ANI PHARMACEUTICALS, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited interim condensed consolidated financial statements and the accompanying notes thereto included in Part I, Item 1 of this Form 10-Q quarterly report, the audited consolidated financial statements and the accompanying notes thereto in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 (the "2019 Annual Report"), as well as the information contained under Management's Discussion and Analysis of Financial Condition and Results of Operations and "Risk Factors" contained in the 2019 Annual Report, and Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q , and other information provided from time to time in our other filings with theSEC . This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under "Risk Factors" in our 2019 Annual Report.
EXECUTIVE OVERVIEW
ANI Pharmaceuticals, Inc. and its consolidated subsidiaries,ANIP Acquisition Company andANI 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 inBaudette, Minnesota and one is located inOakville, Ontario , are together capable of producing oral solid dose products, as well as semi-solids, liquids and topicals, controlled substances, and potent products that must be manufactured in a fully-contained environment. Our strategy is to use our assets to develop, acquire, manufacture, and market branded and generic specialty prescription pharmaceuticals. By executing this strategy, we believe we will be able to continue to grow our business, expand and diversify our product portfolio, and create long-term value for our investors. We consider a variety of criteria in determining which products to develop, all of which influence the level of competition upon product launch. These criteria include:
Formulation Complexity. Our development and manufacturing capabilities enable
us to manufacture pharmaceuticals that are difficult to produce, including
? highly potent, extended release, combination, and low dosage products. This
ability to manufacture a variety of complex products is a competitive strength
that we intend to leverage in selecting products to develop or manufacture.
? Patent Status. We seek to develop products whose branded bioequivalents do not
have long-term patent protection or existing patent challenges.
Market Size. When determining whether to develop or acquire an individual
product, we review the current and expected market size for that product at
? launch, as well as forecasted price erosion upon conversion from branded to
generic pricing. We endeavor to manufacture products with sufficient market
size to enable us to enter the market with a strong likelihood of being able to
price our products both competitively and at a profit. Profit Potential. We research the availability and cost of active
pharmaceutical ingredients in determining which products to develop or acquire.
? In determining the potential profit of a product, we forecast our anticipated
market share, pricing, including the expected price erosion caused by
competition from other generic manufacturers, and the estimated cost to
manufacture the products.
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Manufacturing. We generally seek to develop and manufacture products at our own
? manufacturing plants in order to optimize the utilization of our facilities,
ensure quality control in our products, and maximize profit potential.
Competition. When determining whether to develop or acquire a product, we
research existing and expected competition. We seek to develop products for
? which we can obtain sufficient market share and may decline to develop a
product if we anticipate significant competition. Our specialized manufacturing
facilities provide a means of entering niche markets, such as hormone
therapies, in which fewer generic companies are able to compete.
Recent Developments Product Launches InJune 2020 , we launched Mexiletine Hydrochloride Capsules USP, 150mg, 200mg, and 250mg. Mexiletine Hydrochloride Capsules are indicated for the treatment of documented ventricular arrhythmias, such as sustained ventricular tachycardia, that, in the judgment of the physician, are life-threatening.
In
In
InFebruary 2020 , we launched Sulfamethoxazole and Trimethoprim Oral Suspension USP 200 mg/40 mg per 5 mL. Sulfamethoxazole and Trimethoprim Oral Suspension is indicated in the treatment and prevention of various infections proven or strongly suspected to be caused by susceptible bacteria which include urinary tract infections, acute otitis media, bronchitis, shigellosis, Pneumocystis jiroveci pneumonia, and traveler's diarrhea.
In
InJanuary 2020 , we launched Paliperidone Extended-Release Tablets, 1.5 mg, 3 mg, 6 mg, and 9 mg. Paliperidone Extended-Release Tablets is an atypical antipsychotic agent indicated for the treatment of schizophrenia, the treatment of schizoaffective disorder as monotherapy, and as an adjunct to mood stabilizers and/or antidepressants. 37
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Cortrophin Gel Re-commercialization Update
InApril 2020 , theFood and Drug Administration ("FDA") issued a Refusal to File ("RTF") letter for our Supplemental New Drug Application ("sNDA") for Cortrophin Gel. Since this time, our efforts have been focused on the preparation of a complete and timely resubmission of the sNDA. We immediately retained a prominent regulatory consulting firm to support our efforts and augment the capabilities of our internal Cortrophin development team. In addition, we restructured the composition of the internal team. We have performed a comprehensive review of the original sNDA filing and prepared an internal gap assessment. The resultant remediation activities are currently in-progress and we currently anticipate re-submitting the sNDA no later than the first quarter of 2021. In addition, in the third quarter of 2019, we began purchasing materials that are intended to be used commercially in anticipation of FDA approval of Cortrophin Gel and the resultant product launch. UnderU.S. GAAP, we cannot capitalize these pre-launch purchases of materials as inventory prior to FDA approval, and accordingly, they are charged to expense in the period in which they are incurred. We expect these pre-launch purchases of material to increase significantly in the future as we build raw materials, API and finished goods for the expected launch of this product.
Management Transition
OnMay 10, 2020 , our former President and Chief Executive Officer,Arthur S. Przybyl , departed the Company. Our Board of Directors retained an executive search firm to lead the search for a new President and Chief Executive Officer. InAugust 2020 , we announced thatNikhil Lalwani was named our President and Chief Executive Officer and his employment was effectiveSeptember 8, 2020 , at which time he also joined our Board of Directors.
COVID-19 Impact
We continue to closely monitor the impact of the novel coronavirus ("COVID-19")
pandemic on our business and the geographic regions where we operate. During the
three months ended June 30, 2020 , per IQVIA/IMS data, total market generic and
brand prescriptions in the United States declined when compared to each of the
previous calendar quarters during the trailing 12 months. The decline was in
part attributable to the COVID-19 pandemic, including but not limited to
negative impacts from "shelter-in-place" and quarantine orders in certain
states, restrictions on travel, the prohibition of elective medical procedures,
and the related downstream impact of the global economic activity during this
period. The decline in prescriptions due to the COVID-19 pandemic negatively
impacted our generic and brand net revenues during the three months ended June
30, 2020 when compared to the three months ended March 31, 2020 and June 30,
2019 . During the three months ended September 30, 2020 , IQVIA/IMS data indicates
both brand and generic total market prescription volume increased when compared
to the three month period ended June 30, 2020 , in part due to the easing of
COVID-19 related restrictions. However, total market prescription volume did not
increase to pre-pandemic levels during this period. We have not experienced a
significant impact to our manufacturing operations, however have seen minor
disruptions to our supply chain from the COVID-19 pandemic during 2020. Our
manufacturing facilities in Baudette, MN and Oakville, Ontario have remained
open throughout the pandemic and have operated in accordance with local, state
and national safety guidelines. The pandemic has not impacted our access to
capital and has not significantly impacted our use of funds, including but not
limited to capital expenditures, spend on research and development activities
and business development opportunities.
We are unable to predict the impact that the COVID-19 pandemic will have on our
future financial condition, results of operations and cash flows due to numerous
uncertainties. These uncertainties include the scope, severity and duration of
the pandemic, the actions taken to contain the pandemic or mitigate its impact
and the direct and indirect economic effects of the pandemic and containment
measures, among others. The outbreak of COVID-19 in many countries, including
the United States and Canada , has had a significant adverse impact on global
economic activity and has contributed to significant volatility and negative
pressure in financial markets. As a result, the COVID-19 pandemic is negatively
impacting almost every industry, either directly or indirectly. Further, the
impacts of a potential worsening of global economic conditions and the continued
disruptions to, and volatility in, the credit and financial markets,
pharmaceutical supply chains, patient access to healthcare as well as other
unanticipated consequences remain unknown.
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GENERAL
The following table summarizes our results of operations for the periods
indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2020 2019 2020 2019
Net revenues $ 52,979 $ 51,337 $ 151,223 $ 158,581
Operating expenses
Cost of sales (exclusive of depreciation and
amortization) 20,118 15,002 62,617 45,359
Research and development 2,939 4,982 12,318 15,128
Selling, general, and administrative 15,725 14,357 50,621 41,829 Depreciation and amortization 11,358 9,473 33,739 35,048 Cortrophin pre-launch charges 37 195 8,275 195 Operating income/(loss) 2,802 7,328 (16,347) 21,022 Interest expense, net (2,510) (3,336) (6,898) (10,096) Other expense, net (229) (33) (335) (117) Income/(loss) before benefit/(provision) for income taxes 63 3,959 (23,580) 10,809 Benefit/(provision) for income taxes 371 (64)
4,667 120
Net income/(loss) $ 434 $ 3,895 $ (18,913) $ 10,929
The following table sets forth, for all periods indicated, items in our
unaudited interim condensed consolidated statements of operations as
a percentage of net revenues:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net revenues 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses
Cost of sales (exclusive of depreciation and
amortization) 38.0 % 29.2 % 41.4 % 28.6 %
Research and development 5.5 % 9.7 % 8.1 % 9.5 %
Selling, general, and administrative 29.7 % 28.0 % 33.5 % 26.4 % Depreciation and amortization 21.4 % 18.5 % 22.3 % 22.1 % Cortrophin pre-launch charges 0.1 % 0.4 % 5.5 % 0.1 % Operating income/(loss) 5.3 % 14.2 % (10.8) % 13.3 % Interest expense, net (4.7) % (6.4) % (4.6) % (6.4) % Other expense, net (0.4) % (0.1) % (0.2) % (0.1) % Income/(loss) before benefit/(provision) for income taxes 0.2 % 7.7 % (15.6) % 6.8 % Benefit/(provision) for income taxes 0.7 % (0.1) %
3.1 % 0.1 %
Net income/(loss) 0.9 % 7.6 % (12.5) % 6.9 %
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Net Revenues
Three Months Ended September 30,
(in thousands) 2020 2019 Change % ChangeGeneric pharmaceutical products $ 37,712 $ 31,753$ 5,959 18.8 % Branded pharmaceutical products 12,411
16,605 (4,194) (25.3) %
Contract manufacturing 2,152 2,376 (224) (9.4) %
Royalty and other 704 603 101 16.7 %
Total net revenues $ 52,979 $ 51,337 $ 1,642 3.2 %
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We derive substantially all of our revenues from sales of generic and branded
pharmaceutical products, contract manufacturing, and contract services, which
include product development services, laboratory services, and royalties on net
sales of certain products.
Net revenues for the three months ended
Net revenues for generic pharmaceutical products were
three months ended
million for the same period in 2019. The primary reasons for the increase were
? the
products acquired from
increases were tempered by declines in revenues of Ezetimibe Simvastatin,
Vancomycin Capsules, and Methazolamide.
Net revenues for branded pharmaceutical products were
three months ended
? million for the same period in 2019. The primary reasons for the decrease were
lower unit sales of Inderal XL and InnoPran XL and a decline in revenues of
Atacand.
Contract manufacturing revenues were
?
period in 2019, due to a decreased volume of orders from contract manufacturing
customers in the period.
Royalty and other revenues were
?
period in 2019, primarily due to an increase in product development revenues
earned by ANI Canada and an increase in royalty revenues.
Cost of Sales (Excluding Depreciation and Amortization)
Three Months Ended September 30,
(in thousands) 2020 2019 Change % Change
Cost of sales (excl. depreciation and
amortization) $ 20,118 $ 15,002 $ 5,116 34.1 %
Cost of sales consists of direct labor, including manufacturing and packaging,
active and inactive pharmaceutical ingredients, freight costs, packaging
components, and royalties related to profit-sharing arrangements. Cost of sales
does not include depreciation and amortization expense, which is reported as a
separate component of operating expenses on our unaudited interim condensed
consolidated statements of operations.
For the three months ended September 30, 2020 , cost of sales increased to $20.1
million from $15.0 million for the same period in 2019, an increase of $5.1
million , or 34.1%, primarily as a result of increased volumes related to a shift
in product mix toward generic products and increased sales of products subject
to profit-sharing arrangements. Cost of sales as a percentage of net revenues
increased to 38.0% during the three months ended September 30, 2020 , from 29.2%
during same period in 2019, primarily as a result of a shift in product mix to
an increase volume of generic products, which have lower average selling prices,
and increased sales of products subject to profit-sharing arrangements during
the current quarter.
During the three months ended September 30, 2020 , we purchased approximately 14%
of our inventory from one supplier. As of September 30, 2020 , our amount payable
to this supplier was $1.6 million . During the three months ended September 30,
2019 , we purchased 10% of our inventory from one supplier.
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Other Operating Expenses
Three Months Ended September 30,
(in thousands) 2020 2019 Change % Change
Research and development $ 2,939 $ 4,982 $ (2,043) (41.0) %Selling, general, and administrative 15,725 14,357 1,368 9.5 % Depreciation and amortization 11,358 9,473 1,885 19.9 % Cortrophin pre-launch charges 37 195 (158) (81.0) % Total other operating expenses $ 30,059 $
29,007 $ 1,052 3.6 %
Other operating expenses consist of research and development costs, selling, general, and administrative expenses, depreciation and amortization, and Cortrophin pre-launch charges.
For the three months ended
Research and development expenses decreased from
a decrease of 41.0%, primarily due to a decrease in expense related to the
? Cortrophin re-commercialization project. We currently anticipate that
Cortrophin-related expenses in the fourth quarter of 2020 will be moderately
higher than those of the third quarter, as we continue to focus on our
supplemental New Drug Application ("sNDA") resubmission efforts.
Selling, general, and administrative expenses increased from
? pharmacovigilance compliance costs in continued support of the expansion of our
commercial portfolio, and increased legal, insurance and other professional
fees.
Depreciation and amortization increased from
? increase of 19.9%, primarily due to the amortization of the Abbreviated New
Drug Applications ("ANDAs") and marketing and distribution rights acquired in
January 2020 from Amerigen and the ANDA acquired inJuly 2020 . As described in Note 13, Cortrophin Pre-Launch Charges, in the unaudited
interim condensed consolidated financial statements included in Part I, Item 1
? of this Form 10-Q quarterly report, we recognized Cortrophin pre-launch charges
of less than
recognized Cortrophin pre-launch charges of$0.2 million in the three months endedSeptember 30, 2019 . Other Expense, net Three Months Ended September 30, (in thousands) 2020 2019 Change % Change Interest expense, net$ (2,510) $ (3,336) $ 826 (24.8) % Other expense, net (229) (33) (196) 593.9 % Total other expense, net$ (2,739) $
(3,369)$ 630 (18.7) %
For the three months endedSeptember 30, 2020 , we recognized other expense of$2.7 million versus other expense of$3.4 million for the same period in 2019, a decrease of$0.6 million . Interest expense, net for the three months endedSeptember 30, 2020 consists primarily of interest expense on borrowings under our secured term loan ("Term Loan"), delayed draw term loan ("DDTL"), and line of credit ("Revolver"). Interest expense, net for the three months endedSeptember 30, 2019 consists primarily of interest expense on our convertible debt, including amortization of related debt discount, and interest expense on borrowings under our Term Loan. For the three months endedSeptember 30, 2020 and 2019, there was$18 thousand and$41 thousand of interest capitalized into construction in progress, respectively. 41
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Benefit/(Provision) for Income Taxes
Three Months Ended September 30,
(in thousands) 2020 2019 Change % ChangeBenefit/(provision) for income taxes $ 371 $
(64)$ (435) 679.7 %
Our provision for income taxes consists of current and deferred components, which include changes in our deferred tax assets, our deferred tax liabilities, and our valuation allowance.
For interim periods, we recognize an income tax provision/(benefit) based on our estimated annual effective tax rate expected for the entire year plus the effects of certain discrete items occurring in the quarter. 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. During periods when we incur net losses before income taxes, our annual estimated effective tax rate may be adjusted based on the "loss limitation" requirements applicable to interim tax provisions, resulting in a limited income tax benefit recognized in that 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. For the three months endedSeptember 30, 2020 , we recognized an income tax benefit of$0.4 million . The income tax benefit for this period is the incremental benefit generated from applying the estimated annual worldwide effective tax benefit rate of 19.8% to consolidated pre-tax losses for the nine months endedSeptember 30, 2020 as compared to the consolidated income tax benefit as ofJune 30, 2020 . The estimated annual effective rate varies from the statutory rate as a result of permanent differences as well as the net effects of certain discrete items occurring which impact our income tax provision in the period in which they occur. There were no material discrete items during the three months endedSeptember 30, 2020 . For the three months endedSeptember 30, 2019 , we recognized an income tax expense of$0.1 million . The income tax expense resulted from applying an estimated annual worldwide effective tax rate of 8.4% to pre-tax consolidated income of$4.0 million reported during the period, reduced by the net effects of certain discrete items occurring in 2019 which impact our income tax provision in the period in which they occur. Discrete items occurring during the three months endedSeptember 30, 2019 include the impact of stock option exercises, disqualifying dispositions of incentive stock options, and return to provision adjustments. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDEDSEPTEMBER 30, 2020 AND 2019
Nine Months Ended September 30,
(in thousands) 2020 2019 Change % ChangeGeneric pharmaceutical products$ 108,607 $ 99,452$ 9,155 9.2 % Branded pharmaceutical products 32,201 48,300 (16,099) (33.3) % Contract manufacturing 7,026 8,499 (1,473) (17.3) % Royalty and other income 3,389
2,330 1,059 45.5 % Total net revenues$ 151,223 $ 158,581 $ (7,358) (4.6) %
Net revenues for the nine months ended
Net revenues for generic pharmaceutical products were
? nine months ended
million for the same period in 2019. The primary reasons for the increase are
theJanuary 2020 launch of Miglustat, Paliperidone, Penicillamine, Mixed 42 Table of Contents
Amphetamine Salts, Bexarotene and other products acquired from Amerigen, and the
by decreases in revenues of Ezetimibe Simvastatin, Erythromycin Ethylsuccinate
("EES"), Vancomycin Capsules, Esterified Estrogen with Methyltestosterone
("EEMT"), and Nilutamide. During the nine months ended
primarily during the second quarter ended
pharmaceutical product market and our generic revenue results were negatively
impacted by the COVID-19 pandemic, including but not limited to effects from
"shelter-in-place" orders and the prohibition of elective medical procedures.
These actions resulted in a decline in generic prescriptions during the nine
months ended
30, 2020, when compared to the nine months endedSeptember 30, 2019 .
Net revenues for branded pharmaceutical products were
nine months ended
million for the same period in 2019. The primary reasons for the decrease were
lower unit sales of Inderal LA, Inderal XL and InnoPran XL, as well as a
decrease in sales of Arimidex and Atacand. These decreases were tempered by an
increase in sales of Atacand HCT and Vancocin. During the nine months ended
?
2020, the overall brand pharmaceutical product market and our brand revenue
results were negatively impacted by the COVID-19 pandemic, including but not
limited to effects from "shelter-in-place" orders and the prohibition of
elective medical procedures. These actions resulted in a decline in brand
prescriptions during the nine months ended
the second quarter ended
Contract manufacturing revenues were
?
period in 2019, due to a decreased volume of orders from contract manufacturing
customers in the period.
Royalty and other were
? 2020, an increase of
2019, primarily due to an increase in product development revenues earned by
ANICanada and an increase in royalty revenues.
Cost of Sales (Excluding Depreciation and Amortization)
Nine Months Ended September 30,
(in thousands) 2020 2019 Change % Change
Cost of sales (excl. depreciation and
amortization) $ 62,617 $ 45,359 $ 17,258 38.0 %
For the nine months ended September 30, 2020 , cost of sales increased to $62.6
million from $45.4 million for the same period in 2019, an increase of $17.3
million or 38.0%, primarily as a result of increased volumes related to a shift
in product mix toward generic products, $4.2 million in cost of sales
representing the excess of fair value over cost for inventory acquired in the
Amerigen acquisition and subsequently sold during the period, increased sales of
products subject to profit-sharing arrangements, and inventory reserve charges
of $3.9 million related to excess inventory on hand, expired product and
discontinued projects, partially offset by the non-recurrence of the January
2019 royalty buy out from the Asset Purchase Agreement Amendment with Teva
Pharmaceuticals USA, Inc. Cost of sales, exclusive of the $4.2 million net
impact related to excess of fair value over the cost of inventory sold during
the period, as a percentage of net revenues increased to 39% during the nine
months ended September 30, 2020 , from 28.6% during same period in 2019,
primarily as a result of a shift in product mix to an increased volume of
generic products, which have lower average selling prices, increased sales of
products subject to profit-sharing arrangements, and inventory reserve charges
related to excess inventory on hand, expired product and discontinued projects.
During the nine months ended
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Other Operating Expenses
Nine Months Ended September 30,
(in thousands) 2020 2019 Change % Change
Research and development $ 12,318 $ 15,128 $ (2,810) (18.6) %Selling, general, and administrative 50,621 41,829 8,792 21.0 % Depreciation and amortization 33,739 35,048 (1,309) (3.7) % Cortrophin pre-launch charges 8,275 195 8,080 NM (1) Total other operating expenses $ 104,953 $
92,200$ 12,753 13.8 % (1) Not Meaningful For the nine months endedSeptember 30, 2020 , other operating expenses increased to$105.0 million from$92.2 million for the same period in 2019, an increase of$12.8 million , or 13.8%, primarily as a result of the following factors:
Research and development expenses decreased from
million, a decrease of 18.6%, primarily due to the non-recurrence of the
million of expense related to in-process research and development acquired from
? Coeptis during the nine months ended
expense related to the Cortrophin re-commercialization project and the
Methylphenidate project. These decreases were tempered by the
in-process research and development expense from the Amerigen acquisition in
January 2020 .
Selling, general, and administrative expenses increased from
termination benefit expenses related to the departure of our former President
? and CEO, comprised of
million of expense for salary continuation, bonus, and fringe benefits, and
increased quality assurance expenses. We also incurred$0.8 million in recruitment and related legal charges associated with our CEO search.
Depreciation and amortization decreased from
decrease of 3.7%, primarily due to the non-recurrence of amortization expense
? recorded in relation to the
the amortization of the ANDAs and marketing and distribution rights acquired in
As described in Note 13, Cortrophin Pre-Launch Charges, in the unaudited
interim condensed consolidated financial statements included in Part I, Item 1
of this Form 10-Q quarterly report, we recognized Cortrophin pre-launch charges
? of
Cortrophin pre-launch charges of
activity of approximately
Other Expense, net
Nine Months Ended September 30,
(in thousands) 2020 2019 Change % Change
Interest expense, net $ (6,898) $ (10,096) $ 3,198 (31.7) %
Other expense, net (335) (117) (218) 186.3 %
Total other expense, net $ (7,233) $ (10,213) $ 2,980 (29.2) %
For the nine months ended September 30, 2020 , we recognized other expense of
$7.2 million versus other expense of $10.2 million for the same period in 2019,
a decrease of $3.0 million . Interest expense, net for 2020 consists primarily of
interest expense on our Term Loan, DDTL, and Revolver. Interest expense, net for
2019 consists primarily of interest
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expense on our convertible debt, including amortization of related debt discount, and interest expense on borrowings under our Term Loan. For the nine months endedSeptember 30, 2020 and 2019, there was$0.1 million of interest capitalized into construction in progress. Benefit for Income Taxes Nine Months Ended September 30, (in thousands) 2020 2019 Change % Change
Benefit for income taxes $ 4,667$ 120 $ (4,547) NM (1) (1) Not Meaningful For interim periods, we recognize an income tax provision/(benefit) based on our estimated annual effective tax rate expected for the entire year plus the effects of certain discrete items occurring in the quarter. 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. For the nine months endedSeptember 30, 2020 , we recognized an income tax benefit of$4.7 million . The income tax benefit resulted from applying an estimated annual worldwide effective tax rate of 19.8% to pre-tax consolidated loss of$23.6 million reported during the period, reduced by the net effects of certain discrete items occurring which impact our income tax provision in the period in which they occur. There were no material discrete items occurring during the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2019 , we recognized an income tax benefit of$0.1 million . The income tax benefit resulted from applying an estimated annual worldwide effective tax rate of 16.6% to pre-tax consolidated income of$10.8 million reported during the period, reduced by the net effects of certain discrete items occurring in 2019 which impact our income tax provision in the period in which they occur. Discrete items occurring during the nine months endedSeptember 30, 2019 include the impact of the release of ANICanada's net valuation allowance, retroactive application of our newly adopted transfer pricing policy to 2018, and the impact of current period awards of stock-based compensation, stock option exercises, disqualifying dispositions of incentive stock options, and return to provision adjustments. 45 Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
The following table highlights selected liquidity and working capital information from our balance sheets:
September 30, December 31,
(in thousands) 2020 2019
Cash and cash equivalents $ 17,900 $ 62,332
Accounts receivable, net 83,745 72,129
Inventories, net 59,195 48,163
Prepaid income taxes 1,621 1,076Prepaid expenses and other current assets 3,358
3,995
Total current assets$ 165,819 $
187,695
Current debt, net of deferred financing costs $ 12,785 $
9,941 Accounts payable 13,460 14,606 Accrued expenses and other 2,534 2,362 Accrued royalties 6,088 5,084
Accrued compensation and related expenses 5,993
3,736 Accrued government rebates 11,678 8,901 Returned goods reserve 23,250 16,595 Deferred revenue 112 451 Total current liabilities $ 75,900$ 61,676 OnSeptember 30, 2020 , we had$17.9 million in unrestricted cash and cash equivalents. OnDecember 31, 2019 , we had$62.3 million in unrestricted cash and cash equivalents. We generated$21.0 million of cash from operations in the nine months endedSeptember 30, 2020 . InJanuary 2020 , we acquired theU.S. portfolio of 23 generic products and certain commercial and development inventory and materials fromAmerigen Pharmaceuticals, Ltd. , for which we have used$57.4 million in cash and could make future payments of up to$25.0 million in contingent profit share payments over the next four years. The contingent payments are earned if annual gross profit exceeds a minimum threshold and are earned on a subset of the acquired products. At the time of the acquisition, the acquired portfolio included ten commercial products, three approved products with launches pending, four filed products, and four in-development products as well as a license to commercialize two approved products. The transaction was funded from cash on hand and$15.0 million of borrowings from our Revolver, of which$7.5 million was repaid in the second quarter. InJuly 2020 , we acquired an ANDA and certain inventories from a private company for total consideration of$4.4 million . The transaction was funded from cash on hand. We believe that our financial resources, consisting of current working capital, anticipated future operating revenue and corresponding collections from customers, and our revolving line of credit facility, under which$67.5 million remains available for borrowing as ofSeptember 30, 2020 , will be sufficient to enable us to meet our working capital requirements and debt obligations for at least the next 12 months. During the period of uncertainty and volatility related to the COVID-19 outbreak, we will continue to closely monitor our liquidity.
The following table summarizes the net cash and cash equivalents provided by/(used in) by operating activities, investing activities, and financing activities for the periods indicated:
Nine Months Ended September 30,
(in thousands) 2020 2019
Operating Activities $ 20,976 $ 40,828
Investing Activities $ (66,203) $ (26,175)
Financing Activities $ 769 $ 2,016
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Net Cash Provided by Operations
Net cash provided by operating activities was$21.0 million for the nine months endedSeptember 30, 2020 , compared to$40.8 million provided by operating activities during the same period in 2019, a decrease of$19.9 million . The decrease was due to changes in working capital and the net loss during the nine months endedSeptember 30, 2020 , including payments made for Cortrophin pre-launch materials and increases to trade accounts receivable.
Net cash used in investing activities for the nine months endedSeptember 30, 2020 was$66.2 million , principally due to theJanuary 2020 acquisition of 23 generic products and inventory and materials fromAmerigen Pharmaceuticals, Ltd. for$57.4 million , cash payments for theJuly 2020 acquisition of an ANDA and certain inventories of$4.0 million , and$4.0 million of capital expenditures during the period. Net cash used in investing activities for the nine months endedSeptember 30, 2019 was$26.2 million , principally due to theJune 2019 acquisition of in-process research and development related to seven development-stage products for$2.3 million , theMarch 2019 asset acquisition of ANDAs for$2.5 million , theJanuary 2019 Asset Purchase Agreement Amendment for$16.0 million , aJuly 2019 contractual license payment for$0.3 million , and$4.9 million of capital expenditures during the period.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was$0.8 million for the nine months endedSeptember 30, 2020 , principally due to net borrowings of$7.5 million on the Revolver and$0.5 million of proceeds from stock option exercises, partially offset by$5.7 million of maturity payments on the Term Loan and DDTL and$1.5 million of treasury stock purchased in relation to restricted stock vests. Net cash provided by financing activities was$2.0 million for the nine months endedSeptember 30, 2019 , principally due to$4.9 million of proceeds from stock option exercises, partially offset by$1.8 million of payments on the Term Loan and$1.0 million of treasury stock purchased in relation to restricted stock vests.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). The preparation of financial statements in conformity withU.S. GAAP requires management 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 our consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, allowance for doubtful accounts, accruals for chargebacks, government rebates, returns, and other allowances, allowance for inventory obsolescence, valuation of financial instruments and intangible assets, accruals for contingent liabilities, fair value of long-lived assets, deferred taxes and valuation allowance, and the depreciable lives of long-lived assets. A summary of our significant accounting policies is included in Item 8. Consolidated Financial Statements, Note 1, Description of Business and Summary of Significant Accounting Policies, in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
A discussion of the recently issued accounting pronouncements is described in
Note 1, Business, Presentation, and Recent Accounting Pronouncements, in the
unaudited interim condensed consolidated financial statements included in
Part I, Item 1 of this Form 10-Q quarterly report and is incorporated herein by
reference.
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OFF-BALANCE SHEET ARRANGEMENTS
As of
CONTRACTUAL OBLIGATIONS
As of
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