The accompanying notes are an integral part of these consolidated financial statements.
The
accompanying notes are an integral part of these consolidated financial statements.
The accompanying
notes are an integral part of these consolidated financial statements.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Business
ANI Pharmaceuticals, Inc. and its
consolidated subsidiaries, ANIP Acquisition Company and ANI Pharmaceuticals Canada Inc. (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 three facilities, of which two are located in Baudette,
Minnesota and one is located in Oakville, Ontario, we manufacture oral solid dose products, as well as semi-solids, 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.
On August 6, 2018, our subsidiary,
ANI Pharmaceuticals Canada Inc. (“ANI Canada”), acquired all the issued and outstanding equity interests of WellSpring
Pharma Services Inc. (“WellSpring”), a Canadian company that performs contract development and manufacturing of pharmaceutical
products for a purchase price of $18.0 million, subject to certain customary adjustments. Pursuant to these customary adjustments,
the total purchase consideration was $16.7 million. The consideration was paid entirely from cash on hand. In conjunction with
the transaction, we acquired WellSpring’s pharmaceutical manufacturing facility, laboratory, and offices, its current book
of commercial business, as well as an organized workforce. Following the consummation of the transaction, WellSpring was merged
into ANI Canada with the resulting entity’s name being ANI Pharmaceuticals Canada Inc.
Our operations are subject to certain risks
and uncertainties including, among others, current and potential competitors with greater resources, dependence on significant
customers, 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
We have a subsidiary located in Canada.
The subsidiary conducts its transactions in U.S. dollars and Canadian dollars, but its functional currency is the U.S. dollar.
The results of any non-U.S. dollar transactions are remeasured in U.S. dollars at the applicable exchange rates during the period
and resulting foreign currency transaction gains and losses are included in the determination of net income. Our gain or loss on
transactions denominated in foreign currencies was immaterial for the years ended December 31, 2019, 2018, and 2017. Unless
otherwise noted, all references to “$” or “dollar” refer to the U.S. dollar.
ANI
Pharmaceuticals, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
For
the years ended December 31, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Use of Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues
and expenses during the reporting period. In the accompanying consolidated financial statements, estimates are used for, but not
limited to, stock-based compensation, revenue recognition, allowance for doubtful accounts, variable consideration determined based
on 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, income tax provision, deferred taxes and valuation allowance, determination of right-of-use assets and lease liabilities,
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.
Leases
At the inception of a contract we determine
if the arrangement is, or contains, a lease. Right-of-use (“ROU”) assets represent our right to use an underlying asset
for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease
ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
Rent expense is recognized on a straight-line basis over the lease term.
We have made certain accounting policy
elections whereby we (i) do not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12-months
or less) and (ii) combine lease and non-lease elements of our operating leases. Operating lease ROU assets are included in other
non-current assets and operating lease liabilities are included in accrued expenses and other and other non-current liabilities
in our consolidated balance sheets. As of December 31, 2019, we did not have any finance leases.
Comprehensive Income
Comprehensive income, which is reported
in the statement of comprehensive income, consists of net income, changes in fair value of our interest rate swap, and other comprehensive
income, net of tax.
Credit Concentration
Our customers are primarily wholesale distributors,
chain drug stores, group purchasing organizations, and other pharmaceutical companies.
During the year ended December 31,
2019, three customers represented approximately 32%, 25%, and 23% of net revenues, respectively. As of December 31, 2019,
accounts receivable from these customers totaled 88% of net accounts receivable. During the year ended December 31, 2018,
three customers represented approximately 21%, 23%, and 33% of net revenues, respectively. During the year ended December 31,
2017, three customers represented approximately 29%, 29%, and 20% 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, 2019, we purchased approximately 13% of our inventory from one supplier. As of December 31,
2019, amounts payable to this supplier was $0.7 million. During the year ended December 31, 2018, we purchased approximately
13% of our inventory from one supplier. During the year ended December 31, 2017, we purchased approximately 23% of our inventory
from two suppliers.
Revenue Recognition
On January 1, 2018, we adopted
guidance for revenue recognition for contracts, using the modified retrospective method. The implementation of the guidance had
no material impact on the measurement or recognition of revenue from customer contracts of prior periods. For our revenue recognition
policies prior to adopting the guidance for revenue recognition for contracts, please see Item 8. Consolidated Financial
Statements, Note 1, Description of Business and Summary of Significant Accounting Policies, in our Annual Report on
Form 10-K for the year ended December 31, 2017.
We recognize revenue using the following
steps:
|
·
|
Identification of the contract, or contracts, with a customer;
|
|
·
|
Identification of the performance obligations in the contract;
|
|
·
|
Determination of the transaction price, including the identification
and estimation of variable consideration;
|
|
·
|
Allocation of the transaction price to the performance obligations
in the contract; and
|
|
·
|
Recognition of revenue when we satisfy a performance obligation.
|
ANI
Pharmaceuticals, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
For
the years ended December 31, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
We derive our revenues primarily from sales
of generic and branded pharmaceutical products. Revenue is recognized when our obligations under the terms of our contracts with
customers are satisfied, which generally occurs when control of the products we sell is transferred to the customer. We estimate
variable consideration after considering applicable information that is reasonably available. We generally do not have incremental
costs to obtain contracts that would otherwise not have been incurred. We do not adjust revenue for the promised amount of consideration
for the effects of a significant financing component because our customers generally pay us within 100 days.
All revenue recognized in our consolidated
statements of operations is considered to be revenue from contracts with customers. The following table depicts the disaggregation
of revenue:
Products and Services
|
|
Years Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Sales of generic pharmaceutical products
|
|
$
|
128,729
|
|
|
$
|
117,451
|
|
|
$
|
118,437
|
|
Sales of branded pharmaceutical products
|
|
|
63,767
|
|
|
|
60,554
|
|
|
|
50,919
|
|
Sales of contract manufactured products
|
|
|
11,139
|
|
|
|
9,119
|
|
|
|
7,046
|
|
Royalties from licensing agreements
|
|
|
807
|
|
|
|
12,504
|
|
|
|
-
|
|
Product development services
|
|
|
1,125
|
|
|
|
1,019
|
|
|
|
-
|
|
Other(1)
|
|
|
980
|
|
|
|
929
|
|
|
|
440
|
|
Total net revenues
|
|
$
|
206,547
|
|
|
$
|
201,576
|
|
|
$
|
176,842
|
|
(1)Primarily includes laboratory services and royalties on sales of contract manufactured products
|
Timing of Revenue Recognition
|
|
Years Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Performance obligations transferred at a point in time
|
|
$
|
205,422
|
|
|
$
|
200,557
|
|
|
$
|
176,842
|
|
Performance obligations transferred over time
|
|
|
1,125
|
|
|
|
1,019
|
|
|
|
-
|
|
Total
|
|
$
|
206,547
|
|
|
$
|
201,576
|
|
|
$
|
176,842
|
|
During
the year ended December 31, 2019, we did not incur, and therefore did not defer, any material incremental costs to
obtain contracts. We recognized a decrease of $10.2 million of net revenue from performance obligations satisfied in prior
periods during the year ended December 31, 2019, consisting primarily of revised estimates for variable consideration,
including chargebacks, rebates, returns, and other allowances, related to prior period sales, partially offset by royalties
from licensing agreements. We
provide technical transfer services to customers, for which services are transferred over time. As a result, we had $0.1
million and $0.1 million of contract assets related to revenue recognized based on percentage of completion but not yet
billed and $0.5 million and $0.7 million of deferred revenue at December 31, 2019 and 2018, respectively. We had no
contract assets or deferred revenue at December 31, 2017. For the year ended December 31, 2019, we recognized $0.1
million of revenue that was included in deferred revenue as of December 31, 2018.
ANI
Pharmaceuticals, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
For
the years ended December 31, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Revenue from Sales of Generic and Branded Pharmaceutical
Products
Product sales consists of sales of our
generic and brand pharmaceutical products. Our sole performance obligation in our contracts is to provide pharmaceutical products
to customers. Our products are sold at pre-determined standalone selling prices and our performance obligation is considered to
be satisfied when control of the product is transferred to the customer. Control is transferred to the customer upon delivery of
the product to the customer, as our pharmaceutical products are sold on an FOB destination basis and because inventory risk and
risk of ownership passes to the customer upon delivery. Payment terms for these sales are generally less than 100 days.
Revenue from Distribution Agreements
From
time to time, we enter into 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. These products are sold under our own label. We have assessed and determined that we control the products sold under these
marketing and distribution agreements and therefore are the principal for sales under each of these marketing and distribution
agreements. As a result, we recognize revenue on a gross basis when control has passed to the customer and we have satisfied our
performance obligation. 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 operations
and are accrued in accrued royalties in our consolidated balance sheets until payment has occurred.
Sales of our pharmaceutical products are
subject to variable consideration due to chargebacks, government rebates, returns, administrative and other rebates, and cash discounts.
Estimates for these elements of variable consideration require significant judgment.
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:
|
·
|
A change in customer mix
|
|
·
|
A change in negotiated terms with customers
|
|
·
|
A change in the volume of off-contract purchases
|
As necessary, we adjust ASPs based on anticipated
changes in the factors above.
The difference between ASP and WAC is recorded
as a reduction in both gross revenues in the consolidated statements of operations 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.
ANI
Pharmaceuticals, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
For
the years ended December 31, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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 operations 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 operations and as an increase to the return goods reserve in the consolidated balance sheets.
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 operations and accounts receivable in the consolidated balance sheets.
ANI
Pharmaceuticals, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
For
the years ended December 31, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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 operations 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, 2019, 2018, and 2017:
|
|
Accruals for Chargebacks, Returns, and Other Allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
Prompt
|
|
|
|
|
|
|
Government
|
|
|
|
|
|
Fees and Other
|
|
|
Payment
|
|
(in thousands)
|
|
Chargebacks
|
|
|
Rebates
|
|
|
Returns
|
|
|
Rebates
|
|
|
Discounts
|
|
Balance at December 31, 2016
|
|
$
|
26,785
|
|
|
$
|
5,891
|
|
|
$
|
5,756
|
|
|
$
|
3,550
|
|
|
$
|
1,554
|
|
Accruals/Adjustments
|
|
|
179,297
|
|
|
|
12,237
|
|
|
|
12,184
|
|
|
|
24,037
|
|
|
|
8,126
|
|
Credits Taken Against Reserve
|
|
|
(177,852
|
)
|
|
|
(10,198
|
)
|
|
|
(9,666
|
)
|
|
|
(22,361
|
)
|
|
|
(7,846
|
)
|
Balance at December 31, 2017
|
|
$
|
28,230
|
|
|
$
|
7,930
|
|
|
$
|
8,274
|
|
|
$
|
5,226
|
|
|
$
|
1,834
|
|
Accruals/Adjustments
|
|
|
229,813
|
|
|
|
11,383
|
|
|
|
14,243
|
|
|
|
33,167
|
|
|
|
9,371
|
|
Credits Taken Against Reserve
|
|
|
(219,036
|
)
|
|
|
(10,339
|
)
|
|
|
(9,965
|
)
|
|
|
(31,040
|
)
|
|
|
(9,196
|
)
|
Balance at December 31, 2018
|
|
$
|
39,007
|
|
|
$
|
8,974
|
|
|
$
|
12,552
|
|
|
$
|
7,353
|
|
|
$
|
2,009
|
|
Accruals/Adjustments
|
|
|
260,771
|
|
|
|
17,549
|
|
|
|
19,105
|
|
|
|
36,874
|
|
|
|
10,789
|
|
Credits Taken Against Reserve
|
|
|
(249,896
|
)
|
|
|
(17,622
|
)
|
|
|
(15,062
|
)
|
|
|
(35,946
|
)
|
|
|
(10,249
|
)
|
Balance at December 31, 2019
|
|
$
|
49,882
|
|
|
$
|
8,901
|
|
|
$
|
16,595
|
|
|
$
|
8,281
|
|
|
$
|
2,549
|
|
Contract Manufacturing Product Sales Revenue
Contract manufacturing arrangements consists
of agreements in which we manufacture a pharmaceutical product on behalf of third party. Our performance obligation is to manufacture
and provide pharmaceutical products to customers, typically pharmaceutical companies. The contract manufactured products are sold
at pre-determined standalone selling prices and our performance obligations are considered to be satisfied when control of the
product is transferred to the customer. Control is transferred to the customer when the product leaves our dock to be shipped to
the customer, as our pharmaceutical products are sold on an FOB shipping point basis and the inventory risk and risk of ownership
passes to the customer at that time. Payment terms for these sales are generally less than two months. We estimate returns based
on historical experience. Historically, we have not had material returns for contract manufactured products.
As of December 31, 2019, the value
of our unsatisfied performance obligations (or backlog) was $8.1 million, which consists of firm orders for contract manufactured
products, for which our performance obligations remain unsatisfied and for which the related revenue has yet to be recognized.
We anticipate satisfying these performance obligations within six months.
Royalties from Licensing Agreements
From time to time, we enter into transition
agreements with the sellers of products we acquire, under which we license to the seller the right to sell the acquired products.
Therefore, we recognize the revenue associated with sales of the underlying products as royalties. Because these royalties are
sales-based, we recognize the revenue when the underlying sales occur, based on sales and gross profit information received from
the sellers. Upon full transition of the products and upon launching the products under our own labels, we recognize revenue for
the products as sales of generic or branded pharmaceutical products, as described above.
We receive royalties from a license for
patent rights initially owned by Cell Genesys, Inc., which merged with BioSante in 2009. The royalties are the results of
sales and milestones related to the Yescarta® product. We recognize revenue for sales-based royalties when the underlying sales
occur. We estimate variable consideration related to milestones, which requires significant judgment.
ANI
Pharmaceuticals, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
For
the years ended December 31, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Product Development Services Revenue
We provide product development services
to customers, which are performed over time. These services primarily relate to the technical transfer of product development
to our facility in Oakville, Ontario. The duration of these technical transfer projects can be up to three years. Deposits received
from these customers are recorded as deferred revenue until revenue is recognized. For contracts with no deposits and for the
remainder of contracts with deposits, we invoice customers as our performance obligations are satisfied. We recognize revenue
on a percentage of completion basis, which results in contract assets on our balance sheet. As of December 31, 2019, the
value of our unsatisfied performance obligations for product development services contracts was $1.3 million. We expect to satisfy
these performance obligations in the next 6 to 15 months.
Cash, Cash Equivalents, and Restricted Cash
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.
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. Additionally, we transferred $5.0 million to an escrow account as security for future milestone payments. This escrow
account balance is included in restricted cash in our accompanying consolidated balance sheet as of December 31, 2019.
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. Our
allowance for doubtful accounts was immaterial as of December 31, 2019 and 2018.
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. In the
fourth quarter of 2019, we recognized inventory reserve charges of $4.6 million, primarily related to our exiting from the market
of Methylphenidate Extended Release.
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
|
|
|
20 - 40 years
|
|
Machinery, furniture, and equipment
|
|
|
1 - 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, 2019, 2018, and 2017. 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,
2019 and 2018.
ANI
Pharmaceuticals, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
For
the years ended December 31, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible Assets
Intangible assets other than goodwill consist
of acquired ANDAs for previously commercialized and marketed drug products, acquired approved ANDAs for generic products yet to
be commercialized, an acquired development package for a generic drug product, a license, supply and distribution agreement for
a generic drug product, acquired product rights for generic products, acquired NDAs and product rights for branded products, acquired
marketing and distribution rights, and a non-compete agreement.
The ANDAs, NDAs and product rights, marketing
and distribution rights, and non-compete agreement are amortized over their remaining estimated useful lives, ranging from four
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. During the year ended December 31, 2019, we recognized an impairment charge of $75 thousand relating to our
Ranitidine product right asset (Note 7). No impairment losses related to intangible assets were recognized in the year ended
December 31, 2018. During the year ended December 31, 2017, we recognized impairment charges of $0.9 million in relation
to our testosterone gel NDA asset (Note 7).
Goodwill
Goodwill relates to the Merger and the
acquisition of WellSpring 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 for impairment 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.
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 were to exceed its fair value, we would recognize an impairment
charge for the amount by which the carrying amount exceeded the reporting unit’s fair value. The loss recognized would not
exceed the total amount of goodwill allocated to that reporting unit. No impairment loss related to goodwill was recognized in
the years ended December 31, 2019, 2018, and 2017.
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 operations 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.
ANI
Pharmaceuticals, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
For
the years ended December 31, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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 operations 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 $19.8 million,
$15.4 million, and $9.1 million for the years ended December 31, 2019, 2018, and 2017, 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 is recognized
as expense on a straight-line basis over the employee’s requisite service period and classified where the underlying salaries
are classified. We also account for forfeitures as they occur rather than using an estimated forfeiture rate. We recognize excess
tax benefits or tax deficiencies as a component of our current period provision for income taxes.
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 $9.1 million, $6.7 million, and $6.1
million of non-cash, stock-based compensation cost for the years ended December 31, 2019, 2018, and 2017, respectively, and
$147 thousand, $102 thousand, and $68 thousand of the 2019, 2018, and 2017 expense related to the ESPP, respectively.
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 and dividend yields. Changes in these assumptions can affect the fair value estimate.
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.
During the second quarter of 2019, we adopted
an intercompany transfer pricing policy that uses the “comparable profits method” for pricing intercompany services
between ANI Pharmaceuticals, Inc. and ANI Canada. For U.S. and Canadian tax purposes, the policy was adopted in conjunction
with the acquisition date of August 6, 2018.
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 have provided a valuation allowance against certain of our state net operating loss (“NOL”)
carryforwards that are not expected to be used during the carryforward periods. As of December 31, 2018, we had provided a valuation
allowance against ANI Canada’s net deferred tax assets of $1.9 million and against certain of our state net operating loss
(“NOL”) carryforwards that are not expected to be used during the carryforward periods of $0.3 million. As a result
of the newly adopted transfer pricing policy, our assessment of the amount of ANI Canada’s deferred tax assets that are more
likely than not to be realized changed. As a result, during the second quarter 2019, we released ANI Canada’s valuation allowance
and, as a result, our valuation allowance at December 31, 2019 of $0.4 million relates solely to our state NOL carryforwards.
We have not provided for deferred taxes
related to any difference between the tax basis in the shares of ANI Canada and the financial reporting basis in those shares since
it has the intent and ability to indefinitely reinvest ANI Canada’s earnings and not repatriate those earnings.
ANI
Pharmaceuticals, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
For
the years ended December 31, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
We use a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.
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 December 31, 2019, 2018, and 2017. We are subject to taxation in various U.S. jurisdictions
and Canada and all of our income tax returns remain subject to examination by tax authorities due to the availability of NOL carryforwards.
We consider potential tax effects resulting
from discontinued operations and for gains and losses in other comprehensive income and record intra-period tax allocations, when
those effects are deemed material. In 2019 and 2018, we entered in an interest rate swap agreements (Note 4) that we designated
as cash flow hedges designed to manage exposure to changes in LIBOR-based interest rate underlying our secured Term Loan (the “Term
Loan”) and Delayed Draw Term Loan (“DDTL”) with Citizen’s Bank., N.A. Due to the effective nature of the
hedge, the initial fair value of the hedge and subsequent changes in the fair value of the hedge are recognized in accumulated
other comprehensive loss, net of tax in the accompanying consolidated balance sheets. Income taxes are allocated to the hedge component
of accumulated other comprehensive income based on appropriate intra-period tax allocations when those effects are deemed material.
Earnings (Loss) per Share
Basic earnings (loss) per share is computed
by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding during
the period.
For periods of net income, and when the
effects are not anti-dilutive, we calculate diluted earnings (loss) 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 because the impact of all dilutive potential common shares is anti-dilutive.
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 (loss) 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 (loss) per share, we elected a policy that the principal portion of our 3.0% Convertible Senior Notes that matured
on December 1, 2019 (the “Notes,” Note 3) was settled in cash. As such, the principal portion of the Notes had
no effect on either the numerator or denominator when determining diluted earnings (loss) per share. Any conversion gain was assumed
to be settled in shares and was incorporated in diluted earnings (loss) per share using the treasury method. This policy was consistent
with our election for settlement of the Notes under the First Supplemental Indenture to the Notes. The warrants issued in conjunction
with the issuance of the Notes were considered to be dilutive when they were in-the-money relative to our average stock price during
the period; the bond hedge purchased in conjunction with the issuance of the Notes was always considered to be anti-dilutive.
ANI
Pharmaceuticals, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
For
the years ended December 31, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
The numerator for earnings per share for
the years ended December 31, 2019, 2018, and 2017 are calculated for basic and diluted earnings (loss) per share as follows:
|
|
Basic
|
|
|
Diluted
|
|
|
|
Years Ended December 31,
|
|
|
Years Ended December 31,
|
|
(in thousands, except per share amounts)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Net income/(loss)
|
|
$
|
6,094
|
|
|
$
|
15,494
|
|
|
$
|
(1,076
|
)
|
|
$
|
6,094
|
|
|
$
|
15,494
|
|
|
$
|
(1,076
|
)
|
Net income allocated to restricted stock
|
|
|
(97
|
)
|
|
|
(154
|
)
|
|
|
-
|
|
|
|
(97
|
)
|
|
|
(154
|
)
|
|
|
-
|
|
Net income/(loss) allocated to common shares
|
|
$
|
5,997
|
|
|
$
|
15,340
|
|
|
$
|
(1,076
|
)
|
|
$
|
5,997
|
|
|
$
|
15,340
|
|
|
$
|
(1,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted-Average Shares Outstanding
|
|
|
11,841
|
|
|
|
11,677
|
|
|
|
11,547
|
|
|
|
11,841
|
|
|
|
11,677
|
|
|
|
11,547
|
|
Dilutive effect of stock options and ESPP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
95
|
|
|
|
-
|
|
Dilutive effect of Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
-
|
|
|
|
-
|
|
Diluted Weighted-Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,040
|
|
|
|
11,772
|
|
|
|
11,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(Loss) per share
|
|
$
|
0.51
|
|
|
$
|
1.31
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.50
|
|
|
$
|
1.30
|
|
|
$
|
(0.09
|
)
|
The
number of anti-dilutive shares, which have been excluded from the computation of diluted earnings (loss) per share, including the
shares underlying the Notes, were 3.0 million, 4.4 million, and 4.8 million for the years ended December 31, 2019, 2018, and
2017, respectively. Due to the net loss in the year ended December 31, 2017, all dilutive potential common shares were
also excluded from the diluted loss per share calculation, as the impact of those potential common shares is anti-dilutive in the
case of a net loss. 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.
Hedge Accounting
On January 1, 2018, we adopted
guidance intended to simplify hedge accounting by better aligning how an entity’s risk management activities and hedging
relationships are presented in its financial statements. The guidance also simplified the application of hedge accounting guidance
in certain situations. The adoption of this guidance did not have a material impact on our consolidated financial statements. However,
the adoption of this guidance did impact how we accounted for the interest rate swaps we entered into in April 2018, December 2018,
and February 2019. See Note 4 for further details regarding the interest rate swap.
At times we use derivative financial instruments
to hedge our exposure to interest rate risks. All derivative financial instruments are recognized as either assets or liabilities
at fair value on the consolidated balance sheet and are classified as current or non-current based on the scheduled maturity of
the instrument.
When we enter into a hedge arrangement
and intend to apply hedge accounting, we formally document the hedge relationship and designate the instrument for financial reporting
purposes as a fair value hedge, a cash flow hedge, or a net investment hedge. When we determine that a derivative financial instrument
qualifies as a cash flow hedge and is effective, the changes in fair value of the instrument are recorded in accumulated other
comprehensive income/(loss), net of tax in our consolidated balance sheets and will be reclassified to earnings when the hedged
item affects earnings.
ANI
Pharmaceuticals, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
For
the years ended December 31, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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. 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 8 for additional information
regarding fair value.
Geographic Information
Based on the distinct nature of our operations,
our internal management structure, and the financial information that is evaluated regularly by our Chief
Operating Decision Maker, we determined that we operate in one reportable segment. Our operations are located in the United
States and Canada. The majority of the assets of the Company are located in the United States.
The following table depicts the Company’s
revenue by geographic operations during the following periods:
(in thousands)
|
|
Years Ended December 31,
|
|
Location of Operations
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
199,663
|
|
|
$
|
196,886
|
|
|
$
|
176,842
|
|
Canada
|
|
|
6,884
|
|
|
|
4,690
|
|
|
|
-
|
|
Total Revenue
|
|
$
|
206,547
|
|
|
$
|
201,576
|
|
|
$
|
176,842
|
|
The following table depicts the Company’s
property and equipment, net according to geographic location as of:
(in thousands)
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
United States
|
|
$
|
26,708
|
|
|
$
|
24,437
|
|
Canada
|
|
|
13,843
|
|
|
|
13,653
|
|
Total property and equipment, net
|
|
$
|
40,551
|
|
|
$
|
38,090
|
|
ANI
Pharmaceuticals, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
For
the years ended December 31, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Recent Accounting Pronouncements
Recent Accounting Pronouncements Not Yet Adopted
In
November 2019, the Financial Accounting Standards Board (“FASB”) issued guidance simplifying the accounting
for income taxes by removing the following exceptions: 1) exception to the incremental approach for intraperiod tax
allocation when there is a loss from continuing operations and income or a gain from other items, 2) exception requirement to
recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes and equity method
investment, 3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign
equity method investment becomes a subsidiary, and 4) exception to the general methodology for calculating income taxes in an
interim period when a year-to-date loss exceeds the anticipated loss the year. The amendments also simplify accounting for
income taxes by doing the following: 1) requiring that an entity recognize a franchise tax or similar tax that is
partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax,
2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business
combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, 3)
specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal
entity that is not subject to tax in its separate financial statements, 4) requiring that an entity reflect the effect of an
enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the
enactment date, and 5) making minor Codification improvements for income taxes related to employee stock ownership plans and
investments in qualified affordable housing projects accounted for using the equity method. The guidance is effective for
reporting periods beginning after December 15, 2020, including interim periods within that fiscal year. Early adoption
is permitted, including adoption in an interim period. We are currently evaluating the impact, if any, that the adoption of
this guidance will have on our consolidated financial statements.
In
November 2018, the FASB issued guidance clarifying that certain transactions between collaborative arrangement participants
should be accounted for as revenue under Accounting Standards Codification Topic 606 when the collaborative arrangement participant
is a customer in the context of a unit of account. The guidance is effective for reporting periods beginning after December 15,
2019, including interim periods within that fiscal year. Early adoption is permitted, including adoption in an interim period.
We will adopt this guidance as of January 1, 2020. The adoption of this guidance is not expected to have a material impact
on our consolidated financial statements.
In
August 2018, the FASB issued guidance amending the disclosure requirements on fair value measurements. The amendments add,
modify, and eliminate certain disclosure requirements on fair value measurements. The guidance is effective for reporting
periods beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted,
including adoption in an interim period. We will adopt this guidance as of January 1, 2020. The
adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
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. In April 2019, the FASB
further clarified the scope of the credit losses standard and addressed issues related to accrued interest receivable balances,
recoveries, variable interest rates, and prepayment. In May 2019, the FASB issued further guidance to provide entities with
an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible financial instruments.
In November 2019, the FASB issued further guidance on expected recoveries for purchased financial assets with credit deterioration,
and transition refiled for troubled debt restructurings, disclosures related to accrued interest receivables, financial assets
secured by collateral maintenance provisions. 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 may change the way we assess the collectability of our receivables and recoverability
of other financial instruments. We will adopt this guidance as of January 1, 2020. The adoption of this guidance is not expected
to 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, 2019, 2018, and 2017
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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 operations, comprehensive income, balance sheets, or cash flows.
Recently Adopted Accounting Pronouncements
In
October 2018, the FASB issued guidance for accounting for derivatives and hedging. The guidance provides for the inclusion
of the Secured Overnight Financing Rate (“SOFR”) Overnight Index swap rate as a benchmark interest rate for hedge accounting
purposes. In July 2017, the Financial Conduct Authority in the United Kingdom announced that it would phase out London Interbank
Offered Rate (“LIBOR”) as a benchmark by the end of 2021. As a result, the U.S. Federal Reserve identified the SOFR
as its preferred alternative reference rate, calculated with a broad set of short-term repurchase agreements backed by treasury
securities. Amounts drawn under our five-year senior secured credit facility bear interest rates in relation to LIBOR, and our
interest rate swaps are designated in LIBOR. The guidance was effective for reporting periods beginning after December 15,
2018. We adopted this guidance as of January 1, 2019 on a prospective basis. The adoption of this guidance did not have a
material impact on our consolidated financial statements.
In
August 2018, the Securities and Exchange Commission (“SEC”) adopted the final rule amending certain disclosure
requirements that have become redundant, duplicative, overlapping, outdated, or superseded. In addition, the amendments
expand the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments,
an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate
statement. The rule was effective on November 5, 2018 and was effective for the quarter that began after the effective
date. The adoption of this guidance resulted in the inclusion of the statement of changes stockholder’s equity in our interim
financial statement filings.
In June 2018, the FASB issued guidance
simplifying the accounting for nonemployee stock-based compensation awards. The guidance aligns the measurement and classification
for employee stock-based compensation awards to nonemployee stock-based compensation awards. Under the guidance, nonemployee awards
are measured at their grant date fair value. Upon transition, the existing nonemployee awards are measured at fair value as of
the adoption date. The guidance was effective for reporting periods beginning after December 15, 2018, including interim periods
within that fiscal year. We adopted this guidance as of January 1, 2019. The adoption of this guidance did not have a material
impact on our consolidated financial statements.
In
February 2016, the FASB issued guidance for accounting for leases. The guidance requires lessees to recognize assets and liabilities
related to long-term leases on the balance sheet and expands disclosure requirements regarding leasing arrangements. In July 2018,
the FASB issued additional guidance, which offers a transition option to entities adopting the new lease standards. Under
the transition option, entities can elect to apply the new guidance using a modified retrospective approach at the beginning of
the year in which the new lease standard is adopted, rather than to the earliest comparative period presented in their financial
statements. The guidance was effective for reporting periods beginning after December 15, 2018. We adopted this
guidance on a modified retrospective basis effective January 1, 2019, using the following allowable practical expedients:
|
·
|
We did not reassess if any expired or existing contracts
are or contain leases;
|
|
·
|
We did not reassess the classification of any expired
or existing leases.
|
Additionally,
we made ongoing accounting policy elections whereby we (i) do not recognize right-of-use assets or lease liabilities for short-term
leases (those with original terms of 12-months or less) and (ii) combine lease and non-lease elements of our operating leases.
Upon adoption
of the new guidance on January 1, 2019, we recognized a right-of-use asset of approximately $0.5 million, which was reduced
by approximately $10 thousand of net prepaid rents at the date of adoption, along with a lease liability of approximately $0.5
million. We also recognized total deferred tax assets of approximately $0.1 million and deferred tax liabilities of approximately
$0.1 million related to book-tax basis differences. The net effect of the adoption resulted in a cumulative effect adjustment
to retained earnings on January 1, 2019 of approximately $2 thousand.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated
Financial Statements
For the years
ended December 31, 2019, 2018, and 2017
2. BUSINESS COMBINATION
Summary
On August 6, 2018, our subsidiary,
ANI Canada, acquired all the issued and outstanding equity interests of WellSpring, a Canadian company that performs contract development
and manufacturing of pharmaceutical products for a purchase price of $18.0 million, subject to certain customary adjustments. Pursuant
to these customary adjustments, the total purchase consideration was $16.7 million. The consideration was paid entirely from cash
on hand. In conjunction with the transaction, we acquired WellSpring’s pharmaceutical manufacturing facility, laboratory,
and offices, its current book of commercial business, as well as an organized workforce. Following the consummation of the transaction,
WellSpring was merged into ANI Canada with the resulting entity’s name being ANI Pharmaceuticals Canada Inc.
We acquired WellSpring to provide an additional
tech transfer site in order to accelerate the re-commercialization of the previously-approved ANDAs in our pipeline, to expand
our contract manufacturing revenue base, and to broaden our manufacturing capabilities to three manufacturing facilities.
Transaction Costs
In conjunction with the acquisition, we
incurred approximately $1.1 million in transaction costs, all of which were expensed in 2018.
Purchase Consideration and Net Assets Acquired
The business combination was accounted
for using the acquisition method of accounting, with ANI as the accounting acquirer of WellSpring. The acquisition method requires
that acquired assets and assumed liabilities be recorded at their fair values as of the acquisition date.
The following presents the final allocation
of the purchase price to the assets acquired and liabilities assumed on August 6, 2018:
|
|
(in thousands)
|
|
Total Purchase Consideration
|
|
$
|
16,687
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
220
|
|
Accounts receivable
|
|
|
1,311
|
|
Inventories
|
|
|
2,197
|
|
Prepaid expenses and other current assets
|
|
|
361
|
|
Property and equipment
|
|
|
13,935
|
|
Goodwill
|
|
|
1,742
|
|
Total assets acquired
|
|
|
19,766
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
|
2,413
|
|
Deferred revenue
|
|
|
666
|
|
Total liabilties assumed
|
|
|
3,079
|
|
Net assets acquired
|
|
$
|
16,687
|
|
The net assets were recorded at their estimated
fair value. In valuing acquired assets and liabilities, fair value estimates were based primarily on future expected cash flows,
market rate assumptions for contractual obligations, and appropriate discount rates.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated
Financial Statements
For the years
ended December 31, 2019, 2018, and 2017
2. BUSINESS COMBINATION (Continued)
Goodwill is considered an indefinite-lived
asset and relates primarily to intangible assets that do not qualify for separate recognition, such as the assembled workforce
and synergies between the entities. Goodwill established as a result of the acquisition is not tax deductible in any taxing jurisdiction.
There was no value ascribed to any separately identifiable intangible assets.
Legacy WellSpring operations generated
$6.9 million of revenue and recorded a net loss of $5.2 million for the year ended December 31, 2019.
Pro Forma Condensed
Combined Financial Information (unaudited)
The following unaudited pro forma condensed
combined financial information summarizes the results of operations for the periods indicated as if the WellSpring acquisition
had been completed as of January 1, 2017.
|
|
Years Ended December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017(1)
|
|
Net revenues
|
|
$
|
208,213
|
|
|
$
|
188,758
|
|
Net income/(loss)
|
|
$
|
13,287
|
|
|
$
|
(3,102
|
)
|
(1) Net loss for the year ended December 31, 2017 includes the impact to WellSpring of $4.4 million of related party debt forgiveness.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated
Financial Statements
For the years
ended December 31, 2019, 2018, and 2017
3. INDEBTEDNESS
Credit Facility
On December 27, 2018, we
refinanced our $125.0 million Credit Agreement by entering into an amended and restated Senior Secured Credit Facility (the
“Credit Facility”) for up to $265.2 million. The principal new feature of the Credit Facility was a $118.0
million DDTL, which could only be drawn on in order to pay down the Company’s remaining 3.0% Convertible Senior Notes,
which matured on December 1, 2019. The Credit Facility (and specifically the DDTL) has a subjective acceleration clause
in case of a material adverse event. The Credit Facility also extended the maturity of the $72.2 million Term Loan to
December 2023. In addition, the Credit Facility increased the previous $50.0 million line of credit (the
“Revolver”) to $75.0 million. Also on December 27, 2018, we entered into an interest rate swap arrangement
to manage our exposure to changes in LIBOR-based interest rates underlying our refinanced Term Loan (Note 4). The Term Loan
includes a repayment schedule, pursuant to which $4.5 million of the loan will be paid in quarterly installments during 2020. As of
December 31, 2019, $4.5 million of the loan is recorded as current borrowings in the accompanying
consolidated balance sheets. In February 2019, we entered into an interest rate swap arrangement to manage our exposure
to changes in LIBOR-based interest rates underlying the DDTL once drawn upon (Note 4). On November 29, 2019, we
exercised our option to borrow $118.0 million pursuant to the DDTL feature and the proceeds were used to repay the
outstanding 3% Convertible Senior Notes, which matured on December 1, 2019. The DDTL matures in December 2023 and
includes a repayment schedule, pursuant to which $5.9 million will be paid in quarterly installments during 2020. As of
December 31, 2019, $5.9 million of the loan is recorded as current borrowings in the accompanying
consolidated balance sheets. Amounts drawn on the Term Loan and the DDTL bear an interest rate equal to, at our option,
either a LIBOR rate plus 1.50% to 2.75% per annum, depending on our total leverage ratio or an alternative base rate plus an
applicable base rate margin, which varies within a range of 0.50% to 1.75%, depending our total leverage ratio. On the
Revolver, we incur a commitment fee at a rate per annum that varies within a range of 0.25% to 0.50%, depending on our
leverage ratio.
The Credit Facility is secured by a
lien on substantially all of ANI Pharmaceuticals, Inc.’s and its principal domestic subsidiary’s assets and
any future domestic subsidiary guarantors’ assets. The Credit Facility imposes financial covenants consisting of a
maximum total leverage ratio, which is, as of December 31, 2019 no greater than 3.50 to 1.00 and a minimum fixed charge
coverage ratio, which shall be greater than or equal to 1.25 to 1.00. The primary non-financial covenants under the Credit
Facility limit, subject to various exceptions, our ability to incur future indebtedness, to place liens on assets, to pay
dividends or make other distributions on our capital stock, to repurchase our capital stock, to conduct acquisitions, to
alter our capital structure, and to dispose of assets.
The carrying value of the current and non-current
components of the Term Loan and DDTL as of December 31, 2019 and 2018 are:
|
|
Current
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
Current borrowing on secured Term Loan and Delayed Draw Term Loan
|
|
$
|
10,412
|
|
|
$
|
3,609
|
|
Deferred financing costs
|
|
|
(471
|
)
|
|
|
(353
|
)
|
Current component of Term Loan and Delayed Draw Term Loan, net of deferred financing costs
|
|
$
|
9,941
|
|
|
$
|
3,256
|
|
|
|
Non-Current
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
Non-current borrowing on secured Term Loan and Delayed Draw Term Loan
|
|
$
|
177,069
|
|
|
$
|
68,578
|
|
Deferred financing costs
|
|
|
(1,261
|
)
|
|
|
(1,282
|
)
|
Term Loan and Delayed Draw Term Loan, net of deferred financing costs and current component
|
|
$
|
175,808
|
|
|
$
|
67,296
|
|
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated
Financial Statements
For the years
ended December 31, 2019, 2018, and 2017
3. INDEBTEDNESS (Continued)
The refinancing of the Term Loan was accounted
for as a modification of our previous term loan and consequently, the remaining balance of the deferred issuance costs related
to the previous term loan are included with the lenders fees associated with the refinance of the Term Loan and amortized as interest
expense over the life of the Term Loan using the effective interest method. Fees to third parties associated with the refinance
of the Term Loan were recognized as other (expense)/income, net in the accompanying consolidated statements of operations. The
refinancing of the Revolver was accounted for as a modification of our previous revolving credit facility and consequently, the
remaining balance of the deferred issuance costs related to the previous revolving credit facility are included with the lenders
fees and fees to third parties associated with the refinance of the Revolver and amortized as interest expense on a straight-line
basis over the life of the Revolver. All issuance costs allocated to the DDTL were deferred and will be amortized as interest expense
on a straight-line basis over the five-year term of the DDTL.
As of December 31, 2019, we had a
$69.5 million balance on the Term Loan and $118.0 million balance on the DDTL. As of December 31, 2019, we had not drawn on
the Revolving Credit Facility. Of the $1.0 million of deferred debt issuance costs allocated to the Revolving Credit Facility,
$0.8 million is included in other non-current assets in the accompanying consolidated balance sheets and $0.2 million is included
in prepaid expenses and other current assets in the accompanying consolidated balance sheets. Of the 0.5 million of deferred debt
issuance costs allocated to the DDTL, $0.1 million is classified as a direct deduction to the current portion of the DDTL in the
accompanying consolidated balance sheets and $0.4 million is classified as a direct reduction to the non-current portion of the
DDTL in the accompanying consolidated balance sheets. Of the $1.3 million of deferred debt issuance costs allocated to the Term
Loan, $0.4 million is classified as a direct deduction to the current portion of the Term Loan in the accompanying consolidated
balance sheets and $0.9 million is classified as a direct deduction to the non-current portion of the Term Loan in the accompanying
consolidated balance sheets.
The contractual maturity of our Term Loan
and DDTL is as follows for the years ending December 31:
(in thousands)
|
|
Term Loan
|
|
|
DDTL
|
|
2020
|
|
$
|
4,512
|
|
|
$
|
5,900
|
|
2021
|
|
|
5,414
|
|
|
|
5,900
|
|
2022
|
|
|
5,414
|
|
|
|
8,850
|
|
2023
|
|
|
54,141
|
|
|
|
97,350
|
|
Total
|
|
$
|
69,481
|
|
|
$
|
118,000
|
|
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 paid 3.0% interest semi-annually in arrears on June 1 and December 1 of each year, starting
on June 1, 2015, and matured on December 1, 2019. In December 2018, we entered
into separate, privately negotiated agreements with certain holders of our Notes and repurchased $25.0 million of our outstanding
Notes. We accounted for the repurchase as an extinguishment of the portion of the Notes and recognized a loss on extinguishment
of $0.5 million, which was recorded in other (expense)/income, net in the accompanying consolidated statements of operations. At
the same time, we unwound a corresponding portion of the bond hedge and warrant, which are described in further detail below. As
a result of unwinding this portion of the bond hedge and warrant, we received a net amount of $0.4 million. The repurchase of the
Notes and the unwinding of the bond hedge and warrant resulted in a $1.7 million net reduction to additional paid-in capital (“APIC”)
in the accompanying consolidated balance sheets. The remaining Notes were convertible into 1,709,002 shares of common stock, based
on an initial conversion price of $69.48 per share.
The Notes were 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, 2019, 2018, and 2017
3. INDEBTEDNESS (Continued)
Upon conversion by the holders, we had
the option 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. 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 8); the debt discount was 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 were 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, we 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 a “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
and the exercise price of the warrant is $96.21 per share of our common stock. 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. After the repurchase of $25.0 million of our outstanding Notes and the unwinding of the corresponding
portion of the bond hedge and warrant, our remaining bond hedge had an underlying 1,709,002 common shares and the remaining warrant
had an underlying 1,709,002 common shares.
On December 2, 2019 (December 1,
2019 was not a business day), we used the proceeds of the DDTL and operating cash on hand to repay the outstanding Notes. Holders
of $50,000 of the Notes elected for conversion, which pursuant to the First Supplemental Indenture to the Notes, resulted in the
holders’ receipt of cash for the principal portion of the Notes and 33 shares of our common stock. These shares were provided
by our counterparty pursuant to the Call Option Overlay. As of December 31, 2019, the remaining warrant had an underlying
1,709,002 common shares.
The carrying value
of the Notes is as follows as of December 31:
(in thousands)
|
|
2019
|
|
|
2018
|
|
Principal amount
|
|
$
|
-
|
|
|
$
|
118,750
|
|
Unamortized debt discount
|
|
|
-
|
|
|
|
(5,648
|
)
|
Deferred financing costs
|
|
|
-
|
|
|
|
(639
|
)
|
Net carrying value
|
|
$
|
-
|
|
|
$
|
112,463
|
|
The effective interest
rate on the Notes was 7.4% and 8.5%, on an annualized basis, as of December 31, 2019 and 2018, respectively.
The following table
sets forth the components of total interest expense related to the Notes, Term Loan, and DDTL recognized in our consolidated statements
of operations for the year ended December 31:
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Contractual coupon
|
|
$
|
6,635
|
|
|
$
|
7,170
|
|
|
$
|
4,313
|
|
Amortization of debt discount
|
|
|
5,647
|
|
|
|
7,002
|
|
|
|
6,720
|
|
Amortization of finance fees
|
|
|
1,377
|
|
|
|
1,463
|
|
|
|
845
|
|
Capitalized interest
|
|
|
(191
|
)
|
|
|
(724
|
)
|
|
|
(554
|
)
|
|
|
$
|
13,468
|
|
|
$
|
14,911
|
|
|
$
|
11,324
|
|
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated
Financial Statements
For the years
ended December 31, 2019, 2018, and 2017
4.
DERIVATIVE FINANCIAL INSTRUMENT AND HEDGING ACTIVITY
In April 2018, we entered into an
interest rate swap arrangement, which was considered a derivative financial instrument, with Citizens Bank, N.A. to manage our
exposure to changes in LIBOR-based interest rates underlying our previous Term Loan. The interest rate swap hedged the variable
cash flows associated with the borrowings under our previous Term Loan (Note 3), effectively providing a fixed rate of interest
throughout the life of the previous Term Loan.
In
December 2018, we refinanced our previous Credit Agreement and, as part of that refinancing, extended the maturity of our
$72.2 million secured Term Loan to December 2023. At the same time, we closed out the original interest rate swap and entered
into a new interest rate swap arrangement, which is also considered a derivative financial instrument, with Citizens Bank, N.A.
to manage our exposure to changes in LIBOR-based interest rates underlying our Term Loan. We accounted for the close-out of the
original interest rate swap as a termination of the interest rate swap and wrote the interest rate swap liability and accumulated
other comprehensive loss balance off as of the date of termination. As there were no excluded components, there was no net impact
to the consolidated statement of operations. The interest rate swap hedges the variable cash flows associated with the borrowings
under our Term Loan (Note 3), effectively providing a fixed rate of interest throughout the life of our Term Loan.
The interest rate swap arrangement
with Citizens Bank, N.A became effective on December 27, 2018, with a maturity date of December 27, 2023. The
notional amount of the swap agreement at inception was $72.2 million and decreases in line with our Term Loan. As of
December 31, 2019, the notional amount of the interest rate swap was $69.5 million. The interest rate swap has a
weighted average fixed rate of 2.60% and has been designated as an effective cash flow hedge and therefore qualifies for
hedge accounting. As of December 31, 2019, the fair value of the interest rate swap liability was valued at $2.4 million
and was recorded in other non-current liabilities in the accompanying consolidated balance sheets. As of December 31,
2019, $1.9 million, the fair value of the interest rate swap net of tax, was recorded in accumulated other comprehensive
loss, net of tax in the accompanying consolidated balance sheets. During the year ended December 31, 2019, changes in
the fair value of the interest rate swap of $1.5 million, net of tax, was recorded in accumulated other comprehensive (loss),
net of tax in our consolidated statements of comprehensive income. Differences between the hedged LIBOR rate and the fixed
rate are recorded as interest expense in the same period that the related interest is recorded for the Term Loan based on the
LIBOR rate. In the year ended December 31, 2019, $0.2 million of interest expense was recognized in relation to the
interest rate swap.
In
February 2019, we entered into an interest rate swap with Citizens Bank, N.A. to manage our exposure to changes in LIBOR-based
interest rates underlying our DDTL. As of December 31, 2019, the notional amount of the interest rate swap was $118.0 million
and decreases in line with our DDTL. The interest rate swap provides an effective fixed rate of 2.47% and has been designated
as an effective cash flow hedge and therefore qualifies for hedge accounting. The interest rate swap hedges the variable cash flows
associated with the borrowings under our DDTL (Note 3), effectively providing a fixed rate of interest throughout the life of our
DDTL. As of December 31, 2019, the fair value of the interest rate swap liability was valued at $3.8 million and was recorded
in other non-current liabilities in the accompanying consolidated balance sheets. As of December 31, 2019, $3.0 million, the
fair value of the interest rate swap net of tax, was recorded in accumulated other comprehensive loss, net of tax in the accompanying
consolidated balance sheets. During the year ended December 31, 2019, changes in the fair value of the interest rate swap
of $3.0 million, net of tax, were recorded in accumulated other comprehensive loss, net of tax in our consolidated statements of
comprehensive income. Differences between the hedged LIBOR rate and the fixed rate are recorded as interest expense in the same
period that the related interest is recorded for the DDTL based on the LIBOR rate. In the year ended December 31, 2019, $0.1
million of interest expense was recognized in relation to the February 2019 interest rate swap.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated
Financial Statements
For the years
ended December 31, 2019, 2018, and 2017
5. INVENTORIES
Inventories consist of the following as
of December 31:
(in thousands)
|
|
|
2019
|
|
|
|
2018(1)
|
|
Raw materials
|
|
$
|
34,881
|
|
|
$
|
27,671
|
|
Packaging materials
|
|
|
2,902
|
|
|
|
2,563
|
|
Work-in-progress
|
|
|
361
|
|
|
|
1,210
|
|
Finished goods
|
|
|
16,750
|
|
|
|
10,620
|
|
|
|
|
54,894
|
|
|
|
42,064
|
|
Reserve for excess/obsolete inventories
|
|
|
(6,731
|
)
|
|
|
(1,561
|
)
|
Inventories, net
|
|
$
|
48,163
|
|
|
$
|
40,503
|
|
(1) Includes inventory acquired in acquisition of WellSpring (Note 2).
During the fourth quarter 2019, we recognized
a $4.6 million inventory reserve charge, primarily related to our exit from the market of Methylphenidate Extended Release.
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist
of the following as of December 31:
(in thousands)
|
|
|
2019
|
|
|
|
2018(1)
|
|
Land
|
|
$
|
4,566
|
|
|
$
|
4,558
|
|
Buildings
|
|
|
10,275
|
|
|
|
10,079
|
|
Machinery, furniture, and equipment
|
|
|
34,984
|
|
|
|
26,814
|
|
Construction in progress
|
|
|
3,496
|
|
|
|
5,040
|
|
|
|
|
53,321
|
|
|
|
46,491
|
|
Less: accumulated depreciation
|
|
|
(12,770
|
)
|
|
|
(8,401
|
)
|
Property and equipment, net
|
|
$
|
40,551
|
|
|
$
|
38,090
|
|
(1) Includes
property and equipment acquired in acquisition of WellSpring (Note 2).
Depreciation expense for the years ended
December 31, 2019, 2018, and 2017 totaled $4.4 million, $2.1 million, and $1.2 million, respectively. During the years ended
December 31, 2019 and 2018, there was $0.2 million and $0.7 million of interest capitalized into construction in progress,
respectively.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated
Financial Statements
For the years
ended December 31, 2019, 2018, and 2017
7. INTANGIBLE ASSETS
Goodwill
As a result of the Merger we recorded goodwill
of $1.8 million. As a result of our acquisition of WellSpring, we recorded additional goodwill of $1.7 million in 2018. 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.
Changes in the carrying amount of goodwill
as of December 31 are as follows:
(in thousands)
|
|
2019
|
|
|
2018
|
|
Balance at beginning of year
|
|
$
|
3,580
|
|
|
$
|
1,838
|
|
Acquisition of WellSpring (Note 2)
|
|
|
-
|
|
|
|
1,742
|
|
Balance at end of year
|
|
$
|
3,580
|
|
|
$
|
3,580
|
|
For the goodwill impairment analyses performed
at October 31, 2019 and 2018, 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 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, 2019 and 2018, and therefore no quantitative testing for impairment was required.
In addition to the qualitative impairment
analysis performed at October 31, 2019, 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, 2019 to December 31, 2019. No impairment loss was
recognized during the years ended December 31, 2019, 2018, and 2017, and the balance of goodwill was $3.6 million as of December 31,
2019 and 2018.
Definite-lived Intangible Assets
Acquisition of Abbreviated New Drug Applications
In March 2019, we entered into an
agreement with Teva Pharmaceutical Industries Ltd. to purchase a basket of ANDAs for 35 previously-marketed generic drug products
for $2.5 million in cash. We
also capitalized $10 thousand of costs directly related to the transaction. We accounted for this transaction as an asset purchase.
The $2.5 million of ANDAs are being amortized in full over their estimated useful lives of 10 years. Please see Note 8 for further
details regarding the transaction.
In January 2019, we entered into an
amendment to three asset purchase agreements (the “Asset Purchase Agreement Amendment”) with Teva Pharmaceuticals USA, Inc.
(“Teva”). Under the terms of the Asset Purchase Agreement Amendment, all royalty obligations of the Company owed to
Teva with respect to products associated with ten ANDAs under the original asset purchase agreements ceased being effective as
of December 31, 2018. As consideration for the termination of such future royalty obligations, we paid Teva a sum of $16.0
million. Upon the payment of $16.0 million, the purchase price of each basket of ANDAs was increased as if the
payment had been made on the initial acquisition date. As a result, we recognized cumulative amortization expense of $6.8 million
upon recording the transaction. Please see Note 8 for further details regarding the transaction.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
7. INTANGIBLE ASSETS (Continued)
In April 2018, we entered into an
agreement with Impax Laboratories, Inc. (now Amneal Pharmaceuticals, Inc., or “Amneal”) to purchase the approved
ANDAs for three previously-commercialized generic drug products, the approved ANDAs for two generic drug products that have not
yet been commercialized, the development package for one generic drug product, a license, supply, and distribution agreement for
a generic drug product with an ANDA that is pending approval, and certain manufacturing equipment required to manufacture one of
the products, for $2.3 million in cash up front. We also capitalized $0.1 million of costs directly related to the transaction. We accounted for this transaction
as an asset purchase. The $1.0 million acquired ANDA intangible assets are being amortized in full over their estimated useful
lives of 10 years. Please see Note 8 for further details regarding the transaction.
In April 2018, we entered into
an agreement with IDT Australia, Limited to purchase the ANDAs for 23 previously-marketed generic drug products and API for
four of the acquired products for $2.7 million in cash and a single-digit royalty on net profits from sales of one of the
products. We also capitalized $18 thousand of costs directly related to the transaction. We accounted for this transaction as
an asset purchase. The $2.5 million acquired ANDA intangible assets are being amortized in full over their estimated useful
lives of 10 years. Please see Note 8 for further details regarding the transaction.
Acquisition of New Drug Applications and Product Rights
In
December 2017, we entered into an agreement with AstraZeneca AB and AstraZeneca UK Limited to purchase the right, title, and
interest in the NDAs and the U.S. rights to market Atacand, Atacand HCT, Arimidex, and Casodex, for $46.5 million in cash. We also
entered into a license agreement for use of these trademarks in the U.S. We also capitalized $0.2 million of costs directly related to the asset purchase. We accounted for this
transaction as an asset purchase. The $46.7 million product rights assets are being amortized in full over their estimated useful
lives of 10 years. Please see Note 8 for further details regarding the transaction.
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 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 8 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 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 8 for further details regarding the transaction.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
7. INTANGIBLE ASSETS (Continued)
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 impairment of $6.7 million in the year ended
December 31, 2016. In addition, the remaining $0.9 million asset was recorded as a short-term asset held for sale as
of December 31, 2016 in the prepaid expenses and other assets caption in the accompanying consolidated balance sheets.
Throughout 2017, we continued to attempt to sell the Testosterone Gel NDA and were unable to complete a sale. As a result, in the
fourth quarter of 2017, we determined that the asset could be impaired. After performing an impairment assessment, which indicated
that the fair value of the asset was lower than the carrying value, we recorded an additional impairment of $0.9 million in the
year ended December 31, 2017, writing off the asset in its entirety.
Marketing and Distribution Rights
In April 2019, we entered into an
agreement with Pharmaceutics International, Inc. (“PII”) and BAS ANDA LLC (“BAS”), under which a previously-commercialized
product will be developed and marketed. Per the agreement, we may pay PII a series of licensing fees in conjunction with the achievement
of certain development and commercial milestones. In the fourth quarter of 2019, the product was launched, triggering a $0.5 million
payment due to PII. The payment due as of December 31, 2019 was capitalized as an intangible asset and will be amortized in
full over its useful life of 10 years.
In March 2018, we entered into
an agreement with Appco Pharma, LLC (“Appco”), in which a potential generic product, Ranitidine, was to be
developed and marketed. Per the agreement, we paid Appco a series of licensing fees in conjunction with certain development
milestones. Ranitidine was launched in the third quarter of 2019, resulting in the final milestone payment of $80 thousand.
The $80 thousand milestone payment was capitalized as an intangible asset and determined to have an estimated useful life of
eight years. In September 2019, the Food and Drug Administration (“FDA”) issued a public statement that some
ranitidine medicines contain a nitrosamine impurity called N-nitrosdimethylamine (“NDMA”) at low levels. NDMA is
classified as a probable human carcinogen (a substance that could cause cancer) based on results from laboratory tests and
the cause of the presence of this impurity in the ranitidine products is not yet fully understood at this time. During the
fourth quarter 2019, testing of the API used in our ranitidine drug product, as well as testing of the drug product itself,
indicated a level of NDMA above acceptable thresholds and Appco initiated a voluntary recall. The Company has elected to exit
the market for Ranitidine and determined that the carrying value of the asset has been impaired. During the fourth quarter
2019, the Company recognized a full impairment of the remaining $75 thousand carrying value of the asset.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
7. INTANGIBLE ASSETS (Continued)
The components of net definite-lived intangible assets
are as follows:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
Weighted Average
|
(in thousands)
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Amortization
Period
|
Acquired ANDA intangible assets
|
|
$
|
64,704
|
|
|
$
|
(30,169
|
)
|
|
$
|
46,194
|
|
|
$
|
(17,093
|
)
|
|
10.0 years
|
NDAs and product rights
|
|
|
230,974
|
|
|
|
(87,352
|
)
|
|
|
230,974
|
|
|
|
(62,222
|
)
|
|
10.0 years
|
Marketing and distribution rights
|
|
|
10,923
|
|
|
|
(8,982
|
)
|
|
|
10,423
|
|
|
|
(7,051
|
)
|
|
4.7 years
|
Non-compete agreement
|
|
|
624
|
|
|
|
(334
|
)
|
|
|
624
|
|
|
|
(245
|
)
|
|
7.0 years
|
|
|
$
|
307,225
|
|
|
$
|
(126,837
|
)
|
|
$
|
288,215
|
|
|
$
|
(86,611
|
)
|
|
10.0 years
|
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 $40.2 million, $31.7 million, and $26.7 million for the years ended December 31,
2019, 2018, and 2017, 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 recognized an impairment of $75 thousand in the year ended December 31, 2019, in relation to the
Ranitidine product right asset. No impairment losses related to intangible assets were recognized in the year ended
December 31, 2018. We recognized an impairment of $0.9 million in the year ended December 31, 2017, in relation to
the Testosterone Gel NDA. No events or circumstances arose in 2019, 2018, or 2017 that indicated that the carrying value of
any of our other definite-lived intangible assets may not be recoverable.
Expected future amortization expense is
as follows for the years ending December 31:
(in thousands)
|
|
|
|
|
2020
|
|
|
$
|
33,180
|
|
2021
|
|
|
|
31,734
|
|
2022
|
|
|
|
28,329
|
|
2023
|
|
|
|
27,581
|
|
2024
|
|
|
|
24,604
|
|
2025 and thereafter
|
|
|
|
34,960
|
|
Total
|
|
|
$
|
180,388
|
|
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
8. 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.
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. The Term
Loan and DDTL bear an interest rate that fluctuates with the changes in LIBOR and, because the variable interest rates approximate
market borrowing rates available to us, we believe the $69.5 million and $118.0 million carrying value of the Term Loan and DDTL
approximated their fair values at December 31, 2019.
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 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, 2019 and 2018. We also determined that the changes in such fair value
were immaterial for the years ended December 31, 2019, 2018, and 2017.
In
April 2018, we entered into an interest rate swap arrangement (Note 4), with Citizens Bank, N.A. to manage our exposure to
the variable interest rate on our previous Term Loan. The notional amount of this interest rate swap was set to match the balance
of our previous Term Loan. The fair value of our interest rate swap was estimated based on the present value of projected future
cash flows using the LIBOR forward rate curve. The model used to value the interest rate swap included inputs of readily observable
market data, a Level 2 input.
In December 2018, we refinanced our
previous Credit Agreement and, as part of that refinancing, extended the maturity of our $72.2 million secured Term Loan to December 2023.
At the same time, we closed out the original interest rate swap and entered into a new interest rate swap arrangement (Note 4)
to manage our exposure to the variable interest rate on our Term Loan (Note 3). The notional amount of our interest rate swap
is set to match the balance of our Term Loan. Both the notional amount of the interest rate swap and the balance of our Term Loan
were $69.5 million as of December 31, 2019. The fair value of our interest rate swap is estimated based on the present value
of projected future cash flows using the LIBOR forward rate curve. The model used to value the interest rate swap includes inputs
of readily observable market data, a Level 2 input. As described in detail in Note 4, the fair value of the interest rate swap
was a $2.4 million liability at December 31, 2019.
In
February 2019, we entered into an interest rate swap arrangement (Note 4), with Citizens Bank, N.A. to manage our exposure
to changes in LIBOR-based interest rates underlying our DDTL (Note 3). The notional amount of our interest rate swap is
set to match the balance of our DDTL. Both the notional amount of the interest rate swap and the balance of our DDTL were $118.0
million as of December 31, 2019. The fair value of our interest rate swap was estimated based on the present value of projected
future cash flows using the LIBOR forward rate curve. The model used to value the interest rate swap included inputs of readily
observable market data, a Level 2 input. As described in detail in Note 4, the fair value of the interest rate swap was a $3.8
million liability at December 31, 2019.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
8. FAIR VALUE DISCLOSURES (Continued)
The following table presents our financial
assets and liabilities accounted for at fair value on a recurring basis as of December 31, 2019 and December 31, 2018,
by level within the fair value hierarchy:
(in thousands)
Description
|
|
Fair
Value at
December 31, 2019
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
6,215
|
|
|
$
|
-
|
|
|
$
|
6,215
|
|
|
$
|
-
|
|
CVRs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Description
|
|
Fair
Value at
December 31, 2018
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
496
|
|
|
$
|
-
|
|
|
$
|
496
|
|
|
$
|
-
|
|
CVRs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Financial Assets and Liabilities Measured at Fair Value
on a Non-Recurring Basis
We have no non-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 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. During the year ended December 31, 2019, we recognized
a $75 thousand impairment charge related to our Ranitidine product right asset (Note 7). There were no other fair value impairments
recognized in the year ended December 31, 2019.
On August 6, 2018, our subsidiary,
ANI Canada, acquired all the issued and outstanding equity interests of WellSpring, a Canadian company that performs contract
development and manufacturing of pharmaceutical products for a purchase price of $18.0 million, subject to certain customary adjustments.
Pursuant to these customary adjustments, the total purchase consideration was $16.7 million. The consideration was paid entirely
from cash on hand. In conjunction with the transaction, we acquired WellSpring’s pharmaceutical manufacturing facility,
laboratory, and offices, its current book of commercial business, as well as an organized workforce. Following the consummation
of the transaction, WellSpring was merged into ANI Canada with the resulting entity’s name being ANI Pharmaceuticals Canada
Inc. See Note 2, Business Combination.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
8. FAIR VALUE DISCLOSURES (Continued)
Acquired Non-Financial Assets Measured at Fair Value
In June 2019, we acquired from Coeptis
Pharmaceuticals, Inc. seven development stage generic products, as well as API and reference-listed drug inventory related
to certain of the products for a payment of $2.3 million. The entire payment, and $24 thousand of transaction costs directly
related to the acquisition, was recorded as research and development expense because the potential generic products have significant
remaining work required in order to commercialize the products and do not have an alternative future use. In addition, we could
make up to $12.0 million in payments for certain development and commercial milestones. These milestones were determined to be
contingent liabilities and will be accrued when they are both estimable and probable.
In April 2019, we entered into an
agreement with PII and BAS, under which a previously-commercialized product will be developed and marketed. Per the agreement,
we may pay PII a series of licensing fees in conjunction with the achievement of certain development and commercial milestones.
In the fourth quarter of 2019, the product was launched, triggering a $0.5 million payment due to PII. The payment due as of December 31,
2019 was capitalized as an intangible asset and will be amortized in full over its useful life of 10 years.
In March 2019, we entered into an
agreement with Teva Pharmaceutical Industries Ltd. to purchase a basket of ANDAs for 35 previously-marketed generic drug products
for $2.5 million in cash (Note 7). We also capitalized $10 thousand of costs
directly related to the asset purchase. We accounted for this transaction as an asset purchase. The $2.5 million of ANDAs were
recorded at their relative fair value, determined using Level 3 unobservable inputs. In order to determine the fair value of the
product rights intangible assets, we used the present value of the estimated cash flows related to the product rights, using a
discount rate of 15%. The ANDAs 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 asset may not be recoverable. No such triggering events were identified
during the period from the date of acquisition to December 31, 2019 and therefore no impairment loss was recognized for the
year ended 2019.
In January 2019, we entered into
an amendment to asset purchase agreements with Teva related to three purchases of baskets of ANDAs. Under the terms of the Asset
Purchase Agreement Amendment, all royalty obligations of the Company owed to Teva with respect to products associated with ten
ANDAs under the original asset purchase agreements ceased being effective as of December 31, 2018. As consideration for the
termination of such future royalty obligations, we paid Teva a sum of $16.0 million in cash (Note 7). Upon payment of $16.0 million,
the purchase price of each basket of ANDAs was increased to reflect the subsequent payment as if that payment had been made on
the initial acquisition date. As a result, in addition to increasing the carrying value of the acquired ANDA intangible assets
by $9.2 million, we recognized cumulative amortization expense of $6.8 million. The payment was allocated to the three ANDA baskets
based on the relative fair value of the ANDA baskets, which were determined using Level 3 unobservable inputs. In order to determine
the fair value of the acquired ANDA intangible assets, we used the present value of the estimated cash flows related to the ANDAs,
using a discount rate of 12%. The additional carrying value will be amortized over the remaining useful lives of the three ANDA
baskets 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, 2019
and therefore no impairment loss was recognized for the year ended 2019.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
8. FAIR VALUE DISCLOSURES (Continued)
In April 2018, we entered into an
agreement with Impax Laboratories, Inc. (now Amneal) to purchase the approved ANDAs for three previously-commercialized generic
drug products, the approved ANDAs for two generic drug products that have not yet been commercialized, the development package
for one generic drug product, a license, supply, and distribution agreement for a generic drug product with an ANDA that is pending
approval, and certain manufacturing equipment required to manufacture one of the products, for $2.3 million in cash (Note 7).
At the same time, we entered into a supply agreement with Amneal under which we may elect to purchase the finished goods for one
of the products for up to 17 months beginning October 1, 2019, under certain conditions. If we do elect to purchase the finished
goods from Amneal for this period, we may be required to pay a milestone payment of up to $10.0 million upon launch, depending
on the number of competitors selling the product at the time of launch. This milestone payment was determined to be contingent
consideration and will be recognized when the contingency is resolved. When one of the approved ANDAs that have not yet been commercialized
is launched, we could be required to pay a milestone of $25.0 million to Teva Pharmaceuticals USA, Inc. (“Teva”),
depending on the number of competitors selling the product at the time of launch. In addition, depending on the number of competitors
selling the product one year after the launch date, we could be required to pay a second milestone of $15.0 million to Teva. These
milestones are determined to be contingent liabilities and will be recognized if and when they are both estimable and probable.
Because we believe that neither milestone is both estimable and probable, we did not record a contingent liability for the milestones.
We also capitalized $0.1 million of costs directly related to the asset purchase.
We accounted for this transaction as an asset purchase. The $1.0 million acquired ANDA intangible assets were recorded at their
relative fair value, determined using Level 3 unobservable inputs. In order to determine the fair value of the acquired ANDA intangible
assets, we used the present value of the estimated cash flows related to the approved ANDAs, using discount rates of 10 to 15%.
The acquired ANDAs 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. The $58 thousand of manufacturing equipment
used to manufacture one of the products was recorded at its relative fair value, based on the estimated net book value of the
equipment purchased. The equipment will be amortized in full over its 5-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, 2019 and therefore no impairment loss was recognized for the
years ended December 31, 2018 and 2019. The $1.3 million of in-process research and development related to products with
significant further work required in order to commercialize the products, and for which there is no alternative future use. The
in-process research and development was recorded at its relative fair value, determined using Level 3 unobservable inputs. In
order to determine the fair value of the in-process research and development, we used the present value of the estimated cash
flows related to the products, using a discount rate of 75%, reflective of the higher risk associated with these products. As
the transaction was accounted for as an asset purchase, the $1.3 million of in-process research and development was immediately
recognized as research and development expense.
In
April 2018, we entered into an agreement with IDT Australia, Limited to purchase the ANDAs for 23 previously-marketed generic
drug products and API for four of the acquired products for $2.7 million in cash and a single-digit royalty on net profits from
sales of one of the products (Note 7). We also capitalized $18 thousand of
costs directly related to the asset purchase. We accounted for this transaction as an asset purchase. The $2.5 million acquired
ANDA intangible assets were recorded at their relative fair value, determined using Level 3 unobservable inputs. In order to determine
the fair value of the product rights intangible assets, we used the present value of the estimated cash flows related to the product
rights, using discount rates of 10% to 15%. The acquired ANDA intangible assets 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 asset may not be
recoverable. No such triggering events were identified during the period from the date of acquisition to December 31, 2019
and therefore no impairment loss was recognized for the years ended December 31, 2018 and 2019. We also recorded $0.2 million
of raw materials inventory, measured at fair value. The fair value of the raw materials inventory was determined based
on the estimated replacement cost.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
8. FAIR VALUE DISCLOSURES (Continued)
In
March 2018, we entered into an agreement with Appco, in which a potential generic product, Ranitidine, was to be
developed and marketed. Per the agreement, we paid Appco a series of licensing fees in conjunction with certain development
milestones. Ranitidine was launched in the third quarter of 2019, resulting in the final milestone payment of $80 thousand.
The $80 thousand milestone payment was capitalized as an intangible asset and determined to have estimated useful life of
eight years. In September 2019, the FDA issued a public statement that some ranitidine medicines contain a nitrosamine
impurity referred to as NDMA at low levels. NDMA is classified as a probable human carcinogen (a substance that could cause
cancer) based on results from laboratory tests and the cause of the presence of this impurity in the ranitidine products is
not yet fully understood at this time. During the fourth quarter of 2019, testing of the API used in our ranitidine
drug product, as well as testing of the drug product itself, indicated a level of NDMA above acceptable thresholds and Appco
initiated a voluntary recall. The Company has elected to exit the market for Ranitidine and determined that the carrying
value of the asset has been impaired. During the fourth quarter of 2019, the Company recognized a full impairment of the
remaining $75 thousand carrying value of the asset.
In
December 2017, we entered into an agreement with AstraZeneca AB and AstraZeneca UK Limited to purchase the right, title,
and interest in the NDAs and the U.S. right to market Atacand, Atacand HCT, Arimidex, and Casodex, for $46.5 million in cash (Note
7). We also licensed these trademarks for use in the U.S. We also capitalized $0.2 million of costs directly related to the asset purchase. The agreement included a $3.0
million contingent payment due in early 2023 if the annual net sales of the Atacand and Atacand HCT products equals or exceeds
certain threshold amounts in 2020, 2021, and 2022. Because we believe that the likelihood of meeting or exceeding the threshold
amounts is not probable, we did not record a contingent liability in relation to the agreement. We accounted for this transaction
as an asset purchase. The $46.7 million product rights intangible assets were recorded at their relative fair value, determined
using Level 3 unobservable inputs. In order to determine the fair value of the product rights intangible assets, 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 their 10-year useful lives, 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, 2019 and therefore no impairment loss was recognized for the years ended December 31, 2017, 2018, and
2019.
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 also 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 December 31, 2019 and therefore
no impairment loss was recognized for the years ended December 31, 2019, 2018, and 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.
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 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 December 31, 2019 and therefore no impairment loss
was recognized for the years ended December 31, 2017, 2018, and 2019. 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.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
9. 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, 2019.
There were 12.1 million and 11.9 million
shares of common stock issued and outstanding as of December 31, 2019 and 2018, respectively.
There were 11 thousand shares of class C
special stock issued and outstanding as of December 31, 2019 and 2018. 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, 2019 and 2018.
Warrants
Warrants to purchase an aggregate of 1.7
million shares of our common stock were outstanding and exercisable as of December 31, 2019:
Issue Date
|
|
Number
of
Underlying Shares
of Common Stock
(in thousands)
|
|
|
Per
Share
Exercise Price
|
|
|
First
Expiration Date
|
December 4,
2014
|
|
|
1,486
|
|
|
$
|
96.21
|
|
|
March 1, 2020
|
December 5, 2014
|
|
|
223
|
|
|
$
|
96.21
|
|
|
March 1, 2020
|
All outstanding warrants are classified
as equity. No warrants were granted, exercised, or expired unexercised during the years ended December 31, 2019, 2018 and
2017. The warrants expire ratably over a 60 business day period beginning on March 1, 2020 and finishing on May 25, 2020.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
10. STOCK-BASED COMPENSATION
Employee Stock Purchase Plan
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 six thousand, five thousand, and four thousand shares in the years ended December 31, 2019,
2018, and 2017, respectively.
The following table summarizes ESPP expense
incurred under the 2016 Employee Stock Purchase Plan and included in our accompanying consolidated statements of operations:
|
|
|
|
|
|
Years
Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Cost of sales
|
|
$
|
18
|
|
|
$
|
11
|
|
|
$
|
6
|
|
Research and development
|
|
|
29
|
|
|
|
16
|
|
|
|
1
|
|
Selling, general, and administrative
|
|
|
100
|
|
|
|
75
|
|
|
|
61
|
|
|
|
$
|
147
|
|
|
$
|
102
|
|
|
$
|
68
|
|
Stock Incentive Plan
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,
2019, 0.4 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 ratably 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.
The following table summarizes stock-based
compensation expense incurred under the 2008 Plan and included in our consolidated statements of operations:
|
|
|
|
|
|
Years
Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Cost of sales
|
|
$
|
101
|
|
|
$
|
87
|
|
|
$
|
86
|
|
Research and development
|
|
|
756
|
|
|
|
771
|
|
|
|
677
|
|
Selling, general, and administrative
|
|
|
8,213
|
|
|
|
5,822
|
|
|
|
5,259
|
|
|
|
$
|
9,070
|
|
|
$
|
6,680
|
|
|
$
|
6,022
|
|
We recognized income tax benefits of $1.4
million, $1.2 million, and $0.6 million for stock-based compensation-related tax deductions in our 2019, 2018, and 2017 consolidated
statements of operations, respectively.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
10. STOCK-BASED COMPENSATION (Continued)
Stock Options
Outstanding stock options granted to employees
and consultants 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 four 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 2019, 2018, and 2017, the fair value
of each option grant was estimated using the Black-Scholes option-pricing model, using the following assumptions:
|
|
|
Years
Ended December 31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2017
|
|
Expected option life (years)
|
|
|
5.50
- 6.25
|
|
|
|
5.48
- 6.25
|
|
|
|
5.33
- 7.00
|
|
Risk-free interest rate
|
|
|
1.91%
- 2.58%
|
|
|
|
2.64%
- 2.93%
|
|
|
|
1.93%
- 2.33%
|
|
Expected stock price volatility
|
|
|
63.1%
- 66.7%
|
|
|
|
55.1%
- 60.6%
|
|
|
|
50.3%
- 57.4%
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
We use the simplified method to estimate
the life of options. 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.
In
2017, we granted options to two consultants. We used the Black-Scholes option-pricing model to determine the fair value of the
option grants and the valuation of the grants were marked to market through December 31, 2018. In June 2018, the FASB
issued guidance simplifying the accounting for nonemployee stock-based compensation awards (Note 1). We adopted this guidance
as of January 1, 2019, therefore the nonemployee awards are measured at fair value as of the adoption date, and no longer
marked to market.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
10. STOCK-BASED COMPENSATION (Continued)
A summary of stock option activity under
the 2008 Plan during the years ended December 31, 2019, 2018, and 2017 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, 2016
|
|
|
578
|
|
|
$
|
39.28
|
|
|
|
|
|
|
|
8.2
|
|
|
$
|
12,928
|
|
Granted
|
|
|
207
|
|
|
|
51.66
|
|
|
$
|
27.04
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(13
|
)
|
|
|
15.92
|
|
|
|
|
|
|
|
|
|
|
|
542
|
|
Forfeited
|
|
|
(5
|
)
|
|
|
53.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2017
|
|
|
767
|
|
|
$
|
42.93
|
|
|
|
|
|
|
|
7.8
|
|
|
$
|
16,785
|
|
Granted
|
|
|
156
|
|
|
|
57.60
|
|
|
$
|
31.76
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(142
|
)
|
|
|
19.47
|
|
|
|
|
|
|
|
|
|
|
|
5,863
|
|
Forfeited
|
|
|
(18
|
)
|
|
|
60.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(4
|
)
|
|
|
74.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
759
|
|
|
$
|
49.74
|
|
|
|
|
|
|
|
7.6
|
|
|
$
|
2,221
|
|
Granted
|
|
|
160
|
|
|
|
65.97
|
|
|
$
|
40.14
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(130
|
)
|
|
|
41.99
|
|
|
|
|
|
|
|
|
|
|
|
3,335
|
|
Forfeited
|
|
|
(31
|
)
|
|
|
56.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1
|
)
|
|
|
54.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
757
|
|
|
$
|
54.21
|
|
|
|
|
|
|
|
7.2
|
|
|
$
|
6,761
|
|
Exercisable at December 31, 2019
|
|
|
366
|
|
|
$
|
50.47
|
|
|
|
|
|
|
|
6.2
|
|
|
$
|
4,469
|
|
As of December 31, 2019, there was
$8.9 million of total unrecognized compensation cost related to non-vested stock options granted under the 2008 Plan. The cost
is expected to be recognized over a weighted-average period of 2.5 years. During the year ended December 31, 2019, we received
$5.5 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, 2018, we received $2.8 million in cash from the exercise of stock options and recorded a $0.6
million tax benefit related to these exercises. During the year ended December 31, 2017, we received $0.2 million in cash
from the exercise of stock options and recorded a $0.2 million tax benefit related to these exercises.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
10. STOCK-BASED COMPENSATION (Continued)
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 year.
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.
A summary of RSA activity under the Plan
during the years ended December 31, 2019, 2018, and 2017 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, 2016
|
|
|
63
|
|
|
$
|
45.72
|
|
|
|
2.2
|
|
Granted
|
|
|
50
|
|
|
|
49.51
|
|
|
|
|
|
Vested
|
|
|
(28
|
)
|
|
|
44.49
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Unvested at December 31, 2017
|
|
|
85
|
|
|
$
|
48.34
|
|
|
|
2.6
|
|
Granted
|
|
|
65
|
|
|
|
58.11
|
|
|
|
|
|
Vested
|
|
|
(33
|
)
|
|
|
47.34
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Unvested at December 31, 2018
|
|
|
117
|
|
|
$
|
54.04
|
|
|
|
2.1
|
|
Granted
|
|
|
122
|
|
|
|
66.39
|
|
|
|
|
|
Vested
|
|
|
(42
|
)
|
|
|
54.77
|
|
|
|
|
|
Forfeited
|
|
|
(5
|
)
|
|
|
62.63
|
|
|
|
|
|
Unvested at December 31, 2019
|
|
|
192
|
|
|
$
|
61.46
|
|
|
|
2.6
|
|
As of December 31, 2019, there was
$8.6 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 2.6 years.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
11. INCOME TAXES
On August 6, 2018, ANI Canada acquired
all the issued and outstanding equity interests of WellSpring in a non-taxable transaction (Note 2). Following the consummation
of the transaction, WellSpring was merged into ANI Canada. For U.S. Federal and state income tax purposes, ANI Canada is not part
of ANI’s consolidated group; rather, ANI Canada is subject to income taxes only in Canada and solely based on its stand-alone
operations. The foreign current and foreign deferred provisions (benefits) below represent ANI Canada’s tax provision (benefit)
from the Canadian taxing jurisdictions.
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, 2018, we had provided a valuation allowance against our
consolidated net deferred tax assets of $2.2 million.
As part of purchase accounting, as of
the August 6, 2018 acquisition date the Company established net deferred tax assets relating to differences in the book bases
(determined based on fair value purchase accounting) and tax bases (determined based on the carryover nature of the nontaxable
transaction) of ANI Canada’s assets and liabilities of approximately $1.9 million, offset by a full valuation allowance
due to our determination that it was more likely than not that all of the deferred tax assets will not be realized. During
the second quarter 2019, we adopted an intercompany transfer pricing policy that uses the “comparable profits method”
for pricing intercompany services between ANI Pharmaceuticals, Inc. and ANI Canada. For U.S. and Canadian tax purposes, the policy
was adopted in conjunction with the acquisition date of August 6, 2018. As a result of the newly adopted transfer pricing policy,
our assessment of the amount of ANI Canada’s deferred tax assets that are more likely than not to be realized changed and,
as a result, during the second quarter 2019, we released the remaining net valuation allowance related to ANI Canada’s deferred
tax assets.
As of December 31, 2019, our consolidated
valuation allowance was $0.4 million, related solely to deferred tax assets for net operating loss carryforwards in certain U.S.
state jurisdictions.
Our total provision for income taxes consists
of the following for the years ended December 31, 2019, 2018, and 2017:
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current income tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,985
|
|
|
$
|
7,985
|
|
|
$
|
13,175
|
|
State
|
|
|
1,212
|
|
|
|
1,751
|
|
|
|
690
|
|
Total
|
|
|
6,197
|
|
|
|
9,736
|
|
|
|
13,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax (benefit)/provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(6,274
|
)
|
|
|
(4,630
|
)
|
|
|
4,065
|
|
State
|
|
|
(2,027
|
)
|
|
|
(556
|
)
|
|
|
(556
|
)
|
Foreign
|
|
|
1,000
|
|
|
|
(214
|
)
|
|
|
-
|
|
Total
|
|
|
(7,301
|
)
|
|
|
(5,400
|
)
|
|
|
3,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(1,833
|
)
|
|
|
221
|
|
|
|
51
|
|
Total (benefit)/provision for income taxes
|
|
$
|
(2,937
|
)
|
|
$
|
4,557
|
|
|
$
|
17,425
|
|
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
11. INCOME TAXES (Continued)
The difference between our expected income
tax provision from applying U.S. Federal statutory tax rates to the pre-tax income and actual income tax provision relates primarily
to the effect of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
US Federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of Federal benefit
|
|
|
3.2
|
%
|
|
|
2.4
|
%
|
|
|
2.0
|
%
|
Foreign taxes
|
|
|
0.4
|
%
|
|
|
26.5
|
%
|
|
|
-
|
%
|
Impact of Tax Cuts and Jobs Act
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
81.9
|
%
|
Domestic production activities deduction
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
(8.8
|
)%
|
Change in valuation allowance
|
|
|
(58.1
|
)%
|
|
|
(26.5
|
)%
|
|
|
-
|
%
|
Stock-based compensation
|
|
|
(6.7
|
)%
|
|
|
(1.8
|
)%
|
|
|
0.8
|
%
|
Non-deductible costs
|
|
|
9.1
|
%
|
|
|
-
|
%
|
|
|
0.5
|
%
|
Change in state apportionment factors, state and foreign rates
|
|
|
(28.1
|
)%
|
|
|
-
|
%
|
|
|
-
|
%
|
Research and experimentation and charitable credits
|
|
|
(33.5
|
)%
|
|
|
-
|
%
|
|
|
(2.5
|
)%
|
Transfer pricing and other
|
|
|
(0.2
|
)%
|
|
|
1.1
|
%
|
|
|
(2.3
|
)%
|
Total income tax (benefit)/provision
|
|
|
(93.0
|
)%
|
|
|
22.7
|
%
|
|
|
106.6
|
%
|
In 2017 our effective tax rate was impacted
by the revaluation of our deferred tax assets and liabilities at the lower 21% U.S. corporate tax rate, as proscribed by the Tax
Cuts and Jobs Act, which was enacted on December 22, 2017 and lowered the U.S. corporate tax rate from 35% to 21%, which began
in 2018. We measure our deferred tax assets and liabilities using the tax rates that we believe will apply in the years in which
the temporary differences are expected to be recovered or paid. As a result, we remeasured our deferred tax assets and deferred
tax liabilities to reflect the reduction in the enacted U.S. corporate income tax rate, resulting in a net $13.4 million increase
in income tax expense for the year ended December 31, 2017.
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:
|
|
As of December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accruals and advances
|
|
$
|
8,586
|
|
|
$
|
7,748
|
|
Stock-based compensation
|
|
|
3,750
|
|
|
|
-
|
|
Bond hedge
|
|
|
-
|
|
|
|
3,019
|
|
Accruals for chargebacks and returns
|
|
|
7,603
|
|
|
|
7,132
|
|
Inventory
|
|
|
4,720
|
|
|
|
1,228
|
|
Intangible asset
|
|
|
14,923
|
|
|
|
9,393
|
|
Net operating loss carryforwards
|
|
|
4,767
|
|
|
|
5,604
|
|
Other
|
|
|
1,459
|
|
|
|
4,682
|
|
Total deferred tax assets
|
|
$
|
45,808
|
|
|
$
|
38,806
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
(6,029
|
)
|
|
$
|
(4,437
|
)
|
Debt discount
|
|
|
-
|
|
|
|
(1,316
|
)
|
Intangible assets
|
|
|
(13
|
)
|
|
|
(11
|
)
|
Other
|
|
|
(1,008
|
)
|
|
|
(2,813
|
)
|
Total deferred tax liabilities
|
|
$
|
(7,050
|
)
|
|
$
|
(8,577
|
)
|
Valuation allowance
|
|
|
(432
|
)
|
|
|
(2,265
|
)
|
Deferred tax assets, net of deferred tax liabilities and valuation allowance
|
|
$
|
38,326
|
|
|
$
|
27,964
|
|
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated Financial
Statements
For the years ended December 31,
2019, 2018, and 2017
11. INCOME TAXES (Continued)
As of December 31, 2019, we had
U.S. federal net operating loss carryforwards of approximately $11.3 million, all of which arose as a result of the Merger
and, if not used, expire in annual increments through 2033. 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. Additionally, as of December 31, 2019 we have
total net operating losses in Canada of $7.9 million that begin expiring in 2035.
We are subject to income taxes in numerous
jurisdictions in the U.S. and in Canada. 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, 2019 and 2018.
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,
2019, 2018, and 2017
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
All our existing leases as of December
31, 2019 are classified as operating leases. As of December 31, 2019, we have twelve material operating leases for facilities and
office equipment with remaining terms expiring from 2021 through 2024 and a weighted average remaining lease term of 2.4 years.
Many of our existing leases have fair value renewal options, none of which are considered certain of being exercised or included
in the minimum lease term. Discount rates used in the calculation of our lease liability ranged between 4.02% and 8.95%.
Rent expense for the year ended December
31, 2019 consisted of the following:
(in thousands)
|
|
|
|
Operating lease costs
|
|
$
|
190
|
|
Variable lease costs
|
|
|
60
|
|
Total lease costs
|
|
$
|
250
|
|
A maturity analysis of our operating leases follows:
(in thousands)
|
|
|
|
Future payments:
|
|
|
|
2020
|
|
$
|
214
|
|
2021
|
|
|
152
|
|
2022
|
|
|
111
|
|
2023
|
|
|
40
|
|
2024
|
|
|
3
|
|
Total
|
|
$
|
520
|
|
|
|
|
|
|
Discount
|
|
|
(31
|
)
|
Lease liability
|
|
|
489
|
|
Current lease liability
|
|
|
(197
|
)
|
Non-current lease liability
|
|
$
|
292
|
|
Future minimum lease payments under non-cancelable operating
leases as of December 31, 2018 were approximately $0.1 million per year from 2019 through 2022.
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 $15.2
million of API from these four vendors during the year ended December 31, 2020.
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, 2019, 2018, and 2017, net revenues for these products totaled $20.7 million, $24.9 million, and $27.6
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 the group of unapproved products for the years ended December 31, 2019,
2018, and 2017 were $3.1 million, $2.0 million, and $2.0 million, respectively.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated
Financial Statements
For the years ended December 31,
2019, 2018, and 2017
12. COMMITMENTS AND CONTINGENCIES (Continued)
Legal proceedings
We are involved,
and from time to time may become involved, in various disputes, governmental and/or regulatory inquiries, investigations, and litigation
matters, some of which could result in losses, including damages, fines, and/or civil or criminal penalties against us. These matters
are often complex and have outcomes that we are unable to predict.
We intend to vigorously
defend ourselves in these matters and believe that we have strong defenses regarding the claims currently asserted against us.
However, from time to time, we may settle or otherwise resolve these matters on terms and conditions that we believe are in our
best interests. Resolution of any or all claims, investigations, and legal proceedings, individually or in the aggregate, could
have a material adverse effect on our results of operations and/or cash flows in any given accounting period or on our overall
financial condition.
Some of these
matters with which we are involved are described below, and unless otherwise disclosed, we are unable to predict the outcome of
the matter or to provide an estimate of the range of reasonably possible material losses. We record accruals for loss contingencies
to the extent we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
From time to time, we are also involved in other pending proceedings for which, in our opinion based upon facts and circumstances
known at the time, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such
proceedings is not expected to be material to our results. If and when any reasonably possible losses associated with the resolution
of such other pending proceedings, in our opinion, become material, we will disclose such matters.
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.
Civil Action
In November of 2017, we were served with
a complaint filed by Arbor Pharmaceuticals, LLC, in the United States District Court, District of Minnesota. The complaint alleges
false advertising and unfair competition in violation of Section 43(a) of the Lanham Act, Section 1125(a) of Title 15 of the United
States Code, and Minnesota State law, and seeks injunctive relief and damages. Discovery in this action closed on March 31,
2019. Trial is expected to be scheduled for October 2020. We continue to defend this action vigorously.
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 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 (“legacy claims”). All these original legacy claims were settled or closed out, including
a series of claims in California that were resolved by coordinated proceeding and settlement. At the end of March 2019, we
were served with a lawsuit in the Superior Court of California, County of Riverside, adding us as a defendant in a complaint filed
in July 2017 that is alleged not to have been part of the original settled legacy claims. This new claim as well as
the impact of the prior settlements on this claim is currently being evaluated by the Company, its insurers, and its legal counsel.
At the present time, we are unable to
assess the likely outcome of the case. Our insurance company had assumed the defense of the legacy claims and paid all losses
in settlement of the California cases. We cannot provide assurances that the outcome of this new matter 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.
Our ANDA for Erythromycin Ethylsuccinate
(“EES”) was originally approved by the FDA on November 27th, 1978. We purchased the EES ANDA
from Teva on July 10, 2015. 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 our 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 September 27, 2016. 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 reserved our legal right to an internal Agency appeal. We believe that our supplemental
ANDA is valid, and as such continued to market the product. In addition, we filed a PAS which was approved by the FDA on November 2,
2018 with no FDA objection to our prior actions.
On or about September 20, 2017, the
Company and certain of its employees were served with search warrants and/or grand jury subpoenas to produce documents and possibly
testify relating to a federal investigation of the generic pharmaceutical industry. The Company has been cooperating and
intends to continue cooperating with the investigation. However, no assurance can be given as to the timing or outcome of the
investigation.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated
Financial Statements
For the years
ended December 31, 2019, 2018, and 2017
13. CORTROPHIN PRE-LAUNCH CHARGES
In January 2016, we acquired the right,
title and interest in the NDAs for Cortrophin Gel and Cortrophin-Zinc. Subsequently, we have assembled a Cortrophin re-commercialization
team of scientists, executed a long-term supply agreement with a supplier of pig pituitary glands, our primary raw material for
corticotrophin API, executed a long-term supply agreement with an API manufacturer, with whom we have advanced the manufacture
of corticotropin API via manufacture of commercial-scale batches, and executed a long-term commercial supply agreement with a current
good manufacturing practice (“cGMP”) aseptic fill contract manufacturer.
Prior to the third and fourth quarter
2019, all purchases of material, including pig pituitary glands and API, related to the re-commercialization efforts have
been consumed in research and development activities and recognized as research and development expense in the period in
which they were incurred. In the third quarter of 2019, we began purchasing materials that are intended to be used
commercially in anticipation of FDA approval of Cortrophin Gel and the resultant product launch. Under U.S. GAAP, we cannot
capitalize these pre-launch purchases of materials as inventory prior to FDA approval, and accordingly, they are charged to
expense in the period in which they are incurred. We expect these pre-launch purchases of material to increase significantly
in the future as we build raw materials, API and finished goods for the expected launch of this product. During the year
ended December 31, 2019, we incurred related charges for the purchase of materials of $6.7 million. We currently project
expense related to this activity to be approximately $11.0-$12.0 million for 2020. In the future, we also expect to incur
other charges directly related to the Cortrophin pre-launch commercialization efforts, including, but not limited to, sales
and marketing and consulting expenses, which will vary in frequency and impact on our results of operations.
14. SUBSEQUENT EVENTS
On
January 8, 2020 we acquired the U.S. portfolio of 23 generic products from Amerigen Pharmaceuticals, Ltd. for $52.5 million
in cash at close and up to $25.0 million in contingent profit share payments over the next four years. The contingent payments
will be earned when annual gross profit exceeds a minimum threshold and will be earned on a subset of the acquired products. The
acquired portfolio includes ten commercial products, three approved products with launches pending, four filed products, and four
in-development products as well as a license to commercialize two approved products. We also made a $4.0 million cash payment to
Amerigen to acquire certain commercial and development inventory and materials. The transaction was funded from cash on hand.
On January 17, 2020, ANI Pharmaceuticals, Inc.
(the “Company”) entered into employment agreements with its (i) President and Chief Executive Officer, Arthur S. Przybyl,
(ii) Vice President of Finance and Chief Financial Officer, Stephen P. Carey, (iii) Senior Vice President of Business
Development and Specialty Sales, Robert Schrepfer and (iv) Senior Vice President of Operations and Product Development, James
G. Marken.
ANI Pharmaceuticals, Inc. and Subsidiaries
Notes to the Consolidated
Financial Statements
For the years
ended December 31, 2019, 2018, and 2017
15. 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.
|
|
2019 Quarters (unaudited)
|
|
(in thousands, except per share data)
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth(1)
|
|
Net revenues
|
|
$
|
52,887
|
|
|
$
|
54,357
|
|
|
$
|
51,337
|
|
|
$
|
47,966
|
|
Total operating expenses
|
|
|
48,485
|
|
|
|
45,065
|
|
|
|
44,009
|
|
|
|
52,637
|
|
Operating income/(expense)
|
|
|
4,402
|
|
|
|
9,292
|
|
|
|
7,328
|
|
|
|
(4,671
|
)
|
(Provision)/benefit for income taxes
|
|
|
(469
|
)
|
|
|
653
|
|
|
|
(64
|
)
|
|
|
2,817
|
|
Net income/(loss)
|
|
$
|
449
|
|
|
$
|
6,585
|
|
|
$
|
3,895
|
|
|
$
|
(4,835
|
)
|
Basic and diluted earnings/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings/(loss) per share
|
|
$
|
0.04
|
|
|
$
|
0.55
|
|
|
$
|
0.32
|
|
|
$
|
(0.41
|
)
|
Diluted earnings/(loss) per share
|
|
$
|
0.04
|
|
|
$
|
0.53
|
|
|
$
|
0.32
|
|
|
$
|
(0.41
|
)
|
(1) During the fourth quarter 2019, we recognized a $4.6 million inventory reserve charge, primarily related to our exit from the market of Methylphenidate Extended Release. We also recognized Cortrophin pre-launch charges of $6.5 million.
|
|
2018 Quarters (unaudited)
|
|
(in thousands, except per share data)
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Net revenues
|
|
$
|
46,483
|
|
|
$
|
47,268
|
|
|
$
|
50,703
|
|
|
$
|
57,122
|
|
Total operating expenses
|
|
|
39,946
|
|
|
|
40,005
|
|
|
|
40,589
|
|
|
|
45,677
|
|
Operating income
|
|
|
6,537
|
|
|
|
7,263
|
|
|
|
10,114
|
|
|
|
11,445
|
|
Provision for income taxes
|
|
|
(592
|
)
|
|
|
(726
|
)
|
|
|
(1,329
|
)
|
|
|
(1,910
|
)
|
Net income
|
|
$
|
2,250
|
|
|
$
|
2,777
|
|
|
$
|
5,037
|
|
|
$
|
5,430
|
|
Basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.19
|
|
|
$
|
0.24
|
|
|
$
|
0.43
|
|
|
$
|
0.46
|
|
Diluted earnings per share
|
|
$
|
0.19
|
|
|
$
|
0.23
|
|
|
$
|
0.42
|
|
|
$
|
0.46
|
|