(All amounts in thousands, except per share amounts, unless
otherwise noted)
Note 1 — Summary of Operations and Significant Accounting
Policies
Nature of Business and Operations
Albany Molecular Research, Inc. (the
“Company”) is a leading global contract research and manufacturing organization providing customers fully integrated
drug discovery, development, and manufacturing services. It supplies a broad range of services and technologies supporting the
discovery and development of pharmaceutical products, the manufacturing of Active Pharmaceutical Ingredients (“API”)
and the development and manufacturing of drug product for new and generic drugs, as well as research, development and manufacturing
for the agrochemical and other industries. With locations in the United States, Europe, and Asia, the Company maintains geographic
proximity to its customers and flexible cost models.
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited
condensed consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted
accounting principles for complete consolidated financial statements. The year-end condensed consolidated balance sheet data was
derived from audited financial statements but does not include all disclosures required by U.S. generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered
necessary for a fair statement of the results for the interim period have been included. Operating results for the three and six
month periods ended June 30, 2016 are not necessarily indicative of the results that may be expected for any other period or for
the year ending December 31, 2016. The accompanying unaudited condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2015.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries as of and for the three and six month periods ended June 30, 2016. All intercompany balances
and transactions have been eliminated during consolidation. Assets and liabilities of non-U.S. operations are translated at period-end
rates of exchange, and the statements of operations are translated at the average rates of exchange for the period. Gains or losses
resulting from translating non-U.S. currency financial statements are recorded in the unaudited condensed consolidated statements
of comprehensive (loss) income and in accumulated other comprehensive loss in the accompanying unaudited condensed consolidated
balance sheets. When necessary, prior years’ unaudited condensed consolidated financial statements have been reclassified
to conform to the current year presentation.
Use of Management Estimates
The preparation of financial statements
in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates included
in the accompanying consolidated financial statements include assumptions regarding the valuation of inventory, intangible assets,
and long-lived assets, assumptions associated with the Company’s accounting for business combinations and goodwill impairment
assessment, and the amount and realizability of deferred tax assets. Other significant estimates include assumptions utilized
in determining actuarial obligations in conjunction with the Company’s pension and postretirement health plans, assumptions
utilized in determining stock-based compensation, as well as those utilized in determining the value of both the notes hedges
and the notes conversion derivative and the assumptions related to the collectability of receivables. Actual results can vary
from these estimates.
Contract Revenue Recognition
The Company’s contract revenue consists
primarily of amounts earned under contracts with third-party customers and reimbursed expenses under such contracts. Reimbursed
expenses consist of chemicals and other project specific costs. The Company also seeks to include provisions in certain contracts
that contain a combination of up-front licensing fees, milestone and royalty payments should the Company’s proprietary technology
and expertise lead to the discovery of new products that become commercial. Generally, the Company’s contracts may be terminated
by the customer upon 30 days’ to two years’ prior notice, depending on the terms and/or size of the contract.
The Company analyzes its agreements to determine whether the elements can be separated and accounted for individually or as a
single unit of accounting in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting
Standards Codification (“ASC”) 605-25, “Revenue Arrangements with Multiple Deliverables,” and Staff Accounting
Bulletin (“SAB”) 104, “Revenue Recognition”. Allocation of revenue to individual elements that qualify
for separate accounting is based on the separate selling prices determined for each component, and total contract consideration
is then allocated pro rata across the components of the arrangement. If separate selling prices are not available, the Company
will use its best estimate of such selling prices, consistent with the overall pricing strategy and after consideration of relevant
market factors.
The Company generates contract revenue
under the following types of contracts:
Fixed-Fee
. Under a fixed-fee contract,
the Company charges a fixed agreed-upon amount for a deliverable. Fixed-fee contracts have fixed deliverables upon completion
of the project. Typically, the Company recognizes revenue for fixed-fee contracts after projects are completed and when delivery
is made or title and risk of loss otherwise transfers to the customer, and collection is reasonably assured. In certain instances,
the Company’s customers request that the Company retain materials produced upon completion of the project due to the fact
that the customer does not have a qualified facility to store those materials or for other reasons. In these instances, the revenue
recognition process is considered complete when project documents have been delivered to the customer, as required under the arrangement,
or other customer-specific contractual conditions have been satisfied.
Full-time Equivalent
(“FTE”)
. An FTE agreement establishes the number of Company employees contracted for a project or a series of
projects, the duration of the contract period, the price per FTE, plus an allowance for chemicals and other project specific
costs, which may or may not be incorporated in the FTE rate. FTE contracts can run in one month increments, but typically
have terms of six months or longer. FTE contracts typically provide for annual adjustments in billing rates for the
scientists assigned to the contract.
These contracts involve the Company’s
scientists providing services on a “best efforts” basis on a project that may involve a research component with a
timeframe or outcome that has some level of unpredictability. There are no fixed deliverables that must be met for payment as
part of these services. As such, the Company recognizes revenue under FTE contracts on a monthly basis as services are performed
according to the terms of the contract.
Time and Materials
. Under a time
and materials contract, the Company charges customers an hourly rate plus reimbursement for chemicals and other project specific
costs. The Company recognizes revenue for time and materials contracts based on the number of hours devoted to the project multiplied
by the customer’s billing rate plus other project specific costs incurred.
Recurring Royalty and Milestone Revenues
Recurring Royalty Revenue
.
Recurring royalties have historically related to royalties under a license agreement with Sanofi based on the worldwide net sales
of fexofenadine HCl, marketed as Allegra in the Americas and Telfast elsewhere, as well as on sales of Sanofi’s authorized
or licensed generics and sales by certain authorized sub-licensees. These royalty payments ceased in May 2015 due to the expiration
of patents under the license agreement. The Company currently receives royalties on net sales of generic products sold by Allergan,
plc (“Allergan”) in conjunction with a Development and Supply Agreement. The Company records royalty revenue in the
period in which the net sales of the product occur. Royalty payments from Allergan are due within 60 days after each calendar
quarter and are determined based on sales of the qualifying products in that quarter. The Company also receives royalties on certain
other products.
Up-Front License Fees and Milestone
Revenue
.
The Company recognizes revenue from up-front non-refundable licensing fees on a straight-line basis over the
period of the underlying project. The Company will recognize revenue arising from a substantive milestone payment upon the successful
achievement of the event, and the resolution of any uncertainties or contingencies regarding potential collection of the related
payment, or if appropriate over the remaining term of the agreement.
In 2014, the Company entered into development
and supply agreements with Genovi Pharmaceuticals Limited, which have subsequently been transferred to HBT Labs, Inc. (“HBT”),
to manufacture select generic parenteral drug products for registration and subsequent commercialization in the U.S., Europe,
and select emerging markets.
Under the terms of these HBT agreements,
the Company may receive milestone payments for each drug product candidate upon achievement of certain development milestones
including technology transfer activities, analytical development activities, and manufacture of regulatory submission batches.
Following U.S. Food and Drug Administration approval, the Company will supply generic parenteral drug products to HBT pursuant
to the HBT agreements and receive payments based on HBT’s sales of such products.
The Company has determined these milestones
payments to be substantive milestones in accordance with ASC 605-28-25, “Revenue Recognition – Milestone Method”. In evaluating these milestones, the Company considered the following:
|
·
|
Each
individual milestone is considered to be commensurate with the enhanced value of the underlying licensed intellectual property
or drug product candidate as they are advanced from the development stage to a commercialized product, and considered them
to be reasonable when evaluated in relation to the total agreement consideration, including other milestones.
|
|
·
|
The
milestones are deemed to relate solely to past performance, as each milestone is payable to the Company only after the achievement
of the related event defined in the agreement, and is not refundable if additional future success events do not occur.
|
For both the three and six months ended
June 30, 2016 and 2015, no milestone revenue was recognized by the Company.
Proprietary Drug Development Arrangements
The Company has discovered and conducted
the early development of several new drug candidates, and has out-licensed certain of these candidates to partners for further
development in return for a potential combination of up-front license fees, milestone payments and recurring royalty payments
if compounds resulting from the Company’s intellectual property are successfully developed into new drugs and reach the
market. The Company does not anticipate milestone or recurring royalty payments under its current license arrangements to have
a significant impact on the Company’s consolidated operating results, financial position, or cash flows.
Cash, Cash Equivalents and Restricted
Cash
Cash equivalents consist of money market
accounts and overnight deposits. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash and cash equivalents
are held principally at four financial institutions and at times may exceed insured limits. The Company has placed these
funds in high quality institutions in order to minimize risk relating to exceeding insured limits.
Restricted cash balances at June 30, 2016
and December 31, 2015 are required as collateral for the letters of credit associated with the Company’s debt agreements.
Long-Lived Assets
The Company assesses the impairment of
a long-lived asset group whenever events or changes in circumstances indicate that its carrying value may not be recoverable.
Factors the Company considers important that could trigger an impairment review include, among others, the following:
|
·
|
a significant
change in the extent or manner in which a long-lived asset group is being used;
|
|
·
|
a significant
change in the business climate that could affect the value of a long-lived asset group; or
|
|
·
|
a significant
decrease in the market value of assets.
|
If the Company determines that the carrying
value of long-lived assets may not be recoverable, based upon the existence of one or more of the above indicators of impairment,
the Company compares the carrying value of the asset group to the undiscounted cash flows expected to be generated by the asset
group. If the carrying value exceeds the undiscounted cash flows, an impairment charge is indicated. An impairment charge is recognized
to the extent that the carrying amount of the asset group exceeds its fair value and will reduce only the carrying amounts of
the long-lived assets.
Derivative
Instruments and Hedging Activities
The Company accounts for derivatives in
accordance with FASB ASC Topic 815, “Derivatives and Hedging”, which establishes accounting and reporting standards
requiring that derivative instruments be recorded on the balance sheet as either an asset or a liability measured at fair value.
Additionally, changes in a derivative’s fair value shall be recognized currently in earnings unless specific hedge accounting
criteria are met. If the specific hedge accounting criteria are met, then changes in fair value are recorded in accumulative other
comprehensive loss, net.
Recently Issued Accounting Pronouncements
In March 2016, the
FASB issued Accounting Standard Update (“ASU”) No. 2016-08, “Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”. In April 2016, the FASB issued ASU No.
2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”.
In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients” and ASU No. 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging
(Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements
at the March 3, 2016 EITF Meeting”. These amendments provide additional clarification and implementation guidance on
the previously issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which is discussed
below.
The amendments
in ASU No. 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation
and how it should apply the control principle to certain types of arrangements. ASU No. 2016-10 clarifies the following two aspects
of ASU No. 2014-09; identifying performance obligations and licensing implementation guidance. ASU No. 2016-11 rescinds several
SEC Staff Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for consideration
given by a vendor to a customer, as well as accounting for shipping and handling fees and freight services. ASU No. 2016-12 provides
clarification to Topic 606 on how to assess collectability, present sales tax, treat noncash consideration, and account for completed
and modified contracts at the time of transition. In addition, ASU No. 2016-12 clarifies that an entity retrospectively applying
the guidance in Topic 606 is not required to disclose the effect of the accounting change in the period of adoption. The effective
date and transition requirements for these amendments are the same as the effective date and transition requirements of ASU No.
2014-09, which is effective for calendar years beginning after December 15, 2017. The Company is currently assessing the impact
of these ASUs on its consolidated financial statements.
In March 2016, the FASB issued ASU No.
2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”,
which changes the accounting for share-based payment transactions, including income tax consequences, classification of awards
as either equity or liabilities, and classification in the statement of cash flows. The new standard is effective for fiscal years
beginning after December 15, 2016 and for interim periods therein with early adoption permitted. The Company is currently evaluating
the impact this ASU will have on its consolidated financial statements.
In February 2016, the FASB issued ASU
No. 2016-02, “Leases (Topic 842)”. The new standard establishes a right-of-use (“ROU”) model that
requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.
Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in
the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating
leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements,
with certain practical expedients available. The Company is currently evaluating the impact this ASU will have on its consolidated
financial statements.
In July 2015, the FASB issued ASU No.
2015-11, “Simplifying the Measurement of Inventory.” This ASU simplifies the measurement of inventory by requiring
certain inventory to be measured at the lower of cost or net realizable value. The amendments in this ASU are effective for fiscal
years beginning after December 15, 2016 and for interim periods therein. The Company does not expect this ASU to have a material
impact on its consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15,
“Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern”, which defines management’s responsibility to assess an entity’s ability
to continue as a going concern, and to provide related footnote disclosures if there is substantial doubt about its ability to
continue as a going concern. The pronouncement is effective for annual reporting periods ending after December 15, 2016,
with early adoption permitted. The Company does not expect this ASU to have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers: (Topic 606).” This ASU affects any entity that either enters into contracts
with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts
are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition
requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. In addition, the existing
requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer
(e.g., assets within the scope of ASC Topic 360, “Property, Plant, and Equipment,” and intangible assets within the
scope of ASC Topic 350, “Intangibles-Goodwill and Other”) are amended to be consistent with the guidance on recognition
and measurement (including the constraint on revenue) in this ASU. The core principle of the guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB deferred the effective
date of ASU 2014-09. This ASU is effective for annual periods and interim periods within those annual periods beginning after
December 15, 2017. Early adoption is not permitted. The Company is currently evaluating the impact this ASU will have on
its consolidated financial statements.
In June 2014, the FASB issued ASU No.
2014-12, “Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide
That a Performance Target Could Be Achieved after the Requisite Service Period.” This ASU requires that a performance target
that affects vesting and that could be achieved after the requisite service period, be treated as a performance condition. This
ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The adoption
of this ASU as of January 1, 2016 did not have a material impact on the Company’s consolidated financial statements.
Note 2 — Earnings Per Share
The shares used in the computation of
the Company’s basic and diluted earnings per share are as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Weighted average common shares outstanding - basic
|
|
|
34,935
|
|
|
|
32,124
|
|
|
|
34,826
|
|
|
|
31,999
|
|
Dilutive effect of warrants
|
|
|
—
|
|
|
|
179
|
|
|
|
—
|
|
|
|
90
|
|
Dilutive effect of share-based compensation
|
|
|
—
|
|
|
|
923
|
|
|
|
—
|
|
|
|
950
|
|
Weighted average common shares outstanding - diluted
|
|
|
34,935
|
|
|
|
33,226
|
|
|
|
34,826
|
|
|
|
33,039
|
|
The Company has excluded certain outstanding
stock options, non-vested restricted stock and warrants from the calculation of diluted earnings per share for the three and six
months ended June 30, 2016 and 2015 because of anti-dilutive effects. The weighted average number of anti-dilutive common equivalents
outstanding (before the effects of the treasury stock method) was 11,662 and 271 for the three months ended June 30, 2016 and
2015, respectively, and 11,765 and 194 for the six months ended June 30, 2016 and 2015, respectively. These amounts are not included
in the calculation of weighted average common shares outstanding.
Note 3 — Business Acquisitions
Glasgow
On January 8, 2015, the Company completed the
purchase of all of the outstanding equity interests of Aptuit’s Glasgow, U.K. business, now Albany Molecular Research (Glasgow)
Limited (“Glasgow”), for total consideration of $23,805 (net of cash acquired of $146). The Glasgow facility extends
the Company’s capabilities to sterile injectable drug product pre-formulation, formulation and clinical stage manufacturing.
Glasgow has been assigned to the Drug Product Manufacturing (“DPM”) segment.
SSCI
On February 13, 2015, the Company completed the
purchase of assets and assumed certain liabilities of Aptuit’s Solid State Chemical Information business, now AMRI SSCI, LLC (“SSCI”),
for total consideration of $35,850. SSCI brings extensive material science knowledge and technology and expands the Company’s
capabilities in analytical testing to include peptides, proteins and oligonucleotides. SSCI has been assigned to the Discovery
and Development Services (“DDS”) segment.
Gadea Grupo
On July 16, 2015, the Company completed the purchase
of Gadea Grupo Farmaceutico, S.L. (“Gadea”), a contract manufacturer of complex active pharmaceutical ingredients
(“APIs”) and finished drug product. Gadea operates within the Company’s API and DPM segments. The aggregate net
purchase price was $127,572 (net of cash acquired of $10,961), which included the issuance of 2,200 shares of common stock, valued
at $40,568, with the balance comprised of $96,961 in cash, plus a working capital adjustment of $1,004. The purchase price has
been allocated based on an estimate of the fair value of assets and liabilities acquired as of the acquisition date. The following
table summarizes the final allocation of the aggregate purchase price to the estimated fair value of the net assets acquired:
|
|
July 16, 2015
|
|
Assets Acquired
|
|
|
|
|
Accounts receivable
|
|
$
|
23,756
|
|
Prepaid expenses and other current assets
|
|
|
3,334
|
|
Inventory
|
|
|
47,400
|
|
Property and equipment
|
|
|
29,420
|
|
Deferred tax assets
|
|
|
1,115
|
|
Intangible assets
|
|
|
58,200
|
|
Goodwill
|
|
|
51,358
|
|
Other long term-assets
|
|
|
1,760
|
|
Total assets acquired
|
|
$
|
216,343
|
|
|
|
|
|
|
Liabilities Assumed
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
18,103
|
|
Debt
|
|
|
44,523
|
|
Income taxes payable
|
|
|
5,422
|
|
Deferred income taxes
|
|
|
19,179
|
|
Other long-term liabilities
|
|
|
1,544
|
|
Total liabilities assumed
|
|
|
88,771
|
|
Net assets acquired
|
|
$
|
127,572
|
|
The purchase price was adjusted in the first
quarter of 2016 by $676 due to the finalization of the net working capital adjustment. The purchase price allocation was adjusted
in the first quarter of 2016, primarily due to the recognition of an environmental remediation liability of $1,542, and a corresponding
indemnification receivable from the seller of $771. These adjustments resulted in a net increase of goodwill of approximately $1,400.
The purchase price allocation was adjusted
in the second quarter of 2016 to reduce the estimated uncertain tax position liabilities associated with pre-acquisition tax years
by $498, and to reduce the corresponding indemnification receivable from the seller by $293. These adjustments resulted in a net
decrease of goodwill of $205.
The Company has attributed the goodwill
of $51,358 to an expanded global footprint and additional market opportunities that the Gadea business offers. The goodwill has
been allocated between business segments, with API of $30,879 and DPM of $20,479, and is not deductible for tax purposes. Intangible
assets acquired consisted of customer relationships of $24,000 (with an estimated life of 13 years), a tradename of $4,100 (with
an indefinite estimated life), intellectual property of $11,900 (with an estimated life of 15 years), in-process research and
development of $18,000 (with an indefinite estimated life), and $200 of order backlog.
Whitehouse Laboratories
On December 15, 2015, the
Company acquired all the outstanding equity interests of Whitehouse Analytical Laboratories, LLC (“Whitehouse”), a
leading provider of testing services that includes chemical and material analysis, method development and validation and quality
control verification services to the pharmaceutical, medical device and personal care industries. Whitehouse offers a comprehensive
array of testing solutions for life sciences from materials and excipients, container qualification and container closure integrity
testing, routine analytical chemistry, drug delivery systems and device qualification programs, packaging, distribution, and stability
and storage programs. The aggregate net purchase price was $55,986 (net of cash acquired of $377), which included the issuance
of 137 shares of common stock, valued at $1,800, with the balance comprised of $53,924 in cash, plus a working capital adjustment
of $262.
The purchase price was increased in the first
quarter of 2016 by $262 due to the finalization of the net working capital adjustment. The purchase price was reduced in the first
quarter of 2016 to recognize the discount associated with the 137 shares of restricted shares issued in conjunction with the Whitehouse
acquisition in the amount of $200. These adjustments resulted in a net increase of goodwill of $62.
The following table shows the unaudited
pro forma statements of operations for the three and six months ended June 30 2015, as if the Gadea, Whitehouse, Glasgow and SSCI
acquisitions had occurred on January 1, 2014. This pro forma information does not purport to represent what the Company’s
actual results would have been if the acquisitions had occurred as of the date indicated or what such results would be for any
future periods.
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30, 2015
|
|
|
June 30, 2015
|
|
Total revenues
|
|
$
|
117,687
|
|
|
$
|
222,327
|
|
Net income
|
|
|
7,462
|
|
|
|
7,305
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average basic shares
|
|
|
34,461
|
|
|
|
34,336
|
|
Pro forma weighted average diluted shares
|
|
|
35,563
|
|
|
|
35,376
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.21
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
The following table shows the pro forma
adjustments made to the weighted average shares outstanding for the three and six months ended June 30, 2015:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30, 2015
|
|
|
June 30, 2015
|
|
Weighted average common shares outstanding - basic
|
|
|
32,124
|
|
|
|
31,999
|
|
Pro forma impact of acquisition consideration
|
|
|
2,337
|
|
|
|
2,337
|
|
Pro forma weighted average common shares outstanding -basic
|
|
|
34,461
|
|
|
|
34,336
|
|
Dilutive effect of warrants
|
|
|
179
|
|
|
|
90
|
|
Dilutive effect of share-based compensation
|
|
|
923
|
|
|
|
950
|
|
Pro forma weighted average common shares outstanding -diluted
|
|
|
35,563
|
|
|
|
35,376
|
|
For the three and six month periods ended
June 30, 2015, pre-tax net income was adjusted by reducing expenses by $247 and $1,232, respectively, for acquisition related
costs and increasing expenses by $1,133 and $2,440, respectively, for purchase accounting related depreciation and amortization.
The Company partially funded the acquisition
of Whitehouse utilizing the proceeds from a $30,000 revolving line of credit. For purposes of presenting the pro forma statements
of operations for the three and six months ended June 30, 2015, the Company has assumed that it borrowed on the revolving line
of credit on January 1, 2014 for an amount sufficient to fund the cash consideration to acquire Whitehouse as of that date. The
pro forma statements of operations for the three and six months ended June 30, 2015 reflects the recognition of interest expense
that would have been incurred on the revolving line of credit had it been entered into on January 1, 2014. The Company has recorded
$425 and $850, respectively, of pro forma interest expense on the revolving line of credit for the purposes of presenting the
pro forma statements of operations for the three and six months ended June 30, 2015.
The Company partially funded the acquisition of Gadea utilizing
the proceeds from a $200,000 term loan that was provided for in conjunction with a $230,000 senior secured credit agreement (the
“Credit Agreement”) with Barclays Bank PLC that was completed in July 2015 (see note 5). The Company did not have
sufficient cash on hand to complete the acquisition as of January 1, 2014. For the purposes of presenting the pro forma statements
of operations for the three and six months ended June 30, 2015, the Company has assumed that it entered into the Credit Agreement
on January 1, 2014 for an amount sufficient to fund the preliminary cash consideration to acquire Gadea as of that date. The pro
forma statements of operations for the three and six months ended June 30, 2015 reflect the recognition of interest expense that
would have been incurred on the Credit Agreement had it been entered into on January 1, 2014. The Company has recorded $2,100
and $4,200, respectively of pro forma interest expense on the Credit Agreement for the purposes of presenting the pro forma statements
of operations for the three and six months ended June 30, 2015.
Note 4 — Inventory
Inventory consisted of the following as of June 30, 2016 and
December 31, 2015:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Raw materials
|
|
$
|
42,398
|
|
|
$
|
37,483
|
|
Work in process
|
|
|
22,182
|
|
|
|
29,341
|
|
Finished goods
|
|
|
28,594
|
|
|
|
22,407
|
|
Total inventory
|
|
$
|
93,174
|
|
|
$
|
89,231
|
|
Note 5 — Debt
The following table summarizes long-term debt:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Convertible senior notes, net of unamortized debt discount
|
|
$
|
132,225
|
|
|
$
|
128,917
|
|
Term loan, net of unamortized discount
|
|
|
197,186
|
|
|
|
198,343
|
|
Revolving credit facility
|
|
|
30,000
|
|
|
|
30,000
|
|
Industrial development authority bonds
|
|
|
—
|
|
|
|
2,080
|
|
Various borrowings with institutions, Gadea loans
|
|
|
33,031
|
|
|
|
39,655
|
|
Capital leases – equipment & other
|
|
|
282
|
|
|
|
111
|
|
|
|
|
392,724
|
|
|
|
399,106
|
|
Less deferred financing fees
|
|
|
(8,844
|
)
|
|
|
(9,823
|
)
|
Less current portion
|
|
|
(13,082
|
)
|
|
|
(15,591
|
)
|
Total long-term debt
|
|
$
|
370,798
|
|
|
$
|
373,692
|
|
The aggregate maturities of long-term debt, exclusive of unamortized
debt discount of $19,089 at June 30, 2016, are as follows:
2016 (remaining)
|
|
$
|
6,417
|
|
2017
|
|
|
11,835
|
|
2018
|
|
|
354,561
|
|
2019
|
|
|
5,944
|
|
2020
|
|
|
31,996
|
|
Thereafter
|
|
|
1,060
|
|
Total
|
|
$
|
411,813
|
|
Term Loan
The components of the term loan under
the Company’s Second Amended and Restated Credit Agreement with Barclays Bank PLC, dated as of August 19, 2015 (the “Second
Restated Credit Agreement”) were as follows:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Principal amount – term loan
|
|
$
|
198,500
|
|
|
$
|
200,000
|
|
Unamortized debt discount
|
|
|
(1,314
|
)
|
|
|
(1,657
|
)
|
Net carrying amount of term loan
|
|
$
|
197,186
|
|
|
$
|
198,343
|
|
Convertible Senior Notes
On December 4, 2013, the Company completed
a private offering of $150,000 aggregate principal amount of 2.25% Cash Convertible Senior Notes (the “Notes”). The
Notes mature on November 15, 2018, unless earlier repurchased or converted into cash in accordance with their terms prior to such
date and interest is paid in arrears semiannually on each May 15 and November 15 at an annual rate of 2.25% beginning on May 15,
2014. The Notes were offered and sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of
1933, as amended (the “Securities Act”).
The Notes are not convertible into the
Company’s common stock or any other securities under any circumstances. Holders may convert their Notes solely into cash at their
option at any time prior to the close of business on the business day immediately preceding May 15, 2018 only under the following
circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2013 (and only during
such calendar quarter), if the last reported sale price of the Company’s 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; (2) during the five business
day period after any five consecutive trading day period in which the trading price per thousand dollars principal amount of Notes
for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s
common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or
after May 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders
may convert their Notes solely into cash at any time, regardless of the foregoing circumstances. Upon conversion, in lieu of receiving
shares of the Company’s common stock, a holder will receive, per thousand dollars principal amount of Notes, an amount in cash
equal to the settlement amount, determined in the manner set forth in the indenture. The initial conversion rate is 63.9844 shares
of the Company’s common stock per thousand dollars principal amount of Notes (equivalent to an initial conversion price of approximately
$15.63 per share of common stock). The conversion rate is subject to adjustment in some events as described in the indenture but
will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to
the maturity date, the Company has agreed to pay a cash make-whole premium by increasing the conversion rate for a holder who
elects to convert its Notes in connection with such a corporate event in certain circumstances as described in the indenture.
The Company may not redeem the Notes prior
to the maturity date, and no sinking fund is provided for the Notes.
The cash conversion feature of the Notes
(“Notes Conversion Derivative”) requires bifurcation from the Notes in accordance with ASC Topic 815,
Derivatives
and Hedging
, and is accounted for as a derivative liability. The fair value of the Notes Conversion Derivative at the time
of issuance of the Notes was $33,600 and was recorded as original debt discount for purposes of accounting for the debt component
of the Notes. This discount is amortized as interest expense using the effective interest method over the term of the Notes. For
the three months ended June 30, 2016 and 2015, the Company recorded $1,664 and $1,542, respectively, and for the six months ended
June 30, 2016 and 2015, the Company recorded $3,308 and $3,057, respectively, of amortization of the debt discount as interest
expense based upon an effective rate of 7.69%.
The components of the Notes were as follows:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Principal amount
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Unamortized debt discount
|
|
|
(17,775
|
)
|
|
|
(21,083
|
)
|
Net carrying amount of Notes
|
|
$
|
132,225
|
|
|
$
|
128,917
|
|
In connection with the pricing of the
Notes, on November 19, 2013, the Company entered into cash convertible note hedge transactions (“Notes Hedges”) relating
to a notional number of shares of the Company’s common stock underlying the Notes with two counterparties (the “Option Counterparties”).
The Notes Hedges, which are cash-settled, are intended to reduce the Company’s exposure to potential cash payments that
it is required to make upon conversion of the Notes in excess of the principal amount of converted Notes if the Company’s
common stock price exceeds the conversion price. The Notes Hedges are accounted for as a derivative instrument in accordance with
ASC Topic 815. The aggregate cost of the note hedge transaction was $33,600.
At the same time, the Company also entered
into separate warrant transactions with each of the Option Counterparties initially relating, in the aggregate, to 9,598 shares
of the Company’s common stock underlying the Note Hedges. The cash convertible Note Hedges are intended to offset cash payments
due upon any conversion of the Notes. However, the warrant transactions could separately have a dilutive effect to the extent
that the market price per share of the Company’s common stock (as measured under the terms of the warrant transactions) exceeds
the applicable strike price of the warrants. The initial strike price of the warrants is $18.9440 per share, which was 60% above
the last reported sale price of the Company’s common stock of $11.84 on November 19, 2013 and proceeds of $23,100 were received
from the Option Counterparties from the sale of the warrants.
Aside from the initial payment of a
$33,600 premium to the Option Counterparties, the Company is not required to make any cash payments to the Option
Counterparties under the Note Hedges and will be entitled to receive from the Option Counterparties an amount of cash,
generally equal to the amount by which the market price per share of common stock exceeds the strike price of the Note Hedges
during the relevant valuation period. The strike price under the Note Hedges is initially equal to the conversion price of
the Notes. Additionally, if the market price per share of the Company’s common stock, as measured under the warrant
transactions, exceeds the strike price of the warrants during the measurement period at the maturity of the warrants, the
Company will be obligated to issue to the Option Counterparties a number of shares of the Company’s common stock in an amount
based on the excess of such market price per share of the Company’s common stock over the strike price of the warrants. The
Company will not receive any proceeds if the warrants are exercised.
Neither the Notes Conversion Derivative
nor the Notes Hedges qualify for hedge accounting, thus any changes in the fair market value of the derivatives is recognized
immediately in the statement of operations. As of June 30, 2016 and December 31, 2015, the changes in fair market value of the
Notes Conversion Derivative and the Notes Hedges were equal, therefore there was no change in fair market value that was recognized
in the statement of operations.
The following table summarizes the fair
value and the presentation in the consolidated balance sheet:
|
|
Location on Balance
Sheet
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Notes Hedges
|
|
Other assets
|
|
$
|
37,316
|
|
|
$
|
76,393
|
|
Notes Conversion Derivative
|
|
Other liabilities
|
|
$
|
(37,316
|
)
|
|
$
|
(76,393
|
)
|
IDA Bonds
In May 2016, the sale of the Company’s
Syracuse, NY facility, within the DDS operating segment, was completed for $675. Commensurate with the sale of the facility, the
industrial development authority (“IDA”) bonds associated with the facility were repaid in full, with a final payment
of $1,760.
Note 6 — Facilities Impairment, Restructuring and
Other Charges
In April 2015, the Company announced a
restructuring plan with respect to certain operations in the U.K. within its API business segment. In connection with the restructuring
plan, the Company ceased all operations at its Holywell, U.K. facility in the fourth quarter of 2015. The Company recorded $569
and $1,565 in charges for reduction in force and termination benefits and other restructuring-related charges related to the U.K.
facility during the three and six months ended June 30, 2016, respectively. In conjunction with the Company’s actions to
cease operations at its Holywell, U.K. facility, the Company also recorded property and equipment impairment charges in the API
segment of $2,550 in the first quarter of 2015. These charges are included under the caption “impairment charges”
on the consolidated statement of operations. Also in 2015, the Company made additional resource changes at its Singapore site
(within the DDS segment) to optimize the cost profile of the facility, which resulted in restructuring charges of $491 and $1,918
during the three and six months ended June 30, 2016. Equipment that was not transferred or recovered through sale was subject
to accelerated depreciation over the remaining operating period of the facility, which terminated in the first quarter of 2016.
In the second quarter of 2016, Cedarburg Pharmaceuticals,
Inc. entered into a sublease for a closed facility. The previously recorded restructuring charges and associated liability were
reversed for an amount of $634, which is equivalent to the sublease payments. Other restructuring and other charges for various
sites at the three and six months ended June 30, 2016, were $100 and $277, respectively.
Restructuring and other charges for the three
months ended June 30, 2016 and 2015 were $526 and $1,632, respectively, and for the six months ended June 30, 2016 and 2015 were
$3,126 and $3,119, respectively, consisting primarily of U.K. termination charges and costs associated with the transfer of continuing
products from the Holywell, U.K. facility to the Company’s other manufacturing locations, resource optimization charges at
the Company’s Singapore facility and lease termination and other charges associated with the previously announced restructuring
at the Company’s Syracuse, NY facility.
The following table displays the restructuring activity and
liability balances for the six-month period ended as of June 30, 2016:
|
|
Balance at
January 1,
2016
|
|
|
Charges/
(reversals)
(1)
|
|
|
Amounts
Paid
|
|
|
Foreign
Currency
Translation &
Other
Adjustments
(1)
|
|
|
Balance
at
June 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination benefits and personnel realignment
|
|
$
|
539
|
|
|
$
|
615
|
|
|
|
(1,021
|
)
|
|
|
(48
|
)
|
|
$
|
85
|
|
Lease termination and relocation charges
|
|
|
2,153
|
|
|
|
(39
|
)
|
|
|
(2,023
|
)
|
|
|
58
|
|
|
|
149
|
|
Other
|
|
|
—
|
|
|
|
2,550
|
|
|
|
(1,354
|
)
|
|
|
(1,102
|
)
|
|
|
94
|
|
Total
|
|
$
|
2,692
|
|
|
$
|
3,126
|
|
|
|
(4,398
|
)
|
|
|
(1,092
|
)
|
|
$
|
328
|
|
|
(1)
|
Included in other
restructuring charges are non-cash accelerated depreciation charges of $1,145 related
to our Singapore facility.
|
Termination benefits and personnel realignment
costs related to severance packages, outplacement services, and career counseling for employees affected by the restructuring.
Lease termination charges related to estimated costs associated with exiting a facility, net of estimated sublease income.
Restructuring charges are included under
the caption “Restructuring and other charges” in the consolidated statements of operations for the three and six months
ended June 30, 2016 and 2015 and the restructuring liabilities are included in “Accounts payable and accrued expenses”
and “other long-term liabilities” on the consolidated balance sheets at June 30, 2016 and December 31, 2015.
Anticipated cash outflow related to the
above restructuring liability as of June 30, 2016 for the remainder of 2016 is approximately $228.
The Company is currently marketing its Holywell,
U.K. facility for sale. The facility is an asset of the API operating segment and is classified as for held for sale with the long-lived
assets segregated to a separate line on the consolidated balance sheets until they are sold. Depreciation expense on the facility
has ceased. The carrying value of the facility is $1,557 at June 30, 2016. The Company expects to sell the facility within one
year.
Note 7 — Goodwill and Intangible Assets
The changes in the carrying amount of
goodwill for the six months ended June 30, 2016 were as follows:
|
|
DDS
|
|
|
API
|
|
|
DPM
|
|
|
Total
|
|
Balance as of December 31, 2015
|
|
$
|
45,987
|
|
|
$
|
46,182
|
|
|
$
|
77,302
|
|
|
$
|
169,471
|
|
Measurement period adjustments
|
|
|
62
|
|
|
|
1,211
|
|
|
|
—
|
|
|
|
1,273
|
|
Foreign exchange translation
|
|
|
—
|
|
|
|
647
|
|
|
|
(689
|
)
|
|
|
(42
|
)
|
Balance as of June 30, 2016
|
|
$
|
46,049
|
|
|
$
|
48,040
|
|
|
$
|
76,613
|
|
|
$
|
170,702
|
|
The components of intangible assets are as follows:
|
|
Cost
|
|
|
Impairment
|
|
|
Accumulated
Amortization
|
|
|
Foreign
exchange
translation
|
|
|
Net
|
|
|
Amortization
Period
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and Licensing Rights
|
|
$
|
20,511
|
|
|
$
|
(2,709
|
)
|
|
$
|
(3,454
|
)
|
|
$
|
(352
|
)
|
|
$
|
13,996
|
|
|
2-16 years
|
Customer Relationships
|
|
|
86,774
|
|
|
|
—
|
|
|
|
(7,357
|
)
|
|
|
58
|
|
|
|
79,475
|
|
|
5-20 years
|
Tradename
|
|
|
4,100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34
|
|
|
|
4,134
|
|
|
indefinite
|
In-Process Research and Development
|
|
|
18,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
151
|
|
|
|
18,151
|
|
|
indefinite
|
Trademarks
|
|
|
2,200
|
|
|
|
—
|
|
|
|
(921
|
)
|
|
|
—
|
|
|
|
1,279
|
|
|
5 years
|
Order Backlog
|
|
|
200
|
|
|
|
—
|
|
|
|
(202
|
)
|
|
|
2
|
|
|
|
—
|
|
|
n/a
|
Total
|
|
$
|
131,785
|
|
|
$
|
(2,709
|
)
|
|
$
|
(11,934
|
)
|
|
$
|
(107
|
)
|
|
$
|
117,035
|
|
|
|
|
|
Cost
|
|
|
Impairment
|
|
|
Accumulated
Amortization
|
|
|
Foreign
exchange
translation
|
|
|
Net
|
|
|
Amortization
Period
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and Licensing Rights
|
|
$
|
20,352
|
|
|
$
|
(2,508
|
)
|
|
$
|
(3,004
|
)
|
|
$
|
(165
|
)
|
|
$
|
14,675
|
|
|
2-16 years
|
Customer Relationships
|
|
|
86,774
|
|
|
|
—
|
|
|
|
(4,303
|
)
|
|
|
(408
|
)
|
|
|
82,063
|
|
|
5-20 years
|
Tradename
|
|
|
4,100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(57
|
)
|
|
|
4,043
|
|
|
indefinite
|
In-Process Research and Development
|
|
|
18,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(250
|
)
|
|
|
17,750
|
|
|
indefinite
|
Trademarks
|
|
|
2,200
|
|
|
|
—
|
|
|
|
(727
|
)
|
|
|
—
|
|
|
|
1,473
|
|
|
5 years
|
Order Backlog
|
|
|
200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
200
|
|
|
n/a
|
Total
|
|
$
|
131,626
|
|
|
$
|
(2,508
|
)
|
|
$
|
(8,034
|
)
|
|
$
|
(880
|
)
|
|
$
|
120,204
|
|
|
|
Amortization expense related to intangible
assets was $1,958 and $677 for the three months ended June 30, 2016 and 2015, respectively, and $3,900 and $1,427 for the six
months ended June 30, 2016 and 2015, respectively. The weighted average amortization period is 12.4 years.
The following chart represents estimated
future annual amortization expense related to intangible assets:
Year ending December 31,
|
|
|
|
2016 (remaining)
|
|
$
|
3,724
|
|
2017
|
|
|
7,622
|
|
2018
|
|
|
7,617
|
|
2019
|
|
|
7,611
|
|
2020
|
|
|
7,598
|
|
Thereafter
|
|
|
60,578
|
|
Total
|
|
$
|
94,750
|
|
Note 8 — Income Taxes
During the three
month period ended June 30, 2016, the Company established a valuation allowance against its U.S. deferred tax assets in the amount
of $8,467. In assessing the realizability of deferred tax assets, management considers whether 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 taxable income, either in prior years available for carryback claims or in the future. Management considers
all available evidence in support of its ability to utilize its deferred tax assets, including the following:
|
·
|
Cumulative
income or loss in recent years
|
|
·
|
Taxable
income in recent years against which future losses may be carried back
|
|
·
|
Future
reversals of existing temporary differences
|
|
·
|
Forecasted
future taxable income
|
|
·
|
Tax planning strategies
|
In
evaluating this evidence, management considered the appropriate weighting to be assigned regarding each source of income, including
the following facts:
|
·
|
The
Company is in a cumulative loss position.
|
|
·
|
The
analysis takes into consideration the fact that all taxable income realized in prior
years has previously been fully absorbed by the Company’s net operating loss generated
in 2015.
|
|
·
|
Future
reversals of temporary differences are not significant when both deferred tax assets
and deferred tax liabilities are considered.
|
|
·
|
As
of the period ended March 31, 2016, the Company had forecasted sufficient future income to realize its net
operating loss carryovers by December 31, 2019. However, the Company did not achieve forecasted U.S. taxable income results for
the three month period ended June 30, 2016 and reduced its 2016 full year forecasted U.S. taxable income estimates.
|
Based upon the
level and weighting of available evidence, including cumulative losses in recent years and reduced weighting on forecasted future
earnings, management concluded that it is more likely than not that all of the U.S. deferred tax assets will not be realized and
a full valuation allowance was recorded as of June 30, 2016.
Although not considered in determining the need to recognize a valuation
allowance against its U.S. deferred tax assets as of June 30, 2016, the Company acquired Euticals on July 11, 2016 (see Note 16
for additional details). As a result of additional U.S. debt borrowed to execute the acquisition of Euticals, the Company expects
to incur substantial interest expense in future periods, which will substantially reduce U.S. taxable income in the future, making
it less likely that the U.S. deferred tax assets will be realized. The Company will continue to evaluate all positive and negative
evidence in support of its deferred tax assets in the future, as changes in temporary differences, tax laws, and operating performance
may require a change in the need for a valuation allowance. If the Company determines the valuation allowance should be reversed
in a future period, the resulting adjustment would be recorded as a tax benefit in the Consolidated Statements of Operations,
and such amount may be material.
Note 9 — Share-Based Compensation
During the three and six months ended
June 30, 2016, the Company recognized total share based compensation cost of $2,484 and $4,630, respectively, as compared to total
share-based compensation cost for the three and six months ended June 30, 2015 of $1,464 and $3,019, respectively.
The Company grants share-based compensation,
including restricted shares, under its 1998 Stock Option Plan, its 2008 Stock Option and Incentive Plan, as amended, as well as
its 1998 Employee Stock Purchase Plan, as amended (“ESPP”). The 1998 Stock Option Plan, the 2008 Stock Option and
Incentive Plan and ESPP are together referred to as the “Stock Option and Incentive Plans”.
Restricted Stock
A summary of unvested restricted stock activity during the
six months ended June 30, 2016 is presented below:
|
|
Number of
Shares
|
|
|
Weighted
Average Grant Date
Fair Value Per
Share
|
|
Outstanding, January 1, 2016
|
|
|
1,020
|
|
|
$
|
13.71
|
|
Granted
|
|
|
444
|
|
|
$
|
14.75
|
|
Vested
|
|
|
(184
|
)
|
|
$
|
13.16
|
|
Forfeited
|
|
|
(25
|
)
|
|
$
|
10.21
|
|
Outstanding, June 30, 2016
|
|
|
1,255
|
|
|
$
|
14.23
|
|
As of June 30, 2016, there was $13,755 of total
unrecognized compensation cost related to unvested restricted shares. That cost is expected to be recognized over a weighted-average
period of 2.81 years. 302 restricted shares outstanding have market-based vesting provisions. The grant date fair value assumptions
for these shares contain a vesting probability factor to reflect the Company’s expectation that not all shares will vest.
Of the remaining 953 restricted shares outstanding, the Company currently expects all shares to vest.
Stock Options
The fair value of each stock option award
is estimated at the date of grant using the Black-Scholes valuation model based on the following assumptions:
|
|
For the Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Expected life in years
|
|
|
5
|
|
|
|
5
|
|
Risk free interest rate
|
|
|
1.25
|
%
|
|
|
1.59
|
%
|
Volatility
|
|
|
42
|
%
|
|
|
42
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
A summary of stock option activity under
the Company’s Stock Option and Incentive Plans during the six months ended June 30, 2016 is presented below:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per Share
|
|
|
Weighted Average
Remaining
Contractual Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, January 1, 2016
|
|
|
1,439
|
|
|
$
|
8.20
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
295
|
|
|
$
|
15.77
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(64
|
)
|
|
$
|
4.67
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(31
|
)
|
|
$
|
2.93
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2016
|
|
|
1,639
|
|
|
$
|
9.80
|
|
|
|
5.72
|
|
|
$
|
7,546
|
|
Options exercisable, June 30, 2016
|
|
|
1,023
|
|
|
$
|
7.25
|
|
|
|
5.90
|
|
|
$
|
6,935
|
|
The weighted average fair value of stock
options granted for the six months ended June 30, 2016 and 2015 was $5.98 and $6.51, respectively. As of June 30, 2016, there
was $2,781 of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over
a weighted-average period of 2.80 years. Of the 1,639 stock options outstanding, the Company currently expects all options to
vest.
Employee Stock Purchase Plan
During the six months ended June 30, 2016
and 2015, 54 and 46 shares, respectively, were issued under the Company’s ESPP.
During the six months ended June 30, 2016
and 2015, cash received from stock option exercises and employee stock purchases under the ESPP was $903 and $2,087, respectively.
The excess tax benefit realized for the tax deductions from share-based compensation was $0 and $1,727 for the six months ended
June 30, 2016 and 2015, respectively.
Note 10 — Operating Segment Data
The Company has organized its operations into the DDS, API
and DPM segments. The DDS segment includes activities such as drug lead discovery, optimization, drug development, analytical
services and small scale commercial manufacturing. API includes pilot to commercial scale manufacturing of active pharmaceutical
ingredients and intermediates and high potency and controlled substance manufacturing. DPM includes pre-formulation, formulation
and process development through commercial scale production of complex liquid-filled and lyophilized injectable formulations.
Corporate activities include sales and marketing and administrative functions, as well as research and development costs that
have not been allocated to the operating segments.
The following table contains earnings data by operating segment,
reconciled to totals included in the unaudited condensed consolidated financial statements:
|
|
Contract
Revenue
|
|
|
Recurring
Royalty
Revenue
|
|
|
Income
(Loss)
from
Operations
|
|
|
Depreciation
and
Amortization
|
|
For the three months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDS
|
|
$
|
25,820
|
|
|
$
|
—
|
|
|
$
|
6,534
|
|
|
$
|
2,448
|
|
API
|
|
|
65,447
|
|
|
|
4,353
|
|
|
|
21,430
|
|
|
|
3,449
|
|
DPM
|
|
|
25,190
|
|
|
|
—
|
|
|
|
6,426
|
|
|
|
1,859
|
|
Corporate (a)
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,924
|
)
|
|
|
—
|
|
Total
|
|
$
|
116,457
|
|
|
$
|
4,353
|
|
|
$
|
6,466
|
|
|
$
|
7,756
|
|
|
|
Contract
Revenue
|
|
|
Recurring
Royalty
Revenue
|
|
|
Income
(Loss)
from
Operations
|
|
|
Depreciation
and
Amortization
|
|
For the three months ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDS (b)
|
|
$
|
21,399
|
|
|
$
|
1,787
|
|
|
$
|
6,902
|
|
|
$
|
2,134
|
|
API
|
|
|
39,997
|
|
|
|
2,535
|
|
|
|
12,174
|
|
|
|
2,301
|
|
DPM (b)
|
|
|
23,830
|
|
|
|
—
|
|
|
|
3,609
|
|
|
|
1,842
|
|
Corporate (a)
|
|
|
—
|
|
|
|
—
|
|
|
|
(16,518
|
)
|
|
|
—
|
|
Total
|
|
$
|
85,226
|
|
|
$
|
4,322
|
|
|
$
|
6,167
|
|
|
$
|
6,277
|
|
|
|
Contract
Revenue
|
|
|
Recurring
Royalty
Revenue
|
|
|
Income
(Loss)
from
Operations
|
|
|
Depreciation
and
Amortization
|
|
For the six months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDS
|
|
$
|
49,023
|
|
|
$
|
—
|
|
|
$
|
11,086
|
|
|
$
|
6,039
|
|
API
|
|
|
120,149
|
|
|
|
7,094
|
|
|
|
34,056
|
|
|
|
6,571
|
|
DPM
|
|
|
50,123
|
|
|
|
—
|
|
|
|
9,696
|
|
|
|
3,670
|
|
Corporate (a)
|
|
|
—
|
|
|
|
—
|
|
|
|
(52,525
|
)
|
|
|
—
|
|
Total
|
|
$
|
219,295
|
|
|
$
|
7,094
|
|
|
$
|
2,313
|
|
|
$
|
16,280
|
|
|
|
Contract
Revenue
|
|
|
Recurring
Royalty
Revenue
|
|
|
Income
(Loss)
from
Operations
|
|
|
Depreciation
and
Amortization
|
|
For the six months ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDS (b)
|
|
$
|
39,273
|
|
|
$
|
5,604
|
|
|
$
|
14,252
|
|
|
$
|
3,960
|
|
API
|
|
|
77,845
|
|
|
|
5,403
|
|
|
|
20,005
|
|
|
|
4,723
|
|
DPM (b)
|
|
|
43,240
|
|
|
|
—
|
|
|
|
7,132
|
|
|
|
3,079
|
|
Corporate (a)
|
|
|
—
|
|
|
|
—
|
|
|
|
(33,992
|
)
|
|
|
—
|
|
Total
|
|
$
|
160,358
|
|
|
$
|
11,007
|
|
|
$
|
7,397
|
|
|
$
|
11,762
|
|
|
(a)
|
Corporate consists primarily of the general and administrative
activities of the Company.
|
|
(b)
|
A portion of the 2015 amounts were reclassified from DDS to
DPM to better align business activities within segments. This reclassification impacted
contract revenue and income (loss) from operations for 2015.
|
The following table summarizes other information by segment
as of, and for the six-month period ended June 30, 2016:
|
|
DDS
|
|
|
API
|
|
|
DPM
|
|
|
Total
|
|
Long-lived assets including goodwill
|
|
$
|
139,521
|
|
|
$
|
210,998
|
|
|
$
|
159,229
|
|
|
$
|
509,748
|
|
Total assets
|
|
|
176,664
|
|
|
|
452,327
|
|
|
|
177,515
|
|
|
|
806,506
|
|
Goodwill included in total assets
|
|
|
46,049
|
|
|
|
48,040
|
|
|
|
76,613
|
|
|
|
170,702
|
|
Investments in unconsolidated affiliates
|
|
|
956
|
|
|
|
—
|
|
|
|
—
|
|
|
|
956
|
|
Capital expenditures
|
|
|
7,205
|
|
|
|
13,707
|
|
|
|
4,054
|
|
|
|
24,966
|
|
The following table summarizes other information by segment
as of December 31, 2015 and for capital expenditures for the six-month period ended June 30, 2015:
|
|
DDS
|
|
|
API
|
|
|
DPM
|
|
|
Total
|
|
Long-lived assets including goodwill
|
|
$
|
136,387
|
|
|
$
|
201,219
|
|
|
$
|
161,577
|
|
|
$
|
499,183
|
|
Total assets
|
|
|
174,203
|
|
|
|
523,036
|
|
|
|
168,328
|
|
|
|
865,567
|
|
Goodwill included in total assets
|
|
|
45,987
|
|
|
|
46,182
|
|
|
|
77,302
|
|
|
|
169,471
|
|
Investments in unconsolidated affiliates
|
|
|
956
|
|
|
|
—
|
|
|
|
—
|
|
|
|
956
|
|
Capital expenditures (six months ended June 30, 2015)
|
|
|
2,433
|
|
|
|
3,929
|
|
|
|
1,179
|
|
|
|
7,541
|
|
Note 11 — Financial Information by Customer Concentration
and Geographic Area
Total percentages of contract revenues
by each segment’s three largest customers for the three and six months ended June 30, 2016 and 2015 are indicated in the
following table:
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
DDS
|
|
10%, 4%, 4%
|
|
10%, 8%, 4%
|
|
11%, 4%, 4%
|
|
11%, 9%, 4%
|
API
|
|
16%, 12%, 8%
|
|
23%, 12%, 10%
|
|
17%, 11%, 6%
|
|
24%, 14%, 10%
|
DPM
|
|
12%, 11%, 10%
|
|
20%, 12%, 7%
|
|
12%, 7%, 7%
|
|
16%, 12%, 7%
|
Total contract revenue from GE Healthcare
(“GE”), the Company’s largest customer, represented 9% of total contract revenue for the three and six months
ended June 30, 2016, respectively. Total contract revenue from GE represented 11% and 13% of total contract revenue for the three
and six months ended June 30, 2015, respectively.
The Company’s total contract revenue
for the three and six months ended June 30, 2016 and 2015 was recognized from customers in the following geographic regions:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
|
59
|
%
|
|
|
68
|
%
|
|
|
61
|
%
|
|
|
69
|
%
|
Europe
|
|
|
31
|
|
|
|
24
|
|
|
|
30
|
|
|
|
24
|
|
Asia
|
|
|
6
|
|
|
|
6
|
|
|
|
5
|
|
|
|
5
|
|
Other
|
|
|
4
|
|
|
|
2
|
|
|
|
4
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Long-lived assets, including goodwill,
by geographic region are as follows:
|
|
June
30,
2016
|
|
|
December 31,
2015
|
|
United States
|
|
$
|
334,983
|
|
|
$
|
323,151
|
|
Asia
|
|
|
13,761
|
|
|
|
14,336
|
|
Europe
|
|
|
161,004
|
|
|
|
161,696
|
|
Total long-lived assets
|
|
$
|
509,748
|
|
|
$
|
499,183
|
|
Note 12 — Legal Proceedings and Other
The Company, from time to time, may be
involved in various claims and legal proceedings arising in the ordinary course of business. Except as noted below, the Company
is not currently a party to any such claims or proceedings which, if decided adversely to the Company, would either individually
or in the aggregate have a material adverse effect on the Company’s business, financial condition, results of operations
or cash flows.
On November 12, 2014, a purported class action
lawsuit,
John Gauquie v. Albany Molecular Research, Inc., et al.
, No. 14-cv-6637, was filed against the Company and certain
of its current and former officers in the United States District Court for the Eastern District of New York. An amended complaint
was filed on March 31, 2015. The amended complaint alleges claims under the Securities Exchange Act of 1934 arising from the
Company’s alleged failure to disclose in its August 5, 2014 announcement of its financial results for the second quarter
of 2014 that one of the manufacturing facilities experienced a power interruption in July 2014. The amended complaint alleges that
the price of the Company’s stock was artificially inflated between August 5, 2014 and November 5, 2014, and seeks unspecified
monetary damages and attorneys’ fees and costs. The defendants submitted on July 29, 2015 a motion to dismiss lead plaintiffs’
amended complaint. Lead plaintiffs submitted an opposition on October 7, 2015, and defendants submitted a reply on November 20,
2015. On July 26, 2016, the court denied the defendants motion to dismiss. The Company is evaluating its options with respect to
further proceedings regarding this matter and has updated its insurers as to this development.
Note 13 — Fair Value of Financial Instruments
The Company uses a framework for measuring
fair value in generally accepted accounting principles and making disclosures about fair value measurements. A three-tiered
fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value.
These tiers include:
Level 1 – defined as quoted prices
in active markets for identical instruments;
Level 2 – defined as inputs other
than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 – defined as unobservable
inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company determines the fair value
of its financial instruments using the following methods and assumptions:
Cash and cash equivalents,
restricted cash, receivables, and accounts payable:
The carrying amounts reported in the consolidated balance sheets
approximate their fair value because of the short maturities of these instruments.
Convertible senior notes, derivatives
and hedging instruments:
The fair value of the Company’s Notes, which differ from their carrying value, are influenced
by interest rates and the Company’s stock price and stock price volatility and are determined by prices for the Notes observed
in market trading, which are level 2 inputs. The estimated fair value of the Notes at June 30, 2016 was $152,997. The Notes Hedges
and the Notes Conversion Derivative are measured at fair value using level 2 inputs. These instruments are not actively traded
and are valued using an option pricing model that uses observable market data for all inputs, such as implied volatility of the
Company’s common stock, risk-free interest rate and other factors.
Interest rate swaps:
At June 30,
2016, the Company had contracted a derivative financial instrument to reduce the impact of fluctuations in variable interest rates
on a loan that a financial institution granted in February 2015. The estimated fair value of the swap at June 30, 2016 was $70.
The Company hedges the interest rate risk of the initial amount of the aforementioned bank loan through an interest rate swap.
In this arrangement, the interest rates are exchanged so that the Company receives from the financial institution a variable rate
of the 3-month Euribor, in exchange for a fixed interest payment for the same nominal amount (0.3%). The variable interest rate
received for the derivative offsets the interest payment on the hedged transaction, with the end result being a fixed interest
payment on the hedged financing. At June 30, 2016, the derivative financial instrument had not been designated as a hedge.
To determine the fair value of the interest
rate swap, the Company uses cash flow discounting based on the implicit rates determined by the euro interest rate curve, according
to market conditions at the valuation date, which are level 2 inputs.
Instrument
|
|
Nominal Amount
at 6/30/2016
|
|
|
Contract
Date
|
|
Contract
Date
Expiration
|
|
Interest
Rate
Payable
|
|
Interest Rate
Receivable
|
Interest rate swap
|
|
$
|
5,748
|
|
|
2/19/2015
|
|
2/19/2020
|
|
3-month Euribor
|
|
Fixed rate of 0.30%
|
Euticals acquisition hedge:
In May
2016, the Company entered into a forward contract to hedge the foreign currency exposure related to the purchase price of the Euticals
acquisition (see Note 16 for additional details regarding the Euticals acquisition). In this arrangement, the Company is obligated
to purchase €150,000 at a fixed price on July 8, 2016. In connection with the closing of the Euticals acquisition, the forward
contract was settled on July 8, 2016, at which time the Company recognized a realized loss of approximately $6,491 related to this
contract.
As of June 30, 2016, the fair value of
the forward contract was an unrealized loss of approximately $6,401, which has been recorded in Hedge liability on the Condensed
Consolidated Balance Sheets. The forward contract does not qualify as a hedging instrument in accordance with ASC 815,
Derivatives
and Hedging
. Consequently, the unrealized loss of $6,401 was recognized in Other (expense) income, net on the Condensed Consolidated
Statements of Operations. The fair value is based on inputs other than quoted prices in active markets that either directly or
indirectly observable.
Long-term debt, other than
convertible senior notes:
The carrying value of long-term debt approximated fair value at June 30, 2016 due to the
resetting dates of the variable interest rates.
Note 14 — Accumulated Other Comprehensive Loss, Net
The activity related to accumulated other comprehensive loss,
net was as follows:
|
|
Pension and
postretirement
benefit plans
|
|
|
Foreign
currency
adjustments
|
|
|
Total
Accumulated
Other
Comprehensive
Loss
|
|
Balance at December 31, 2015, net of tax
|
|
$
|
(5,581
|
)
|
|
$
|
(12,820
|
)
|
|
$
|
(18,401
|
)
|
Net current period change, net of tax
|
|
|
230
|
|
|
|
33
|
|
|
|
263
|
|
Balance at June 30, 2016, net
of tax
|
|
$
|
(5,351
|
)
|
|
|
(12,787
|
)
|
|
|
(18,138
|
)
|
The following table provides additional details of the amounts
recognized into net earnings from accumulated other comprehensive loss, net:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Actuarial losses before tax effect (a)
|
|
$
|
177
|
|
|
$
|
237
|
|
|
$
|
354
|
|
|
$
|
474
|
|
Tax benefit on amounts reclassified
into earnings
|
|
|
(62
|
)
|
|
|
(83
|
)
|
|
|
(124
|
)
|
|
|
(166
|
)
|
|
|
$
|
115
|
|
|
$
|
154
|
|
|
$
|
230
|
|
|
$
|
308
|
|
|
(a)
|
Amounts represent amortization of net actuarial loss from
shareholders’ equity into postretirement benefit plan cost. This amount was primarily
recognized as cost of contract revenue in the consolidated statements of operations.
|
Note 15 —
Collaboration
Arrangements
The Company enters into collaboration
arrangements with third parties for the development and manufacture of certain products and/or product candidates. Although each
of these arrangements is unique in nature, both parties are active participants in the activities of the collaboration and are
exposed to significant risks and rewards depending on the commercial success of the activities. These arrangements typically include
research and development and manufacturing. The rights and obligations of the parties can be global or limited to geographic regions
and the activities under these collaboration agreements are performed with no guarantee of either technological or commercial
success.
The Company is obligated under these arrangements
to perform the development activities and contract manufacturing of the product. Generally, the contract manufacturing component
of the arrangement commences during the development activities and continues through the commercial stage of each product, during
which time the collaboration partner is obligated to purchase the product from the Company. The collaboration partners are generally
responsible for obtaining regulatory approval and for sale and distribution of the product. The original terms of these arrangements
vary in length but generally range from 7 to 10 years in duration. In the event the arrangements are terminated prematurely, the
Company generally has the right to receive payment for all development costs incurred through the date of termination. Additionally,
in the event of termination, the Company is generally permitted to develop, manufacture and sell the product to a third party
on a contract research and manufacturing basis provided that it does not use the technology developed during the collaboration
arrangements. None of the product candidates associated with these collaboration arrangements have reached the contract manufacturing
or commercial and profit sharing stages.
These arrangements may include non-refundable,
upfront payments, milestone payments and cost sharing arrangements during the development stage, payments for manufacturing based
on a cost plus an agreed percentage, as well as profit sharing payments during the product’s commercial stage.
The Company recognizes revenue for payments
received for services performed under these arrangements as contract revenue in accordance with ASC Topic 605, “Revenue Recognition”.
Development stage payments are recognized using the milestone method when the contractual milestones are determined to be substantive
and have been achieved. Certain contractual milestones are deemed to be achieved upon the occurrence of the contractual performance
events. Other non-performance based milestones, including the filing of an Abbreviated new Drug Application (ANDA) and approval
by the Food and Drug Administration (FDA), which are generally events that occur at the end of the development period, are recognized
upon occurrence of the related event. Contractual milestones that are deemed not substantive are recognized using proportional
performance over the remaining development period. Upfront, non-refundable payments are recognized over the term of the development
period using the proportional performance recognition model. Revenue associated with payments received for contract manufacturing
services will be recognized upon delivery of the product to the Company’s collaborative partners. Revenue associated with
payments received for profit sharing payments will be recognized when earned based on the terms of the agreements.
The Company recognizes costs as incurred
during the performance of development activities and classifies these costs as Research and development (“R&D”)
expense. Costs incurred by the Company during the performance of the contract manufacturing activities will be classified as Cost
of contract revenue when the related revenue is recognized.
Contract revenue and R&D expense associated
with these collaboration arrangements recognized during the three and six months ended June 30, 2016 and 2015 is as follows:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
Contract revenue
|
|
$
|
3,151
|
|
|
$
|
1,803
|
|
|
$
|
4,420
|
|
|
$
|
2,450
|
|
R&D expense
|
|
$
|
1,584
|
|
|
$
|
1,729
|
(a)
|
|
$
|
4,022
|
|
|
$
|
1,771
|
(a)
|
|
(a)
|
Amounts recorded in cost of contract revenue in the condensed consolidated statements of operations for the three and six month
periods ended June 30, 2015.
|
Contract revenue for the three and six months ended June 30,
2016 includes $2,484 of termination revenue related to the early termination of one of the Company’s collaboration arrangements.
The Company is actively negotiating to secure a new collaboration partner for this program.
Note 16 — Subsequent Events
Acquisition
On July 11, 2016, the Company purchased from
Lauro Cinquantasette S.p.A. (the “Seller”) all of the capital stock of Prime European Therapeuticals S.p.A., (“Euticals”)
(“the Euticals Acquisition” or the “Transaction”), a privately-held company headquartered in Lodi, Italy,
specializing in custom synthesis and the manufacture of active pharmaceutical ingredients with a network of facilities located
primarily in Italy, Germany, the U.S. and France.
The consideration paid by the Company consisted
of cash, common stock of the Company and the issuance of debt to the Seller. Specifically, upon the closing of the Transaction,
the Company (i) paid approximately $182,115 (€164 million) in cash, subject to certain working capital, net debt and transaction
expenses adjustments (the “Cash Consideration”), (ii) issued approximately 7,051 unregistered shares of common stock
of the Company; and (iii) paid approximately $61,075 (€55 million) in deferred cash consideration payable to the Seller in
the form of two Seller notes (the “Euticals Seller Notes”).
The Euticals Seller Notes are unsecured promissory
notes, guaranteed by the Company, and are subject to customary representations and warranties and events of default with repayment
to be made in three equal annual installments made on the third, fourth and fifth anniversaries of the Euticals Acquisition closing
date. The repayment is subject to certain set off rights of the Company relating to the seller’s indemnification obligations.
The Euticals Seller Notes are subject to an interest rate equal to 0.25% per annum, which shall be due and payable in cash on the
first day of January, April, July and October during each calendar year.
Financing
In connection with the Euticals Acquisition,
on July 7, 2016, the Second Amended and Restated Credit Agreement was amended and the Company entered into the Third Amended and
Restated Credit Agreement with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto.
The Third Amended and Restated Credit Agreement (i) provides incremental senior secured first lien term loans in an aggregate principal
amount of $230,000 which increases the aggregate principal amount of senior secured first lien term loans under the Third Amended
and Restated Credit Agreement to $428,500 and (ii) increases the first lien revolving credit facility commitments by $5,000 to
$35,000. The Company used the proceeds of the Third Amended and Restated Credit Agreement to: (i) pay a portion of the Cash Consideration
for the Transaction; (ii) pay various fees and expenses incurred in connection with the Euticals Acquisition and related financing
activities; and (iii) repay the $30,000 first lien revolving credit facility and certain other indebtedness of the Company, Euticals
and their subsidiaries.
The term loans under the Third Amended and
Restated Credit Agreement mature and are payable on July 16, 2021 and the revolving credit facility commitments thereunder terminate
and all amounts then outstanding thereunder are payable on July 16, 2020, subject, in each case, to earlier acceleration (i) to
six months prior to the scheduled maturity date of the Company’s 2.25% Cash Convertible Senior Notes if on such date both
(x) more than $25,000 of the Cash Convertible Senior Notes shall remain outstanding and (y) the ratio the secured debt of the Company
and its subsidiaries to the EBITDA of the Company and its subsidiaries exceeds 1.50:1.00 and (ii) to April 7, 2019, April 7, 2020
or April 7, 2021, respectively, in each case to the extent that at any such date the Company has not (x) prepaid or otherwise satisfied
the amortization or final maturity payment amounts to next come due under each Euticals Seller Note then outstanding or (y) refinanced
such amortization or final maturity payment amount to next come due under each Euticals Seller Note then outstanding in a manner
permitted by the Third Amended and Restated Credit Agreement.
At the Company’s election, loans
made under the Third Amended and Restated Credit Agreement bear interest at (a) the one-month, three-month or six-month LIBOR
rate subject to a floor of 1.0% (the “LIBOR Rate”) or (b) a base rate determined by reference to the highest of (i)
the United States federal funds rate plus 0.50%, (ii) the rate of interest quoted by The Wall Street Journal as the “Prime
Rate”, and (iii) a daily rate equal to the one-month LIBOR Rate plus 1.0%, subject to a floor of 2.0% (the “Base Rate”),
plus an applicable margin of 4.75% per annum for LIBOR Rate loans and 3.75% per annum for Base Rate loans.
The obligations under the Third Amended
and Restated Credit Agreement are guaranteed by each material domestic subsidiary of the Company (each a “Guarantor”)
and are secured by first priority liens on, and security interests in, substantially all of the present and after-acquired assets
of the Company and each Guarantor subject to certain customary exceptions.