1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Business
ANI Pharmaceuticals, Inc. and its consolidated
subsidiaries (together, “ANI,” the “Company,” “we,” “us,” or “our”)
is an integrated specialty pharmaceutical company focused on delivering value to our customers by developing, manufacturing, and
marketing high quality branded and generic prescription pharmaceuticals. ANI was organized as a Delaware corporation in April 2001.
At our two facilities located in Baudette, Minnesota, we manufacture oral solid dose products, as well as liquids and topicals,
controlled substances, and potent products that must be manufactured in a fully-contained environment. We also perform contract
manufacturing for other pharmaceutical companies.
On June 19, 2013, BioSante Pharmaceuticals,
Inc. (“BioSante”) acquired ANIP Acquisition Company (“ANIP”) in an all-stock, tax-free reorganization (the
“Merger”), in which ANIP became a wholly-owned subsidiary of BioSante. BioSante was renamed ANI Pharmaceuticals, Inc.
The Merger was accounted for as a reverse acquisition pursuant to which ANIP was considered the acquiring entity for accounting
purposes. As such, ANIP's historical results of operations replace BioSante's historical results of operations for all periods
prior to the Merger. The results of operations of both companies are included in our consolidated financial statements for all
periods after completion of the Merger.
Our operations are subject to certain risks
and uncertainties including, among others, current and potential competitors with greater resources, dependence on significant
customers, lack of operating history and uncertainty of future profitability, and possible fluctuations in financial results. The
accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates
continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety
of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability
to generate sufficient cash from operations, and potential other funding sources, including cash on hand, to meet our obligations
as they become due. We believe the going-concern basis is appropriate for the accompanying consolidated financial statements based
on our current operating plan and business strategy for the 12 months following the issuance of this report.
Basis of Presentation
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”). Certain prior period information has been reclassified to conform to the current period presentation.
Principles of Consolidation
The consolidated financial statements include
the accounts of ANI Pharmaceuticals, Inc. and its subsidiaries. All intercompany 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 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.
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 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,
government 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 could differ from those estimates.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Comprehensive Income
We have no components of other comprehensive
income and accordingly, no statement of comprehensive income is included in the accompanying consolidated financial statements.
Credit Concentration
Our customers are primarily wholesale distributors,
chain drug stores, group purchasing organizations, and other pharmaceutical companies.
During the year ended December 31,
2016, three customers represented approximately 28%, 22%, and 18% of net revenues, respectively. As of December 31, 2016,
accounts receivable from these customers totaled 83% of net accounts receivable. During the year ended December 31, 2015,
three customers represented approximately 26%, 20%, and 18% of net revenues, respectively. During the year ended December 31,
2014, three customers represented approximately 30%, 25%, and 14% of net revenues, respectively.
Vendor Concentration
We source the raw materials for products,
including active pharmaceutical ingredients (“API”), from both domestic and international suppliers. Generally, only
a single source of API is qualified for use in each product due to the costs and time required to validate a second source of supply.
As a result, we are dependent upon our current vendors to supply reliably the API required for ongoing product manufacturing. During
the year ended December 31, 2016, we purchased approximately 25% of our inventory from one supplier. As of December 31,
2016, amounts payable to this supplier were immaterial. During the year ended December 31, 2015, we purchased approximately
33% of our inventory from two suppliers. During the year ended December 31, 2014, we purchased approximately 42% of our inventory
from two suppliers.
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
consolidated statements of earnings, and are presented as current liabilities or reductions in accounts receivable in the accompanying
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
when risk and title are passed 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. 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.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Cash and Cash Equivalents
We consider all highly liquid instruments
with maturities of three months or less when purchased to be cash equivalents. All interest bearing and non-interest bearing accounts
are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250 thousand. The majority of our cash
balances are in excess of FDIC coverage. We consider this to be a normal business risk.
Accounts Receivable
We extend credit to customers on an unsecured
basis. We use the allowance method to provide for doubtful accounts based on our evaluation of the collectability of accounts receivable,
whereby we provide an allowance for doubtful accounts equal to the estimated uncollectible amounts. Our estimate is based on historical
collection experience and a review of the current status of trade accounts receivable. We determine trade receivables to be delinquent
when greater than 30 days past due. Receivables are written off when it is determined that amounts are uncollectible. We determined
that no allowance for doubtful accounts was necessary as of December 31, 2016 and 2015.
Accruals for Chargebacks, Rebates, Returns, and Other Allowances
Our generic and branded product revenues
are typically subject to agreements with customers allowing chargebacks, government rebates, product returns, administrative fees
and other rebates, and prompt payment discounts. We accrue for these items at the time of sale based on the estimates and methodologies
described below. In the aggregate, these accruals exceed 50% of generic and branded gross product sales, reduce gross revenues
to net revenues in the accompanying consolidated statements of earnings, and are presented as current liabilities or reductions
in accounts receivable in the accompanying consolidated balance sheets. Due to our substantial increase in sales from 2015 to 2016,
our accruals for chargebacks, government rebates, product returns, administrative fees and other rebates, and prompt payment discounts
increased significantly in the year ended December 31, 2016. We anticipate that these accruals will continue to increase in 2017
as we recognize a full year of sales of products launched in 2016, as well as additional products we expect to launch in 2017.
We continually monitor and re-evaluate
the accruals as additional information becomes available, which includes, among other things, trade inventory levels, customer
product mix, products returned by customers, and trends in government rebates experience. 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 or upon issuance of credit to the customer.
Chargebacks
Chargebacks, primarily from wholesalers,
result from arrangements we have with indirect customers establishing prices for products which the indirect customer purchases
through a wholesaler. Alternatively, we may pre-authorize wholesalers to offer specified contract pricing to other indirect customers.
Under either arrangement, we provide a chargeback credit to the wholesaler for any difference between the contracted price with
the indirect customer and the wholesaler's invoice price, typically Wholesale Acquisition Cost ("WAC").
Chargeback credits are calculated as follows:
Prior period chargebacks claimed by wholesalers
are analyzed to determine the actual average selling price ("ASP") for each product. This calculation is performed by
product by wholesaler. ASPs can be affected by several factors such as:
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·
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A change in customer mix
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|
·
|
A change in negotiated terms with customers
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|
·
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A change in the volume of off-contract purchases
|
|
·
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Changes in WAC
|
As necessary, we adjust ASPs based on anticipated
changes in the factors above.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
The difference between ASP and WAC is recorded
as a reduction in both gross revenues in the consolidated statements of earnings and accounts receivable in the consolidated balance
sheets, at the time we recognize revenue from the product sale.
To evaluate the adequacy of our chargeback
accruals, we obtain on-hand inventory counts from the wholesalers. This inventory is multiplied by the chargeback amount, the difference
between ASP and WAC, to arrive at total expected future chargebacks, which is then compared to the chargeback accruals. We continually
monitor chargeback activity and adjust ASPs when we believe that actual selling prices will differ from current ASPs.
Government Rebates
Our government rebates reserve consists
of estimated payments due to governmental agencies for purchases made by third parties under various governmental programs. The
two largest government programs that impact our net revenue and our government rebates reserve are federal and state Medicaid rebate
programs and Medicare.
We participate in certain qualifying federal
and state Medicaid rebate programs whereby discounts and rebates are provided to participating programs after the final dispensing
of the product by a pharmacy to a Medicaid plan participant. Medicaid rebates are typically billed up to 120 days after the
product is shipped. Medicaid rebate amounts per product unit are established by law, based on the Average Manufacturer Price (“AMP”),
which is reported on a monthly and quarterly basis, and, in the case of branded products, best price, which is reported on a quarterly
basis. Our Medicaid reserves are based on expected claims from state Medicaid programs. Estimates for expected claims are driven
by patient usage, sales mix, calculated AMP or best price, as well as inventory in the distribution channel that will be subject
to a Medicaid rebate. As a result of the delay between selling the products and rebate billing, our Medicaid rebate reserve includes
both an estimate of outstanding claims for end-customer sales that have occurred but for which the related claim has not been billed,
as well as an estimate for future claims that will be made when inventory in the distribution channel is sold through to plan participants.
Many of our products are also covered under
Medicare. We, like all pharmaceutical companies, must provide a discount for any products sold under NDAs to Medicare Part D participants.
This applies to all products sold under NDAs, regardless of whether the products are marketed as branded or generic. Our estimates
for these discounts are based on historical experience with Medicare rebates for our products. While such experience has allowed
for reasonable estimations in the past, history may not always be an accurate indicator of future rebates. Medicare rebates
are typically billed up to 120 days after the product is shipped. As a result of the delay between selling the products and
rebate billing, our Medicare rebate reserve includes both an estimate of outstanding claims for end-customer sales that have occurred
but for which the related claim has not been billed, as well as an estimate for future claims that will be made when inventory
in the distribution channel is sold through to Medicare Part D participants.
To evaluate the adequacy of our government
rebate reserves, we review the reserves on a quarterly basis against actual claims data to ensure the liability is fairly stated.
We continually monitor our government rebate reserve and adjust our estimates if we believe that actual government rebates may
differ from our established accruals. Accruals for government rebates are recorded as a reduction to gross revenues in the consolidated
statements of earnings and as an increase to accrued government rebates in the consolidated balance sheets.
Returns
We maintain a return policy that allows
customers to return product within a specified period prior to and subsequent to the expiration date. Generally, product may be
returned for a period beginning six months prior to its expiration date to up to one year after its expiration date. Our product
returns are settled through the issuance of a credit to the customer. Our estimate for returns is based upon historical experience
with actual returns. While such experience has allowed for reasonable estimation in the past, history may not always be an accurate
indicator of future returns. We continually monitor our estimates for returns and make adjustments when we believe that actual
product returns may differ from the established accruals. Accruals for returns are recorded as a reduction to gross revenues in
the consolidated statements of earnings and as an increase to the return goods reserve in the consolidated balance sheets.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Administrative Fees and Other Rebates
Administrative fees or rebates are offered
to wholesalers, group purchasing organizations and indirect customers. We accrue for fees and rebates, by product by wholesaler,
at the time of sale based on contracted rates and ASPs.
To evaluate the adequacy of our administrative
fee accruals, we obtain on-hand inventory counts from the wholesalers. This inventory is multiplied by the ASPs to arrive at total
expected future sales, which is then multiplied by contracted rates. The result is then compared to the administrative fee accruals.
We continually monitor administrative fee activity and adjust our accruals when we believe that actual administrative fees will
differ from the accruals. Accruals for administrative fees and other rebates are recorded as a reduction in both gross revenues
in the consolidated statements of earnings and accounts receivable in the consolidated balance sheets.
Prompt Payment Discounts
We often grant sales discounts for
prompt payment. The reserve for prompt payment discounts is based on invoices outstanding. We assume, based on past experience,
that all available discounts will be taken. Accruals for prompt payment discounts are recorded as a reduction in both gross revenues
in the consolidated statements of earnings and accounts receivable in the consolidated balance sheets.
The following table summarizes activity
in the consolidated balance sheets for accruals and allowances for the years ended December 31, 2016, 2015, and 2014:
(in thousands)
|
|
Accruals for Chargebacks, Returns, and Other Allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
Prompt
|
|
|
|
|
|
|
Government
|
|
|
|
|
|
Fees and Other
|
|
|
Payment
|
|
|
|
Chargebacks
|
|
|
Rebates
|
|
|
Returns
|
|
|
Rebates
|
|
|
Discounts
|
|
Balance at December 31, 2013
|
|
$
|
4,076
|
|
|
$
|
253
|
|
|
$
|
736
|
|
|
$
|
735
|
|
|
$
|
332
|
|
Accruals/Adjustments
|
|
|
35,740
|
|
|
|
2,692
|
|
|
|
1,493
|
|
|
|
5,212
|
|
|
|
1,820
|
|
Credits Taken Against Reserve
|
|
|
(32,951
|
)
|
|
|
(681
|
)
|
|
|
(784
|
)
|
|
|
(4,460
|
)
|
|
|
(1,681
|
)
|
Balance at December 31, 2014
|
|
$
|
6,865
|
|
|
$
|
2,264
|
|
|
$
|
1,445
|
|
|
$
|
1,487
|
|
|
$
|
471
|
|
Accruals/Adjustments
|
|
|
51,933
|
|
|
|
6,719
|
|
|
|
2,808
|
|
|
|
6,136
|
|
|
|
2,744
|
|
Credits Taken Against Reserve
|
|
|
(47,417
|
)
|
|
|
(4,352
|
)
|
|
|
(1,605
|
)
|
|
|
(5,970
|
)
|
|
|
(2,541
|
)
|
Balance at December 31, 2015
|
|
$
|
11,381
|
|
|
$
|
4,631
|
|
|
$
|
2,648
|
|
|
$
|
1,653
|
|
|
$
|
674
|
|
Accruals/Adjustments
|
|
|
114,433
|
|
|
|
9,671
|
|
|
|
10,271
|
|
|
|
12,747
|
|
|
|
5,517
|
|
Credits Taken Against Reserve
|
|
|
(99,029
|
)
|
|
|
(8,411
|
)
|
|
|
(7,163
|
)
|
|
|
(10,850
|
)
|
|
|
(4,637
|
)
|
Balance at December 31, 2016
|
|
$
|
26,785
|
|
|
$
|
5,891
|
|
|
$
|
5,756
|
|
|
$
|
3,550
|
|
|
$
|
1,554
|
|
Inventories
Inventories consist of raw materials, packaging materials, work-in-progress,
and finished goods. Inventories are stated at the lower of standard cost or net realizable value. We periodically review and adjust
standard costs, which generally approximate weighted average cost.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Property and Equipment
Property and equipment are recorded at
cost. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is recorded on a straight-line
basis over estimated useful lives as follows:
Buildings and improvements
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20 - 40 years
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|
Machinery, furniture, and equipment
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3 - 10 years
|
|
Construction in progress consists of multiple
projects, primarily related to new equipment to expand our manufacturing capability as our product lines continue to grow. Construction
in progress includes the cost of construction and other direct costs attributable to the construction, along with capitalized interest.
Depreciation is not recorded on construction in progress until such time as the assets are placed in service.
We review property and equipment for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. No impairment loss related to
property and equipment was recognized during the years ended December 31, 2016, 2015, and 2014. Assets held for disposal are reportable
at the lower of the carrying amount or fair value, less costs to sell. No assets were held for disposal as of December 31,
2016 and 2015.
Intangible Assets
Intangible assets were acquired as part
of the Merger and several asset purchase transactions. These assets include ANDAs for a total of 54 previously marketed generic
products we acquired in 2014 and 2015, NDAs and product rights for our branded products Lithobid, Vancocin, Inderal LA, and Corticotropin,
an NDA for male testosterone gel, acquired marketing and distribution rights, a non-compete agreement, and
fully amortized product rights for Reglan and a generic product. These intangible assets were originally
recorded at fair value for business combinations and at relative fair value based on the purchase price for asset acquisitions
and are stated net of accumulated amortization.
The ANDAs, NDAs and product rights,
marketing and distribution rights, and non-compete agreement are amortized over their remaining estimated useful lives,
ranging from two to 10 years, based on the straight-line method. Management reviews definite-lived intangible assets for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, in a manner
similar to that for property and equipment. We recognized an impairment charge of $6.7 million in relation to our
testosterone gel NDA asset during the year ended December 31, 2016 (Note 5). The testosterone gel NDA asset was classified as
held for sale as of December 31, 2016. No impairment losses related to intangible assets were recognized in the years ended
December 31, 2015 and 2014.
Goodwill
Goodwill relates to the Merger and represents
the excess of the total purchase consideration over the fair value of acquired assets and assumed liabilities, using the purchase
method of accounting. Goodwill is not amortized, but is subject to periodic review for impairment. Goodwill is reviewed annually,
as of October 31, and whenever events or changes in circumstances indicate that the carrying amount of the goodwill might
not be recoverable. We perform our review of goodwill on our one reporting unit.
Before employing detailed impairment testing methodologies,
we first evaluate the likelihood of impairment by considering qualitative factors relevant to our reporting unit. When performing
the qualitative assessment, we evaluate events and circumstances that would affect the significant inputs used to determine the
fair value of the goodwill. Events and circumstances evaluated include: macroeconomic conditions that could affect us, industry
and market considerations for the generic pharmaceutical industry that could affect us, cost factors that could affect our performance,
our financial performance (including share price), and consideration of any company-specific events that could negatively affect
us, our business, or the fair value of our business. If we determine that it is more likely than not that goodwill is impaired,
we will then apply detailed testing methodologies. Otherwise, we will conclude that no impairment has occurred.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
1. DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Detailed impairment testing involves comparing
the fair value of our one reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant
would be willing to pay in a potential sale of ANI. If the fair value exceeds carrying value, then it is concluded that no goodwill
impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure
possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and intangible assets and liabilities
of our one reporting unit as if it had been acquired in a business combination. Then, the implied fair value of our one reporting
unit's goodwill is compared to the carrying value of that goodwill. If the carrying value of our one reporting unit's goodwill
exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed
the carrying value. No impairment loss related to goodwill was recognized in the years ended December 31, 2016, 2015, and 2014.
Collaborative Arrangements
At times, we have entered into arrangements
with various commercial partners to further business opportunities. In collaborative arrangements such as these, when we are actively
involved and exposed to the risks and rewards of the activities and are determined to be the principal participant in the collaboration,
we classify third party costs incurred and revenues in the consolidated statements of earnings on a gross basis. Otherwise, third
party revenues and costs generated by collaborative arrangements are presented on a net basis. Payments between us and the other
participants are recorded and classified based on the nature of the payments.
Royalties
We have entered profit-sharing arrangements
with third parties in which we sell products under ANDAs or NDAs owned or licensed by these third parties. 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 recorded in cost of sales in our consolidated statements of earnings when the associated revenue is recognized and are recorded
in accrued royalties in our consolidated balance sheets when the associated revenue is recognized and until payment has occurred.
Research and Development Expenses
Research and development costs are expensed
as incurred and primarily consist of expenses relating to product development. Research and development costs totaled $2.9 million,
$2.9 million, and $2.7 million for the years ended December 31, 2016, 2015, and 2014, respectively.
Stock-Based Compensation
We have a stock-based compensation plan
that includes stock options and restricted stock, which are awarded in exchange for employee and non-employee director services.
Stock-based compensation cost for stock options is determined at the grant date using an option pricing model and stock-based compensation
cost for restricted stock is based on the closing market price of the stock at the grant date. The value of the award that is ultimately
expected to vest is recognized as expense on a straight-line basis over the employee's requisite service period. In addition, in
July 2016, we commenced administration of our Employee Stock Purchase Plan (“ESPP”). We recognize the estimated fair
value of stock-based compensation awards and classify the expense where the underlying salaries are classified. We incurred $6.1
million, $3.9 million, and $3.4 million of non-cash, stock-based compensation cost for the years ended December 31, 2016, 2015,
and 2014, respectively, of which $25 thousand of the 2016 expense related to the ESPP.
Valuation of stock awards requires us to
make assumptions and to apply judgment to determine the fair value of the awards. These assumptions and judgments include estimating
the future volatility of our stock price, dividend yields, and future employee stock option exercise behaviors. Changes in these
assumptions can affect the fair value estimate.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
1. DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
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. We calculate income
tax benefits related to stock-based compensation arrangements using the with and without method.
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.
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 to the consolidated financial statements.
We are subject to taxation in various jurisdictions in the U.S. and remain subject to examination by taxing jurisdictions for the
years 1998 and all subsequent periods due to the availability of net operating loss 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 December 31,
2016, 2015, and 2014.
We consider potential tax effects resulting
from discontinued operations and record intra-period tax allocations, when those effects are deemed material.
Earnings per Share
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 ESPP, unvested restricted stock awards, stock purchase warrants, and
any conversion gain on the Notes, 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 and certain
of our outstanding warrants 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 (but not
net loss) attributable to the unvested restricted shares and to the participating warrants, 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 our 3.0% Convertible Senior Notes
due December 1, 2019 (the “Notes,” Note 2) 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 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 the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
1. DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The numerator for earnings per share for
the years ended December 31, 2016, 2015, and 2014 are calculated for basic and diluted earnings per share as follows:
|
|
Basic
|
|
|
Diluted
|
|
(in thousands, except per share amounts)
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net income
|
|
$
|
3,934
|
|
|
$
|
15,375
|
|
|
$
|
28,747
|
|
|
$
|
3,934
|
|
|
$
|
15,375
|
|
|
$
|
28,747
|
|
Net income allocated to restricted stock
|
|
|
(21
|
)
|
|
|
(85
|
)
|
|
|
(159
|
)
|
|
|
(21
|
)
|
|
|
(84
|
)
|
|
|
(158
|
)
|
Net income allocated to common shares
|
|
$
|
3,913
|
|
|
$
|
15,290
|
|
|
$
|
28,588
|
|
|
$
|
3,913
|
|
|
$
|
15,291
|
|
|
$
|
28,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted-Average Shares Outstanding
|
|
|
11,445
|
|
|
|
11,370
|
|
|
|
10,941
|
|
|
|
11,445
|
|
|
|
11,370
|
|
|
|
10,941
|
|
Dilutive effect of stock options and ESPP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
187
|
|
|
|
71
|
|
Dilutive effect of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41
|
|
Diluted Weighted-Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,573
|
|
|
|
11,557
|
|
|
|
11,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
0.34
|
|
|
$
|
1.34
|
|
|
$
|
2.61
|
|
|
$
|
0.34
|
|
|
$
|
1.32
|
|
|
$
|
2.59
|
|
The number of anti-dilutive shares, which have been excluded
from the computation of diluted earnings per share, including the shares underlying the Notes, were 4.5 million, 4.5 million, and
4.7 million for the years ended December 31, 2016, 2015, and 2014, 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.
Fair Value of Financial Instruments
Our consolidated balance sheets include
various financial instruments (primarily cash and cash equivalents, prepaid expenses, accounts receivable, accounts payable, accrued
expenses, and other current liabilities) that are carried at cost and that approximate fair value. The fair value of our long-term
indebtedness is estimated based on the quoted prices for the same or similar issues, or on the current rates we have been offered
for debt of the same remaining maturities. 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 which prioritizes and ranks the level of observability of inputs used in measuring fair value.
These tiers include:
|
·
|
Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
|
|
|
|
|
·
|
Level 2—Observable market-based inputs other than quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
·
|
Level 3—Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
|
See Note 6 for additional information
regarding fair value.
Segment Information
We currently operate in a single
reportable segment.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Recent Accounting Pronouncements
Recent Accounting Pronouncements Not Yet Adopted
In January 2017, the Financial Accounting
Standards Board (“FASB”) issued guidance to simplify the measurement of goodwill. The guidance eliminates Step 2 from
the goodwill impairment test. Instead, under the amendments in this guidance, an entity should perform its annual or interim goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment
charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however the loss recognized should
not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects
from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. The
guidance also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative
assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity is required to
disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. The guidance
is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within
those fiscal years, and early adoption is permitted for interim or annual goodwill impairment tests performed for testing dates
after January 1, 2017. The guidance must be adopted on a prospective basis. We are currently evaluating the impact, if any, that
the adoption of this guidance will have on our consolidated financial statements.
In January 2017, the FASB
issued guidance clarifying the definition of a business with the objective of adding guidance to assist entities with
evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The guidance
provides a screen to determine when an integrated set of assets and activities is not a business, provides a framework to
assist entities in evaluating whether both an input and substantive process are present, and narrows the definition of the
term output. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years, and early adoption is permitted. The guidance must be adopted on a prospective
basis. We are currently evaluating the impact, if any, that the adoption of this guidance will have on our consolidated
financial statements.
In November 2016, the FASB issued guidance to reduce diversity
in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The
revised guidance requires that amounts generally described as restricted cash and restricted cash equivalents be included in with
cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash
flows. The guidance is effective for the fiscal years beginning after December 15, 2017, including 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. We will adopt this guidance as of January 1, 2017, on a retrospective basis, and all
periods will be presented under this guidance. The adoption of this new guidance will result in the inclusion of our $5.0 million
of restricted cash in the cash and cash equivalents balance in our consolidated statement of cash flows for all reporting periods
presented in 2017 and onward.
In August 2016, the 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. The adoption of certain amendments of this guidance must be applied
on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. We currently
expect that the adoption of this guidance will likely change the way we assess the collectability of our receivables and recoverability
of other financial instruments. We have not yet begun to evaluate the specific impacts of this guidance nor have we determined
the manner in which we will adopt this guidance.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
In March 2016, the FASB issued
guidance simplifying the accounting for and financial statement disclosure of stock-based compensation awards, consisting of
changes in the accounting for excess tax benefits and tax deficiencies, and changes in the accounting for forfeitures
associated with share-based awards, among other things. We will adopt this guidance as of January 1, 2017. Pursuant to the
adoption requirements for excess tax benefits and tax deficiencies, we will no longer recognize excess tax benefits or tax
deficiencies in APIC; rather, we will recognize them prospectively as a component of our current period income tax expense.
We will not reverse our current APIC pool, which was $3.1 million as of December 31, 2016, and we will present the impact of
classifying excess tax benefits as an operating activity in the Statement of Cash Flows on a prospective basis. Pursuant to
the adoption requirements for forfeitures, we will account for forfeitures as they occur rather than using an estimated
forfeiture rate; we estimate that this change in accounting will result in a $14 thousand cumulative-effect adjustment
increasing our accumulated deficit as of January 1, 2017. The adoption of the remaining amendments is not expected to 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 the adoption of this guidance will have
on our consolidated financial statements. We currently expect that the adoption of this guidance will likely change the way we
account for our operating leases and will likely result in recording the future benefits of those leases and the related minimum
lease payments on our consolidated balance sheets. We have not yet begun to evaluate the specific impacts of 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. 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 do not intend to adopt the guidance early.
We expect that the adoption of this guidance will likely change the way we recognize revenue generated under customer
contracts. However, we are currently reviewing our contracts with customers to determine if the accounting for these contracts
will be impacted by the adoption of this guidance and, if so, if that impact will be material to our consolidated financial statements.
We have not yet determined the manner in which we will adopt this guidance.
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 were effective for
reporting periods beginning after December 15, 2016, and early adoption was permitted. Entities were 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 the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (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 was effective for reporting periods beginning after December 15, 2016. The guidance was required to
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 was effective for reporting
periods beginning after December 15, 2015, and could 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 August 2014,
the
FASB
issued guidance requiring management to evaluate on a regular basis whether any conditions or events have arisen that
could raise substantial doubt about the entity’s ability to continue as a going concern. The guidance 1) provides a definition
for the term “substantial doubt,” 2) requires an evaluation every reporting period, interim periods included, 3) provides
principles for considering the mitigating effect of management’s plans to alleviate the substantial doubt, 4) requires certain
disclosures if the substantial doubt is alleviated as a result of management’s plans, 5) requires an express statement, as
well as other disclosures, if the substantial doubt is not alleviated, and 6) requires an assessment period of one year from the
date the financial statements are issued. The guidance was effective for reporting periods ending after December 15, 2016, and
early adoption was permitted. We adopted this guidance effective January 1, 2016. The adoption of this guidance did not have a
material impact on our consolidated financial statements.
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 consolidated statements of
earnings, balance sheets, or cash flows.
2. INDEBTEDNESS
Convertible Senior Notes
In December 2014, we issued $143.8 million
of our Notes in a registered public offering. After deducting the underwriting discounts and commissions and other expenses (including
the net cost of the bond hedge and warrant, discussed below), the net proceeds from the offering were approximately $122.6 million.
The Notes pay 3.0% interest semi-annually in arrears on June 1 and December 1 of each year, starting on June 1, 2015, and
are due December 1, 2019. The Notes are convertible into 2,068,792 shares of common stock, based on an initial conversion price
of $69.48 per share.
The Notes are convertible at the option of the holder (i) during
any calendar quarter beginning after March 31, 2015, if the last reported sale price of the common stock for at least 20 trading
days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately
preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day, (ii) during
the five business days after any five consecutive trading day period in which the trading price per $1,000 principal amount of
the Notes for each trading day of such period was less than 98% of the product of the last reported sale price of our common stock
and the conversion rate on each such trading day; and (iii) on or after June 1, 2019 until the second scheduled trading day immediately
preceding the maturity date.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
2. INDEBTEDNESS (Continued)
Upon conversion by the holders, 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. The value of the embedded conversion option was determined based on the
estimated fair value of the debt without the conversion feature, which was determined using market comparables to estimate the
fair value of similar non-convertible debt (Note 6); the debt discount is being amortized as additional non-cash interest expense
using the effective interest method over the term of the Notes.
Offering costs of $5.5 million were allocated
to the debt and equity components in proportion to the allocation of proceeds to the components, as deferred financing costs and
equity issuance costs, respectively. The deferred financing costs of $4.2 million are being amortized as additional non-cash interest
expense using the straight-line method over the term of the debt, since this method was not significantly different from the effective
interest method. Pursuant to guidance issued by the FASB in April 2015, we have classified the deferred financing costs as a direct
deduction to the net carrying value of our Convertible Debt. The $1.3 million portion allocated to equity issuance costs was charged
to APIC.
A portion of the offering proceeds was
used to simultaneously enter into “bond hedge” (or purchased call) and “warrant” (or written call) transactions
with an affiliate of one of the offering underwriters (collectively, the “Call Option Overlay”). We entered into the
Call Option Overlay 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 exercise price of the bond hedge is $69.48 per share,
with an underlying 2,068,792 common shares; the exercise price of the warrant is $96.21 per share of our common stock, also with
an underlying 2,068,792 common shares. Because the bond hedge and warrant are both indexed to our common stock and otherwise would
be classified as equity, we recorded both elements as equity, resulting in a net reduction to APIC of $15.6 million.
The carrying
value of the Notes is as follows as of December 31:
(in thousands)
|
|
2016
|
|
|
2015
|
|
Principal amount
|
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Unamortized debt discount
|
|
|
(20,644
|
)
|
|
|
(27,016
|
)
|
Deferred financing costs
|
|
|
(2,463
|
)
|
|
|
(3,307
|
)
|
Net Carrying value
|
|
$
|
120,643
|
|
|
$
|
113,427
|
|
The following table
sets forth the components of total interest expense related to the Notes recognized in the accompanying consolidated statements
of earnings for the year ended December 31:
(in thousands)
|
|
2016
|
|
|
2015
|
|
Contractual coupon
|
|
$
|
4,312
|
|
|
$
|
4,312
|
|
Amortization of debt discount
|
|
|
6,372
|
|
|
|
6,043
|
|
Amortization of finance fees
|
|
|
844
|
|
|
|
844
|
|
Capitalized interest
|
|
|
(234
|
)
|
|
|
(56
|
)
|
|
|
$
|
11,294
|
|
|
$
|
11,143
|
|
The effective interest
rate on the Notes as of December 31, 2016 and 2015 was 7.9% and 7.8%, respectively, on an annualized basis.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
2. INDEBTEDNESS (Continued)
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 December 31, 2016, we had no outstanding
balance on the Line of Credit. In February 2017, we drew down $30.0 million on the Line of Credit (Note 13). As part of this draw
down, we implemented the accordion feature and increased the Line of Credit to $40.0 million.
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 consolidated balance sheet at December 31, 2016.
During the period from when we entered into the Line of Credit through December 31, 2016, we recorded $65 thousand of interest
expense related to the Line of Credit.
3. INVENTORIES
Inventories consist of the following as
of December 31:
(in thousands)
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
14,138
|
|
|
$
|
10,192
|
|
Packaging materials
|
|
|
930
|
|
|
|
998
|
|
Work-in-progress
|
|
|
477
|
|
|
|
456
|
|
Finished goods
|
|
|
10,812
|
|
|
|
1,897
|
|
|
|
|
26,357
|
|
|
|
13,543
|
|
Reserve for excess/obsolete inventories
|
|
|
(174
|
)
|
|
|
(156
|
)
|
Inventories, net
|
|
$
|
26,183
|
|
|
$
|
13,387
|
|
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
4. PROPERTY, PLANT, AND EQUIPMENT
Property, Plant, and Equipment consist
of the following as of December 31:
(in thousands)
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
160
|
|
|
$
|
87
|
|
Buildings
|
|
|
3,756
|
|
|
|
3,682
|
|
Machinery, furniture, and equipment
|
|
|
8,176
|
|
|
|
5,623
|
|
Construction in progress
|
|
|
4,293
|
|
|
|
2,189
|
|
|
|
|
16,385
|
|
|
|
11,581
|
|
Less: accumulated depreciation
|
|
|
(5,387
|
)
|
|
|
(4,450
|
)
|
Property, Plant, and Equipment, net
|
|
$
|
10,998
|
|
|
$
|
7,131
|
|
Depreciation expense for the years ended
December 31, 2016, 2015, and 2014 totaled $0.9 million, $0.7 million, and $0.6 million, respectively. During the years ended
December 31, 2016 and 2015, there was $0.2 million and $56 thousand of interest capitalized into construction in progress. During
the year ended December 31, 2014, there was no material interest capitalized into construction in progress.
5. INTANGIBLE ASSETS
Goodwill
As a result of the Merger we recorded goodwill
of $1.8 million in our one reporting unit. We assess the recoverability of the carrying value of goodwill on an annual basis as
of October 31 of each year, and whenever events occur or circumstances changes that would, more likely than not, reduce the fair
value of our reporting unit below its carrying value.
For the goodwill impairment analyses performed
at October 31, 2016, 2015, and 2014, we performed qualitative assessments to determine whether it was more likely than not that
our goodwill asset was impaired in order to determine the necessity of performing a quantitative impairment test, under which management
would calculate the asset’s fair value. When performing the qualitative assessments, we evaluated events and circumstances
that would affect the significant inputs used to determine the fair value of the goodwill. Events and circumstances evaluated include:
macroeconomic conditions that could affect us, industry and market considerations for the generic pharmaceutical industry that
could affect us, cost factors that could affect our performance, our financial performance (including share price), and consideration
of any company-specific events that could negatively affect us, our business, or our fair value. Based on our assessments of the
aforementioned factors, it was determined that it was more likely than not that the fair value of our one reporting unit is greater
than its carrying amount as of October 31, 2016, 2015, and 2014, and therefore no quantitative testing for impairment was required.
In addition to the qualitative impairment
analysis performed at October 31, 2016, there were no events or changes in circumstances that could have reduced the fair value
of our reporting unit below its carrying value from October 31, 2016 to December 31, 2016. No impairment loss was recognized during
the years ended December 31, 2016, 2015, and 2014, and the balance of goodwill was $1.8 million as of both December 31, 2016 and
2015.
Definite-lived Intangible Assets
Acquisition of Abbreviated New Drug Applications
In July 2015, we purchased 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.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
5. INTANGIBLE ASSETS (Continued)
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.
On December 26, 2013, we entered into an
agreement to purchase 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. On January 2, 2014, we paid the first installment of $8.5 million to Teva and we paid
the $4.0 million balance on March 6, 2014. 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.
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.
In conjunction with our 2013
merger with BioSante (the “Merger”), we acquired a testosterone gel product that was licensed to Teva
(the “Testosterone Gel NDA”) and this product was assigned an intangible asset value of $10.9 million in
accounting for the Merger. In May 2015, Teva transferred the rights of the product back to ANI. In exchange, 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. We assessed the value of the Testosterone Gel NDA under the new arrangement and determined that the net asset value
was recoverable as of the May 2015 transfer date and subsequent balance sheet dates. We began the commercialization process
for the product during the second half of 2015 and it continued throughout 2016. In late 2016, we determined that the
development and manufacturing costs required to commercialize the product had increased and would pose a significant barrier
to commercializing the product ourselves. Generic competition in the testosterone replacement market had increased
substantially by the end of 2016, leading to significant decreases in pricing for the product. In the fourth quarter,
management began putting forth efforts to sell the Testosterone Gel NDA rather than commercialize it ourselves. As a result
of all these factors, in the fourth quarter of 2016, we determined that the facts and circumstances indicated that the asset
could be impaired. We performed an impairment assessment, which indicated that the fair value of the asset was lower than the
carrying value. We determined the fair value of the Testosterone Gel NDA by using a discounted cash flows model. As a result
of this assessment, we recorded an intangible asset impairment of $6.7 million in the year ended December 31, 2016. We
also determined in the fourth quarter of 2016 that the asset met the criteria for being held for sale. The Testosterone
Gel NDA is now recorded as a short-term asset held for sale in the prepaid expenses and other assets caption in the
accompanying consolidated balance sheets at $0.9 million, which is the fair value of the asset less estimated costs to sell.
We are no longer amortizing the Testosterone Gel NDA.
In August 2014, we entered into an
agreement to purchase (the “Vancocin Purchase Agreement”) the product rights to Vancocin from Shire ViroPharma
Incorporated (“Shire”) 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 (“Noven”) 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.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
5. INTANGIBLE ASSETS (Continued)
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)
|
|
December 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
|
|
|
$
|
(8,390
|
)
|
|
$
|
42,076
|
|
|
$
|
(4,287
|
)
|
|
|
10.0 years
|
|
NDAs and product rights
|
|
|
150,250
|
|
|
|
(17,081
|
)
|
|
|
33,422
|
|
|
|
(5,754
|
)
|
|
|
10
.0
years
|
|
Marketing and distribution rights
|
|
|
11,042
|
|
|
|
(2,662
|
)
|
|
|
1,000
|
|
|
|
(60
|
)
|
|
|
4.7 years
|
|
Non-compete agreement
|
|
|
624
|
|
|
|
(67
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
7.0 years
|
|
|
|
$
|
203,992
|
|
|
$
|
(28,200
|
)
|
|
$
|
76,498
|
|
|
$
|
(10,101
|
)
|
|
|
|
|
Definite-lived intangible assets
are stated at cost, net of accumulated amortization using the straight line method over
the expected useful lives of the intangible assets. Amortization expense was $21.4 million, $6.2 million, and $3.3 million
for the years ended December 31, 2016, 2015, and 2014, 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. We recorded an intangible asset impairment of $6.7 million in the year ended December 31, 2016 in relation
to the Testosterone Gel NDA. The testosterone gel NDA asset was classified as held for sale as of December 31, 2016. No
events or circumstances arose in 2016, 2015, or 2014 that indicated that the carrying value of any of our other
definite-lived intangible assets may not be recoverable. No impairment losses related to intangible assets were recognized in
the years ended December 31, 2015 and 2014.
Expected future amortization expense is
as follows for the years ending December 31:
(in thousands)
|
|
|
|
2017
|
|
$
|
21,731
|
|
2018
|
|
|
21,376
|
|
2019
|
|
|
21,376
|
|
2020
|
|
|
20,894
|
|
2021
|
|
|
19,448
|
|
2022 and thereafter
|
|
|
70,967
|
|
Total
|
|
$
|
175,792
|
|
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
6. 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 which prioritizes and ranks the level of observability
of inputs used in measuring fair value.
Financial Assets and Liabilities Measured at Fair Value on
a Recurring Basis
The inputs used in measuring the fair value
of cash and cash equivalents are considered to be Level 1 in accordance with the three-tier fair value hierarchy. The fair
market values are based on period-end statements supplied by the various banks and brokers that held the majority of our funds.
The fair value of short-term financial instruments (primarily accounts receivable, prepaid expenses, accounts payable, accrued
expenses, and other current liabilities) approximate their carrying values because of their short-term nature. While our Notes
are recorded on our consolidated balance sheets at their net carrying value of $120.6 million as of December 31, 2016, the Notes
are being traded on the bond market and their full fair value is $166.4 million, based on their closing price on December 31, 2016,
a Level 1 input.
Our contingent value rights (“CVRs”),
which were granted coincident with our merger with BioSante and expire in June 2023, are considered to be 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 management’s 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 was immaterial as of December 31, 2016 and 2015. We also determined that the changes in such fair value were
immaterial for the years ended December 31, 2016, 2015, and 2014.
The following table presents our financial
assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2016 and 2015, by level
within the fair value hierarchy:
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Fair Value at
December 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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Financial Liabilities Measured at Fair Value on a Non-Recurring
Basis
In December 2014, we issued $143.8M of
Notes (Note 2). Because we have the option to cash settle the potential conversion of the Notes in cash, we separated the
embedded conversion option feature from the debt feature and account for each component separately, based on the fair value of
the debt component assuming no conversion option. The calculation of the fair value of the debt component required the use of
Level 3 inputs, and was determined by calculating the fair value of similar non-convertible debt, using a theoretical interest
rate of 9%. The theoretical interest rate was determined from market comparables to estimate what the interest rate would have
been if there was no conversion option embedded in the Notes. The fair value of the embedded conversion option was calculated
using the residual value method and is classified as equity.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
6. FAIR VALUE DISCLOSURES (Continued)
A portion of the offering proceeds was
used to simultaneously enter into “bond hedge” (or purchased call) and “warrant” (or written call) transactions
with an affiliate of one of the offering underwriters (Note 2). The exercise price of the bond hedge is $69.48 per share, with
an underlying 2,068,792 common shares; the exercise price of the warrant is $96.21 per share of our common stock, also with an
underlying 2,068,792 common shares. We calculated the fair value of the bond hedge based on the price we paid to purchase the
call. We calculated the fair value of the warrant based on the price at which the affiliate purchased the warrants from us. Because
the bond hedge and warrant are both indexed to our common stock and otherwise would be classified as equity, we recorded both
elements as equity, resulting in a net reduction to APIC of $15.6 million.
Non-Financial Assets and Liabilities Measured at Fair Value
on a Recurring Basis
We have no 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
years ended December 31, 2015 and 2014.
In the fourth quarter of 2016, the facts and circumstances surrounding our testosterone gel NDA indicated
that the asset could be impaired.
Our testosterone gel
NDA intangible asset was initially acquired as part of the Merger, when we acquired a testosterone gel product that was licensed
to Teva. This product was assigned an intangible asset value of $10.9 million in accounting
for the Merger. In May 2015, Teva transferred the rights of the product back to ANI. In exchange, 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. We assessed
the value of the Testosterone Gel NDA under the new arrangement and determined that the net asset value was recoverable as of the
May 2015 transfer date and subsequent balance sheet dates. We began the commercialization process for the product during the second half of 2015
and it continued throughout 2016. In late 2016, we determined that the development and manufacturing costs required to commercialize
the product had increased and would pose a significant barrier to commercializing the product ourselves. Generic competition in
the testosterone replacement market had increased substantially by the end of 2016, leading to significant decreases in pricing
for the product. In the fourth quarter, management began putting forth efforts to sell the Testosterone Gel NDA rather than commercialize
it ourselves. As a result of all these factors, in the fourth quarter of 2016, we determined that the facts and circumstances indicated
that the asset could be impaired. We performed an impairment assessment, which indicated that the fair value of the asset was lower
than the carrying value. We determined the fair value of the Testosterone Gel NDA by using a discounted cash flows model. Due to
the uncertainty and risk regarding the potential commercialization of the testosterone gel NDA, we used a discount rate of 30%
in our valuation. As a result of this assessment, we recorded an intangible asset impairment of $6.7 million in the year ended
December 31, 2016. We also determined in the fourth quarter of 2016 that the asset met the criteria for being held for sale. The
Testosterone Gel NDA is now recorded as a short-term asset held for sale in the prepaid expenses and other assets caption in the
accompanying consolidated balance sheets at $0.9 million, which is the fair value of the asset less estimated costs to sell. We
are no longer amortizing the Testosterone Gel NDA. No events or circumstances arose in 2016 that indicated that the carrying value
of any of our other definite-lived intangible assets may not be recoverable.
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 5). 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 consolidated balance sheet as of December 31, 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. These assets were recorded at their relative fair values, which were determined based on Level 3 unobservable
inputs. 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 December 31, 2016
and therefore no impairment loss was recognized for the year ended December 31, 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, 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 December 31, 2016 and therefore no impairment loss was recognized for the year ended December 31, 2016. 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 5). In addition, we capitalized $0.3 million in legal costs directly related to the
transaction. We accounted for this transaction as an asset purchase. These assets were recorded at their relative fair values,
which were determined based on Level 3 unobservable inputs. 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 December 31, 2016 and therefore no impairment loss was recognized for the year ended December 31, 2016.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
6. FAIR VALUE DISCLOSURES (Continued)
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 5). 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. These assets were recorded at their relative fair values, which were determined based on Level 3 unobservable
inputs. 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 December 31, 2016 and therefore
no impairment loss was recognized for the year ended December 31, 2016.
In July 2015, we purchased from Teva the
ANDAs for 22 previously marketed generic drug products for $25.0 million in cash and a percentage of future gross profits from
product sales (Note 5). The value of the ANDAs was based on the total purchase price of $25.0 million. We accounted for this transaction
as an asset purchase. These assets were recorded at their relative fair values, which were determined based on Level 3 unobservable
inputs. In order to determine the fair value of the ANDAs, we used the present value of the estimated cash flows related to the
product rights, using a discount rate of 10%. The $25.0 million of ANDAs will be amortized 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 December 31, 2016 and therefore no
impairment loss was recognized in the years ended December 31, 2015 and 2016.
In March 2015, we purchased from
Teva the ANDA for Flecainide for $4.5 million in cash and a percentage of future gross profits from product sales (Note 5).
The value of the ANDA was based on the purchase price of $4.5 million. We accounted for this transaction as an asset
purchase. This asset was recorded at fair value, which was determined based on Level 3 unobservable inputs. In order to
determine the fair value of the ANDA, we used the present value of the estimated cash flows related to the product rights,
using a discount rate of 10%. The $4.5 million ANDA will be amortized 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 December 31, 2016 and therefore no
impairment loss was recognized in the years ended December 31, 2015 and 2016.
In August 2014, we acquired from Shire
the U.S. product rights associated with Vancocin, certain equipment, and inventory, for total consideration of $11.0 million (Note
5). In addition, we capitalized $0.1 million of legal costs directly related to the transaction. We accounted for this transaction
as an asset purchase. These assets were recorded at their relative fair values, which were determined based on Level 3 unobservable
inputs. In order to determine the fair value of the product rights, we used the present value of the estimated cash flows related
to the product rights, using a discount rate of 10%. The $10.5 million of value assigned to the product rights will be amortized
over their 10 year useful life, 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 December 31, 2016 and therefore no impairment loss was recognized in the years ended December 31, 2014, 2015, and 2016. The
$0.2 million of value assigned to the equipment was determined based on the amount for which we believe we would be able to sell
the equipment. The equipment will be depreciated over its estimated 10 year useful life, and would be re-valued at fair value
if deemed to be other-than-temporarily impaired. We recorded $0.4 million of inventory. The value of the raw material inventory
was determined based on the most recent purchase price of the material. The value of the finished goods inventory was determined
based on the estimated sales to be generated from the finished goods, less costs to sell, including a reasonable margin.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
6. FAIR VALUE DISCLOSURES (Continued)
In July 2014, we acquired from Noven
the product rights associated with Lithobid, as well as a small amount of raw material inventory, for total consideration of
$12.0 million (Note 5). In addition, we capitalized $45 thousand of legal costs directly related to the transaction. We
accounted for this transaction as an asset purchase. These assets were recorded at their relative fair values, which were
determined based on Level 3 unobservable inputs. In order to determine the fair value of the product rights, we used the
present value of the estimated cash flows related to the product rights, using a discount rate of 10%. The $12.0 million of
ANDAs will be amortized over their 10 year useful life, 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 December 31, 2016 and therefore no impairment loss was recognized in the years ended
December 31, 2014, 2015, and 2016. We recorded $86 thousand of inventory. The value of the raw material inventory was
determined based on the most recent purchase price of the material.
In the first quarter of 2014, we purchased
from Teva the ANDAs for 31 previously marketed generic drug products for $12.5 million in cash and a percentage of future gross
profits from product sales (Note 5). The value of the ANDAs was based on the total purchase price of $12.5 million. We accounted
for this transaction as an asset purchase. These assets were recorded at their relative fair values, which were determined based
on Level 3 unobservable inputs. In order to determine the fair value of the ANDAs, we used the present value of the estimated
cash flows related to the product rights, using a discount rate of 10%. The $12.5 million of ANDAs will be amortized 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 December 31,
2016 and therefore no impairment loss was recognized in the years ended December 31, 2014, 2015, and 2016.
7. STOCKHOLDERS’ EQUITY
Authorized shares
We are authorized to issue up to 33.3 million
shares of common stock with a par value of $0.0001 per share, 0.8 million shares of class C special stock with a par value
of $0.0001 per share, and 1.7 million shares of undesignated preferred stock with a par value of $0.0001 per share at December
31, 2016.
There were 11.6 million and 11.5 million
shares of common stock issued and outstanding as of December 31, 2016 and 2015, respectively.
There were 11 thousand shares of class C
special stock issued and outstanding as of December 31, 2016 and 2015. Each share of class C special stock entitles its
holder to one vote per share. Each share of class C special stock is exchangeable, at the option of the holder, for one share
of our common stock, at an exchange price of $90.00 per share, subject to adjustment upon certain capitalization events. Holders
of class C special stock are not entitled to receive dividends or to participate in the distribution of our assets if we were
to liquidate, dissolve, or wind-up the company. The holders of class C special stock have no cumulative voting, preemptive,
subscription, redemption, or sinking fund rights.
There were no shares of undesignated preferred
stock outstanding as of December 31, 2016 and 2015.
Equity Offering
On March 10, 2014, we completed a follow-on
public offering of 1.6 million shares of our common stock at a public offering price of $31.00 per share (the “March 2014
Offering”). We received gross proceeds of $50.0 million, or net proceeds of $46.7 million after deducting costs of $3.3 million,
including the underwriters’ fees and commissions, as well as expenses directly related to the March 2014 Offering. The number
of shares sold in the March 2014 Offering includes the exercise in full by the underwriters of their option to purchase an additional
0.2 million shares of common stock.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
7. STOCKHOLDERS’ EQUITY (Continued)
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 could
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. This program terminated on December 31, 2016.
Warrants
Warrants to purchase an aggregate of 2.1
million shares of our common stock were outstanding and exercisable as of December 31, 2016:
Issue Date
|
|
Number of
Underlying Shares
of Common Stock
(in thousands)
|
|
|
Per Share
Exercise Price
|
|
|
Expiration Date
|
December 4, 2014
|
|
|
1,799
|
|
|
$
|
96.21
|
|
|
March 1, 2020
|
December 5, 2014
|
|
|
270
|
|
|
$
|
96.21
|
|
|
March 1, 2020
|
All outstanding warrants are classified
as equity. No warrants were granted, exercised, or expired unexercised during the year ended December 31, 2016.
No warrants were issued or exercised during
the year ended December 31, 2015. Warrants to purchase 405 thousand shares of common stock expired during the year ended December
31, 2015.
In December 2014, we issued 2.1 million
warrants in conjunction with the issuance of the Notes (Note 2). In January 2014, warrants to purchase an aggregate of 20 thousand
shares of common stock were exercised at $9.00 per share. In December 2014, warrants to purchase an aggregate of 63 thousand shares
of common stock were exercised at $9.00 per share. Warrants to purchase an aggregate of 198 thousand shares of common stock expired
unexercised during the year ended December 31, 2014.
8. STOCK-BASED COMPENSATION
In July 2016, we commenced administration
of the ANI Pharmaceuticals, Inc. 2016 Employee Stock Purchase Plan, 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. We issued one thousand shares in 2016. In the year ended December 31, 2016, we recognized $2 thousand and $23 thousand
of stock-based compensation expense related to the ESPP in cost of sales and sales, general, and administrative expense in our
consolidated statements of earnings, respectively.
All equity-based service awards are granted under the ANI Pharmaceuticals,
Inc. Amended and Restated 2008 Stock Incentive Plan (the “2008 Plan”). As of December 31, 2016, 0.2 million shares
of our common stock remained available for issuance under the 2008 Plan.
We measure the cost of equity-based service
awards based on the grant-date fair value of the award. The cost is recognized over the period during which an employee is required
to provide service in exchange for the award or the requisite service period. We recognize stock-based compensation expense ratably
over the vesting periods of the awards, adjusted for estimated forfeitures.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
8. STOCK-BASED COMPENSATION (Continued)
The following table summarizes stock-based
compensation expense incurred under the 2008 Plan and included in our consolidated statements of earnings:
(in thousands)
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of sales
|
|
$
|
60
|
|
|
$
|
82
|
|
|
$
|
104
|
|
Research and development
|
|
$
|
112
|
|
|
$
|
109
|
|
|
$
|
69
|
|
Selling, general, and administrative
|
|
$
|
5,870
|
|
|
$
|
3,665
|
|
|
$
|
3,250
|
|
We recognized income tax benefits of $1.0
million, $0.4 million, and $0.6 million for stock-based compensation-related tax deductions in our 2016, 2015, and 2014 consolidated
statements of earnings, respectively.
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 were recognized in the
second quarter 2016.
Stock Options
Outstanding stock options granted to employees
generally vest over a period of four years and have 10-year contractual terms. Outstanding stock options granted to non-employee
directors generally vest over a period of one to three years and have 10-year contractual terms. Upon exercise of an option, we
issue new shares of our common stock or issue shares from treasury stock.
For 2016, 2015, and 2014, the fair value
of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, using the following weighted
average assumptions:
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Expected option life (years)
|
|
5.50 - 6.25
|
|
5.50 - 6.25
|
|
5.39 - 6.25
|
Risk-free interest rate
|
|
1.14% - 1.55%
|
|
1.31% - 1.82%
|
|
1.55% - 2.03%
|
Expected stock price volatility
|
|
49.4% - 51.7%
|
|
47.9% - 50.5%
|
|
50.6% - 55.1%
|
Dividend yield
|
|
—
|
|
—
|
|
—
|
We use the simplified method to estimate the life of options.
In 2014, 0.3 million options granted by the board of directors but requiring shareholder approval were approved at the May 22,
2014 shareholder’s meeting. As a result, the fair values of these options were calculated using the simplified method less
the time between the grant date and the date of the approval, or 5.39 years. The risk-free interest rate used is the yield on a
U.S. Treasury note as of the grant date with a maturity equal to the estimated life of the option. We calculated an estimated
volatility rate based on the closing prices of several competitors that manufacture
similar products. We have not issued
a cash dividend in the past nor do we have any current plans to do so in the future; therefore, an expected dividend yield
of zero was used.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
8. STOCK-BASED COMPENSATION (Continued)
On April 7, 2016, the Board of Directors
approved grants of options to purchase 63 thousand shares of common stock to our officers and options to purchase 13 thousand shares
of common stock to non-employee directors.
On April 16, 2015, the Board of Directors
approved grants of options to purchase 47 thousand shares of common stock to our officers and options to purchase 9 thousand shares
of common stock to non-employee directors. On October 12, 2015, the Board of Directors approved a grant of options to purchase
3 thousand shares of common stock to a new non-employee director.
On April 1, 2014, the Board of Directors approved grants of
options to purchase 59 thousand shares of common stock to our officers and options to purchase 16 thousand shares of common stock
to non-employee directors. On August 20, 2014, the Board of Directors approved a grant of options to purchase 25 thousand shares
of common stock to one of our officers.
A summary of stock option activity under
the Plan during the years ended December 31, 2016, 2015, and 2014 is presented below:
(in thousands, except per share and
remaining term data)
|
|
Option
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Grant-date
Fair Value
|
|
|
Weighted
Average
Remaining
Term
(years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding December 31, 2013
|
|
|
120
|
|
|
$
|
50.35
|
|
|
|
|
|
|
|
2.4
|
|
|
$
|
81
|
|
Granted
|
|
|
120
|
|
|
|
31.59
|
|
|
$
|
16.84
|
|
|
|
|
|
|
|
|
|
Options previously granted, approved by shareholders
|
|
|
325
|
|
|
|
6.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(43
|
)
|
|
|
19.45
|
|
|
|
|
|
|
|
|
|
|
|
638
|
|
Forfeited
|
|
|
(4
|
)
|
|
|
6.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(60
|
)
|
|
|
73.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2014
|
|
|
458
|
|
|
$
|
14.44
|
|
|
|
|
|
|
|
8.7
|
|
|
$
|
19,472
|
|
Granted
|
|
|
138
|
|
|
|
62.07
|
|
|
$
|
30.08
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(89
|
)
|
|
|
9.24
|
|
|
|
|
|
|
|
|
|
|
|
3,937
|
|
Forfeited
|
|
|
(33
|
)
|
|
|
11.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2015
|
|
|
474
|
|
|
$
|
29.40
|
|
|
|
|
|
|
|
8.2
|
|
|
$
|
10,136
|
|
Granted
|
|
|
265
|
|
|
|
45.60
|
|
|
$
|
22.45
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(127
|
)
|
|
|
11.79
|
|
|
|
|
|
|
|
|
|
|
|
5,837
|
|
Forfeited
|
|
|
(32
|
)
|
|
|
47.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2
|
)
|
|
|
139.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2016
|
|
|
578
|
|
|
$
|
39.28
|
|
|
|
|
|
|
|
8.2
|
|
|
$
|
12,928
|
|
Exercisable at December 31, 2016
|
|
|
128
|
|
|
$
|
30.87
|
|
|
|
|
|
|
|
7.1
|
|
|
$
|
4,033
|
|
Vested or expected to vest at December 31, 2016
|
|
|
567
|
|
|
$
|
39.11
|
|
|
|
|
|
|
|
8.2
|
|
|
$
|
12,776
|
|
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
8. STOCK-BASED COMPENSATION (Continued)
As of December 31, 2016, there was $7.6 million of total
unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized
over a weighted-average period of 2.7 years. During the year ended December 31, 2016, we received $1.6 million in cash from
the exercise of stock options and recorded a $0.7 million tax benefit related to these exercises. During the year ended December 31,
2015, we received $0.8 million in cash from the exercise of stock options and recorded a $0.3 million tax benefit related to these
exercises. During the year ended December 31, 2014, we received $0.8 million in cash from the exercise of stock options and recorded
a $0.1 million tax benefit related to these exercises.
Restricted Stock Awards
Restricted stock awards (“RSAs”)
granted to employees generally vest over a period of four years. RSAs granted to non-officer directors generally vest over
a period of one to three years.
On April 7, 2016, the Board of Directors approved grants of
31 thousand RSAs to employees and 6 thousand to non-officer directors.
On April 16, 2015, the Board of Directors
approved grants of 24 thousand RSAs to employees and four thousand to non-officer directors.
On April 1, 2014, the Board of Directors
approved grants of 30 thousand RSAs to our officers. The restricted stock was granted subject to shareholder
approval of an increase in the total restricted stock available for grant under the 2008 Plan. The increase in total restricted
stock available for grant under the 2008 Plan was approved by shareholders at the May 22, 2014 annual meeting and the restricted
stock was granted as of May 22, 2014.
Shares of our common stock delivered to
employees and directors will be unrestricted upon vesting. During the vesting period, the recipient of the restricted stock
has full voting rights as a stockholder and would receive dividends, if declared, even though the restricted stock remains subject
to transfer restrictions and will generally be forfeited upon termination of the officer prior to vesting. The fair value of each
RSA is based on the market value of our stock on the date of grant.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
8. STOCK-BASED COMPENSATION (Continued)
A summary of RSA activity under the Plan
during the years ended December 31, 2016, 2015, and 2014 is presented below:
(in thousands, except per share and
remaining term data)
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair
Value
|
|
|
Weighted Average
Remaining Term
(years)
|
|
Unvested at December 31, 2013
|
|
|
50
|
|
|
$
|
10.20
|
|
|
|
2.8
|
|
Granted
|
|
|
30
|
|
|
|
29.61
|
|
|
|
|
|
Vested
|
|
|
(17
|
)
|
|
|
10.20
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Unvested at December 31, 2014
|
|
|
63
|
|
|
$
|
19.34
|
|
|
|
2.6
|
|
Granted
|
|
|
28
|
|
|
|
67.26
|
|
|
|
|
|
Vested
|
|
|
(23
|
)
|
|
|
15.82
|
|
|
|
|
|
Forfeited
|
|
|
(5
|
)
|
|
|
19.41
|
|
|
|
|
|
Unvested at December 31, 2015
|
|
|
63
|
|
|
$
|
42.72
|
|
|
|
2.2
|
|
Granted
|
|
|
38
|
|
|
|
40.59
|
|
|
|
|
|
Vested
|
|
|
(30
|
)
|
|
|
33.89
|
|
|
|
|
|
Forfeited
|
|
|
(8
|
)
|
|
|
46.05
|
|
|
|
|
|
Unvested at December 31, 2016
|
|
|
63
|
|
|
$
|
45.72
|
|
|
|
2.2
|
|
As of December 31, 2016, there was
$2.0 million of total unrecognized compensation cost related to non-vested RSAs granted under the Plan, which is expected to be
recognized over a weighted-average period of 2.2 years.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
9. INCOME TAXES
Our total provision/(benefit) from income
taxes consists of the following for the years ended December 31, 2016, 2015, and 2014:
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
11,717
|
|
|
$
|
7,264
|
|
|
$
|
4,034
|
|
State
|
|
|
1,321
|
|
|
|
611
|
|
|
|
273
|
|
Total
|
|
|
13,038
|
|
|
|
7,875
|
|
|
|
4,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax (benefit)/provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(8,387
|
)
|
|
|
(1,468
|
)
|
|
|
2,113
|
|
State
|
|
|
(658
|
)
|
|
|
(409
|
)
|
|
|
154
|
|
Total
|
|
|
(9,045
|
)
|
|
|
(1,877
|
)
|
|
|
2,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
134
|
|
|
|
-
|
|
|
|
(16,726
|
)
|
Excess tax benefit from stock-based compensation awards
|
|
|
617
|
|
|
|
360
|
|
|
|
784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision/(benefit) for income taxes
|
|
$
|
4,744
|
|
|
$
|
6,358
|
|
|
$
|
(9,368
|
)
|
The difference between our expected income
tax provision/(benefit) from applying federal statutory tax rates to the pre-tax income/(loss) and actual income tax provision/(benefit)
relates primarily to the effect of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
US Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of Federal benefit
|
|
|
2.1
|
%
|
|
|
2.1
|
%
|
|
|
1.0
|
%
|
International tax structure impacts
|
|
|
23.3
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Domestic production activities deduction
|
|
|
(14.4
|
)%
|
|
|
(5.3
|
)%
|
|
|
-
|
%
|
Change in valuation allowance
|
|
|
1.6
|
%
|
|
|
-
|
%
|
|
|
(86.5
|
)%
|
Stock-based compensation – no windfall tax benefit
|
|
|
5.7
|
%
|
|
|
1.1
|
%
|
|
|
4.7
|
%
|
Stock-based compensation – windfall tax benefits
|
|
|
-
|
%
|
|
|
(0.1
|
)%
|
|
|
(1.2
|
)%
|
Change in tax rates and other
|
|
|
1.4
|
%
|
|
|
(3.5
|
)%
|
|
|
(1.4
|
)%
|
Total income tax provision/(benefit)
|
|
|
54.7
|
%
|
|
|
29.3
|
%
|
|
|
(48.4
|
)%
|
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
9. INCOME TAXES (Continued)
Deferred income taxes reflect the net tax
effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes. Our deferred
income tax assets and liabilities consisted of the following:
(in thousands)
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accruals and advances
|
|
$
|
3,002
|
|
|
$
|
2,153
|
|
Bond hedge
|
|
|
10,921
|
|
|
|
12,243
|
|
Accruals for chargebacks and returns
|
|
|
7,137
|
|
|
|
2,945
|
|
Inventory
|
|
|
1,255
|
|
|
|
1,271
|
|
Intangible asset
|
|
|
6,302
|
|
|
|
3,631
|
|
Net operating loss carryforward
|
|
|
5,095
|
|
|
|
7,938
|
|
Other
|
|
|
1,680
|
|
|
|
1,149
|
|
Total deferred tax assets
|
|
$
|
35,392
|
|
|
$
|
31,330
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
(857
|
)
|
|
$
|
(700
|
)
|
Debt discount
|
|
|
(7,664
|
)
|
|
|
(10,029
|
)
|
Intangible assets
|
|
|
(353
|
)
|
|
|
(3,127
|
)
|
Other
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Total deferred tax liabilities
|
|
$
|
(8,890
|
)
|
|
$
|
(13,872
|
)
|
Valuation allowance
|
|
|
(275
|
)
|
|
|
(142
|
)
|
Total deferred tax asset, net
|
|
$
|
26,227
|
|
|
$
|
17,316
|
|
As of December 31, 2016, we had Federal
net operating loss carryforwards of approximately $13.7 million, which expire beginning in 2018, and which arose as
a result of the Merger. The utilization of the net operating loss carryforwards are limited in future years as prescribed by Section 382
of the U.S. Internal Revenue Code; our current annual limitation of the Federal net operating loss is approximately $0.8 million
per year.
We are required to establish a valuation
allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. We consider the projected future
taxable income and tax planning strategies in making this assessment. As of December 31, 2016 and 2015, we have provided a valuation
allowance against certain state net operating loss carryforwards of $0.3 million and $0.1 million, respectively.
We are subject to income taxes in numerous
jurisdictions in the U.S. Significant judgment is required in evaluating our tax positions and determining our provision for income
taxes. We establish liabilities for tax-related uncertainties based on estimates of whether, and the extent to which, additional
taxes will be due. These liabilities are established when we believe that certain positions might be challenged despite our belief
that our tax return positions are fully supportable. We adjust these liabilities in light of changing facts and circumstances,
such as the outcome of a tax audit. The provision for income taxes includes the impact of changes to the liability that is considered
appropriate. We identified no material uncertain tax positions as of December 31, 2016 and 2015.
We are subject to income tax audits in
all jurisdictions for which we file tax returns. Tax audits by their nature are often complex and can require several years to
complete. Neither ANI Pharmaceuticals, Inc. nor any of its subsidiaries is currently under audit in any jurisdiction. All of our
income tax returns remain subject to examination by tax authorities due to the availability of net operating loss carryforwards.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
10. COLLABORATIVE ARRANGEMENTS
RiconPharma LLC
In July 2011, we entered into a collaborative
arrangement with RiconPharma LLC (“RiconPharma”). Under the parties' master product development and collaboration agreement
(the “RiconPharma Agreement”), we and RiconPharma agreed to collaborate in a cost, asset and profit sharing arrangement
for the development, manufacturing, regulatory approval, and marketing of pharmaceutical products in the United States. In July
2016, we launched our Nilutamide product under the agreement.
In general, RiconPharma is responsible
for developing the products and we are responsible for manufacturing, sales, marketing, and distribution of the products. The parties
are jointly responsible for directing any bioequivalence studies. We are responsible for obtaining and maintaining all necessary
regulatory approvals, including the preparation of all ANDAs.
Under the RiconPharma Agreement and unless
otherwise specified in an amendment, the parties will own equally all the rights, title, and interest in the products. To the extent
permitted by applicable law, we will be identified on the product packaging as the manufacturer and distributor of the product.
During the term, both parties are prohibited from developing, manufacturing, selling, or distributing any products that are identical
or bioequivalent to products covered under the agreement. The agreement may be terminated or amended under certain specified circumstances.
In August 2016, we and Ricon agreed to a partial termination of the agreement, with only the Nilutamide product remaining under
the agreement.
We recognize the costs incurred with
respect to this agreement as expense and classify the expenses based on the nature of the costs. In the year ended December
31, 2016, we incurred $2.0 million in costs of sales related to the RiconPharma Agreement. In the years ended December 31,
2016, 2015, and 2014, we incurred $23 thousand, $31 thousand, and $0.4 million in research and development expenses related
to the RiconPharma Agreement, respectively.
Sofgen Pharmaceuticals
August 2013 Sofgen Agreement
In August 2013, we entered into an
agreement with Sofgen Pharmaceuticals (“Sofgen”) to develop Nimodipine (the “August 2013 Sofgen Agreement”).
In general, Sofgen was responsible for the development, manufacturing, and regulatory submission of the product, and we made payments
based on the completion of certain milestones. In December 2015, we launched Nimodipine under our label. Sofgen manufactures the
drug and we market and distribute the product under our label in the United States, remitting a percentage of profits from sales
of the drug to Sofgen.
Under the August 2013 Sofgen Agreement,
Sofgen owns all the rights, title, and interest in Nimodipine. During the term, both parties are prohibited from developing, manufacturing,
selling, or distributing any product in the United States that is identical or bioequivalent to the product covered under the agreement.
The agreement may be terminated or amended under certain specified circumstances.
We recognize the costs incurred with respect
to the August 2013 Sofgen Agreement as expense and classify the expenses based on the nature of the costs. In the year ended December
31, 2016, we incurred $0.6 million in cost of sales related to the August 2013 Sofgen Agreement. In the year ended December 31,
2015, we incurred an immaterial amount of cost of sales related to the August 2013 Sofgen Agreement. In the year ended December
31, 2016, we incurred an immaterial amount of research and development expense related to the August 2013 Sofgen Agreement. In
the years ended December 31, 2015 and 2014, we incurred $0.4 million and $0.2 million in research and development expenses related
to the August 2013 Sofgen Agreement, respectively.
April 2014 Sofgen Agreement
In April 2014, we entered into a second
collaboration agreement with Sofgen to develop an oral soft gel prescription product (the “April 2014 Sofgen Agreement”).
The product will be subject to an ANDA filing once developed. In general, Sofgen will be responsible for the development, manufacturing,
and regulatory submission of the product, including preparation of the ANDA, and we will make payments based on the completion
of certain milestones. Upon approval, Sofgen will manufacture the drug and we will market and distribute the product under our
label in the United States, remitting a percentage of profits from sales of the drug to Sofgen.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
10. COLLABORATIVE ARRANGEMENTS (Continued)
Under the April 2014 Sofgen Agreement,
Sofgen will own all the rights, title, and interest in the product. During the term, both parties are prohibited from developing,
selling, or distributing any product in the United States that is identical or bioequivalent to the product covered under the agreement.
The agreement can be terminated or amended under certain specified circumstances. The agreement’s initial term is ten years
from the launch of the product, which term will automatically renew for two year terms until either party terminates the agreement.
We recognize the costs incurred with respect
to the April 2014 Sofgen Agreement as expense and classify the expenses based on the nature of the costs. In the year ended December
31, 2016, we did not incur any research and development expenses related to this agreement. In the years ended December 31, 2015
and 2014, we incurred $37 thousand and $0.1 million in research and development expenses related to the agreement, respectively.
No revenue has yet been recognized.
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.
For the annual periods after December 31,
2016, approximate minimum annual rental payments under non-cancelable leases are presented below:
(in thousands)
|
|
|
|
Year
|
|
Minimum
Annual Rental
Payments
|
|
2017
|
|
$
|
99
|
|
2018
|
|
|
97
|
|
2019
|
|
|
66
|
|
2020
|
|
|
68
|
|
2021
|
|
|
19
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
349
|
|
Rent expense for the years ended December 31, 2016, 2015,
and 2014 totaled $81 thousand, $74 thousand, and $70 thousand, respectively.
Vendor Purchase Minimums
We have supply agreements with four vendors
that include purchase minimums. Pursuant to these agreements, we will be required to purchase a total of $9.0 million of API from
these four vendors during the year ended December 31, 2017.
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 considered 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 years
ended December 31, 2016, 2015, and 2014, net revenues for these products totaled $34.3 million, $44.3 million, and $29.8
million, respectively.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
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 the group of unapproved products for the years ended December 31, 2016,
2015, and 2014 were $1.5 million, $1.6 million, and $1.2 million, respectively.
We received 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 were less than 1% of total revenues for the three
years ended December 31, 2016, 2015, and 2014.
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, have faced 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. In August 2016, we settled the outstanding California 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 and paid
all losses in settlement of the California cases. 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 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.
We launched Erythromycin Ethylsuccinate (“EES”) on September 27, 2016 under a previously approved
ANDA. In August, we filed with the FDA to reintroduce this product under a Changes Being Effected in 30 Days submission (a “CBE-30
submission”). Under a CBE-30 submission, certain defined changes to an ANDA can be made if the FDA does not object in writing within
30 days. The FDA’s regulations, guidance documents, and historic actions support the filing of a CBE-30 for the types of
changes that we proposed for our EES ANDA. We received no formal written letter from the FDA within 30 days of the CBE-30 submission
date, and as such, launched the product in accordance with FDA regulations. On December 16, 2016, and nearly four months after
our CBE-30 submission, the FDA sent us a formal written notice that a Prior Approval Supplement (“PAS”) was required
for this ANDA. Under a PAS, proposed changes to an ANDA cannot be implemented without prior review and approval by the FDA. Because
we did not receive this notice in the timeframe prescribed by the FDA’s regulations, we believe that our supplemental ANDA
is valid, and as such continue to market the product. In addition, we filed a PAS which was accepted by the FDA and has an assigned
action date of June 2017. We reserve all of our legal options in this matter.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the years ended December 31, 2016, 2015, and 2014
12. QUARTERLY FINANCIAL DATA (unaudited)
The following table presents unaudited quarterly
consolidated operating results for each of our last eight fiscal quarters. The information below has been prepared on a basis consistent
with our audited consolidated financial statements.
|
|
2016 Quarters (unaudited)
|
|
(in thousands, except per share data)
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Net revenues
|
|
$
|
20,555
|
|
|
$
|
31,337
|
|
|
$
|
38,525
|
|
|
$
|
38,205
|
|
Total operating expenses
|
|
|
14,889
|
|
|
|
26,143
|
|
|
|
30,604
|
|
|
|
36,907
|
|
Operating income
|
|
|
5,666
|
|
|
|
5,194
|
|
|
|
7,921
|
|
|
|
1,298
|
|
Net income/(loss)
|
|
$
|
1,346
|
|
|
$
|
1,125
|
|
|
$
|
2,543
|
|
|
$
|
(1,080
|
)
|
Basic and diluted earnings/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings/(loss) per share
|
|
$
|
0.12
|
|
|
$
|
0.10
|
|
|
$
|
0.22
|
|
|
$
|
(0.09
|
)
|
Diluted earnings/(loss) per share
|
|
$
|
0.12
|
|
|
$
|
0.10
|
|
|
$
|
0.22
|
|
|
$
|
(0.09
|
)
|
|
|
2015 Quarters (unaudited)
|
|
(in thousands, except per share data)
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Net revenues
|
|
$
|
18,799
|
|
|
$
|
19,516
|
|
|
$
|
19,972
|
|
|
$
|
18,035
|
|
Total operating expenses
|
|
|
9,232
|
|
|
|
11,102
|
|
|
|
11,521
|
|
|
|
11,767
|
|
Operating income
|
|
|
9,567
|
|
|
|
8,414
|
|
|
|
8,451
|
|
|
|
6,268
|
|
Net income
|
|
$
|
4,369
|
|
|
$
|
3,571
|
|
|
$
|
4,559
|
|
|
$
|
2,876
|
|
Basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.38
|
|
|
$
|
0.31
|
|
|
$
|
0.40
|
|
|
$
|
0.25
|
|
Diluted earnings per share
|
|
$
|
0.38
|
|
|
$
|
0.31
|
|
|
$
|
0.39
|
|
|
$
|
0.25
|
|
13. SUBSEQUENT EVENTS
In February 2017, we entered into an agreement
with Cranford Pharmaceuticals, LLC to purchase a distribution license, trademark and certain finished goods inventory for Inderal®
XL for $20.2 million in cash. The transaction closed in February 2017, and we made the $20.2 million cash payment using cash on
hand.
In February 2017, we entered into an agreement
with Holmdel Pharmaceuticals, LP to purchase the NDA, trademark and certain finished goods inventory for InnoPran XL®, including
a license to an Orange Book listed patent, for $30.6 million in cash. The transaction closed in February 2017, and we made the
$30.6 million cash payment using $30.0 million of funds from our Line of Credit (Note 2) and $0.6 million of cash on hand.