NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS, PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS
|
Overview
ANI Pharmaceuticals, Inc. and its consolidated subsidiaries
(together, “ANI,” the “Company,” “we,” “us,” or “our”) is an integrated
specialty pharmaceutical company focused on delivering value to our customers by developing, manufacturing, and marketing high
quality branded and generic prescription pharmaceuticals. We focus on niche and high barrier to entry opportunities including controlled
substances, anti-cancer (oncolytics), hormones and steroids, and complex formulations. Our two pharmaceutical manufacturing facilities
located in Baudette, Minnesota are capable of producing oral solid dose products, as well as liquids and topicals, controlled substances,
and potent products that must be manufactured in a fully-contained environment. Our strategy is to use our assets to develop, acquire,
manufacture, and market branded and generic specialty prescription pharmaceuticals. By executing this strategy, we believe we will
be able to continue to grow our business, expand and diversify our product portfolio, and create long-term value for our investors.
Basis of Presentation
The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”). In our opinion, the accompanying unaudited interim condensed consolidated financial statements include
all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial position, results
of operations, and cash flows. The consolidated balance sheet at December 31, 2016, has been derived from audited financial statements
of that date. The unaudited interim condensed consolidated results of operations are not necessarily indicative of the results
that may occur for the full fiscal year. Certain information and footnote disclosure normally included in financial statements
prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the United
States Securities and Exchange Commission. We believe that the disclosures provided herein are adequate to make the information
presented not misleading when these unaudited interim condensed consolidated financial statements are read in conjunction with
the audited financial statements and notes previously distributed in our Annual Report on Form 10-K for the year ended December
31, 2016. Certain prior period information has been reclassified to conform to the current period presentation. Please see
Recently
Adopted Accounting Pronouncements.
Principles of Consolidation
The unaudited interim condensed consolidated financial
statements include the accounts of ANI Pharmaceuticals, Inc. and its subsidiaries. All inter-company accounts and transactions
are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity
with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during
the reporting period. In the accompanying unaudited interim condensed consolidated financial statements, estimates are used for,
but not limited to, stock-based compensation, allowance for doubtful accounts, accruals for chargebacks, administrative fees and
rebates, 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 may differ from those estimates. Management periodically evaluates estimates used in the preparation of the financial
statements for reasonableness.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS, PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS – continued
|
Recent Accounting Pronouncements
Recent Accounting Pronouncements Not
Yet Adopted
In May 2017, the Financial Accounting Standards Board
(“FASB”) issued guidance clarifying when modification accounting should be used for changes to the terms or conditions
of a share-based payment award. The guidance does not change the accounting for modifications, but clarifies that modification
accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would
not be required if the changes are considered non-substantive. 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.
The guidance must be adopted on a prospective basis.
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.
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.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS, PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS
– continued
|
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 January 2017, the 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. We adopted this guidance in the first quarter
of 2017, effective as of January 1, 2017, on a prospective basis. The adoption of this new guidance did not have a material impact
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 adopted this guidance in the first quarter of 2017, effective
as of January 1, 2017, on a prospective basis. The adoption of this new guidance did not have a material impact on our consolidated
financial statements.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS, PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS – continued
|
In November 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
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 was effective for the fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. Early adoption was permitted, including adoption in an interim period. If an entity adopted the guidance in
an interim period, any adjustments should have been reflected as of the beginning of the fiscal year that includes that interim
period. The guidance must be adopted on a retrospective basis. We adopted this guidance in the first quarter of 2017, effective
as of January 1, 2017, on a retrospective basis, and all periods have been presented under this guidance. The adoption of this
new guidance resulted 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 adopted this guidance in the first quarter of 2017, effective as of January 1, 2017, on
a retrospective basis. The adoption of this new guidance did not have a material impact on our consolidated financial statements.
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 adopted this guidance in the first quarter of 2017, effective as of January 1, 2017. Pursuant to the adoption
requirements for excess tax benefits and tax deficiencies, we no longer recognize excess tax benefits or tax deficiencies in Additional
Paid in Capital (“APIC”); rather, we recognize them prospectively as a component of our current period provision/(benefit)
before income taxes. We did not reverse our current APIC pool, which was $3.1 million as of December 31, 2016, and we presented
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 now account for forfeitures as they occur rather than using an estimated forfeiture
rate; as a result of the change in accounting, we recorded a $14 thousand cumulative-effect adjustment increasing our accumulated
deficit as of January 1, 2017. The adoption of the remaining amendments 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 condensed consolidated
statements of earnings, balance sheets, or cash flows.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
2.
|
REVENUE RECOGNITION AND RELATED ALLOWANCES
|
Revenue Recognition
Revenue is recognized for product sales and contract
manufacturing product sales upon passing of risk and title to the customer, when estimates of the selling price and discounts,
rebates, promotional adjustments, price adjustments, returns, chargebacks, and other potential adjustments are reasonably determinable,
collection is reasonably assured, and we have no further performance obligations. Contract manufacturing arrangements are typically
less than two weeks in duration, and therefore the revenue is recognized upon completion of the aforementioned factors rather than
using a proportional performance method of revenue recognition. The estimates for discounts, rebates, promotional adjustments,
price adjustments, returns, chargebacks, and other potential adjustments reduce gross revenues to net revenues in the accompanying
unaudited interim condensed consolidated statements of earnings, and are presented as current liabilities or reductions in accounts
receivable in the accompanying unaudited interim condensed consolidated balance sheets (see “Accruals for Chargebacks, Rebates,
Returns, and Other Allowances”). Historically, we have not entered into revenue arrangements with multiple elements.
We record revenue related
to marketing and distribution agreements with third parties in which we sell products under Abbreviated New Drug Applications (“ANDAs”)
or New Drug Applications (“NDAs”) owned or licensed by these third parties. We have assessed and determined that we
are the principal for sales under each of these marketing and distribution agreements and recognize the revenue on a gross basis
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.
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 and continually monitor and re-evaluate the accruals
as additional information becomes available. We adjust the accruals at the end of each reporting period, to reflect any such updates
to the relevant facts and circumstances. Accruals are relieved upon receipt of payment from the customer or upon issuance of credit
to the customer.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
2.
|
REVENUE RECOGNITION AND RELATED ALLOWANCES – continued
|
The following table summarizes activity in the consolidated
balance sheets for accruals and allowances for the six months ended June 30, 2017 and 2016, respectively:
(in thousands)
|
|
Accruals for Chargebacks, Rebates, Returns, and Other Allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
Prompt
|
|
|
|
|
|
|
Government
|
|
|
|
|
|
Fees and Other
|
|
|
Payment
|
|
|
|
Chargebacks
|
|
|
Rebates
|
|
|
Returns
|
|
|
Rebates
|
|
|
Discounts
|
|
Balance at December 31, 2015
|
|
$
|
11,381
|
|
|
$
|
4,631
|
|
|
$
|
2,648
|
|
|
$
|
1,653
|
|
|
$
|
674
|
|
Accruals/Adjustments
|
|
|
43,349
|
|
|
|
5,773
|
|
|
|
3,256
|
|
|
|
5,071
|
|
|
|
2,180
|
|
Credits Taken Against Reserve
|
|
|
(34,731
|
)
|
|
|
(3,895
|
)
|
|
|
(2,595
|
)
|
|
|
(4,274
|
)
|
|
|
(1,678
|
)
|
Balance at June 30, 2016
|
|
$
|
19,999
|
|
|
$
|
6,509
|
|
|
$
|
3,309
|
|
|
$
|
2,450
|
|
|
$
|
1,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
26,785
|
|
|
$
|
5,891
|
|
|
$
|
5,756
|
|
|
$
|
3,550
|
|
|
$
|
1,554
|
|
Accruals/Adjustments
|
|
|
88,973
|
|
|
|
5,110
|
|
|
|
5,220
|
|
|
|
10,646
|
|
|
|
3,842
|
|
Credits Taken Against Reserve
|
|
|
(83,757
|
)
|
|
|
(7,467
|
)
|
|
|
(3,418
|
)
|
|
|
(8,593
|
)
|
|
|
(3,448
|
)
|
Balance at June 30, 2017
|
|
$
|
32,001
|
|
|
$
|
3,534
|
|
|
$
|
7,558
|
|
|
$
|
5,603
|
|
|
$
|
1,948
|
|
Credit Concentration
Our customers are primarily wholesale distributors,
chain drug stores, group purchasing organizations, and pharmaceutical companies.
During the three months ended June 30, 2017, three
customers represented 32%, 24%, and
23
% of net revenues, respectively. During the
six months ended June 30, 2017, these same three customers represented 32%, 22%, and
24
%
of net revenues, respectively. As of June 30, 2017, accounts receivable from these customers totaled 82% of accounts receivable,
net. During the three months ended June 30, 2016, three customers represented 28%, 21%, and 18% of net revenues, respectively.
During the six months ended June 30, 2016, these same three customers represented 25%, 24%, and 17% of net revenues, respectively.
Convertible Senior Notes
In December 2014, we issued
$143.8 million of our Convertible Senior Notes due 2019 (the “Notes”) in a registered public offering. The Notes pay
3.0% interest semi-annually in arrears starting on June 1, 2015 and are due December 1, 2019. The initial conversion price was
$69.48 per share. Simultaneous with the issuance of the Notes, we entered into “bond hedge” (or purchased call) and
“warrant” (or written call) transactions with an affiliate of one of the offering underwriters in order to synthetically
raise the initial conversion price of the Notes to $96.21 per share and reduce the potential common stock dilution that may arise
from the conversion of the Notes.
The Notes are convertible at the option of the holder
under certain circumstances and upon conversion we may elect to settle such conversion in shares of our common stock, cash, or
a combination thereof. As a result of our cash conversion option, we separately accounted for the value of the embedded conversion
option as a debt discount (with an offset to APIC) of $33.6 million. Deferred financing costs are recorded as a reduction of long-term
debt in the consolidated balance sheets and are being amortized as additional non-cash interest expense on a straight-line basis
over the term of the debt, since this method was not significantly different from the effective interest method.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
3.
|
INDEBTEDNESS – continued
|
The carrying value of the Notes
is as follows as of:
(in thousands)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Principal amount
|
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Unamortized debt discount
|
|
|
(17,328
|
)
|
|
|
(20,644
|
)
|
Deferred financing costs
|
|
|
(2,041
|
)
|
|
|
(2,463
|
)
|
Net carrying value
|
|
$
|
124,381
|
|
|
$
|
120,643
|
|
We had accrued interest of $0.4 million related to
the Notes recorded in accrued expenses, other in our consolidated balance sheets at both June 30, 2017 and December 31, 2016.
The following table sets forth the components of
total interest expense related to the Notes recognized in the accompanying unaudited interim condensed consolidated statements
of earnings for the three and six months ended June 30, 2017 and 2016:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(in thousands)
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Contractual coupon
|
|
$
|
1,078
|
|
|
$
|
1,078
|
|
|
$
|
2,156
|
|
|
$
|
2,156
|
|
Amortization of debt discount
|
|
|
1,668
|
|
|
|
1,582
|
|
|
|
3,315
|
|
|
|
3,144
|
|
Amortization of finance fees
|
|
|
211
|
|
|
|
211
|
|
|
|
422
|
|
|
|
422
|
|
Capitalized interest
|
|
|
(134
|
)
|
|
|
(54
|
)
|
|
|
(224
|
)
|
|
|
(100
|
)
|
|
|
$
|
2,823
|
|
|
$
|
2,817
|
|
|
$
|
5,669
|
|
|
$
|
5,622
|
|
As of June 30, 2017, the effective interest
rate on the Notes was 7.9%, on an annualized basis.
Line of Credit
In May 2016, we entered into
a credit arrangement (the “Line of Credit”) with Citizens Bank Capital, a division of Citizens Asset Finance, Inc.
(the “Citizens Agreement”). The Citizens Agreement provides for a $30.0 million asset-based revolving credit loan facility,
with availability subject to a borrowing base consisting of eligible accounts receivable and inventory and the satisfaction of
conditions precedent specified in the Citizens Agreement. The Citizens Agreement provides for an accordion feature, whereby we
may increase the revolving commitment up to an additional $10.0 million subject to certain terms and conditions. The Citizens Agreement
matures on May 12, 2019, at which time all amounts outstanding will be due and payable. 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.
In February 2017, we drew down
$30.0 million on the Line of Credit. As part of the draw down, we implemented the accordion feature and increased the Line of Credit
to $40.0 million. As of June 30, 2017, we had a $30.0 million outstanding balance on the Line of Credit. In the second quarter
of 2016, we deferred $0.3 million of debt issuance costs related to the Line of Credit, which are being amortized over the three
year life of the Line of Credit. The $0.2 million net balance of deferred debt issuance costs is included in prepaid expenses and
other current assets in the accompanying unaudited interim condensed consolidated balance sheet at June 30, 2017. During the three
and six months ended June 30, 2017, we recorded $0.2 million and $0.3 million of interest expense related to the Line of Credit,
respectively.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Basic earnings per share is computed by dividing
net income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period.
For periods of net income, and when the effects are
not anti-dilutive, we calculate diluted earnings per share by dividing net income available to common shareholders by the weighted-average
number of shares outstanding plus the impact of all potential dilutive common shares, consisting primarily of common stock options,
shares to be purchased under our Employee Stock Purchase Plan (“ESPP”), unvested restricted stock awards, stock purchase
warrants, and any conversion gain on our Notes (Note 3), using the treasury stock method. For periods of net loss, diluted loss
per share is calculated similarly to basic loss per share.
Our unvested restricted shares contain non-forfeitable
rights to dividends, and therefore are considered to be participating securities; in periods of net income, the calculation of
basic and diluted earnings per share excludes from the numerator net income attributable to the unvested restricted shares, and
excludes the impact of those shares from the denominator.
For purposes of determining diluted earnings per
share, we have elected a policy to assume that the principal portion of the Notes (Note 3) is settled in cash. As such, the principal
portion of the Notes has no effect on either the numerator or denominator when determining diluted earnings per share. Any conversion
gain is assumed to be settled in shares and is incorporated in diluted earnings per share using the treasury method. The warrants
issued in conjunction with the issuance of the Notes (Note 3) are considered to be dilutive when they are in-the-money relative
to our average stock price during the period; the bond hedge purchased in conjunction with the issuance of the Notes is always
considered to be anti-dilutive.
Earnings per share for the three and six months ended
June 30, 2017 and 2016 are calculated for basic and diluted earnings per share as follows:
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
(in thousands, except per share amounts)
|
|
Three Months Ended
June 30,
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
2,681
|
|
|
$
|
1,125
|
|
|
$
|
2,681
|
|
|
$
|
1,125
|
|
|
$
|
3,833
|
|
|
$
|
2,471
|
|
|
$
|
3,833
|
|
|
$
|
2,471
|
|
Net income allocated to restricted stock
|
|
|
(20
|
)
|
|
|
(8
|
)
|
|
|
(20
|
)
|
|
|
(8
|
)
|
|
|
(28
|
)
|
|
|
(17
|
)
|
|
|
(28
|
)
|
|
|
(17
|
)
|
Net income allocated to common shares
|
|
$
|
2,661
|
|
|
$
|
1,117
|
|
|
$
|
2,661
|
|
|
$
|
1,117
|
|
|
$
|
3,805
|
|
|
$
|
2,454
|
|
|
$
|
3,805
|
|
|
$
|
2,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted-Average Shares Outstanding
|
|
|
11,546
|
|
|
|
11,402
|
|
|
|
11,546
|
|
|
|
11,402
|
|
|
|
11,536
|
|
|
|
11,398
|
|
|
|
11,536
|
|
|
|
11,398
|
|
Dilutive effect of stock options and ESPP
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
123
|
|
|
|
116
|
|
Diluted Weighted-Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
11,667
|
|
|
|
11,541
|
|
|
|
|
|
|
|
|
|
|
|
11,659
|
|
|
|
11,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
$
|
0.23
|
|
|
$
|
0.10
|
|
|
$
|
0.23
|
|
|
$
|
0.10
|
|
|
$
|
0.33
|
|
|
$
|
0.22
|
|
|
$
|
0.33
|
|
|
$
|
0.21
|
|
The number of anti-dilutive shares, which have been
excluded from the computation of diluted earnings per share, including the shares underlying the Notes, was 4.8 million and 4.5
million for the three months ended June 30, 2017 and 2016 and was 4.7 million and 4.5 million for the six months ended June 30,
2017 and 2016, respectively. Anti-dilutive shares consist of out-of-the-money Class C Special stock, out-of-the-money common stock
options, common stock options that are anti-dilutive when calculating the impact of the potential dilutive common shares using
the treasury stock method, underlying shares related to out-of-the-money bonds issued as convertible debt, and out-of-the-money
warrants exercisable for common stock.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Inventories consist of the following as of:
(in thousands)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Raw materials
|
|
$
|
17,183
|
|
|
$
|
14,138
|
|
Packaging materials
|
|
|
1,279
|
|
|
|
930
|
|
Work-in-progress
|
|
|
776
|
|
|
|
477
|
|
Finished goods
(1)
|
|
|
23,279
|
|
|
|
10,812
|
|
|
|
|
42,517
|
|
|
|
26,357
|
|
Reserve for excess/obsolete inventories
|
|
|
(210
|
)
|
|
|
(174
|
)
|
Inventories, net
|
|
$
|
42,307
|
|
|
$
|
26,183
|
|
(1)
Includes finished goods acquired in asset purchases
(Note 12).
Vendor Concentration
We source the raw materials for our products, including
active pharmaceutical ingredients (“API”), from both domestic and international suppliers. Generally, only a single
source of API is qualified for use in each product due to the cost and time required to validate a second source of supply. As
a result, we are dependent upon our current vendors to reliably supply the API required for ongoing product manufacturing. During
the three months ended June 30, 2017, we purchased approximately 27% of our inventory (exclusive of inventory acquired in asset
purchases (Note 12)) from two suppliers. As of June 30, 2017, the amounts payable to these suppliers was immaterial. During the
six months ended June 30, 2017, we purchased approximately 18% of our inventory (exclusive of inventory acquired in asset purchases
(Note 12)) from one supplier. As of June 30, 2017, the amounts payable to this supplier was immaterial. During the three months
ended June 30, 2016, we purchased approximately 48% of our inventory from four suppliers. During the six months ended June 30,
2016, we purchased approximately 29% of our inventory from two suppliers.
|
6.
|
PROPERTY, PLANT, AND EQUIPMENT
|
Property, plant, and equipment consist of the following
as of:
(in thousands)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
$
|
160
|
|
|
$
|
160
|
|
Buildings
|
|
|
3,756
|
|
|
|
3,756
|
|
Machinery, furniture, and equipment
|
|
|
9,174
|
|
|
|
8,176
|
|
Construction in progress
|
|
|
7,846
|
|
|
|
4,293
|
|
|
|
|
20,936
|
|
|
|
16,385
|
|
Less: accumulated depreciation
|
|
|
(5,970
|
)
|
|
|
(5,387
|
)
|
Property, Plant, and Equipment, net
|
|
$
|
14,966
|
|
|
$
|
10,998
|
|
Depreciation expense was $0.3 million and $0.2 million
for the three months ended June 30, 2017 and 2016, respectively. Depreciation expense was $0.6 million and $0.4 million for the
six months ended June 30, 2017 and 2016, respectively. During the three months ended June 30, 2017 and 2016, there was $0.1 million
and $54 thousand of interest capitalized into construction in progress, respectively. During the six months ended June 30, 2017
and 2016, there was $0.2 million and $0.1 million of interest capitalized into construction in progress, respectively. Construction
in progress consists of multiple projects, primarily related to new equipment to expand our manufacturing capability as our product
lines continue to grow.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
7.
|
GOODWILL AND INTANGIBLE ASSETS
|
Goodwill
As a result of our 2013 merger with BioSante Pharmaceuticals,
Inc. (“BioSante”), we recorded goodwill of $1.8 million in our one reporting unit. In the first quarter of 2017, effective
as of January 1, 2017, we adopted new accounting guidance with respect to goodwill. As a result, our accounting policy related
to the measurement of goodwill has changed.
Goodwill Accounting Policy
Goodwill 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. We assess the recoverability of the carrying
value of goodwill as of October 31st of each year, and whenever events occur or circumstances change that would, more likely than
not, reduce the fair value of our reporting unit below its carrying value.
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.
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, an impairment loss will be recorded,
measured as the difference between the excess of the carrying value of the reporting unit over its fair value, not to exceed the
total amount of goodwill allocated to that reporting unit.
There have been no events or
changes in circumstances that would have reduced the fair value of our reporting unit below its carrying value during six months
ended June 30, 2017. No impairment losses were recognized during the three or six months ended June 30, 2017 or 2016.
Definite-lived Intangible Assets
Acquisition of New Drug Applications
and Product Rights
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. We made the $20.2 million cash payment using cash on hand. We accounted for this transaction as an asset
purchase. We also capitalized $40 thousand of costs directly related to the transaction. The $15.1 million product rights intangible
asset acquired in the asset purchase is being amortized in full over its estimated useful life of 10 years. Please see Note 12
for further details regarding the transaction.
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. We made the $30.6 million cash payment using $30.0 million of funds
from our Line of Credit (Note 3) and $0.6 million of cash on hand. We accounted for this transaction as an asset purchase. We also
capitalized $0.1 million of costs directly related to the transaction. The $19.0 million product rights intangible asset acquired
in the asset purchase is being amortized in full over its estimated useful life of 10 years. Please see Note 12 for further details
regarding the transaction.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
7.
|
GOODWILL AND INTANGIBLE ASSETS – continued
|
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.
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.
The components of net definite-lived intangible assets
are as follows:
(in thousands)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
Weighted Average
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Amortization
Period
|
Acquired ANDA intangible assets
|
|
$
|
42,076
|
|
|
$
|
(10,491
|
)
|
|
$
|
42,076
|
|
|
$
|
(8,390
|
)
|
|
10.0 years
|
NDAs and product rights
|
|
|
184,306
|
|
|
|
(26,859
|
)
|
|
|
150,250
|
|
|
|
(17,081
|
)
|
|
10.0 years
|
Marketing and distribution rights
|
|
|
11,042
|
|
|
|
(3,963
|
)
|
|
|
11,042
|
|
|
|
(2,662
|
)
|
|
4.7 years
|
Non-compete agreement
|
|
|
624
|
|
|
|
(111
|
)
|
|
|
624
|
|
|
|
(67
|
)
|
|
7.0 years
|
|
|
$
|
238,048
|
|
|
$
|
(41,424
|
)
|
|
$
|
203,992
|
|
|
$
|
(28,200
|
)
|
|
|
Definite-lived intangible assets are stated at cost,
net of amortization, generally using the straight line method over the expected useful lives of the intangible assets. In the case
of the Inderal XL and InnoPran XL asset purchases, because we anticipate that the acquired assets will provide a greater economic
benefit in the earlier years, we are amortizing 80% of the value of the intangible assets over the first five years of useful lives
of the assets and amortizing the remaining 20% of the value of the intangible assets over the second five years of useful lives
of the assets. Amortization expense was $6.8 million and $5.7 million for the three months ended June 30, 2017 and 2016, respectively.
Amortization expense was $13.2 million and $10.1 million for the six months ended June 30, 2017 and 2016, respectively.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
7.
|
GOODWILL AND INTANGIBLE ASSETS – continued
|
We test for impairment of definite-lived intangible
assets when events or circumstances indicate that the carrying value of the assets may not be recoverable. No such triggering events
were identified during the three and six months ended June 30, 2017 and 2016 and therefore no impairment loss was recognized in
the three and six months ended June 30, 2017 or 2016.
Expected future amortization expense is as follows:
(in thousands)
|
|
|
|
|
2017 (remainder of the year)
|
|
$
|
13,502
|
|
2018
|
|
|
26,825
|
|
2019
|
|
|
26,825
|
|
2020
|
|
|
26,343
|
|
2021
|
|
|
24,898
|
|
2022 and thereafter
|
|
|
78,231
|
|
Total
|
|
$
|
196,624
|
|
|
8.
|
STOCK-BASED COMPENSATION
|
In July 2016, we commenced administration of the
ANI Pharmaceuticals, Inc. 2016 Employee Stock Purchase Plan. As of June 30, 2017, we have 0.2 million shares of common stock available
under the ESPP. Under the ESPP, participants can purchase shares of our stock at a 15% discount. In the three and six months ended
June 30, 2017, we recognized $2 thousand and $4 thousand of stock-based compensation expense related to the ESPP in cost of sales
and $26 thousand and $39 thousand of stock-based compensation expense related to the ESPP in sales, general, and administrative
expense in our accompanying unaudited interim condensed consolidated statements of earnings, respectively.
All equity-based service awards are granted under
the ANI Pharmaceuticals, Inc. Fifth Amended and Restated 2008 Stock Incentive Plan (the “2008 Plan”), which was approved
by shareholders at the May 17, 2017 annual meeting. The approved 2008 Plan provided for an increase of 0.8 million shares available
to the plan. As of June 30, 2017, we have 0.8 million shares of common stock available under the 2008 Plan.
The following table summarizes stock-based compensation
expense incurred under the 2008 Plan and included in our accompanying unaudited interim condensed consolidated statements of earnings:
(in thousands)
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cost of sales
|
|
$
|
26
|
|
|
$
|
24
|
|
|
$
|
49
|
|
|
$
|
14
|
|
Research and development
|
|
|
168
|
|
|
|
22
|
|
|
|
307
|
|
|
|
49
|
|
Selling, general, and administrative
|
|
|
1,585
|
|
|
|
2,171
|
|
|
|
2,794
|
|
|
|
3,259
|
|
|
|
$
|
1,779
|
|
|
$
|
2,217
|
|
|
$
|
3,150
|
|
|
$
|
3,322
|
|
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
vested 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 three months ended June 30, 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.
During the three months ended June 30, 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 three months ended June 30, 2016.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
8.
|
STOCK-BASED COMPENSATION – continued
|
A summary of stock option and restricted stock activity
under the 2008 Plan during the six months ended June 30, 2017 and 2016 is presented below:
(in thousands)
|
|
Options
|
|
|
RSAs
|
|
Outstanding December 31, 2015
|
|
|
474
|
|
|
|
63
|
|
Granted
|
|
|
273
|
|
|
|
42
|
|
Options Exercised/RSAs Vested
|
|
|
(54
|
)
|
|
|
(15
|
)
|
Forfeited
|
|
|
(50
|
)
|
|
|
(12
|
)
|
Outstanding June 30, 2016
|
|
|
643
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2016
|
|
|
578
|
|
|
|
63
|
|
Granted
|
|
|
185
|
|
|
|
50
|
|
Options Exercised/RSAs Vested
|
|
|
(2
|
)
|
|
|
(27
|
)
(1)
|
Forfeited
|
|
|
(3
|
)
|
|
|
-
|
|
Outstanding June 30, 2017
|
|
|
758
|
|
|
|
86
|
|
(1)
Includes five thousand shares purchased
from employees to cover employee income taxes related to income earned upon vesting of restricted stock. The shares purchased
are held in treasury and the $259 thousand total purchase price for the shares is included in Treasury stock in our accompanying
unaudited interim condensed consolidated balance sheets.
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 allowed
for repurchases to be conducted through open market or privately negotiated transactions. Shares acquired under the stock repurchase
program were returned to the status of authorized but unissued shares of common stock.
In January 2016, we purchased 65 thousand shares
under the stock repurchase program for $2.5 million. This program terminated on December 31, 2016.
We use the asset and liability method of accounting
for income taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that such tax rate changes are enacted.
The measurement of a deferred tax asset is reduced,
if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not
be realized. The utilization of our NOL carryforwards will be limited in future years as prescribed by Section 382 of the U.S.
Internal Revenue Code. As of both June 30, 2017 and December 31, 2016, we had provided a valuation allowance against certain
state net operating loss (“NOL”) carryforwards of $0.3 million.
We use a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return,
as well as guidance on derecognition, classification, interest and penalties, and financial statement reporting disclosures. For
those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
We have not identified any uncertain income tax positions that could have a material impact on the consolidated financial statements.
We recognize interest and penalties accrued on any unrecognized tax exposures as a component of income tax expense; we did not
have any such amounts accrued as of June 30, 2017 and December 31, 2016. We are subject to taxation in various jurisdictions and
all of our income tax returns remain subject to examination by tax authorities due to the availability of NOL carryforwards.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
10.
|
INCOME TAXES – continued
|
For interim periods, we recognize an income tax provision/(benefit)
based on our estimated annual effective tax rate expected for the entire year. The interim annual estimated effective tax rate
is based on the statutory tax rates then in effect, as adjusted for estimated changes in temporary and estimated permanent differences,
and excludes certain discrete items whose tax effect, when material, is recognized in the interim period in which they occur. These
changes in temporary differences, permanent differences, and discrete items result in variances to the effective tax rate from
period to period. We also have elected to exclude the impacts from significant pre-tax non-recognized subsequent events from our
interim estimated annual effective rate until the period in which they occur. Our estimated annual effective tax rate changes throughout
the year as our on-going estimates of pre-tax income, changes in temporary differences, and permanent differences are revised,
and as material discrete items occur.
The effective tax rate for the three months ended
June 30, 2017 was 32.1% of pre-tax income reported in the period, calculated based on the estimated annual effective rate anticipated
for the year ending December 31, 2017 plus the effects of certain material discrete items that occurred in the second quarter.
Our effective tax rate for the three months ended June 30, 2017 was impacted primarily by the Domestic Production Activities Deduction,
as well as the
impact of current period awards of stock-based compensation, stock option exercises,
and disqualifying dispositions of incentive stock options, all of which impact the consolidated
effective
rate in the period in which they occur.
The effective tax rate for the three months
ended June 30, 2016 was 52.2% for the year ending December 31, 2016. The effective tax rate for the period was primarily
driven by permanent differences related to our former international tax structure surrounding our Corticotropin NDAs, which
resulted in significant non-deductible amortization and interest expense in 2016.
The effective tax rate for the six months ended June
30, 2017 was 31.9% of pre-tax income reported in the period, calculated based on the estimated annual effective rate anticipated
for the year ending December 31, 2017 plus the effects of certain material discrete items that occurred in 2017. Our effective
tax rate for the six months ended June 30, 2017 was impacted primarily by the Domestic Production Activities Deduction, as well
as the impact of current period awards of stock-based compensation, stock option exercises, and disqualifying dispositions of incentive
stock options, all of which impact the consolidated
effective rate in the period in which they
occur.
The effective tax rate for the six months ended
June 30, 2016 was 52.8% for the year ending December 31, 2016. The effective tax rate for the period was primarily driven by
permanent differences related to our former international tax structure surrounding our Corticotropin NDAs, which resulted in
significant non-deductible amortization and interest expense in 2016.
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11.
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COMMITMENTS AND CONTINGENCIES
|
Government Regulation
Our products and facilities are subject to regulation
by a number of federal and state governmental agencies. The FDA, in particular, maintains oversight of the formulation, manufacture,
distribution, packaging, and labeling of all of our products. The Drug Enforcement Administration (“DEA”) maintains
oversight over our products that are controlled substances.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
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11.
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COMMITMENTS AND CONTINGENCIES – continued
|
Unapproved Products
Two of our products, Esterified Estrogen with Methyltestosterone
(“EEMT”) and Opium Tincture, are marketed without approved NDAs or ANDAs. During the three months ended June 30, 2017
and 2016, net revenues for these products totaled $
6.7
million and $9.0 million,
respectively. During the six months ended June 30, 2017 and 2016, net revenues for these products totaled $12
.9
million and $18.0 million, respectively.
The FDA's policy with respect to the continued marketing
of unapproved products is stated in the FDA's September 2011 Compliance Policy Guide Sec. 440.100 titled “Marketed New Drugs
without Approved NDAs or ANDAs.” Under this policy, the FDA has stated that it will follow a risk-based approach with regard
to enforcement against such unapproved products. The FDA evaluates whether to initiate enforcement action on a case-by-case basis,
but gives higher priority to enforcement action against products in certain categories, such as those marketed as unapproved drugs
with potential safety risks or that lack evidence of effectiveness. We believe that, so long as we comply with applicable manufacturing
standards, the FDA will not take action against us under the current enforcement policy. There can be no assurance, however, that
the FDA will continue this policy or not take a contrary position with any individual product or group of products. If the FDA
were to take a contrary position, we may be required to seek FDA approval for these products or withdraw such products from the
market. If we decide to withdraw the products from the market, our net revenues for generic pharmaceutical products would decline
materially, and if we decide to seek FDA approval, we would face increased expenses and might need to suspend sales of the products
until such approval was obtained, and there are no assurances that we would receive such approval.
In addition, one group of products that we manufacture
on behalf of a contract customer is marketed by that customer without an approved NDA. If the FDA took enforcement action against
such customer, the customer may be required to seek FDA approval for the group of products or withdraw them from the market. Our
contract manufacturing revenues for these unapproved products for the three months ended June 30, 2017 and 2016 were $0.4 million
and $0.5 million, respectively. Our contract manufacturing revenues for these unapproved products for the six months ended June
30, 2017 and 2016 were $0.9 million and $0.8 million, respectively.
We receive royalties on the net sales of a group
of contract-manufactured products, which are marketed by the contract customer without an approved NDA. If the FDA took enforcement
action against such customer, the customer may be required to seek FDA approval for the group of products or withdraw them from
the market. Our royalties on the net sales of these unapproved products for the three and six months ended June 30, 2017 and 2016
were less than 1% of total revenues.
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.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
11.
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COMMITMENTS
AND CONTINGENCIES – continued
|
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 2016, 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 was originally assigned action date of June 2017. This date was later revised to October 2017 due to the election
by the FDA to perform a Pre-Approval Inspection (“PAI”) of our Baudette manufacturing facilities. The FDA
conducted its PAI between May 15, 2017 and May 18, 2017. On July 31, 2017, we received an Establishment Inspection Report
from the FDA documenting that no objectionable conditions resulted from the inspection and that no FDA-483 or verbal
observations were issued. We continue to reserve all of our legal options in this matter.
|
12.
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FAIR
VALUE DISCLOSURES
|
Fair value is the price that would be received from
the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement
date. U.S. GAAP establishes a hierarchical disclosure framework that prioritizes and ranks the level of observability of inputs
used in measuring fair value.
The inputs used in measuring the fair value of cash
and cash equivalents are considered to be level 1 in accordance with the three-tier fair value hierarchy. The fair market
values are based on period-end statements supplied by the various banks and brokers that held the majority of our funds. The fair
value of short-term financial instruments (primarily accounts receivable, prepaid expenses, accounts payable, accrued expenses,
borrowings under line of credit, and other current liabilities) approximate their carrying values because of their short-term nature.
While our Notes are recorded on our accompanying unaudited interim condensed consolidated balance sheets at their net carrying
value of $124.4 million as of June 30, 2017, the Notes are being traded on the bond market and their full fair value is $151.0
million, based on their closing price on June 30, 2017, a Level 1 input.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
12.
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FAIR
VALUE DISCLOSURES – continued
|
Financial Assets and Liabilities Measured at Fair
Value on a Recurring Basis
Our contingent value rights (“CVRs”),
which were granted coincident with our merger with BioSante and expire in June 2023, are considered contingent consideration and
are classified as liabilities. As such, the CVRs were recorded as purchase consideration at their estimated fair value, using level
3 inputs, and are marked to market each reporting period until settlement. The fair value of CVRs is estimated using the present
value of our projection of the expected payments pursuant to the terms of the CVR agreement, which is the primary unobservable
input. If our projection or expected payments were to increase substantially, the value of the CVRs could increase as a result.
The present value of the liability was calculated using a discount rate of 15%. We determined that the fair value of the CVRs,
and the changes in such fair value, was immaterial as of June 30, 2017 and December 31, 2016. We also determined that the changes
in such fair value were immaterial as of June 30, 2017 and December 31, 2016.
Financial Assets and Liabilities Measured at Fair
Value on a Non-Recurring Basis
We do not have any financial assets and liabilities
that are measured at fair value on a non-recurring basis.
Non-Financial Assets and Liabilities Measured
at Fair Value on a Recurring Basis
We do not have any non-financial assets and liabilities
that are measured at fair value on a recurring basis.
Non-Financial Assets and Liabilities Measured
at Fair Value on a Non-Recurring Basis
We measure our long-lived assets, including property,
plant, and equipment, intangible assets, and goodwill, at fair value on a non-recurring basis. These assets are recognized at fair
value when they are deemed to be other-than-temporarily impaired. No such fair value impairment was recognized in the six months
ended June 30, 2017 and 2016.
Acquired Non-Financial Assets Measured
at Fair Value
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 (Note 7). We made the $20.2 million cash payment using
cash on hand and capitalized $40 thousand of costs directly related to the asset purchase. We accounted for this transaction as
an asset purchase. The $15.1 million product rights intangible asset was recorded at its relative fair value, determined using
Level 3 unobservable inputs. In order to determine the fair value of the product rights intangible asset, we used the present value
of the estimated cash flows related to the product rights, using a discount rate of 10%. The product rights 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
June 30, 2017 and therefore no impairment loss was recognized for the six months ended June 30, 2017.
We
also recorded $5.0 million of finished goods inventory. The fair value of the finished goods inventory was determined based on
the estimated selling price to be generated from the finished goods, less costs to sell, including a reasonable margin.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
12.
|
FAIR
VALUE DISCLOSURES – continued
|
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 (Note 7). We made the $30.6 million cash payment using $30.0 million
of funds from our Line of Credit (Note 3) and $0.6 million of cash on hand. We also capitalized $0.1 million of costs directly
related to the asset purchase. We accounted for this transaction as an asset purchase. The $19.0 million product rights intangible
asset was recorded at its relative fair value, determined using Level 3 unobservable inputs. In order to determine the fair value
of the product rights intangible asset, we used the present value of the estimated cash flows related to the product rights, using
a discount rate of 10%. The product rights 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 June 30, 2017 and therefore no impairment loss was recognized for
the six months ended June 30, 2017. We also recorded $11.6 million of finished goods inventory. The fair value of the finished
goods inventory was determined based on the estimated selling price to be generated from the finished goods, less costs to sell,
including a reasonable margin.
In April 2016, we purchased the rights,
title, and interest in the NDA for Inderal LA, as well as certain documentation, trademark rights, and finished goods from Cranford
Pharmaceuticals, LLC for $60.0 million in cash and milestone payments based on future gross profits from sales of products under
the NDA (Note 7). In addition, at closing, we transferred $5.0 million to an escrow account as security for future milestone payments.
This escrow account balance is not expected to be released in less than one year and is included in restricted cash in our accompanying
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. We recorded $10.9 million of finished goods. The fair
value of the finished goods was determined based on the estimated selling price 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. 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 is being amortized in full over its 10 year useful life. 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 is being amortized
in full over its seven year useful life. The intangible assets 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 in the six months ended
June 30, 2017 and therefore no impairment loss was recognized for the six months ended June 30, 2017.
In January 2016, we purchased from Merck Sharp &
Dohme B.V. the NDAs for two previously marketed generic drug products for $75.0 million in cash and a percentage of future net
sales from product sales (Note 7). In addition, we capitalized $0.3 million in legal costs directly related to the transaction.
We accounted for this transaction as an asset purchase. 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 are being 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 six months ended June 30, 2017 and therefore no impairment
loss was recognized for the six months ended June 30, 2017.