NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
1. BUSINESS, PRESENTATION,
AND RECENT ACCOUNTING PRONOUNCEMENTS
Overview
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. We focus on niche and
high barrier to entry opportunities including controlled substances, anti-cancer (oncolytics), hormones and steroids, and complex
formulations. Our three pharmaceutical manufacturing facilities, of which two are located in Baudette, Minnesota and one is located
in Oakville, Ontario, are together capable of producing 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. Our strategy is to use our
assets to develop, acquire, manufacture, and market branded and generic specialty prescription pharmaceuticals. By executing this
strategy, we believe we will be able to continue to grow our business, expand and diversify our product portfolio, and create long-term
value for our investors.
Basis of Presentation
The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”). In our opinion, the accompanying unaudited interim condensed consolidated financial statements include
all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial position, results
of operations, comprehensive income, and cash flows. The consolidated balance sheet at December 31, 2018, has been derived from
audited financial statements of that date. The unaudited interim condensed consolidated results of operations are not necessarily
indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included
in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules, and regulations
prescribed by the United States Securities and Exchange Commission. We believe that the disclosures provided herein are adequate
to make the information presented not misleading when these unaudited interim condensed consolidated financial statements are read
in conjunction with the audited financial statements and notes previously distributed in our Annual Report on Form 10-K for the
year ended December 31, 2018.
Principles of Consolidation
The unaudited interim condensed consolidated financial
statements include the accounts of ANI Pharmaceuticals, Inc. and its subsidiaries. All intercompany accounts and transactions are
eliminated in consolidation.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
1. BUSINESS, PRESENTATION,
AND RECENT ACCOUNTING PRONOUNCEMENTS – continued
Foreign Currency
The Company has 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 three and nine months ended September 30, 2019. Unless otherwise noted,
all references to “$” or “dollar” refer to the U.S. dollar.
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 September 30, 2019, we did not have any finance leases.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS, PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS
– continued
|
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 following table depicts the Company’s
revenue by geographic operations during the following periods:
(in thousands)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
Location of Operations
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
United States
|
|
$
|
50,026
|
|
|
$
|
48,961
|
|
|
$
|
153,088
|
|
|
$
|
142,712
|
|
Canada
|
|
|
1,311
|
|
|
|
1,742
|
|
|
|
5,493
|
|
|
|
1,742
|
|
Total Revenue
|
|
$
|
51,337
|
|
|
$
|
50,703
|
|
|
$
|
158,581
|
|
|
$
|
144,454
|
|
The following table depicts the Company’s property
and equipment, net according to geographic location as of:
(in thousands)
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
United States
|
|
$
|
26,147
|
|
|
$
|
24,437
|
|
Canada
|
|
$
|
13,607
|
|
|
|
13,653
|
|
Total property and equipment, net
|
|
$
|
39,754
|
|
|
$
|
38,090
|
|
Recent Accounting Pronouncements
Recent Accounting Pronouncements
Not Yet Adopted
In November 2018, the Financial Accounting Standards
Board (“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 are currently evaluating the impact, if any, that the adoption of this guidance will have 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 are currently evaluating
the impact, if any, that the adoption of this guidance will have on our consolidated financial statements.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS, PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS
– continued
|
In
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. 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 are currently evaluating the
impact, if any, that the adoption of this guidance will have on our consolidated financial statements.
We have evaluated all other issued and unadopted
Accounting Standards Updates and believe the adoption of these standards will not have a material impact on our condensed consolidated
statements of 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 swap is 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.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS, PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS
– continued
|
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 and early adoption was permitted. 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.
|
2.
|
REVENUE RECOGNITION AND RELATED ALLOWANCES
|
Revenue Recognition
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.
|
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.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
2. REVENUE RECOGNITION
AND RELATED ALLOWANCES – continued
All revenue recognized in the accompanying unaudited
interim condensed consolidated statements of operations is considered to be revenue from contracts with customers. The following
table depicts the disaggregation of revenue according to contract type:
Products and Services
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(in thousands)
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Sales of generic pharmaceutical products
|
|
$
|
31,753
|
|
|
$
|
30,287
|
|
|
$
|
99,452
|
|
|
$
|
83,716
|
|
Sales of branded pharmaceutical products
|
|
|
16,605
|
|
|
|
14,589
|
|
|
|
48,300
|
|
|
|
41,714
|
|
Sales of contract manufactured products
|
|
|
2,376
|
|
|
|
2,826
|
|
|
|
8,499
|
|
|
|
5,450
|
|
Royalties from licensing agreements
|
|
|
268
|
|
|
|
2,409
|
|
|
|
594
|
|
|
|
12,560
|
|
Product development services
|
|
|
75
|
|
|
|
288
|
|
|
|
806
|
|
|
|
288
|
|
Other(1)
|
|
|
260
|
|
|
|
304
|
|
|
|
930
|
|
|
|
726
|
|
Total net revenues
|
|
$
|
51,337
|
|
|
$
|
50,703
|
|
|
$
|
158,581
|
|
|
$
|
144,454
|
|
(1)Primarily
includes laboratory services and royalties on sales of contract manufactured products.
The following table depicts revenue recognized during
the following periods:
Timing of Revenue Recognition
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(in thousands)
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Performance obligations transferred at a point in time
|
|
$
|
51,262
|
|
|
$
|
50,415
|
|
|
$
|
157,775
|
|
|
$
|
144,166
|
|
Performance obligations transferred over time
|
|
|
75
|
|
|
|
288
|
|
|
|
806
|
|
|
|
288
|
|
Total
|
|
$
|
51,337
|
|
|
$
|
50,703
|
|
|
$
|
158,581
|
|
|
$
|
144,454
|
|
In
the three and nine months ended September 30, 2019 and 2018, we did not incur, and therefore did not defer, any material incremental
costs to obtain contracts. We recognized a decrease of $6.5 million
to net revenue from performance obligations satisfied in prior periods during the nine months ended September 30, 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 recognized $6.4 million of net revenue from
performance obligations satisfied in prior periods during the nine months ended September 30, 2018, consisting primarily of royalties
from licensing agreements and revised estimates for variable consideration, including chargebacks, rebates, returns, and other
allowances, related to prior period sales. In August 2018, we acquired WellSpring Pharma Services Inc. (“WellSpring”)
(see Note 3), a contract manufacturing company that also provides technical transfer services to customers, for which services
are transferred over time. As a result, we had $0.1 million of contract assets related to revenue recognized based on a percentage
of completion but not yet billed at both September 30, 2019 and December 31, 2018 and $0.5 million and $0.7 million of deferred
revenue at September 30, 2019 and December 31, 2018, respectively. For the nine months ended September 30, 2019, we recognized
$56 thousand of revenue that was included in deferred revenue as of December 31, 2018.
ANI PHARMACEUTICALS, INC.
and subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
2.
|
REVENUE
RECOGNITION AND RELATED ALLOWANCES – 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.
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. A comprehensive
discussion of variable consideration is included in 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, 2018.
The following table summarizes activity in the consolidated
balance sheets for accruals and allowances for the nine months ended September 30, 2019 and 2018, respectively:
|
|
Accruals for Chargebacks, Rebates, Returns, and Other Allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
Prompt
|
|
|
|
|
|
|
Government
|
|
|
|
|
|
Fees and Other
|
|
|
Payment
|
|
(in thousands)
|
|
Chargebacks
|
|
|
Rebates
|
|
|
Returns
|
|
|
Rebates
|
|
|
Discounts
|
|
Balance at December 31, 2017
|
|
$
|
28,230
|
|
|
$
|
7,930
|
|
|
$
|
8,274
|
|
|
$
|
5,226
|
|
|
$
|
1,834
|
|
Accruals/Adjustments
|
|
|
170,533
|
|
|
|
8,097
|
|
|
|
10,942
|
|
|
|
23,148
|
|
|
|
6,744
|
|
Credits Taken Against Reserve
|
|
|
(156,750
|
)
|
|
|
(7,013
|
)
|
|
|
(8,376
|
)
|
|
|
(21,418
|
)
|
|
|
(6,373
|
)
|
Balance at September 30, 2018
|
|
$
|
42,013
|
|
|
$
|
9,014
|
|
|
$
|
10,840
|
|
|
$
|
6,956
|
|
|
$
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
39,007
|
|
|
$
|
8,974
|
|
|
$
|
12,552
|
|
|
$
|
7,353
|
|
|
$
|
2,009
|
|
Accruals/Adjustments
|
|
|
187,843
|
|
|
|
12,723
|
|
|
|
13,392
|
|
|
|
27,476
|
|
|
|
7,962
|
|
Credits Taken Against Reserve
|
|
|
(188,504
|
)
|
|
|
(12,513
|
)
|
|
|
(9,999
|
)
|
|
|
(26,927
|
)
|
|
|
(7,714
|
)
|
Balance at September 30, 2019
|
|
$
|
38,346
|
|
|
$
|
9,184
|
|
|
$
|
15,945
|
|
|
$
|
7,902
|
|
|
$
|
2,257
|
|
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 September 30, 2019, the value of our unsatisfied performance obligations (or backlog) was $6.2 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.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
2.
|
REVENUE
RECOGNITION AND RELATED ALLOWANCES – continued
|
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.
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 September 30, 2019, the value of our unsatisfied
performance obligations for product development services contracts was $4.3 million. We expect to satisfy these performance obligations
in the next 6 to 15 months.
Credit Concentration
Our customers are primarily wholesale distributors,
chain drug stores, group purchasing organizations, and pharmaceutical companies.
During the three months ended September 30, 2019,
three customers represented 34%, 24%, and 23% of net revenues, respectively. During the nine months ended September 30, 2019, the
same three customers represented 33%, 24%, and 24% of net revenues, respectively. As of September 30, 2019, accounts receivable
from these customers totaled 84% of accounts receivable, net. During the three months ended September 30, 2018, three customers
represented 35%, 23%, and 20% of net revenues, respectively. During the nine months ended September 30, 2018, the same three customers
represented 34%, 23%, and 20% of net revenues respectively.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Summary
On August 6, 2018, our subsidiary, ANI Pharmaceuticals
Canada Inc., 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 Pharmaceuticals Canada Inc. (“ANI Canada”).
We acquired WellSpring to provide an additional technical
transfer site in order to accelerate the re-commercialization of the previously-approved Abbreviated New Drug Applications (“ANDAs”)
in our pipeline, to expand our contract manufacturing revenue base, and to increase 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
|
|
Deferred tax assets, net
|
|
|
—
|
|
Goodwill
|
|
|
1,742
|
|
Total assets acquired
|
|
|
19,766
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
|
2,413
|
|
Deferred revenue
|
|
|
666
|
|
Total liabilities 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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
3.
|
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 $1.3 million
and $5.5 million of revenue and recorded a net loss of $2.4 million and $3.8 million for the three and nine months ended September
30, 2019, respectively.
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.
(in thousands)
|
|
Three Months Ended
September 30, 2018
|
|
|
Nine Months Ended
September 30, 2018
|
|
Net revenues
|
|
$
|
51,384
|
|
|
$
|
151,091
|
|
Net income
|
|
$
|
4,456
|
|
|
$
|
7,812
|
|
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Credit Facility
On December 27, 2018, we refinanced our $125.0
million five-year senior secured credit facility (the “Credit Agreement”) with Citizens Bank, N.A. by entering
into an amended and restated Senior Secured Credit Facility (the “Credit Facility”) for up to $265.2 million. The
Credit Facility will mature in December 2023. The principal new feature of the Credit Facility is a $118.0 million Delayed
Draw Term Loan (the “DDTL”), which can only be drawn on in order to pay down the Company’s remaining 3.0%
Convertible Senior Notes, which will mature in December 2019. The Credit Facility (and specifically the DDTL) has a
subjective acceleration clause in case of a material adverse event. As a result, the remaining 3% Convertible Senior Notes
are classified as current in the accompanying unaudited interim condensed consolidated balance sheets. The Credit Facility
also extended the maturity of the remaining $72.2 million secured term loan balance (the “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 5). The Term Loan includes a repayment schedule,
pursuant to which $4.5 million of the loan will be paid in quarterly installments during the 12 months ended September 30,
2020. As a result, $4.5 million of the loan is recorded in current component of term loan, net of deferred financing in the
accompanying unaudited interim condensed consolidated balance sheets. Amounts drawn on the Term Loan and, if drawn upon, 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 on our total leverage ratio. We incur a commitment fee on the Revolver at a rate per annum that varies
within a range of 0.25% to 0.50%, depending on our leverage ratio. We also incur a delayed draw ticking fee on the DDTL at a
rate per annum that varies within a range of 0.25% to 0.50%.
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 initially shall be no greater than 3.75 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 outside the normal course of business.
The carrying value of the current and non-current
components of the Term Loan as of September 30, 2019 and December 31, 2018 are:
|
|
Current
|
|
(in thousands)
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Current borrowing on secured term loan
|
|
$
|
4,512
|
|
|
$
|
3,609
|
|
Deferred financing costs
|
|
|
(358
|
)
|
|
|
(353
|
)
|
Current component of term loan, net of deferred financing costs
|
|
$
|
4,154
|
|
|
$
|
3,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
(in thousands)
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Non-current borrowing on secured term loan
|
|
$
|
65,871
|
|
|
$
|
68,578
|
|
Deferred financing costs
|
|
|
(998
|
)
|
|
|
(1,282
|
)
|
Term loan, net of deferred financing costs and current component
|
|
$
|
64,873
|
|
|
$
|
67,296
|
|
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
4.
|
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 paid to third parties associated with the
refinance of the Term Loan were recognized as other (expense)/income, net in the accompanying unaudited interim condensed 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 September 30, 2019, we had a $70.4 million
balance on the Term Loan. As of September 30, 2019, we had not drawn on the Revolver or DDTL. Of the $1.1 million of deferred debt
issuance costs allocated to the Revolver, $0.8 million is included in other non-current assets in the accompanying unaudited interim
condensed consolidated balance sheets and $0.3 million is included in prepaid expenses and other current assets in the accompanying
unaudited interim condensed consolidated balance sheets. Of the $0.5 million of deferred debt issuance costs allocated to the DDTL,
$0.4 million is included in other non-current assets in the accompanying unaudited interim condensed consolidated balance sheets
and $0.1 million is included in prepaid expenses and other current assets in the accompanying unaudited interim condensed consolidated
balance sheets. Of the $1.4 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 and is included in current component of term loan, net of deferred financing
costs in the accompanying unaudited interim condensed consolidated balance sheets and $1.0 million is classified as a direct deduction
to the non-current portion of the Term Loan and is included in term loan, net of deferred financing costs and current component
in the accompanying unaudited interim condensed consolidated balance sheets.
The contractual maturity of our Term Loan
is as follows for the years ending December 31:
(in thousands)
|
|
|
|
2019 (remainder of the year)
|
|
$
|
1,805
|
|
2020
|
|
|
3,609
|
|
2021
|
|
|
5,414
|
|
2022
|
|
|
5,414
|
|
2023
|
|
|
54,141
|
|
Total
|
|
$
|
70,383
|
|
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
4.
|
INDEBTEDNESS –
continued
|
Convertible
Senior Notes
In December 2014, we issued $143.8 million of our
Convertible Senior Notes due 2019 (the “Notes”) in a registered public offering. After deducting the underwriting discounts
and commissions and other expenses (including the net cost of the bond hedge and warrant, discussed below), the net proceeds from
the offering were approximately $122.6 million. The Notes pay 3.0% interest semi-annually in arrears on June 1 and December
1 of each year, starting on June 1, 2015, and are due December 1, 2019. 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 unaudited interim condensed 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 unaudited interim condensed consolidated balance sheets. The
remaining Notes are convertible into 1,709,002 shares of common stock, based on an initial conversion price of $69.48 per share.
The Notes are convertible at the option of the holder
(i) during any calendar quarter beginning after March 31, 2015, if the last reported sale price of the common stock for at least
20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the
immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day,
(ii) during the five business days after any five consecutive trading day period in which the trading price per $1,000 principal
amount of the Notes for each trading day of such period was less than 98% of the product of the last reported sale price of our
common stock and the conversion rate on each such trading day; and (iii) on or after June 1, 2019 until the second scheduled trading
day immediately preceding the maturity date.
Upon conversion by the holders, we have elected to
settle such conversion in a combination of shares of our common stock and cash. As a result of our conversion election, 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 13); the debt discount
is being amortized as additional non-cash interest expense using the effective interest method over the term of the Notes.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
4.
|
INDEBTEDNESS –
continued
|
Offering costs of $5.5 million were allocated to
the debt and equity components in proportion to the allocation of proceeds to the components, as deferred financing costs and equity
issuance costs, respectively. The deferred financing costs of $4.2 million are being amortized as additional non-cash interest
expense using the straight-line method over the term of the debt, since this method was not significantly different from the effective
interest method. We have classified the deferred financing costs as a direct deduction to the net carrying value of our Notes.
The $1.3 million portion allocated to equity issuance costs was charged to APIC.
A portion of the offering proceeds was used to simultaneously
enter into “bond hedge” (or purchased call) and “warrant” (or written call) transactions with an affiliate
of one of the offering underwriters (collectively, the “Call Option Overlay”). We entered into the Call Option Overlay
to synthetically raise the initial conversion price of the Notes to $96.21 per share and reduce the potential common stock dilution
that may arise from the conversion of the Notes. The exercise price of the bond hedge is $69.48 per share 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 as of September 30, 2019 and the remaining
warrant had an underlying 1,709,002 common shares as of September 30, 2019.
The carrying value
of the Notes is as follows as of:
(in thousands)
|
|
September 30,
2019
|
|
|
December
31,
2018
|
|
Principal amount
|
|
$
|
118,750
|
|
|
$
|
118,750
|
|
Unamortized debt discount
|
|
|
(1,048
|
)
|
|
|
(5,648
|
)
|
Deferred financing costs
|
|
|
(116
|
)
|
|
|
(639
|
)
|
Net carrying value
|
|
$
|
117,586
|
|
|
$
|
112,463
|
|
We had accrued interest of $1.2
million and $0.3 million related to the Notes recorded in accrued expenses, other in our consolidated balance sheets at September
30, 2019 and December 31, 2018, respectively.
The following table sets forth
the components of total interest expense related to the Notes and Term Loan recognized in the accompanying unaudited interim condensed
consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(in thousands)
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Contractual coupon
|
|
$
|
1,628
|
|
|
$
|
1,835
|
|
|
$
|
4,903
|
|
|
$
|
5,393
|
|
Amortization of debt discount
|
|
|
1,553
|
|
|
|
1,783
|
|
|
|
4,600
|
|
|
|
5,280
|
|
Amortization of finance fees
|
|
|
358
|
|
|
|
370
|
|
|
|
1,078
|
|
|
|
1,111
|
|
Capitalized interest
|
|
|
(41
|
)
|
|
|
(174
|
)
|
|
|
(152
|
)
|
|
|
(552
|
)
|
|
|
$
|
3,498
|
|
|
$
|
3,814
|
|
|
$
|
10,429
|
|
|
$
|
11,232
|
|
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
5.
|
DERIVATIVE FINANCIAL INSTRUMENT AND HEDGING ACTIVITY
|
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
loss, net of tax in our consolidated balance sheets and will be reclassified to earnings when the hedged item affects earnings.
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, 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 balance to December 2023.
At the same time, we terminated 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 4), 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 will decrease in line with our Term Loan. As of September 30, 2019, the notional amount of the
interest rate swap was $70.4 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 September 30, 2019, the fair value of the interest
rate swap liability was valued at $3.0 million and was recorded in other non-current liabilities in the accompanying unaudited
interim condensed consolidated balance sheets. As of September 30, 2019, $2.4 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 unaudited interim condensed consolidated
balance sheets. During the three and nine months ended September 30, 2019, changes in the fair value of the interest rate swap
of $0.3 million and $2.0 million, net of tax, were recorded in accumulated other comprehensive loss, net of tax in our unaudited
interim condensed consolidated statements of comprehensive income, respectively. 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. During the three and nine months ended September 30, 2019, $63 thousand and $0.1 million of interest expense
was recognized in relation to the interest rate swap, respectively.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
5.
|
DERIVATIVE FINANCIAL INSTRUMENT AND HEDGING ACTIVITY – continued
|
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. The notional
amount of the interest rate swap is $118.0 million and will have a cash and interest impact beginning in December 2019. 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. As of September 30, 2019, the fair value of the interest rate swap liability was valued at $4.7 million and
was recorded in other non-current liabilities in the accompanying unaudited interim condensed consolidated balance sheets. As of
September 30, 2019, $3.7 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 unaudited interim condensed consolidated balance sheets. During the three and nine months
ended September 30, 2019, changes in the fair value of the interest rate swap of $0.7 million and $3.7 million, net of tax, were
recorded in accumulated other comprehensive loss, net of tax in our unaudited interim condensed consolidated statements of comprehensive
income, respectively. Differences between the hedged LIBOR rate and the fixed rate will be recorded as interest expense in the
same period that the related interest is recorded for the DDTL based on the LIBOR rate. During the three and nine months ended
September 30, 2019, we did not record interest expense in relation to the February 2019 interest rate swap.
Basic earnings per share is computed by dividing
net income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period.
For periods of net income, and when the effects are
not anti-dilutive, we calculate diluted earnings per share by dividing net income available to common shareholders by the weighted-average
number of shares outstanding plus the impact of all potential dilutive common shares, consisting primarily of common stock options,
shares to be purchased under our Employee Stock Purchase Plan (“ESPP”), unvested restricted stock awards, stock purchase
warrants, and any conversion gain on our Notes (Note 4), using the treasury stock method. For periods of net loss, diluted loss
per share is calculated similarly to basic loss per share.
Our unvested restricted shares contain non-forfeitable
rights to dividends, and therefore are considered to be participating securities; in periods of net income, the calculation of
basic and diluted earnings per share excludes from the numerator net income attributable to the unvested restricted shares, and
excludes the impact of those shares from the denominator.
For purposes of determining diluted earnings per
share, we have elected a policy to settle the principal portion of the Notes (Note 4) in cash. As such, the principal portion of
the Notes has no effect on either the numerator or denominator when determining diluted earnings per share. Any conversion gain
is assumed to be settled in shares and is incorporated in diluted earnings per share using the treasury method. The warrants issued
in conjunction with the issuance of the Notes (Note 4) are considered to be dilutive when they are in-the-money relative to our
average stock price during the period; the bond hedge purchased in conjunction with the issuance of the Notes is always considered
to be anti-dilutive.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
6.
|
EARNINGS PER SHARE – continued
|
Earnings per share for the three and nine months
ended September 30, 2019 and 2018 are calculated for basic and diluted earnings per share as follows:
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
Three Months Ended
September 30,
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands, except per share amounts)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net income
|
|
$
|
3,895
|
|
|
$
|
5,037
|
|
|
$
|
3,895
|
|
|
$
|
5,037
|
|
|
$
|
10,929
|
|
|
$
|
10,064
|
|
|
$
|
10,929
|
|
|
$
|
10,064
|
|
Net income allocated to restricted stock
|
|
|
(56
|
)
|
|
|
(51
|
)
|
|
|
(56
|
)
|
|
|
(51
|
)
|
|
|
(169
|
)
|
|
|
(101
|
)
|
|
|
(169
|
)
|
|
|
(101
|
)
|
Net income allocated to common shares
|
|
$
|
3,832
|
|
|
$
|
4,986
|
|
|
$
|
3,832
|
|
|
$
|
4,986
|
|
|
$
|
10,753
|
|
|
$
|
9,963
|
|
|
$
|
10,753
|
|
|
$
|
9,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted-Average Shares Outstanding
|
|
|
11,879
|
|
|
|
11,706
|
|
|
|
11,879
|
|
|
|
11,706
|
|
|
|
11,826
|
|
|
|
11,659
|
|
|
|
11,826
|
|
|
|
11,659
|
|
Dilutive effect of stock options and ESPP
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
|
|
108
|
|
Dilutive effect of Notes
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
-
|
|
Diluted Weighted-Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
12,085
|
|
|
|
11,804
|
|
|
|
|
|
|
|
|
|
|
|
12,060
|
|
|
|
11,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
$
|
0.32
|
|
|
$
|
0.43
|
|
|
$
|
0.32
|
|
|
$
|
0.42
|
|
|
$
|
0.91
|
|
|
$
|
0.85
|
|
|
$
|
0.89
|
|
|
$
|
0.85
|
|
The number of anti-dilutive shares, which have been
excluded from the computation of diluted earnings per share was 2.2 million and 4.8
million for the three months ended September 30, 2019 and 2018 and was 2.9 million and 4.7 million for the nine months ended September
30, 2019 and 2018, respectively. Anti-dilutive shares consist of out-of-the-money Class C Special stock, out-of-the-money common
stock options, common stock options that are anti-dilutive when calculating the impact of the potential dilutive common shares
using the treasury stock method, underlying shares related to out-of-the-money bonds issued as convertible debt when applicable,
and out-of-the-money warrants exercisable for common stock.
Inventories consist of the following as of:
(in thousands)
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Raw materials
|
|
$
|
33,058
|
|
|
$
|
27,671
|
|
Packaging materials
|
|
|
2,958
|
|
|
|
2,563
|
|
Work-in-progress
|
|
|
741
|
|
|
|
1,210
|
|
Finished goods
|
|
|
11,379
|
|
|
|
10,620
|
|
|
|
|
48,136
|
|
|
|
42,064
|
|
Reserve for excess/obsolete inventories
|
|
|
(1,962
|
)
|
|
|
(1,561
|
)
|
Inventories, net
|
|
$
|
46,174
|
|
|
$
|
40,503
|
|
Vendor Concentration
We source the raw materials for our products, including
active pharmaceutical ingredients (“API”), from both domestic and international suppliers. Generally, only a single
source of API is qualified for use in each product due to the cost and time required to validate a second source of supply. As
a result, we are dependent upon our current vendors to reliably supply the API required for on-going product manufacturing. During
the three months ended September 30, 2019, we purchased approximately 10% of our inventory from one supplier. As of September 30,
2019, our amount payable to this supplier was immaterial. During the three months ended September 30, 2018, we purchased approximately
36% of our inventory from one supplier. During the nine months ended September 30, 2019, we purchased approximately 13% of our
inventory from one supplier. As of September 30, 2019, our amount payable to this supplier was immaterial. During the nine months
ended September 30, 2018, we purchased approximately 25% of our inventory from two suppliers.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
8.
|
PROPERTY,
PLANT, AND EQUIPMENT
|
Property and equipment consist of the following as
of:
(in thousands)
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Land
|
|
$
|
4,566
|
|
|
$
|
4,558
|
|
Buildings
|
|
|
10,161
|
|
|
|
10,079
|
|
Machinery, furniture, and equipment
|
|
|
33,156
|
|
|
|
26,814
|
|
Construction in progress
|
|
|
3,491
|
|
|
|
5,040
|
|
|
|
|
51,374
|
|
|
|
46,491
|
|
Less: accumulated depreciation
|
|
|
(11,620
|
)
|
|
|
(8,401
|
)
|
Property and equipment, net
|
|
$
|
39,754
|
|
|
$
|
38,090
|
|
Depreciation expense was $1.1 million and $0.6 million
for the three months ended September 30, 2019 and 2018, respectively. Depreciation expense was $3.2 million and $1.3 million for
the nine months ended September 30, 2019 and 2018, respectively. During the three months ended September 30, 2019 and 2018, there
was $41 thousand and $0.2 million of interest capitalized into construction in progress, respectively. During the nine months ended
September 30, 2019 and 2018, there was $0.2 million and $0.6 million of interest capitalized into construction in progress, respectively.
Construction in progress consists of multiple projects, primarily related to new equipment to expand our manufacturing capability
as our product lines continue to grow.
|
9.
|
GOODWILL
AND INTANGIBLE ASSETS
|
Goodwill
As a result of our 2013 merger with BioSante Pharmaceuticals,
Inc. (“BioSante”), 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 as of October 31st
of each year, and whenever events occur or circumstances change that would, more likely than not, reduce the fair value of our
reporting unit below its carrying value. There have been no events or changes in circumstances that would have reduced the fair
value of our reporting unit below its carrying value during the nine months ended September 30, 2019. No impairment losses were
recognized during the three and nine months ended September 30, 2019 or 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. The transaction closed in March 2019 and we made the $2.5 million payment using cash on hand. 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 13 for further details regarding
the transaction.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
9.
|
GOODWILL
AND INTANGIBLE ASSETS – continued
|
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 using cash on hand.
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 13 for further details regarding the transaction.
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. The transaction closed in May 2018 and we made the $2.3 million payment using cash on hand. 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 13 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 royalty on net profits from sales of one of the products. The transaction closed in April
2018 and we made the $2.7 million payment using cash on hand. 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 13 for further details regarding the transaction.
Marketing and Distribution Rights
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 will be amortized in full over its estimated useful life of eight years. Please see Note 13 for further
details regarding the transaction. 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. While the ranitidine
produced for us has not been specifically recalled, we have voluntarily suspended sale of this product as we follow the investigation.
The FDA does not have scientific evidence to recommend whether individuals should continue or stop taking ranitidine medicines
at this time. The agency is conducting further tests to determine the risk to consumers. We will continue to evaluate the facts
and circumstances around our Ranitidine product to determine if the carrying value of the intangible asset has been impacted.
The components of net definite-lived intangible
assets are as follows:
|
|
September 30, 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
|
|
|
$
|
(28,553
|
)
|
|
$
|
46,194
|
|
|
$
|
(17,093
|
)
|
|
10.0 years
|
NDAs and product rights
|
|
|
230,974
|
|
|
|
(81,070
|
)
|
|
|
230,974
|
|
|
|
(62,222
|
)
|
|
10.0 years
|
Marketing and distribution rights
|
|
|
10,503
|
|
|
|
(8,498
|
)
|
|
|
10,423
|
|
|
|
(7,051
|
)
|
|
4.7 years
|
Non-compete agreement
|
|
|
624
|
|
|
|
(312
|
)
|
|
|
624
|
|
|
|
(245
|
)
|
|
7.0 years
|
|
|
$
|
306,805
|
|
|
$
|
(118,433
|
)
|
|
$
|
288,215
|
|
|
$
|
(86,611
|
)
|
|
|
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
9.
|
GOODWILL
AND INTANGIBLE ASSETS – continued
|
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 certain NDA and product rights assets, we use an accelerated amortization method to better match the anticipated economic benefits
expected to be provided. Amortization expense was $8.4 million and $7.9 million for the three months ended September 30, 2019 and
2018, respectively. Amortization expense was $31.8 million and $23.7 million for the nine months ended September 30, 2019 and 2018,
respectively.
We test for impairment of definite-lived intangible
assets when events or circumstances indicate that the carrying value of the assets may not be recoverable. No such triggering
events were identified during the three and nine months ended September 30, 2019 and 2018 and therefore no impairment loss was
recognized in the three and nine months ended September 30, 2019 and 2018.
Expected future amortization expense is as follows:
(in thousands)
|
|
|
|
2019 (remainder of the year)
|
|
$
|
8,405
|
|
2020
|
|
|
33,135
|
|
2021
|
|
|
31,694
|
|
2022
|
|
|
28,289
|
|
2023
|
|
|
27,541
|
|
2024 and thereafter
|
|
|
59,308
|
|
Total
|
|
$
|
188,372
|
|
|
10.
|
STOCK-BASED
COMPENSATION
|
Employee Stock Purchase Plan
In July 2016, we commenced administration of the
ANI Pharmaceuticals, Inc. 2016 Employee Stock Purchase Plan. As of September 30, 2019, we have 0.2 million shares of common stock
available under the ESPP. Under the ESPP, participants can purchase shares of our stock at a 15% discount.
The following table summarizes ESPP expense incurred
under the 2016 Employee Stock Purchase Plan and included in our accompanying unaudited interim condensed consolidated statements
of operations:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Cost of sales
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
10
|
|
|
$
|
6
|
|
Research and development
|
|
|
7
|
|
|
|
5
|
|
|
|
16
|
|
|
|
8
|
|
Selling, general, and administrative
|
|
|
19
|
|
|
|
15
|
|
|
|
64
|
|
|
|
43
|
|
|
|
$
|
30
|
|
|
$
|
22
|
|
|
$
|
90
|
|
|
$
|
57
|
|
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
10.
|
STOCK-BASED
COMPENSATION – continued
|
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 September 30,
2019, 0.3 million shares of our common stock remained available for issuance under the 2008 Plan.
The following table summarizes stock-based compensation
expense incurred under the 2008 Plan and included in our accompanying unaudited interim condensed consolidated statements of operations:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Cost of sales
|
|
$
|
26
|
|
|
$
|
24
|
|
|
$
|
75
|
|
|
$
|
66
|
|
Research and development
|
|
|
213
|
|
|
|
184
|
|
|
|
545
|
|
|
|
564
|
|
Selling, general, and administrative
|
|
|
2,201
|
|
|
|
1,564
|
|
|
|
6,063
|
|
|
|
4,266
|
|
|
|
$
|
2,440
|
|
|
$
|
1,772
|
|
|
$
|
6,683
|
|
|
$
|
4,896
|
|
A summary of stock option and restricted stock activity
under the 2008 Plan during the nine months ended September 30, 2019 and 2018 is presented below:
(in thousands)
|
|
Options
|
|
|
RSAs
|
|
Outstanding December 31, 2017
|
|
|
767
|
|
|
|
86
|
|
Granted
|
|
|
156
|
|
|
|
65
|
|
Options Exercised/RSAs Vested
|
|
|
(140
|
)
|
|
|
(33
|
)(1)
|
Forfeited
|
|
|
(22
|
)
|
|
|
-
|
|
Outstanding September 30, 2018
|
|
|
761
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2018
|
|
|
759
|
|
|
|
117
|
|
Granted
|
|
|
160
|
|
|
|
122
|
|
Options Exercised/RSAs Vested
|
|
|
(117
|
)
|
|
|
(42
|
)(2)
|
Forfeited
|
|
|
(24
|
)
|
|
|
(3
|
)
|
Expired
|
|
|
(1
|
)
|
|
|
-
|
|
Outstanding September 30, 2019
|
|
|
777
|
|
|
|
194
|
|
(1) Includes 11 thousand shares purchased from employees to cover employee income taxes related to income earned upon vesting of restricted stock. The shares purchased are held in treasury and the $659 thousand total purchase price for the shares is included in Treasury stock in our accompanying unaudited interim condensed consolidated balance sheets.
(2) Includes 15 thousand shares purchased from employees to cover employee income taxes related to income earned upon vesting of restricted stock. The shares purchased are held in treasury and the $1.0 million total purchase price for the shares is included in Treasury stock in our accompanying unaudited interim condensed consolidated balance sheets.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
We use the asset and liability method of accounting
for income taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when
the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in the period that such tax rate changes are enacted.
During the three months ended June 30, 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 impact on the prior periods was not material.
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. 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 three months ended June 30, 2019, we released a net valuation allowance of $1.9 million related to ANI Canada.
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 September 30, 2019 and December 31, 2018. We are subject to taxation in various U.S. jurisdictions
and all of our income tax returns remain subject to examination by tax authorities due to the availability of NOL carryforwards.
For interim periods, we recognize an income tax provision/(benefit)
based on our estimated annual effective tax rate, calculated on a worldwide consolidated basis, expected for the entire year. If
we project taxable losses in any specific taxing jurisdiction, those losses are excluded from the calculation of the worldwide
estimated annual effective tax rate and a resulting tax benefit is not recognized. The interim annual estimated effective tax rate
is based on the statutory tax rates then in effect, as adjusted for estimated changes in temporary and estimated permanent differences,
and excludes certain discrete items whose tax effect, when material, is recognized in the interim period in which they occur. These
changes in temporary differences, permanent differences, and discrete items result in variances to the effective tax rate from
period to period. We also have elected to exclude the impacts from significant pre-tax non-recognized subsequent events from our
interim estimated annual effective rate until the period in which they occur. Our estimated annual effective tax rate changes throughout
the year as our on-going estimates of pre-tax income, changes in temporary differences, and permanent differences are revised,
and as discrete items occur. Global Intangible Low-Taxed Income (“GILTI”), as defined in the Tax Cuts and Jobs
Act of 2017, generated from our Canadian operations is subject to U.S. taxes, with certain defined exemptions,
thresholds and credits. For financial reporting purposes we have elected to treat GILTI inclusions as a period cost.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
11.
|
INCOME
TAXES – continued
|
For the three months ended September 30, 2019, we
recognized an income tax expense of $0.1 million. The income tax expense resulted from applying an estimated annual worldwide effective
tax rate of 8.4% to pre-tax consolidated income of $3.9 million reported during the period, reduced by the net effects of certain
discrete items occurring in 2019 which impact our income tax provision in the period in which they occur. Discrete items occurring
during the three months ended September 30, 2019 include the impact of stock option exercises, disqualifying dispositions of incentive
stock options, and return to provision adjustments.
The estimated consolidated effective tax rate
for the three months ended September 30, 2018, calculated after excluding the taxable losses projected in our Canadian
operations for which no tax benefit could be recognized, was 20.9% of pre-tax income reported in the period, calculated
based on the estimated annual effective rate anticipated for the year ending December 31, 2018 plus the effects of certain
discrete items occurring in the third quarter. Our effective tax rate was also impacted by the discrete impact of current
period awards of stock-based compensation, stock option exercises, and disqualifying dispositions of incentive stock options,
all of which impact the consolidated effective rate in the period in which they occur.
For the nine months ended September 30, 2019, we recognized
an income tax benefit of $0.1 million. The income tax benefit resulted from applying an estimated annual worldwide effective tax
rate of 16.6% to pre-tax consolidated income of $10.9 million reported during the period, reduced by the net effects of certain
discrete items occurring in 2019 which impact our income tax provision in the period in which they occur. Discrete items occurring
during the nine months ended September 30, 2019 include the impact of the release of ANI
Canada’s net valuation allowance, retroactive application of our newly adopted transfer pricing policy to 2018, and
the impact of current period awards of stock-based compensation, stock option exercises, disqualifying dispositions of incentive
stock options, and return to provision adjustments.
The estimated consolidated effective tax rate
for the nine months ended September 30, 2018, calculated after excluding the taxable losses projected in our Canadian
operations for which no tax benefit could be recognized, was 20.8% of pre-tax income reported in the period, calculated
based on the estimated annual effective rate anticipated for the year ending December 31, 2018 plus the effects of certain
discrete items occurring in 2018. Our effective tax rate was also impacted by the discrete impact of current period awards of
stock-based compensation, stock option exercises, and disqualifying dispositions of incentive stock options, all of which
impact the consolidated effective rate in the period in which they occur.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
12.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
All our existing leases as of September 30, 2019
are classified as operating leases. As of September 30, 2019, we have eleven material operating leases for facilities and office
equipment with remaining terms expiring from 2021 through 2024 and a weighted average remaining lease term of 2.6 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 nine months ended
September 30, 2019 consisted of the following:
(in thousands)
|
|
|
|
Operating lease costs
|
|
$
|
138
|
|
Variable lease costs
|
|
|
44
|
|
Total lease costs
|
|
$
|
182
|
|
A maturity analysis of our operating leases follows:
(in thousands)
|
|
|
|
Future payments:
|
|
|
|
|
2019 (remainder of the year)
|
|
$
|
48
|
|
2020
|
|
|
195
|
|
2021
|
|
|
133
|
|
2022
|
|
|
97
|
|
2023
|
|
|
40
|
|
2024 and thereafter
|
|
|
3
|
|
Total
|
|
$
|
516
|
|
|
|
|
|
|
Discount
|
|
|
(33
|
)
|
Lease liability
|
|
|
483
|
|
Current lease liability
|
|
|
(177
|
)
|
Non-current lease liability
|
|
$
|
306
|
|
Government Regulation
Our products and facilities are subject to regulation
by a number of federal and state governmental agencies. The FDA, in particular, maintains oversight of the formulation, manufacture,
distribution, packaging, and labeling of all of our products. The Drug Enforcement Administration (“DEA”) maintains
oversight over our products that are controlled substances.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
12.
|
COMMITMENTS
AND CONTINGENCIES – continued
|
Unapproved Products
Two of our products, Esterified Estrogen with Methyltestosterone
(“EEMT”) and Opium Tincture, are marketed without approved NDAs or ANDAs. During the three months ended September 30,
2019 and 2018, net revenues for these products totaled $4.7 million and $6.2 million, respectively. During the nine months ended
September 30, 2019 and 2018, net revenues for these products totaled $15.5 million and $18.3 million, respectively.
The FDA's policy with respect to the continued marketing
of unapproved products is stated in the FDA's September 2011 Compliance Policy Guide Sec. 440.100 titled “Marketed New Drugs
without Approved NDAs or ANDAs.” Under this policy, the FDA has stated that it will follow a risk-based approach with regard
to enforcement against such unapproved products. The FDA evaluates whether to initiate enforcement action on a case-by-case basis,
but gives higher priority to enforcement action against products in certain categories, such as those marketed as unapproved drugs
with potential safety risks or that lack evidence of effectiveness. We believe that, so long as we comply with applicable manufacturing
standards, the FDA will not take action against us under the current enforcement policy. There can be no assurance, however, that
the FDA will continue this policy or not take a contrary position with any individual product or group of products. If the FDA
were to take a contrary position, we may be required to seek FDA approval for these products or withdraw such products from the
market. If we decide to withdraw the products from the market, our net revenues for generic pharmaceutical products would decline
materially, and if we decide to seek FDA approval, we would face increased expenses and might need to suspend sales of the products
until such approval was obtained, and there are no assurances that we would receive such approval.
In addition, one group of products that we manufacture
on behalf of a contract customer is marketed by that customer without an approved NDA. If the FDA took enforcement action against
such customer, the customer may be required to seek FDA approval for the group of products or withdraw them from the market. Our
contract manufacturing revenues for these unapproved products for the three months ended September 30, 2019 and 2018 were $0.5
million and $0.6 million, respectively. Our contract manufacturing revenues for these unapproved products for the nine months ended
September 30, 2019 and 2018 were $2.0 million and $1.6 million, respectively.
We receive royalties on the net sales of a group
of contract-manufactured products, which are marketed by the contract customer without an approved NDA. If the FDA took enforcement
action against such customer, the customer may be required to seek FDA approval for the group of products or withdraw them from
the market. Our royalties on the net sales of these unapproved products for the three and nine months ended September 30, 2019
and 2018 were less than 1% of total revenues.
Louisiana
Medicaid Lawsuit
On September 11,
2013, the Attorney General of the State of Louisiana filed a lawsuit in Louisiana state court against numerous pharmaceutical companies,
including us, under various state laws, alleging that each defendant caused the state’s Medicaid agency to provide reimbursement
for drug products that allegedly were not approved by the FDA and therefore allegedly not reimbursable under the federal Medicaid
program. The lawsuit relates to three cough and cold prescription products manufactured and sold by our former Gulfport, Mississippi
operation, which was sold in September 2010. Through its lawsuit, the state seeks unspecified damages, statutory fines, penalties,
attorneys’ fees, and costs. While we cannot predict the outcome of the lawsuit at this time, we could be subject to material
damages, penalties, and fines. We intend to vigorously defend against all claims in the lawsuit.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
12.
|
COMMITMENTS
AND CONTINGENCIES – continued
|
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. A trial date has not been scheduled. 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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
13.
|
FAIR
VALUE DISCLOSURES
|
Fair value is the price that would be received from
the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement
date. U.S. GAAP establishes a hierarchical disclosure framework that prioritizes and ranks the level of observability of inputs
used in measuring fair value.
The inputs used in measuring the fair value of cash
and cash equivalents are considered to be level 1 in accordance with the three-tier fair value hierarchy. The fair market
values are based on period-end statements supplied by the various banks and brokers that held the majority of our funds. The fair
value of short-term financial instruments (primarily accounts receivable, prepaid expenses, accounts payable, accrued expenses,
borrowings under lines of credit, and other current liabilities) approximate their carrying values because of their short-term
nature. While our Notes are recorded on our accompanying unaudited interim condensed consolidated balance sheets at their net carrying
value of $117.6 million as of September 30, 2019, the Notes are being traded on the bond market and their fair value is $125.9
million, based on their closing price on September 30, 2019, a Level 1 input.
Financial Assets and Liabilities Measured at Fair
Value on a Recurring Basis
Our contingent value rights (“CVRs”),
which were granted coincident with our merger with BioSante and expire in June 2023, are considered contingent consideration and
are classified as liabilities. As such, the CVRs were recorded as purchase consideration at their estimated fair value, using level
3 inputs, and are marked to market each reporting period until settlement. The fair value of CVRs is estimated using the present
value of our projection of the expected payments pursuant to the terms of the CVR agreement, which is the primary unobservable
input. If our projection or expected payments were to increase substantially, the value of the CVRs could increase as a result.
The present value of the liability was calculated using a discount rate of 15%. We determined that the fair value of the CVRs was
immaterial as of September 30, 2019 and December 31, 2018. We also determined that the changes in such fair value were immaterial
in the three and nine months ended September 30, 2019 and 2018.
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 balance 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 5)
to manage our exposure to the variable interest rate on our Term Loan (Note 4). The notional amount of our interest rate swap was
set to match the balance of our Term Loan. 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 5, the fair value of the interest rate swap
was a $3.0 million liability at September 30, 2019.
In February 2019, we entered into an interest rate
swap arrangement (Note 5), with Citizens Bank, N.A. to manage our exposure to changes in LIBOR-based interest rates underlying
our DDTL (Note 4). 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 5, the fair value of the interest rate swap was a $4.7 million liability
at September 30, 2019.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
13.
|
FAIR
VALUE DISCLOSURES – continued
|
The following table presents our financial assets
and liabilities accounted for at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, by level within
the fair value hierarchy:
(in
thousands)
Description
|
|
Fair Value at
September 30, 2019
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
7,757
|
|
|
$
|
-
|
|
|
$
|
7,757
|
|
|
$
|
-
|
|
CVRs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Description
|
|
Fair Value at
December 31, 2018
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
496
|
|
|
$
|
-
|
|
|
$
|
496
|
|
|
$
|
-
|
|
CVRs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Financial Assets and Liabilities Measured at
Fair Value on a Non-Recurring Basis
We do not have any financial assets and liabilities
that are measured at fair value on a non-recurring basis.
Non-Financial Assets and Liabilities
Measured at Fair Value on a Recurring Basis
We do not have any non-financial assets and liabilities
that are measured at fair value on a recurring basis.
Non-Financial Assets and Liabilities Measured
at Fair Value on a Non-Recurring Basis
We measure our long-lived assets, including property, plant, and equipment, ROU assets, intangible assets,
and goodwill, at fair value on a non-recurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily
impaired. No such fair value impairment was recognized in the three and nine months ended September 30, 2019 and 2018. Please see
Note 3 for discussion of assets and liabilities acquired in the acquisition of WellSpring.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
13.
|
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 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 9). We made the $2.5 million cash payment using cash on hand and 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 September 30, 2019 and therefore no impairment loss was recognized for the nine months ended September
30, 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 9). 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 September 30, 2019 and therefore no impairment loss was recognized
for the nine months ended September 30, 2019.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
13.
|
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 9). 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. The launch of one of the acquired products had the potential to trigger a milestone payment of
$25.0 million to Teva, depending on the number of competitors selling the product at the time of launch. We recently launched this
product and the payment was not triggered. As a result, no payment was owed, and this contingent liability has been resolved. However,
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. This milestone was determined to be a contingent liability and will be recognized when it is
both estimable and probable. Because we do not believe this milestone is probable, we did not record a contingent liability for
the milestone. We made the $2.3 million cash payment using cash on hand and 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 September 30, 2019 and therefore no impairment loss was
recognized for the nine months ended September 30, 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.
ANI PHARMACEUTICALS, INC. and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
13.
|
FAIR VALUE DISCLOSURES – continued
|
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 9). We made
the $2.7 million cash payment using cash on hand and 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 September 30, 2019 and therefore no impairment loss was recognized
for the nine months ended September 30, 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.
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 will be amortized in full over its 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. While the ranitidine produced for
us has not been specifically recalled, we have voluntarily suspended sale of this product as we follow the investigation. The
FDA does not have scientific evidence to recommend whether individuals should continue or stop taking ranitidine medicines at
this time. The agency is conducting further tests to determine the risk to consumers. We will continue to evaluate the facts and
circumstances around our Ranitidine product to determine if the carrying value of the intangible asset has been impacted.
14.
|
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 three months ended September 30, 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 three months ended September 30, 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 three months ended September 30, 2019, we incurred
related charges for the purchase of materials of $0.2 million. 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.