|
|
|
$
|
7,131
|
|
Depreciation expense was $0.2 million for each of
the three month periods ended September 30, 2016 and 2015. Depreciation expense was $0.7 million and $0.5 million for the nine
months ended September 30, 2016 and 2015. During the three months ended September 30, 2016 and 2015, there was $58 thousand and
$11 thousand of interest capitalized into construction in progress, respectively. During the nine months ended September 30, 2016
and 2015, there was $0.2 million and $26 thousand of interest capitalized into construction in progress, respectively. Construction
in progress consists of multiple projects, primarily related to new equipment to expand our manufacturing capability as our product
lines continue to grow.
ANI PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
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
st
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 September 30, 2016. No impairment losses were recognized during the three or nine months
ended September 30, 2016 or 2015.
Definite-lived Intangible Assets
Acquisition of Abbreviated New Drug
Applications
In July 2015, we purchased the 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.
Acquisition of New Drug Applications
and Product Rights
In April 2016, we purchased the rights, title, and
interest in the NDA for Inderal LA, as well as certain documentation, trademark rights, and
finished goods from Cranford Pharmaceuticals, LLC for $60.0 million in cash up front and milestone payments based on future gross
profits from sales of products under the NDA. We made the $60.0 million upfront cash payment using cash on hand, capitalized $0.3
million of costs directly related to the transaction, and recognized $3.9 million of minimum milestone payments for a total purchase
price of $64.2 million. We accounted for this transaction as an asset purchase and the resultant $52.4 million NDA asset is being
amortized in full over its estimated useful life of 10 years. The resultant $0.6 million non-compete agreement associated with
the transaction is being amortized in full over its estimated useful life of seven years. Please see Note 12 for further details
regarding the transaction.
In September 2015, we entered into an agreement to
purchase the 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. Please see Note
12 for further details regarding the transaction.
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.
ANI PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
7.
|
GOODWILL
AND INTANGIBLE ASSETS – continued
|
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 Food and Drug Administration (“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 was 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. Please see Note 12 for further details regarding the transaction.
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 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.
The components of net definite-lived intangible assets
are as follows:
(in thousands)
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
Weighted
Average
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Amortization
Period
|
|
Acquired
ANDA intangible assets
|
|
$
|
42,076
|
|
|
$
|
(7,340
|
)
|
|
$
|
42,076
|
|
|
$
|
(4,287
|
)
|
|
|
10.0
years
|
|
NDAs and product rights
|
|
|
161,150
|
|
|
|
(16,548
|
)
|
|
|
33,422
|
|
|
|
(5,754
|
)
|
|
|
10.1
years
|
|
Marketing and distribution
rights
|
|
|
11,042
|
|
|
|
(2,011
|
)
|
|
|
1,000
|
|
|
|
(60
|
)
|
|
|
4.7
years
|
|
Non-compete
agreement
|
|
|
624
|
|
|
|
(44
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
7.0
years
|
|
|
|
$
|
214,892
|
|
|
$
|
(25,943
|
)
|
|
$
|
76,498
|
|
|
$
|
(10,101
|
)
|
|
|
|
|
ANI PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
7.
|
GOODWILL
AND INTANGIBLE ASSETS – continued
|
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 $5.7 million and $1.9 million for the three months ended September 30, 2016 and 2015, respectively. Amortization expense was
$15.8 million and $4.3 million for the nine months ended September 30, 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 and nine months ended September 30, 2016 and 2015 and therefore no impairment loss was recognized
in the three and nine months ended September 30, 2016 or 2015.
Expected future amortization expense is as follows:
(in thousands)
|
|
|
|
|
2016 (remainder of the year)
|
|
$
|
5,725
|
|
2017
|
|
|
22,722
|
|
2018
|
|
|
22,367
|
|
2019
|
|
|
22,367
|
|
2020
|
|
|
21,885
|
|
2021 and thereafter
|
|
|
93,883
|
|
Total
|
|
$
|
188,949
|
|
|
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 September 30,
2016, 0.2 million shares of our common stock remained available for issuance under the 2008 Plan. In addition, in July 2016, we
commenced administration of our ESPP, which was approved by shareholders in our May 25, 2016 annual shareholder meeting. The Board
of Directors and shareholders approved a maximum of 0.2 million shares of common stock, which were reserved and made available
for issuance under the ESPP.
Under the ESPP, participants can purchase shares of our stock
at a 15% discount. No shares have been issued to date. In the three months ended September 30, 2016, we recognized $12 thousand
of stock-based compensation expense related to the ESPP.
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Cost of sales
|
|
$
|
24
|
|
|
$
|
23
|
|
|
$
|
38
|
|
|
$
|
60
|
|
Research and development
|
|
|
25
|
|
|
|
31
|
|
|
|
74
|
|
|
|
80
|
|
Selling, general, and adminstrative
|
|
|
1,316
|
|
|
|
1,066
|
|
|
|
4,575
|
|
|
|
2,577
|
|
|
|
$
|
1,365
|
|
|
$
|
1,120
|
|
|
$
|
4,687
|
|
|
$
|
2,717
|
|
ANI PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
8.
|
STOCK-BASED
COMPENSATION– continued
|
Separation Agreement
On April 26, 2016, we entered into a Separation Agreement
and Release (the “Separation Agreement”) with our former Chief Financial Officer (the “Former Officer”),
who resigned effective May 6, 2016. Under the Separation Agreement, 25,167 stock options previously granted to the Former Officer
vested on May 6, 2016. In addition, 4,050 restricted stock awards and 2,000 stock options previously granted to the Former Officer
will vest on March 15, 2017, subject to certain conditions. These actions were accounted for as a modification of the underlying
awards and the full expense for the modified awards was recorded in the second quarter 2016. In the second quarter of 2016, we
recorded $0.9 million of stock-based compensation expense, net of forfeitures, in relation to the Separation Agreement. In the
second quarter 2016, we recognized $0.4 million of additional expense related to the Separation Agreement and transition that was
not related to stock-based compensation. All expenses related to the Separation Agreement and transition have been recognized in
the second quarter 2016.
A summary of stock option and restricted stock activity
under the Plan during the nine months ended September 30, 2016 and 2015 is presented below:
(in thousands)
|
|
Options
|
|
|
RSAs
|
|
Outstanding December 31, 2014
|
|
|
458
|
|
|
|
63
|
|
Granted
|
|
|
130
|
|
|
|
28
|
|
Options Exercised/RSAs Vested
|
|
|
(81
|
)
|
|
|
(10
|
)
|
Forfeited
|
|
|
(33
|
)
|
|
|
(5
|
)
|
Outstanding September 30, 2015
|
|
|
474
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2015
|
|
|
474
|
|
|
|
63
|
|
Granted
|
|
|
293
|
|
|
|
42
|
|
Options Exercised/RSAs Vested
|
|
|
(120
|
)
|
|
|
(15
|
)
|
Forfeited
|
|
|
(59
|
)
|
|
|
(12
|
)
|
Outstanding September 30, 2016
|
|
|
588
|
|
|
|
78
|
|
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 and nine months ended September 30, 2016. Warrants to purchase 0.1
million and 0.3 million shares of common stock expired unexercised during the three and nine months ended September 30, 2015. No
warrants to purchase shares of common stock were granted or exercised during the three and nine months ended September 30, 2015.
ANI PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
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. The
utilization of our NOL carryforwards will be limited in future years as prescribed by Section 382 of the U.S. Internal Revenue
Code. As of both September 30, 2016 and December 31, 2015, we had provided a valuation allowance against certain state net
operating loss (“NOL”) carryforwards of approximately $0.2 million.
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 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 September 30, 2016 and December 31, 2015. 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 calculate income tax benefits related to stock-based
compensation arrangements using the with and without method.
For interim periods, we recognize an income tax
provision/(benefit) based on our estimated annual effective tax rate expected for the entire year. The interim annual estimated
effective tax rate is based on the statutory tax rates then in effect, as adjusted for estimated changes in temporary and estimated
permanent differences, and excludes certain discreet items whose tax effect is recognized in the interim period in which they
occur. These changes in temporary differences, permanent differences, and discreet items result in variances to the effective
tax rate from period to period. We also have elected to exclude the impacts from significant pre-tax non-recognized subsequent
events from our interim estimated annual effective rate until the period in which they occur. Our estimated annual effective tax
rate changes throughout the year as our on-going estimates of pre-tax income, changes in temporary differences, and permanent
differences are revised, and as discreet items occur.
Our estimated annual effective tax rate was 53.4%
of pre-tax income for the first quarter of 2016, 52.2% of pre-tax income for the second quarter of 2016, 49.6% of pre-tax income
for the third quarter of 2016, and 51.2% of pre-tax income for the nine months ended September 30, 2016. The progressive decrease
in our estimated annual effective tax rate during the first nine months of 2016 was primarily driven by the on-going revisions
discussed above and by the tax effect of discreet items, including changes in our estimated pre-tax income resulting from various
asset acquisitions that occurred during the periods and associated changes to temporary differences arising from those asset acquisitions,
as well as the impact of current period awards of stock-based compensation, stock option exercises, vesting of restricted stock,
and disqualifying dispositions of incentive stock options, all of which impact the estimated annual effective rate in the period
in which they occur.
The effective tax rate for the nine-month period ended September
30, 2015 was 31.4% of pre-tax income reported in the period, calculated based on the estimated annual effective rate anticipated
for the year ending December 31, 2015. The 19.4% effective tax rate for the three-month period ended September 30, 2015 was primarily
driven by on-going revisions to estimated pre-tax income and permanent differences, and also by state income tax rates and the
impact of third quarter 2015 awards of stock-based compensation, stock option exercises, and disqualifying dispositions of incentive
stock options, all of which impact the estimated annual effective rate in the period in which they occur. The difference in effective
tax rate from 2015 to 2016 was due to larger permanent differences, relative to pre-tax income, in 2015 than in 2016.
|
11.
|
COMMITMENTS AND CONTINGENCIES
|
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 September 30, 2016.
ANI PHARMACEUTICALS, INC. and
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
11.
|
COMMITMENTS
AND CONTINGENCIES – continued
|
Rent expense for the three months ended September
30, 2016 and 2015 totaled $22 thousand and $19 thousand, respectively. Rent expense for the nine months ended September 30, 2016
and 2015 totaled $61 thousand and $57 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 (“EEMT”) and Opium Tincture, are marketed without approved NDAs or ANDAs. During the three
months ended September 30, 2016 and 2015, net revenues for these products totaled $8.6 million and $12.5 million,
respectively. During the nine months ended September 30, 2016 and 2015, net revenues for these products totaled $26.6 million
and $33.8 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 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 month periods ended September 30, 2016 and
2015 were $0.3 million. Our contract manufacturing revenues for these unapproved products for each of the nine month periods ended
September 30, 2016 and 2015 were $1.1 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 the three months ended September 30, 2016 and 2015
were $5 thousand and $0.1 million, respectively. Our royalties on the net sales of these unapproved products for the nine months
ended September 30, 2016 and 2015 were $0.2 million and $0.3 million, respectively.
ANI PHARMACEUTICALS, INC. AND SUBSIDIARIES
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. 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.
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 $118.8 million as of September 30, 2016, the Notes are being traded on the bond market and their full fair value is $176.6
million, based on their closing price on September 30, 2016, a Level 1 input.
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 Recurring Basis
Our contingent value rights (“CVRs”),
which were granted coincident with our merger with BioSante and expire in June 2023, 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 September 30, 2016 and December 31, 2015, and for the three and nine months
ended September 30, 2016 and 2015.
The following table presents our financial assets
and liabilities accounted for at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, by level within
the fair value hierarchy:
(in thousands)
Description
|
|
|
Fair Value at
September 30, 2016
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVRs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Description
|
|
|
Fair Value at
December 31, 2015
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVRs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 and
nine months ended September 30, 2016 and 2015.
ANI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
12.
|
FAIR
VALUE DISCLOSURES– continued
|
Acquired Non-Financial Assets Measured at Fair
Value
In April 2016, we purchased the rights, title, and
interest in the NDA for Inderal LA, as well as certain documentation, trademark rights, and finished goods from Cranford Pharmaceuticals,
LLC for $60.0 million in cash and milestone payments based on future gross profits from sales of products under the NDA (Note 7).
In addition, at closing, we transferred $5.0 million to an escrow account as security for future milestone payments. This escrow
account balance is not expected to be released in less than one year and is included in restricted cash in our accompanying unaudited
interim condensed consolidated balance sheet as of September 30, 2016. We made the $60.0 million upfront cash payment using cash
on hand, capitalized $0.3 million of costs directly related to the transaction, and recognized $3.9 million of minimum milestone
payments for a total purchase price of $64.2 million. We accounted for this transaction as an asset purchase. In order to determine
the fair value of the NDA, we used the present value of the estimated cash flows related to the product rights, using a discount
rate of 12%. The $52.4 million NDA will be amortized in full over its 10 year useful life, and will be tested for impairment when
events or circumstances indicate that the carrying value of the asset may not be recoverable. No such triggering events were identified
during the period from the date of acquisition to September 30, 2016 and therefore no impairment loss was recognized for the three
and nine months ended September 30, 2016. We recorded $10.9 million of finished goods. The fair value of the finished goods was
determined based on the estimated sales to be generated from the finished goods, less costs to sell, including a reasonable margin.
We recorded the $3.9 million of minimum milestone payments as accrued royalties. We recorded $0.6 million for the non-compete agreement
associated with the transaction. In order to determine the fair value of the non-compete agreement, we used the probability-weighted
lost cash flows method, using a discount rate of 10%. The non-compete agreement will be amortized in full over its seven year useful
life. We also recorded a $0.3 million prepaid balance related to a partially paid purchase order for inventory.
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
September 30, 2016 and therefore no impairment loss was recognized for the three and nine months ended September 30, 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 to September 30, 2016 and therefore no impairment
loss was recognized for the three and nine months ended September 30, 2016.