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, Canada are 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.
On August 6, 2018, our subsidiary, ANI Pharmaceuticals
Canada Inc. (“ANI Canada”), acquired all the issued and outstanding equity interests of WellSpring Pharma Services
Inc. (“WellSpring”), a Canadian company that performs contract development and manufacturing of pharmaceutical products
for a purchase price of $18.0 million, subject to certain customary adjustments. Subject to further adjustments, the
estimated consideration was $17.3 million. The consideration was paid entirely from cash on hand. In conjunction with the transaction,
we acquired WellSpring’s pharmaceutical manufacturing facility, laboratory, and offices, its current book of commercial business,
as well as an organized workforce. Following the consummation of the transaction, WellSpring was merged into ANI Canada with the
resulting entity’s name being ANI Pharmaceuticals Canada Inc.
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/(loss), and cash flows. The consolidated balance sheet at December 31, 2017, 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, 2017.
Principles of Consolidation
The unaudited interim condensed consolidated financial
statements include the accounts of ANI Pharmaceuticals, Inc. and its subsidiaries. All inter-company accounts and transactions
are eliminated in consolidation.
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 average exchange rates during
the period and resulting foreign currency transaction gains and losses are included in the determination of net income.
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 unaudited interim condensed consolidated
financial statements, estimates are used for, but not limited to, stock-based compensation, allowance for doubtful accounts,
accruals for chargebacks, administrative fees and rebates, government rebates, returns and other allowances, allowance for
inventory obsolescence, valuation of financial instruments and intangible assets, accruals for contingent liabilities, fair
value of long-lived assets, income tax provision, deferred taxes and valuation allowance,
purchase price allocations, and the depreciable lives of long-lived assets. Because of the uncertainties inherent in such
estimates, actual results may differ from those estimates. Management periodically evaluates estimates used in the
preparation of the financial statements for reasonableness.
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 (“
CODM”), 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,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
United States
|
|
$
|
48,961
|
|
|
$
|
48,164
|
|
|
$
|
142,712
|
|
|
$
|
129,556
|
|
Canada
|
|
|
1,742
|
|
|
|
-
|
|
|
|
1,742
|
|
|
|
-
|
|
Total Revenue
|
|
$
|
50,703
|
|
|
$
|
48,164
|
|
|
$
|
144,454
|
|
|
$
|
129,556
|
|
The following table depicts the Company’s
property, plant, and equipment, net according to geographic location as of:
(in thousands)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
United States
|
|
$
|
23,645
|
|
|
$
|
20,403
|
|
Canada
|
|
|
13,773
|
|
|
|
-
|
|
Total Property, Plant, and Equipment, net
|
|
$
|
37,418
|
|
|
$
|
20,403
|
|
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS,
PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS – continued
|
Recent Accounting Pronouncements
Recent Accounting Pronouncements
Not Yet Adopted
In October 2018, the Financial Accounting
Standards Board (“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 is effective for
reporting periods beginning after December 15, 2018 and early adoption is permitted. The guidance must be adopted on a
modified retrospective basis and provides for certain practical expedients. We will adopt this guidance as of January 1,
2019.
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
will be effective for the quarter that begins after the effective date. T
he adoption of this guidance will result in the
inclusion of the statement of stockholder’s equity in our interim financial statement filings.
In August 2018, the FASB issued guidance modifying 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.
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 will be measured at their grant date fair value. Upon transition, the existing nonemployee
awards will be measured at fair value as of the adoption date. The guidance is effective for reporting periods beginning after
December 15, 2018, 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 June 2016, the FASB issued guidance with respect
to measuring credit losses on financial instruments, including trade receivables. The guidance eliminates the probable initial
recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss
estimate can now reflect an entity's current estimate of all future expected credit losses. Under the previous guidance, an entity
only considered past events and current conditions. The guidance is effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied
on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. We currently
expect that the adoption of this guidance will likely change the way we assess the collectability of our receivables and recoverability
of other financial instruments. We have not yet begun to evaluate the specific impacts of this guidance nor have we determined
the manner in which we will adopt this guidance.
In February 2016, the FASB issued guidance for accounting for
leases. The guidance requires lessees to recognize assets and liabilities related to long-term leases on the balance sheet and
expands disclosure requirements regarding leasing arrangements. 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 is effective for reporting
periods beginning after December 15, 2018 and early adoption is permitted. The guidance must be adopted on a modified retrospective
basis and provides for certain practical expedients. We will elect to use the transition option and adopt the guidance using the
modified retrospective approach as of January 1, 2019. We are currently reviewing our leases and other contracts to determine the
impact the adoption of this guidance will have on our consolidated financial statements, and we will continue to assess any new
lease arrangements entered into during 2018. We currently expect that the adoption of this guidance will likely change the way
we account for our operating leases and will likely result in recording right-of-use assets and liabilities in our consolidated
balance sheets and result in additional lease-related disclosures in the footnotes to our consolidated financial statements.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS,
PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS – continued
|
We have evaluated all other issued and unadopted
Accounting Standards Updates and believe the adoption of these standards will not have a material impact on our condensed consolidated
statements of operations, balance sheets, or cash flows.
Recently Adopted Accounting Pronouncements
In August 2017, the FASB issued guidance improving
accounting for hedging activities. The guidance is intended to simplify hedge accounting by better aligning how an entity’s
risk management activities and hedging relationships are presented in its financial statements. The guidance also simplifies the
application of hedge accounting guidance in certain situations. The guidance is effective for the fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Early adoption was permitted, including adoption in an
interim period. The guidance with respect to the cash flow and net investment hedge relationships existing on the date of adoption
must be applied on a modified retrospective basis and the new disclosure requirements must be applied on a prospective basis. We
adopted this guidance as of January 1, 2018. The adoption of this guidance did not have a material impact on our consolidated financial
statements. However, the adoption of this guidance did impact how we accounted for the interest rate swap we entered into in April
2018. See Note 5 for further details regarding the interest rate swap.
In May 2017, the FASB issued guidance clarifying
when modification accounting should be used for changes to the terms or conditions of a share-based payment award. The guidance
does not change the accounting for modifications, but clarifies that modification accounting guidance should only be applied if
there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered
non-substantive. The guidance is effective for the fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. Early adoption was permitted, including adoption in an interim period. We adopted this guidance as of January
1, 2018 on a prospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In May 2014, the FASB issued guidance for revenue
recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific
guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance
obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard
will result in enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue arising from contracts with
customers. In August 2015, the FASB issued guidance approving a one-year deferral, making the standard effective for reporting
periods beginning after December 15, 2017, with early adoption permitted only for reporting periods beginning after December 15,
2016. In March 2016, the FASB issued guidance to clarify the implementation guidance on principal versus agent considerations for
reporting revenue gross rather than net, with the same deferred effective date. In April 2016, the FASB issued guidance to clarify
the implementation guidance on identifying performance obligations and the accounting for licenses of intellectual property, with
the same deferred effective date. In May 2016, the FASB issued guidance rescinding SEC paragraphs related to revenue recognition,
pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force meeting. In May 2016, the FASB also issued
guidance to clarify the implementation guidance on assessing collectability, presentation of sales tax, noncash consideration,
and contracts and contract modifications at transition, with the same effective date. In September 2017, the FASB issued guidance
amending and rescinding prior SEC staff announcements and observer comments related to revenue recognition, pursuant to the SEC
Staff Announcement at the July 20, 2017 Emerging Issues Task Force meeting.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
1.
|
BUSINESS,
PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS – continued
|
We performed a comprehensive review of our existing
revenue arrangements as of January 1, 2018 following the five-step model. Our analysis indicated that there were no significant
changes to how the amount and timing of revenue is recognized under the new guidance as compared to existing guidance. Additionally,
our analysis indicated that there were no significant changes to how costs to obtain and fulfill our customer contracts are recognized
under the new guidance as compared to existing guidance. We adopted this guidance as of January 1, 2018 using the modified
retrospective method and the impact of adoption on our consolidated balance sheet, statement of operations, and statement of cash
flows was not material. The adoption of the new guidance impacted the way we analyze, document, and disclose revenue recognition
under customer contracts beginning on January 1, 2018 and resulted in additional disclosures in our financial statements. ANI Canada
adopted this guidance as of the acquisition date, August 6, 2018. The adoption of this guidance did not have a material impact
on our consolidated financial statements.
|
2.
|
REVENUE
RECOGNITION AND RELATED ALLOWANCES
|
Revenue Recognition
As of January 1, 2018, we adopted guidance for revenue
recognition for contracts, using the modified retrospective method. The implementation of the guidance had no material impact on
the measurement or recognition of revenue from customer contracts of prior periods. For our revenue recognition policies prior
to adopting the guidance for revenue recognition for contracts, please see Item 8. Consolidated Financial Statements, Note
1,
Description of Business and Summary of Significant Accounting Policies
, in our Annual Report on Form 10-K for the year
ended December 31, 2017.
Upon adoption of this new guidance, 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:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(in thousands)
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Sales of generic pharmaceutical products
|
|
$
|
30,287
|
|
|
$
|
30,546
|
|
|
$
|
83,716
|
|
|
$
|
88,608
|
|
Sales of branded pharmaceutical products
|
|
|
14,589
|
|
|
|
15,688
|
|
|
|
41,714
|
|
|
|
35,398
|
|
Sales of contract manufactured products
|
|
|
2,826
|
|
|
|
1,829
|
|
|
|
5,450
|
|
|
|
5,151
|
|
Royalties from licensing agreements
|
|
|
2,409
|
|
|
|
-
|
|
|
|
12,560
|
|
|
|
-
|
|
Product development services
|
|
|
288
|
|
|
|
-
|
|
|
|
288
|
|
|
|
-
|
|
Other
(1)
|
|
|
304
|
|
|
|
101
|
|
|
|
726
|
|
|
|
399
|
|
Total net revenues
|
|
$
|
50,703
|
|
|
$
|
48,164
|
|
|
$
|
144,454
|
|
|
$
|
129,556
|
|
|
(1)
|
Primarily
includes laboratory services and royalties on sales of contract manufactured products
|
The following table depicts revenue recognized
during the following periods:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(in thousands)
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Performance obligations transferred at
a point in time
|
|
$
|
50,415
|
|
|
$
|
48,164
|
|
|
$
|
144,166
|
|
|
$
|
129,556
|
|
Performance obligations
transferred over time
|
|
|
288
|
|
|
|
-
|
|
|
|
288
|
|
|
|
-
|
|
Total
|
|
$
|
50,703
|
|
|
$
|
48,164
|
|
|
$
|
144,454
|
|
|
$
|
129,556
|
|
In the three and nine months ended September 30,
2018, we did not incur, and therefore did not defer, any material incremental costs to obtain contracts. 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 (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 $14 thousand of contract assets and $0.7 million of deferred revenue at September 30, 2018. We had no contract
assets or deferred revenue at December 31, 2017 or June 30, 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.
Chargebacks
Chargebacks, primarily from wholesalers, result from
arrangements we have with indirect customers establishing prices for products which the indirect customer purchases through a wholesaler.
Alternatively, we may pre-authorize wholesalers to offer specified contract pricing to other indirect customers. Under either arrangement,
we provide a chargeback credit to the wholesaler for any difference between the contracted price with the indirect customer and
the wholesaler's invoice price, typically Wholesale Acquisition Cost ("WAC").
Chargeback credits are calculated as follows:
Prior period chargebacks claimed by wholesalers are
analyzed to determine the actual average selling price ("ASP") for each product. This calculation is performed by product
by wholesaler. ASPs can be affected by several factors such as:
|
·
|
A
change in customer mix
|
|
·
|
A
change in negotiated terms with customers
|
|
·
|
A
change in the volume of off-contract purchases
|
As necessary, we adjust ASPs based on anticipated
changes in the factors above.
The difference between ASP and WAC is recorded as
a reduction in both gross revenues in the consolidated statements of operations and accounts receivable in the consolidated balance
sheets, at the time we recognize revenue from the product sale.
To evaluate the adequacy of our chargeback accruals,
we obtain on-hand inventory counts from the wholesalers. This inventory is multiplied by the chargeback amount, the difference
between ASP and WAC, to arrive at total expected future chargebacks, which is then compared to the chargeback accruals. We continually
monitor chargeback activity and adjust ASPs when we believe that actual selling prices will differ from current ASPs.
Government Rebates
Our government rebates reserve consists of estimated
payments due to governmental agencies for purchases made by third parties under various governmental programs. The two largest
government programs that impact our net revenue and our government rebates reserve are federal and state Medicaid rebate programs
and Medicare.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
2.
|
REVENUE
RECOGNITION AND RELATED ALLOWANCES – continued
|
We participate in certain qualifying federal and
state Medicaid rebate programs whereby discounts and rebates are provided to participating programs after the final dispensing
of the product by a pharmacy to a Medicaid plan participant. Medicaid rebates are typically billed up to 120 days after the
product is shipped. Medicaid rebate amounts per product unit are established by law, based on the Average Manufacturer Price (“AMP”),
which is reported on a monthly and quarterly basis, and, in the case of branded products, best price, which is reported on a quarterly
basis. Our Medicaid reserves are based on expected claims from state Medicaid programs. Estimates for expected claims are driven
by patient usage, sales mix, calculated AMP or best price, as well as inventory in the distribution channel that will be subject
to a Medicaid rebate. As a result of the delay between selling the products and rebate billing, our Medicaid rebate reserve includes
both an estimate of outstanding claims for end-customer sales that have occurred but for which the related claim has not been billed,
as well as an estimate for future claims that will be made when inventory in the distribution channel is sold through to plan participants.
Many of our products are also covered under Medicare.
We, like all pharmaceutical companies, must provide a discount for any products sold under New Drug Applications (“NDAs”)
to Medicare Part D participants. This applies to all products sold under NDAs, regardless of whether the products are marketed
as branded or generic. Our estimates for these discounts are based on historical experience with Medicare rebates for our products.
While such experience has allowed for reasonable estimations in the past, history may not always be an accurate indicator of future
rebates. Medicare rebates are typically billed up to 120 days after the product is shipped. As a result of the delay
between selling the products and rebate billing, our Medicare rebate reserve includes both an estimate of outstanding claims for
end-customer sales that have occurred but for which the related claim has not been billed, as well as an estimate for future claims
that will be made when inventory in the distribution channel is sold through to Medicare Part D participants.
To evaluate the adequacy of our government rebate
reserves, we review the reserves on a quarterly basis against actual claims data to ensure the liability is fairly stated. We continually
monitor our government rebate reserve and adjust our estimates if we believe that actual government rebates may differ from our
established accruals. Accruals for government rebates are recorded as a reduction to gross revenues in the consolidated statements
of operations and as an increase to accrued government rebates in the consolidated balance sheets.
Returns
We maintain a return policy that allows customers
to return product within a specified period prior to and subsequent to the expiration date. Generally, product may be returned
for a period beginning six months prior to its expiration date to up to one year after its expiration date. Our product returns
are settled through the issuance of a credit to the customer. Our estimate for returns is based upon historical experience with
actual returns. While such experience has allowed for reasonable estimation in the past, history may not always be an accurate
indicator of future returns. We continually monitor our estimates for returns and make adjustments when we believe that actual
product returns may differ from the established accruals. Accruals for returns are recorded as a reduction to gross revenues in
the consolidated statements of operations and as an increase to the return goods reserve in the consolidated balance sheets.
Administrative Fees and Other Rebates
Administrative fees or rebates are offered to wholesalers,
group purchasing organizations and indirect customers. We accrue for fees and rebates, by product by wholesaler, at the time of
sale based on contracted rates and ASPs.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
2.
|
REVENUE
RECOGNITION AND RELATED ALLOWANCES – continued
|
To evaluate the adequacy of our administrative fee
accruals, we obtain on-hand inventory counts from the wholesalers. This inventory is multiplied by the ASPs to arrive at total
expected future sales, which is then multiplied by contracted rates. The result is then compared to the administrative fee accruals.
We continually monitor administrative fee activity and adjust our accruals when we believe that actual administrative fees will
differ from the accruals. Accruals for administrative fees and other rebates are recorded as a reduction in both gross revenues
in the consolidated statements of operations and accounts receivable in the consolidated balance sheets.
Prompt Payment Discounts
We often grant sales discounts for prompt payment.
The reserve for prompt payment discounts is based on invoices outstanding. We assume, based on past experience, that all available
discounts will be taken. Accruals for prompt payment discounts are recorded as a reduction in both gross revenues in the consolidated
statements of operations and accounts receivable in the consolidated balance sheets.
The following table summarizes activity in the consolidated
balance sheets for accruals and allowances for the nine months ended September 30, 2018 and 2017, respectively:
(in thousands)
|
|
Accruals for Chargebacks,
Rebates, Returns, and Other Allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
Prompt
|
|
|
|
|
|
|
Government
|
|
|
|
|
|
Fees and Other
|
|
|
Payment
|
|
|
|
Chargebacks
|
|
|
Rebates
|
|
|
Returns
|
|
|
Rebates
|
|
|
Discounts
|
|
Balance at December 31, 2016
|
|
$
|
26,785
|
|
|
$
|
5,891
|
|
|
$
|
5,756
|
|
|
$
|
3,550
|
|
|
$
|
1,554
|
|
Accruals/Adjustments
|
|
|
133,849
|
|
|
|
7,807
|
|
|
|
8,949
|
|
|
|
16,840
|
|
|
|
5,960
|
|
Credits Taken Against Reserve
|
|
|
(134,412
|
)
|
|
|
(7,943
|
)
|
|
|
(6,388
|
)
|
|
|
(15,448
|
)
|
|
|
(5,617
|
)
|
Balance at September 30, 2017
|
|
$
|
26,222
|
|
|
$
|
5,755
|
|
|
$
|
8,317
|
|
|
$
|
4,942
|
|
|
$
|
1,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
2.
|
REVENUE
RECOGNITION AND RELATED ALLOWANCES – continued
|
As of September 30, 2018, the value of our unsatisfied
performance obligations (or backlog) was $5.7 million, which consists of firm orders for contract manufactured products, for which
our performance obligations remain unsatisfied and for which the related revenue has yet to be recognized. We anticipate satisfying
these performance obligations within six months.
Royalties from Licensing Agreements
From time to time, we enter into transition agreements
with the sellers of products we acquire, under which we license to the seller the right to sell the acquired products. Therefore,
we recognize the revenue associated with sales of the underlying products as royalties. Because these royalties are sales-based,
we recognize the revenue when the underlying sales occur, based on sales and gross profit information received from the sellers.
Upon full transition of the products and upon launching the products under our own labels, we recognize revenue for the products
as sales of generic or branded pharmaceutical products, as described above.
In addition, 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 products to our facility in Oakville,
Canada. The duration of these technical transfer projects is generally 18 months 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, 2018, the value of our unsatisfied
performance obligations for product development services contracts was $3.5 million. We expect to satisfy these performance obligations
in the next 9 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, 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. As of September 30, 2018, accounts receivable
from these customers totaled 80% of accounts receivable, net. During the three months ended September 30, 2017, three customers
represented 30%, 30%, and 19% of net revenues, respectively. During the nine months ended September 30, 2017, these same three
customers represented 31%, 26%, and 21% of net revenues, respectively.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Summary
On August 6, 2018, our subsidiary, ANI Canada, acquired
all the issued and outstanding equity interests of WellSpring, a Canadian company that performs contract development and manufacturing
of pharmaceutical products for a purchase price of $18.0 million, subject to certain customary adjustments. Subject
to further adjustments, the estimated consideration was $17.3 million. The consideration was paid entirely from cash on hand. In
conjunction with the transaction, we acquired WellSpring’s pharmaceutical manufacturing facility, laboratory, and offices,
its current book of commercial business, as well as an organized workforce. Following the consummation of the transaction, WellSpring
was merged into ANI Canada with the resulting entity’s name being ANI Pharmaceuticals Canada Inc.
We acquired WellSpring to provide an
additional tech transfer site in order to accelerate the re-commercialization of the previously-approved ANDAs in our
pipeline, to expand our contract manufacturing revenue base, and to broaden our manufacturing capabilities to three
manufacturing facilities.
Transaction Costs
In conjunction with the acquisition, we incurred
approximately $1.0 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 preliminary allocation
of the preliminary purchase price to the assets acquired and liabilities assumed on August 6, 2018:
|
|
(in thousands)
|
|
Total Purchase Consideration
|
|
$
|
17,287
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
220
|
|
Accounts receivable
|
|
|
1,311
|
|
Inventories
|
|
|
2,197
|
|
Prepaid expenses and other current assets
|
|
|
361
|
|
Property and equipment
|
|
|
13,935
|
|
Goodwill
|
|
|
2,342
|
|
Total assets acquired
|
|
|
20,366
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
|
2,413
|
|
Deferred revenue
|
|
|
666
|
|
Total liabilities assumed
|
|
|
3,079
|
|
Net assets acquired
|
|
$
|
17,287
|
|
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
3.
|
BUSINESS COMBINATION –
continued
|
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.
The above allocation of the purchase price
is based upon certain preliminary valuations and other analyses that have not been finalized as of the date of this filing.
Any changes in the estimated fair values of the net assets recorded for this business combination upon the finalization of
more detailed analyses of the facts and circumstances that existed at the date of the transaction may change the allocation
of the purchase price. As such, the purchase price allocations for this transaction are preliminary estimates, which may
be subject to change within the measurement period.
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 $1.7
million of revenue and recorded a net loss of $0.2 million from the acquisition date through September 30, 2018.
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.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(in thousands)
|
|
September 30,
2018
|
|
|
September 30,
2017
(1)
|
|
|
September 30,
2018
|
|
|
September 30,
2017
(1)
|
|
Net revenues
|
|
$
|
51,384
|
|
|
$
|
51,676
|
|
|
$
|
151,091
|
|
|
$
|
137,884
|
|
Net income
|
|
$
|
4,456
|
|
|
$
|
8,683
|
|
|
$
|
7,812
|
|
|
$
|
10,108
|
|
|
(1)
|
Net income for the three and nine months ended September
30, 2017 includes the impact to WellSpring of $4.4 million of related party debt forgiveness.
|
The pro forma amounts are not necessarily indicative
of the results that would have been obtained if the transaction had occurred as of January 1, 2017 or that may be obtained in the
future. The unaudited pro forma condensed consolidated financial information includes pro forma adjustments primarily relating to the
following non-recurring items directly attributable to the business combination:
|
·
|
Elimination of amortization expense related to the acquiree’s
historical intangible assets;
|
|
·
|
Elimination of transaction costs;
|
|
·
|
Elimination of profit on sales from WellSpring to ANI in the periods;
and
|
|
·
|
Tax impacts of the adjustments to the acquirer’s net income,
calculated as 23% in 2018 and 37% in 2017. As the acquiree has a loss in both years, there is no tax impact to adjustments to the
acquiree’s net income.
|
The pro forma financial information does not include
the effects of any expected operational efficiencies or synergies resulting from the acquisition.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Convertible Senior Notes
In December 2014, we issued
$143.8 million of our Convertible Senior Notes due 2019 (the “Notes”) in a registered public offering. The Notes pay
3.0% interest semi-annually in arrears starting on June 1, 2015 and are due December 1, 2019. The initial conversion price was
$69.48 per share. Simultaneous with the issuance of the Notes, we entered into “bond hedge” (or purchased call) and
“warrant” (or written call) transactions with an affiliate of one of the offering underwriters in order to synthetically
raise the initial conversion price of the Notes to $96.21 per share and reduce the potential common stock dilution that may arise
from the conversion of the Notes.
The Notes are convertible at the option of the holder
under certain circumstances and upon conversion we may elect to settle such conversion in shares of our common stock, cash, or
a combination thereof. As a result of our cash conversion option, we separately accounted for the value of the embedded conversion
option as a debt discount (with an offset to Additional Paid in Capital (“APIC”)) of $33.6 million. Deferred financing
costs are recorded as a reduction of long-term debt in the consolidated balance sheets and are being amortized as additional non-cash
interest expense on a straight-line basis over the term of the debt, since this method was not significantly different from the
effective interest method.
The carrying value of the Notes
is as follows as of:
(in thousands)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Principal amount
|
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Unamortized debt discount
|
|
|
(8,643
|
)
|
|
|
(13,924
|
)
|
Deferred financing costs
|
|
|
(985
|
)
|
|
|
(1,618
|
)
|
Net carrying value
|
|
$
|
134,122
|
|
|
$
|
128,208
|
|
We had accrued interest of $1.4 million and
$0.4 million related to the Notes recorded in accrued expenses, other in our consolidated balance sheets at September
30, 2018 and December 31, 2017, respectively.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
4.
|
INDEBTEDNESS – continued
|
Credit Agreement
In December 2017, we entered into a five-year senior
secured credit facility (the “Credit Agreement”) with Citizens Bank, N.A. as a lender and administrative agent. As
contemplated in the initial agreement, Citizens Bank, N.A. syndicated the facility to five additional lenders on February 5, 2018.
The Credit Agreement is comprised of a $75.0 million five-year term loan (the “Term Loan”) and a $50.0 million senior
secured revolving credit facility (the “Revolving Credit Facility”), with availability subject to a borrowing base
consisting of eligible accounts receivable and inventory and the satisfaction of conditions precedent specified in the agreement.
We may repay borrowings under the Term Loan and Revolving Credit Facility without any premium or penalty, but must pay all borrowings
thereunder by August 30, 2019 if we do not meet certain conditions relating to the repayment or refinance of our outstanding 3.0%
Senior Convertible Notes due 2019, and in no event later than December 29, 2022.
The Term Loan includes a repayment schedule, pursuant
to which $6.1 million of the loan will be paid in quarterly installments during the 12 months ended September 30, 2019. As a result,
$6.1 million of the loan is recorded in current component of long-term borrowing, net of deferred financing in the accompanying
unaudited interim condensed consolidated balance sheets. We deferred $2.9 million of total debt issuance costs related to the Credit
Agreement, of which $1.8 million was allocated to the Term Loan and $1.1 million was allocated to the undrawn Revolving Credit
Facility. In April 2018, we entered into an interest rate swap with Citizens Bank, N.A. to hedge the variable rate on our Term
Loan balance with a fixed rate (Note 5).
The carrying value of the current and long-term components
of the Term Loan as of September 30, 2018 and December 31, 2017 are:
|
|
Current
|
|
(in thousands)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Current borrowing on secured term loan
|
|
$
|
6,094
|
|
|
$
|
3,750
|
|
Unamortized deferred financing costs
|
|
|
(402
|
)
|
|
|
(397
|
)
|
Current component of long-term borrowing, net of unamortized deferred financing costs
|
|
$
|
5,692
|
|
|
$
|
3,353
|
|
|
|
Long-Term
|
|
(in thousands)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Long-term borrowing on secured term loan
|
|
$
|
67,031
|
|
|
$
|
71,250
|
|
Unamortized deferred financing costs
|
|
|
(1,077
|
)
|
|
|
(1,304
|
)
|
Long-term borrowing, net of unamortized deferred financing costs and current borrowing component
|
|
$
|
65,954
|
|
|
$
|
69,946
|
|
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
4.
|
INDEBTEDNESS – continued
|
The Term Loan was accounted for as a modification
of our existing Line of Credit and consequently, the remaining balance of the deferred issuance costs related to the Line of Credit
are included with the Term Loan issuance costs and amortized as interest expense over the life of the Term Loan using the effective
interest method. The issuance costs allocated to the Revolving Credit Facility will be deferred and amortized as interest expense
on a straight-line basis over the term of the Revolving Credit Facility.
As of September 30, 2018, we had a $73.1 million
balance on the Term Loan. As of September 30, 2018, we had not drawn on the Revolving Credit Facility. As of September 30, 2018,
$0.7 million of unamortized deferred debt issuance costs is included in other long-term assets in the accompanying unaudited interim
condensed consolidated balance sheets and $0.2 million is included in prepaid expenses and other current assets in the unaudited
interim condensed consolidated balance sheets.
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, 2018 and 2017:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(in thousands)
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Contractual coupon
|
|
$
|
1,835
|
|
|
$
|
1,078
|
|
|
$
|
5,393
|
|
|
$
|
3,234
|
|
Amortization of debt discount
|
|
|
1,783
|
|
|
|
1,692
|
|
|
|
5,280
|
|
|
|
5,007
|
|
Amortization of finance fees
|
|
|
370
|
|
|
|
211
|
|
|
|
1,111
|
|
|
|
633
|
|
Capitalized interest
|
|
|
(174
|
)
|
|
|
(143
|
)
|
|
|
(552
|
)
|
|
|
(367
|
)
|
|
|
$
|
3,814
|
|
|
$
|
2,838
|
|
|
$
|
11,232
|
|
|
$
|
8,507
|
|
As of September 30, 2018, the combined effective
interest rate on the Notes and Term Loan was 6.8%, on an annualized basis.
|
5.
|
DERIVATIVE
FINANCIAL INSTRUMENT AND HEDGING ACTIVITY
|
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 long-term based on the scheduled maturity of the instrument.
When we enter into a hedge arrangement and intend
to apply hedge accounting, we formally document the hedge relationship and designate the instrument for financial reporting purposes
as a fair value hedge, a cash flow hedge, or a net investment hedge. When we determine that a derivative financial instrument qualifies
as a cash flow hedge and is effective, the changes in fair value of the instrument are recorded in accumulated other comprehensive
income/(loss), net of tax in our consolidated balance sheets and will be reclassified to earnings when the hedged item affects
earnings.
In April 2018, we entered into an interest rate swap
arrangement, which is 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. 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 the Term Loan.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
5.
|
DERIVATIVE
FINANCIAL INSTRUMENT AND HEDGING ACTIVITY – continued
|
The interest rate swap arrangement with Citizens
Bank, N.A became effective on April 29, 2018, with a maturity date of December 29, 2022. The notional amount of the swap agreement
at inception was $74.1 million and will decrease in line with our Term Loan. As of September 30, 2018, the notional amount of the
interest rate swap was $72.2 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, 2018, the fair value of the interest
rate swap asset was valued at $0.7 million and was recorded in other long-term assets in the accompanying unaudited condensed consolidated
balance sheets. As of September 30, 2018, $0.5 million, the fair value of the interest rate swap net of tax, was recorded in accumulated
other comprehensive income, net of tax in the accompanying unaudited condensed consolidated balance sheets. During the three and
nine months ended September 30, 2018, changes in the fair value of the interest rate swap of $0.3 million, net of tax, and
$0.5 million, net of tax, respectively, was recorded in accumulated other comprehensive income, net of tax in the accompanying
unaudited condensed consolidated statements of comprehensive income. Differences between the hedged LIBOR rate and the fixed rate
recorded as interest expense in the same period that the related interest is recorded for the Term Loan based on the LIBOR rate.
In three and nine months ended September 30, 2018, $0.1 million and $0.2 million of interest expense was recognized in relation
to the interest rate swap, respectively.
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 assume that the principal portion of the Notes (Note 4) is settled in cash. As such, the principal
portion of the Notes has no effect on either the numerator or denominator when determining diluted earnings per share. Any conversion
gain is assumed to be settled in shares and is incorporated in diluted earnings per share using the treasury method. The warrants
issued in conjunction with the issuance of the Notes (Note 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, 2018 and 2017 are calculated for basic and diluted earnings per share as follows:
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
(in thousands, except per share amounts)
|
|
Three
Months Ended
September 30,
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income
|
|
$
|
5,037
|
|
|
$
|
4,720
|
|
|
$
|
5,037
|
|
|
$
|
4,720
|
|
|
$
|
10,064
|
|
|
$
|
8,553
|
|
|
$
|
10,064
|
|
|
$
|
8,553
|
|
Net income allocated to restricted stock
|
|
|
(51
|
)
|
|
|
(35
|
)
|
|
|
(51
|
)
|
|
|
(35
|
)
|
|
|
(101
|
)
|
|
|
(64
|
)
|
|
|
(101
|
)
|
|
|
(64
|
)
|
Net income allocated to common shares
|
|
$
|
4,986
|
|
|
$
|
4,685
|
|
|
$
|
4,986
|
|
|
$
|
4,685
|
|
|
$
|
9,963
|
|
|
$
|
8,489
|
|
|
$
|
9,963
|
|
|
$
|
8,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted-Average Shares Outstanding
|
|
|
11,706
|
|
|
|
11,553
|
|
|
|
11,706
|
|
|
|
11,553
|
|
|
|
11,659
|
|
|
|
11,542
|
|
|
|
11,659
|
|
|
|
11,542
|
|
Dilutive effect of stock options and ESPP
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
124
|
|
Diluted Weighted-Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
11,804
|
|
|
|
11,677
|
|
|
|
|
|
|
|
|
|
|
|
11,767
|
|
|
|
11,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
$
|
0.43
|
|
|
$
|
0.41
|
|
|
$
|
0.42
|
|
|
$
|
0.40
|
|
|
$
|
0.85
|
|
|
$
|
0.74
|
|
|
$
|
0.85
|
|
|
$
|
0.73
|
|
The number of anti-dilutive shares, which have been
excluded from the computation of diluted earnings per share, including the shares underlying the Notes, was 4.8 million for both
the three months ended September 30, 2018 and 2017 and was 4.7 million for both the nine months ended September 30, 2018 and 2017.
Anti-dilutive shares consist of out-of-the-money Class C Special stock, out-of-the-money common stock options, common stock options
that are anti-dilutive when calculating the impact of the potential dilutive common shares using the treasury stock method, underlying
shares related to out-of-the-money bonds issued as convertible debt, and out-of-the-money warrants exercisable for common stock.
Inventories consist of the following as of:
(in thousands)
|
|
September
30,
2018
(1)
|
|
|
December 31,
2017
|
|
Raw materials
|
|
$
|
26,653
|
|
|
$
|
22,139
|
|
Packaging materials
|
|
|
2,283
|
|
|
|
1,527
|
|
Work-in-progress
|
|
|
1,282
|
|
|
|
510
|
|
Finished goods
|
|
|
10,317
|
|
|
|
13,901
|
(2)
|
|
|
|
40,535
|
|
|
|
38,077
|
|
Reserve for excess/obsolete inventories
|
|
|
(529
|
)
|
|
|
(350
|
)
|
Inventories, net
|
|
$
|
40,006
|
|
|
$
|
37,727
|
|
|
(1)
|
Includes inventory acquired in acquisition of WellSpring
(Note 3).
|
|
(2)
|
Includes finished goods acquired in asset purchases (Note
13).
|
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
7.
|
INVENTORIES
– continued
|
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, 2018, we purchased approximately 36% of our inventory (exclusive of inventory acquired in
the acquisition of WellSpring (Note 3)) from one supplier. As of September 30, 2018, the amounts payable to this supplier was immaterial.
During the nine months ended September 30, 2018, we purchased approximately 25% of our inventory (exclusive of inventory acquired
in the acquisition of WellSpring (Note 3)) from two suppliers. As of September 30, 2018, the amounts payable to these suppliers
was immaterial. During the three months ended September 30, 2017, we purchased approximately 40% of our inventory (exclusive of
inventory acquired in asset purchases (Note 13)) from two suppliers. During the nine months ended September 30, 2017, we purchased
approximately 24% of our inventory (exclusive of inventory acquired in asset purchases (Note 13)) from two suppliers.
|
8.
|
PROPERTY,
PLANT, AND EQUIPMENT
|
Property, plant, and equipment consist of the following
as of:
(in thousands)
|
|
September
30,
2018
(1)
|
|
|
December 31,
2017
|
|
Land
|
|
$
|
4,558
|
|
|
$
|
160
|
|
Buildings
|
|
|
6,725
|
|
|
|
3,835
|
|
Machinery, furniture, and equipment
|
|
|
23,038
|
|
|
|
12,334
|
|
Construction in progress
|
|
|
10,744
|
|
|
|
10,663
|
|
|
|
|
45,065
|
|
|
|
26,992
|
|
Less: accumulated depreciation
|
|
|
(7,647
|
)
|
|
|
(6,589
|
)
|
Property, Plant, and Equipment, net
|
|
$
|
37,418
|
|
|
$
|
20,403
|
|
|
(1)
|
Includes property, plant, and equipment acquired in acquisition
of WellSpring (Note 3).
|
Depreciation expense was $0.6 million and $0.3 million
for the three months ended September 30, 2018 and 2017, respectively. Depreciation expense was $1.3 million and $0.9 million for
the nine months ended September 30, 2018 and 2017, respectively. During the three months ended September 30, 2018 and 2017, there
was $0.2 million and $0.1 million of interest capitalized into construction in progress, respectively. During the nine months ended
September 30, 2018 and 2017, there was $0.6 million and $0.4 million of interest capitalized into construction in progress, respectively.
Construction in progress consists of multiple projects, primarily related to new equipment to expand our manufacturing capability
as our product lines continue to grow.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
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 $2.3 million in August 2018. We assess the recoverability of the carrying value of
goodwill as of October 31
st
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, 2018. No impairment losses were recognized during the three or nine months ended
September 30, 2018 or 2017.
Definite-lived Intangible Assets
Acquisition of Abbreviated New Drug
Applications
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 single-digit 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.
Acquisition of New Drug Applications and Product
Rights
In December 2017, we entered into an agreement with
AstraZeneca AB and AstraZeneca UK Limited to purchase the right, title, and interest in the NDAs and the U.S. rights to market
Atacand, Atacand HCT, Arimidex, and Casodex, for $46.5 million in cash. We also entered into a license agreement for use of these
trademarks in the U.S. We made the $46.5 million cash payment with funds from our Term Loan (Note 3). We also capitalized $0.2
million of costs directly related to the asset purchase. We accounted for this transaction as an asset purchase. The $46.7 million
product rights assets are being amortized in full over their estimated useful lives of 10 years. Please see Note 13 for further
details regarding the transaction.
In February 2017, we entered into an agreement with
Cranford Pharmaceuticals, LLC to purchase a distribution license, trademark, and certain finished goods inventory for Inderal XL
for $20.2 million in cash. We made the $20.2 million cash payment using cash on hand. We accounted for this transaction as an asset
purchase. We also capitalized $40 thousand of costs directly related to the transaction. The $15.1 million product rights intangible
asset acquired in the asset purchase is being amortized in full over its estimated useful life of 10 years. Please see Note 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 February 2017, we entered into an agreement with
Holmdel Pharmaceuticals, LP to purchase the NDA, trademark, and certain finished goods inventory for InnoPran XL, including a license
to an Orange Book listed patent, for $30.6 million in cash. We made the $30.6 million cash payment using $30.0 million of funds
from our former Line of Credit and $0.6 million of cash on hand. We accounted for this transaction as an asset purchase. We also
capitalized $0.1 million of costs directly related to the transaction. The $19.0 million product rights intangible asset acquired
in the asset purchase is being amortized in full over its estimated useful life of 10 years. Please see Note 13 for further details
regarding the transaction.
The components of net definite-lived intangible assets
are as follows:
(in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
Weighted Average
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Amortization
Period
|
Acquired ANDA intangible assets
|
|
$
|
46,194
|
|
|
$
|
(15,940
|
)
|
|
$
|
42,076
|
|
|
$
|
(12,592
|
)
|
|
10.0 years
|
NDAs and product rights
|
|
|
230,974
|
|
|
|
(55,939
|
)
|
|
|
230,974
|
|
|
|
(37,091
|
)
|
|
10.0 years
|
Marketing and distribution rights
|
|
|
10,423
|
|
|
|
(6,569
|
)
|
|
|
11,042
|
|
|
|
(5,087
|
)
|
|
4.7 years
|
Non-compete agreement
|
|
|
624
|
|
|
|
(223
|
)
|
|
|
624
|
|
|
|
(156
|
)
|
|
7.0 years
|
|
|
$
|
288,215
|
|
|
$
|
(78,671
|
)
|
|
$
|
284,716
|
|
|
$
|
(54,926
|
)
|
|
|
Definite-lived intangible assets are stated at cost,
net of amortization, generally using the straight-line method over the expected useful lives of the intangible assets. In the case
of the Inderal XL and InnoPran XL asset purchases, because we anticipate that the acquired assets will provide a greater economic
benefit in the earlier years, we are amortizing 80% of the value of the intangible assets over the first five years of useful lives
of the assets and amortizing the remaining 20% of the value of the intangible assets over the second five years of useful lives
of the assets. Amortization expense was $7.9 million and $6.8 million for the three months ended September 30, 2018 and 2017, respectively.
Amortization expense was $23.7 million and $20.0 million for the nine months ended September 30, 2018 and 2017, respectively.
We test for impairment of definite-lived intangible
assets when events or circumstances indicate that the carrying value of the assets may not be recoverable. No such triggering events
were identified during the three and nine months ended September 30, 2018 and 2017 and therefore no impairment loss was recognized
in the three and nine months ended September 30, 2018 or 2017.
Expected future amortization expense is as follows:
(in thousands)
|
|
|
|
2018 (remainder of the year)
|
|
$
|
7,940
|
|
2019
|
|
|
31,761
|
|
2020
|
|
|
31,279
|
|
2021
|
|
|
29,833
|
|
2022
|
|
|
26,428
|
|
2023 and thereafter
|
|
|
82,303
|
|
Total
|
|
$
|
209,544
|
|
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
10.
|
STOCK-BASED
COMPENSATION
|
In July 2016, we commenced administration of the
ANI Pharmaceuticals, Inc. 2016 Employee Stock Purchase Plan. As of September 30, 2018, we have 0.2 million shares of common stock
available under the ESPP. Under the ESPP, participants can purchase shares of our stock at a 15% discount. In the three and nine
months ended September 30, 2018, we recognized $2 thousand and $6 thousand of stock-based compensation expense related to the ESPP
in cost of sales, $5 thousand, and $8 thousand of stock-based compensation expense related to the ESPP in research and development,
and $15 thousand and $43 thousand of stock-based compensation expense related to the ESPP in sales, general, and administrative
expense in our accompanying unaudited interim condensed consolidated statements of operations, respectively. In the three and nine
months ended September 30, 2017, we recognized $1 thousand and $5 thousand of stock-based compensation expense related to the ESPP
in cost of sales and $11 thousand and $50 thousand of stock-based compensation expense related to the ESPP in sales, general, and
administrative expense in our accompanying unaudited interim condensed consolidated statements of operations, respectively.
All equity-based service awards are granted under
the ANI Pharmaceuticals, Inc. Amended and Restated 2008 Stock Incentive Plan (the “2008 Plan”). As of September 30,
2018, 0.6 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:
(in thousands)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cost of sales
|
|
$
|
24
|
|
|
$
|
19
|
|
|
$
|
66
|
|
|
$
|
68
|
|
Research and development
|
|
|
184
|
|
|
|
173
|
|
|
|
564
|
|
|
|
485
|
|
Selling, general, and adminstrative
|
|
|
1,564
|
|
|
|
1,270
|
|
|
|
4,266
|
|
|
|
4,059
|
|
|
|
$
|
1,772
|
|
|
$
|
1,462
|
|
|
$
|
4,896
|
|
|
$
|
4,612
|
|
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
10.
|
STOCK-BASED
COMPENSATION – continued
|
A summary of stock option and restricted stock activity
under the 2008 Plan during the nine months ended September 30, 2018 and 2017 is presented below:
(in thousands)
|
|
Options
|
|
|
RSAs
|
|
Outstanding December 31, 2016
|
|
|
578
|
|
|
|
63
|
|
Granted
|
|
|
192
|
|
|
|
50
|
|
Options Exercised/RSAs Vested
|
|
|
(7
|
)
|
|
|
(27
|
)
(1)
|
Forfeited
|
|
|
(3
|
)
|
|
|
-
|
|
Outstanding September 30, 2017
|
|
|
760
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2017
|
|
|
767
|
|
|
|
86
|
|
Granted
|
|
|
156
|
|
|
|
65
|
|
Options Exercised/RSAs Vested
|
|
|
(140
|
)
|
|
|
(33
|
)
(2)
|
Forfeited
|
|
|
(22
|
)
|
|
|
-
|
|
Outstanding September 30, 2018
|
|
|
761
|
|
|
|
118
|
|
(1)
Includes five thousand shares purchased from
employees to cover employee income taxes related to income earned upon vesting of restricted stock. The shares purchased are held
in treasury and the $259 thousand total purchase price for the shares is included in Treasury stock in our accompanying unaudited
interim condensed consolidated balance sheets.
(2)
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.
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.
The measurement of a deferred tax asset is reduced,
if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not
be realized. The utilization of our NOL carryforwards will be limited in future years as prescribed by Section 382 of the U.S.
Internal Revenue Code. As of both September 30, 2018 and December 31, 2017, we had provided a valuation allowance against
certain state net operating loss (“NOL”) carryforwards of $0.3 million.
We use a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.
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, 2018 and December 31, 2017. We are subject to taxation in various jurisdictions
and all of our income tax returns remain subject to examination by tax authorities due to the availability of NOL carryforwards.
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 recently acquired 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.
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 can 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 for the three months ended September 30, 2018 was impacted primarily by the Tax Cuts and Jobs Act
of 2017, which was enacted on December 22, 2017 and lowered the U.S. corporate tax rate from 35% to 21%, beginning 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.
The effective tax rate for the three months ended
September 30, 2017 was 25.9% of pre-tax income reported in the period, calculated based on the estimated annual effective rate
anticipated for the year ending December 31, 2017. Our effective tax rate for the three months ended September 30, 2017 was impacted
primarily by the Domestic Production Activities Deduction, as well as the impact of current period awards of stock-based compensation,
stock option exercises, and disqualifying dispositions of incentive stock options, all of which impact the consolidated effective
rate in the period in which they occur.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
11.
|
INCOME
TAXES – continued
|
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 can 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 for the nine months ended September 30, 2018 was impacted primarily by the Tax Cuts and Jobs Act of 2017,
which was enacted on December 22, 2017 and lowered the U.S. corporate tax rate from 35% to 21%, beginning 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.
The effective tax rate for the nine months ended
September 30, 2017 was 28.7% of pre-tax income reported in the period, calculated based on the estimated annual effective rate
anticipated for the year ending December 31, 2017. Our effective tax rate for the nine months ended September 30, 2017 was impacted
primarily by the Domestic Production Activities Deduction, as well as the impact of current period awards of stock-based compensation,
stock option exercises, and disqualifying dispositions of incentive stock options, all of which impact the consolidated effective
rate in the period in which they occur.
|
12.
|
COMMITMENTS
AND CONTINGENCIES
|
Government Regulation
Our products and facilities are subject to regulation
by a number of federal and state governmental agencies. The FDA, in particular, maintains oversight of the formulation, manufacture,
distribution, packaging, and labeling of all of our products. The Drug Enforcement Administration (“DEA”) maintains
oversight over our products that are controlled substances.
Unapproved Products
Two of our products, Esterified Estrogen with Methyltestosterone
(“EEMT”) and Opium Tincture, are marketed without approved NDAs or Abbreviated New Drug Applications (“ANDAs”).
During the three months ended September 30, 2018 and 2017, net revenues for these products totaled $6.2 million and $7.9 million,
respectively. During the nine months ended September 30, 2018 and 2017, net revenues for these products totaled $18.3 million
and $20.9 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.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
12.
|
COMMITMENTS
AND CONTINGENCIES – continued
|
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 both the three months ended September 30, 2018 and 2017 were
$0.6 million. Our contract manufacturing revenues for these unapproved products for the nine months ended September 30, 2018 and
2017 were $1.6 million and $1.5 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, 2018
and 2017 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.
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. The action is
currently in the discovery phase. We intend 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, including California, New
Jersey, and Pennsylvania, claiming bodily injuries as a result of ingestion of metoclopramide or its brand name, Reglan, prior
to the FDA's February 2009 Black Box warning requirement. In August 2012, we were dismissed with prejudice from all New Jersey
complaints. In August 2016, we settled the outstanding California short form complaints and in February 2018, we settled the remaining
four complaints that were not captured in the 2016 settlement. We consider our exposure to this litigation to be limited due to
several factors: (1) the only generic metoclopramide that we manufactured prior to the implementation of the FDA's warning requirement
was an oral solution introduced after May 28, 2008; (2) our market share for the oral solution was a very small portion of the
overall metoclopramide market; and (3) once we received a request for change of labeling from the FDA, we submitted our proposed
changes within 30 days, and such changes were subsequently approved by the FDA.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
12.
|
COMMITMENTS
AND CONTINGENCIES – continued
|
At the present time, we are unable to assess the
likely outcome of the cases in the remaining states. Our insurance company has assumed the defense of this matter and paid all
losses in settlement of the California cases. We cannot provide assurances that the outcome of these matters will not have an
adverse effect on our business, financial condition, and operating results. Furthermore, like all pharmaceutical manufacturers,
we may be exposed to other product liability claims in the future, which could limit our coverage under future insurance policies
or cause those policies to become more expensive, which could harm our business, financial condition, and operating results.
Our ANDA for Erythromycin Ethylsuccinate (“EES”)
was originally approved by the FDA on November 27
th
, 1978. We purchased the EES ANDA from Teva on July 10, 2015,
and subsequently launched EES on September 27, 2016. In August 2016, we filed with the FDA to reintroduce this product under a
Changes Being Effected in 30 Days submission (a “CBE-30 submission”). Under a CBE-30 submission, certain defined changes
to an ANDA can be made if the FDA does not object in writing within 30 days. The FDA’s regulations, guidance documents, and
historic actions support the filing of a CBE-30 for the types of changes that we proposed for our EES ANDA. We received no formal
written letter from the FDA within 30 days of the CBE-30 submission date, and as such, launched the product in accordance with
FDA regulations. On December 16, 2016, and nearly four months after our CBE-30 submission, the FDA sent us a formal written notice
that a Prior Approval Supplement (“PAS”) was required for this ANDA. Under a PAS, proposed changes to an ANDA cannot
be implemented without prior review and approval by the FDA. Because we did not receive this notice in the timeframe prescribed
by the FDA’s regulations, we believe that our supplemental ANDA is valid, and as such continued to market the product. In
addition, we filed a PAS which was approved by the FDA on November 2, 2018.
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 line of credit, and other current liabilities) approximate their carrying values because of their short-term nature.
While our Notes are recorded on our accompanying unaudited interim condensed consolidated balance sheets at their net carrying
value of $134.1 million as of September 30, 2018, the Notes are being traded on the bond market and their fair value is $146.8
million, based on their closing price on September 30, 2018, 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, 2018 and December 31, 2017. We also determined that the changes in such fair value were immaterial
in the three and nine months ended September 30, 2018 and 2017.
In April 2018, we entered into an interest rate swap
(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 is set to match the balance of our Term Loan. Both the notional amount of the interest rate swap and the balance of our Term
Loan were $72.2 million as of September 30, 2018. 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 $0.7 million asset at September 30, 2018.
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, 2018 and December 31, 2017, by level within
the fair value hierarchy:
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Fair Value at
September 30, 2018
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
699
|
|
|
$
|
-
|
|
|
$
|
699
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVRs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Description
|
|
Fair Value at
December 31, 2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 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, 2018 and 2017. 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 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. When one of the approved
ANDAs that have not yet been commercialized is launched, we could be required to pay a milestone of $25.0 million to Teva
Pharmaceuticals (“Teva”), depending on the number of competitors selling the product at the time of launch. In
addition, depending on the number of competitors selling the product one year after the launch date, we could be required to
pay a second milestone of $15.0 million to Teva. These milestones are determined to be contingent liabilities and will be
recognized if and when they are both estimable and probable. Because we believe that neither milestone is both estimable and
probable, we did not record a contingent liability for the milestones. We 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, 2018 and therefore no impairment loss was
recognized for the nine months ended September 30, 2018. The $1.3 million of in-process research and development related to
products with significant further work required in order to commercialize the products, and for which there is no alternative
future use. The in-process research and development was recorded at its relative fair value, determined using Level 3
unobservable inputs. In order to determine the fair value of the in-process research and development, we used the present
value of the estimated cash flows related to the products, using a discount rate of 75%, reflective of the higher risk
associated with these products. As the transaction was accounted for as an asset purchase, the $1.3 million of in-process
research and development was immediately recognized as research and development expense.
In April 2018, we entered into an agreement with
IDT Australia, Limited to purchase the ANDAs for 23 previously-marketed generic drug products and API for four of the acquired
products for $2.7 million in cash and a single-digit royalty on net profits from sales of one of the products (Note 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, 2018 and therefore no impairment loss was recognized
for the nine months ended September 30, 2018. We also recorded $0.2 million of raw materials inventory, measured at fair value.
The fair value of the raw materials inventory was determined based on the estimated replacement cost.
ANI PHARMACEUTICALS, INC.
and
subsidiarIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
|
13.
|
FAIR
VALUE DISCLOSURES – continued
|
In December 2017, we entered into an agreement with
AstraZeneca AB and AstraZeneca UK Limited to purchase the right, title, and interest in the NDAs and the U.S. right to market Atacand,
Atacand HCT, Arimidex, and Casodex, for $46.5 million in cash (Note 9). We also licensed these trademarks for use in the U.S. We
made the $46.5 million cash payment with funds from our Term Loan (Note 3) and capitalized $0.2 million of costs directly related
to the asset purchase. The agreement included a $3.0 million contingent payment due in early 2023 if the annual net sales of the
Atacand and Atacand HCT products equals or exceeds certain threshold amounts in 2020, 2021, and 2022. Because we believe that the
likelihood of meeting or exceeding the threshold amounts is not probable, we did not record a contingent liability in relation
to the agreement. We accounted for this transaction as an asset purchase. The $46.7 million product rights intangible assets were
recorded at their relative fair value, determined using Level 3 unobservable inputs. In order to determine the fair value of the
product rights intangible assets, we used the present value of the estimated cash flows related to the product rights, using a
discount rate of 10%. The product rights will be amortized in full over their 10-year useful lives, and will be tested for impairment
when events or circumstances indicate that the carrying value of the asset may not be recoverable. No such triggering events were
identified during the period from the date of acquisition to September 30, 2018 and therefore no impairment loss was recognized
for the nine months ended September 30, 2018.
In February 2017, we entered into an agreement with
Cranford Pharmaceuticals, LLC to purchase a distribution license, trademark, and certain finished goods inventory for Inderal XL
for $20.2 million in cash (Note 9). We made the $20.2 million cash payment using cash on hand and capitalized $40 thousand of costs
directly related to the asset purchase. We accounted for this transaction as an asset purchase. The $15.1 million product rights
intangible asset was recorded at its relative fair value, determined using Level 3 unobservable inputs. In order to determine the
fair value of the product rights intangible asset, we used the present value of the estimated cash flows related to the product
rights, using a discount rate of 10%. The product rights will be amortized in full over its 10-year useful life, and will be tested
for impairment when events or circumstances indicate that the carrying value of the asset may not be recoverable. No such triggering
events were identified during the period from the date of acquisition to September 30, 2018 and therefore no impairment loss was
recognized for the nine months ended September 30, 2018. We also recorded $5.0 million of finished goods inventory. The fair value
of the finished goods inventory was determined based on the estimated selling price to be generated from the finished goods, less
costs to sell, including a reasonable margin.
In February 2017, we entered into an agreement with
Holmdel Pharmaceuticals, LP to purchase the NDA, trademark, and certain finished goods inventory for InnoPran XL, including a license
to an Orange Book listed patent, for $30.6 million in cash (Note 9). We made the $30.6 million cash payment using $30.0 million
of funds from our former Line of Credit and $0.6 million of cash on hand. We also capitalized $0.1 million of costs directly related
to the asset purchase. We accounted for this transaction as an asset purchase. The $19.0 million product rights intangible asset
was recorded at its relative fair value, determined using Level 3 unobservable inputs. In order to determine the fair value of
the product rights intangible asset, we used the present value of the estimated cash flows related to the product rights, using
a discount rate of 10%. The product rights will be amortized in full over its 10-year useful life, and will be tested for impairment
when events or circumstances indicate that the carrying value of the asset may not be recoverable. No such triggering events were
identified during the period from the date of acquisition to September 30, 2018 and therefore no impairment loss was recognized
for the nine months ended September 30, 2018. We also recorded $11.6 million of finished goods inventory. The fair value of the
finished goods inventory was determined based on the estimated selling price to be generated from the finished goods, less costs
to sell, including a reasonable margin.