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ANIP > SEC Filings for ANIP > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for ANI PHARMACEUTICALS INC

Form 10-Q for ANI PHARMACEUTICALS INC


9-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited condensed consolidated financial statements and the accompanying notes thereto included in Part I, Item 1 of this Form 10-Q quarterly report. This discussion contains forward-looking statements, based on current expectations and related to future events and the Company's future financial performance, that involve risks and uncertainties. The Company's 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 the Company's annual report on Form 10-K for the year ended December 31, 2012, and in Part II, Item
1.A. of this quarterly report.

OVERVIEW

ANI Pharmaceuticals, Inc. (the "Company") is an integrated specialty pharmaceutical company developing, manufacturing and marketing branded and generic prescription pharmaceuticals. In two facilities with combined manufacturing, packaging and laboratory capacity totaling 173,000 square feet, the Company manufactures oral solid dose products, as well as liquids and topicals, including narcotics and those that must be manufactured in a fully contained environment due to their potency and/or toxicity. The Company also performs contract manufacturing for other pharmaceutical companies.

The Company's established product portfolio consists of both branded and generic pharmaceuticals, including:

                 Generic Products                     Branded Products
                  Opium Tincture                         Cortenema®
            Fluvoxamine Maleate Tablets               Reglan® Tablets
Esterified Estrogen with Methyltestosterone Tablets
               Hydrocortisone Enema
               Metoclopramide Syrup

The Company's business strategy is to utilize its manufacturing assets to develop and market niche generic pharmaceuticals, focusing on products in pain management (narcotics), anti-cancer (oncolytics), women's health (hormones and steroids), as well as complex formulations, including extended release and combination products. These areas of focus reflect the Company's specialized manufacturing experience and capabilities and offer a large number of attractive niche generic product opportunities.

The Company considers 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 Difficulty. Potent, extended release, combination and low dosage products.

· Patent Status. Existing patent protection, if any, time remaining to patent expiration, and existing patent challenges.

· Market Size. Current and expected market size at launch based on forecasted price erosion upon conversion from branded to generic pricing.

· Profit Potential. Availability and cost of active pharmaceutical ingredients combined with forecasted market share.

· Manufacturing. Ability of the Company to manufacture in its own facilities.

· Competition. Existing and expected competitors.

GENERAL



The following table sets forth, for all periods indicated, items in the
Company's unaudited condensed consolidated statements of operations as a
percentage of net revenues:



                                              Three months                   Six months
                                             ended June 30,                ended June 30,
                                           2013           2012           2013           2012
Net revenues                                 100.0 %        100.0 %        100.0 %        100.0 %
Operating Expenses
Cost of sales (exclusive of
depreciation and amortization)                34.1 %         40.9 %         37.9 %         39.7 %
Salaries and benefits                         92.9 %         21.8 %         59.5 %         22.2 %
Freight                                        1.2 %          1.7 %          1.2 %          1.6 %
Research and development                       7.1 %          4.0 %          6.3 %          4.9 %
Selling, general and administrative           23.7 %         17.6 %         21.4 %         17.0 %
Depreciation and amortization                  2.4 %          2.7 %          2.5 %          2.8 %
Operating (Loss) Income from
Continuing Operations                        -61.4 %         11.3 %        -28.8 %         11.8 %
Interest expense                              -6.1 %         -9.6 %         -4.0 %        -11.5 %
Other expense                                 -7.0 %         -1.0 %         -4.1 %         -1.0 %
Income tax benefit                               - %            - %            - %          0.4 %
Net (Loss) Income from Continuing
Operations                                   -74.5 %          0.7 %        -36.9 %         -0.3 %
Gain on discontinued operations, net
of tax                                           - %            - %            - %          0.6 %
Net (Loss) Income                            -74.5 %          0.7 %        -36.9 %          0.3 %

The following table summarizes the Company's results of operations for the periods indicated:

                                             Three months ended                Six months ended
                                                  June 30,                         June 30,
                                            2013            2012             2013             2012
Net revenues                            $  6,151,539     $ 5,186,793     $ 11,713,448     $ 10,013,595
Operating Expenses
Cost of sales (excl. of depr. and
amort.)                                    2,098,540       2,118,922        4,437,076        3,970,604
Salaries and benefits                      5,713,504       1,128,857        6,970,572        2,224,760
Freight                                       72,777          88,072          142,773          162,192
Research and development                     437,184         209,875          733,564          488,076
Selling, general and administrative        1,457,845         914,004        2,510,448        1,704,895
Depreciation and amortization                146,523         140,639          291,129          281,279
Operating (Loss) Inc. from Cont. Ops.   $ (3,774,834 )   $   586,424     $ (3,372,114 )   $  1,181,789
Interest expense                            (374,476 )      (501,002 )       (466,902 )     (1,157,912 )
Other expense                               (433,956 )       (50,000 )       (483,956 )        (99,400 )
Income tax benefit                                 -               -                -           40,380
Net (Loss) Income from Cont. Ops        $ (4,583,266 )   $    35,422     $ (4,322,972 )   $    (35,143 )
Gain on discontinued operations, net
of tax                                             -               -                -           61,257
Net (Loss) Income                       $ (4,583,266 )   $    35,422     $ (4,322,972 )   $     26,114

RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2013 AND 2012



Net Revenues



                                            Three months ended
                                                 June 30,
                                           2013            2012           Change        % Change
Generic pharmaceutical products         $ 2,829,282     $ 2,583,274     $  246,008             9.5 %
Branded pharmaceutical products           1,114,479         547,577        566,902           103.5 %
Contract manufacturing                    1,809,325       1,958,895       (149,570 )          -7.6 %
Contract services and other income          398,453          97,047        301,406           310.6 %
Total Net Revenues                      $ 6,151,539     $ 5,186,793     $  964,746            18.6 %

The Company has historically derived substantially all of its revenues from sales of generic and branded pharmaceutical products, contract manufacturing, and contract services. Contract services includes product development services for potential contract customers, laboratory services for existing contract customers where those services are billed separately from contract manufacturing, and royalties on net sales of certain contract manufactured products.

Net revenue for the three-month period ended June 30, 2013 was $6.2 million compared to $5.2 million for the same period in 2012, an increase of $965,000, or 18.6%, compared to the same period in 2012, primarily as a result of the following factors:

· Net revenues for generic pharmaceutical products were $2.8 million during the three-month period ended June 30, 2013, an increase of 9.5% compared to $2.6 million for the same period in 2012. The primary reasons for the increase were market share gains on Opium Tincture and Fluvoxamine Maleate tablets. As described in Note 10 in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q quarterly report, the Company markets certain generic products, including Opium Tincture, without FDA-approved New Drug Applications ("NDA"). The Company's combined net revenues for these products for the three-month periods ended June 30, 2013 and 2012 were $1.8 million and $1.5 million, respectively.

· Net revenues for branded pharmaceutical products were $1.1 million during the three-month period ended June 30, 2013, an increase of 103.5% compared to $548,000 for the same period in 2012. The primary reason for the increase was higher unit sales of Reglan® tablets. Higher unit sales of Cortenema® contributed to the increase to a lesser extent.

· Contract manufacturing revenues were $1.8 million during the three-month period ended June 30, 2013, a decrease of 7.6% compared to $2.0 million for the same period in 2012, due to decreased orders from contract manufacturing customers during the period. As described in Note 10 in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q quarterly report, the Company contract manufactures a group of products on behalf of a customer, which are marketed by that customer without an FDA-approved NDA. The Company's contract manufacturing revenue for the group of unapproved products for the three-month periods ended June 30, 2013 and 2012 was $760,000 and $160,000, respectively.

· Contract services and other income were $398,000 during the three-month period ended June 30, 2013, an increase of 310.6% from $97,000 for the same period in 2012, due to increased fees charged to contract manufacturing customers. As described in Note 10, in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q quarterly report, the Company receives royalties on the net sales of a group of contract-manufactured products, which are marketed by the customer without an FDA-approved NDA. The Company's royalties on the net sales of these unapproved products for the three-month periods ended June 30, 2013 and 2012 were $106,000 and $62,000, respectively.

Cost of Sales (Exclusive of Depreciation and Amortization)

Three months ended
June 30,
2013 2012 Change % Change
Cost of sales (excl. depr. and amort.) $ 2,098,540 $ 2,118,922 $ (20,382 ) -1.0 %

Cost of sales consists of direct labor, including manufacturing and packaging, active pharmaceutical ingredients ("API"), excipients and packaging components. Cost of sales does not include depreciation and amortization expense, which is reported as a separate component of operating expenses on the Company's statements of operations.

For the three-month period ended June 30, 2013, cost of sales decreased by $20,000 or 1.0% from the same period in 2012. Cost of sales as a percentage of net revenues decreased to 34.1% during the three-month period ended June 30, 2013 from 40.9% during same period in 2012, primarily as a result of a favorable shift in product mix toward higher margin products, as well as decreases in the costs of raw materials for Opium Tincture, Fluvoxamine Maleate tablets, and Esterified Estrogen with Methyltestosterone tablets.

The Company sources the raw materials for its products, including APIs, from both domestic and international suppliers. Generally, only a single source of API is qualified for use in each product due to the costs and time required to validate a second source of supply. Changes in API suppliers usually must be approved by the FDA, which can take 18 months or longer. As a result, the Company is dependent upon its current vendors to reliably supply the APIs required for ongoing product manufacturing. During the three-month period ended June 30, 2013, the Company purchased 28% of total costs of sales from three suppliers. As of June 30, 2013, amounts payable to these suppliers totaled $177,000.

Each year, the Company must submit a request to the Drug Enforcement Agency ("DEA") for a quota to purchase the amount of API needed to manufacture Opium Tincture. Without an approved quota from DEA, the Company would not be able to purchase API from its supplier. As a result, the Company is dependent upon the DEA to annually approve a sufficient quota of API to support the continued manufacture of Opium Tincture.

Other Operating Expenses



                                     Three months ended
                                          June 30,
                                    2013            2012           Change         % Change
Salaries and benefits            $ 5,713,504     $ 1,128,857     $ 4,584,647          406.1 %
Freight                               72,777          88,072         (15,295 )        -17.4 %
Research and development             437,184         209,875         227,309          108.3 %
General and administrative         1,457,845         914,004         543,841           59.5 %
Depreciation and amortization        146,523         140,639           5,884            4.2 %
Total Other Operating Expenses   $ 7,827,833     $ 2,481,447     $ 5,346,386          215.5 %

Other operating expenses consist of salaries and benefits, outbound freight, research and development costs, selling, general and administrative expenses, and depreciation and amortization.

For the three-month period ended June 30, 2013, other operating expenses increased to $7.8 million from $2.5 million for the same period in 2012, an increase of $5.3 million, or 215.5%, primarily as a result of the following factors, which are described in further detail in the Company's proxy statement/prospectus filed with the SEC on May 8, 2013 under "Management of the Combined Company following the Merger - Certain Relationships and Related Transactions" and "Executive Compensation - Transaction Bonus Agreements and Related Agreements":

· Salaries and benefits increased from $1.1 million to $5.7 million, primarily as a result of non-cash transaction bonuses paid to the Company's executives upon completion of the Merger. The compensation expense resulting from these bonuses totaled $4.5 million.

· Research and development expenses increased from $210,000 to $437,000, due to timing differences in product development schedules between the periods.

· Selling, general and administrative expenses increased from $914,000 to $1.5 million, primarily as a result of expenses incurred relating to the Merger.

Other Expenses



                         Three months ended
                              June 30,
                         2013          2012          Change        % Change
Interest expense       $ 374,476     $ 501,002     $ (126,526 )        -25.3 %
Other expense            433,956        50,000        383,956          767.9 %
Total Other Expenses   $ 808,432     $ 551,002     $  257,430           46.7 %

Other expenses consist of interest expense associated with the Company's revolving line of credit and secured subordinated convertible notes and other non-operating expenses including monitoring and advisory fees payable to certain of the Company's investors.

For the three-month period ended June 30, 2013, other expenses increased to $808,000 from $551,000 for the same period in 2012, an increase of $257,000, or 46.7%, primarily as a result of the following factors, which are described in further detail in the Company's proxy statement/prospectus filed with the SEC on May 8, 2013 under "Management of the Combined Company following the Merger - Certain Relationships and Related Transactions" and "Executive Compensation - Transaction Bonus Agreements and Related Agreements":

· Interest expense decreased from $501,000 to $374,000 as a result of the conversion in June 2012 of all of ANIP's subordinated debt to Series D convertible preferred stock. This reduction was partially offset by an early termination fee and accelerated amortization of deferred loan costs incurred upon repayment in June 2013 of the Company's revolving line of credit in connection with the Merger.

· Other expense increased from $50,000 to $434,000 as a result of payments totaling $390,000 to certain of the Company's investors for overall management, deal structuring, financial advisory and due diligence services in connection with the Merger.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012



Net Revenues



                                              Six months ended
                                                  June 30,
                                            2013             2012           Change         % Change
Generic pharmaceutical products         $  5,492,858     $  4,557,857     $   935,001            20.5 %
Branded pharmaceutical products            1,979,378          867,682       1,111,696           128.1 %
Contract manufacturing                     3,549,588        4,168,061        (618,473 )         -14.8 %
Contract services and other income           691,624          419,995         271,629            64.7 %
Total Net Revenues                      $ 11,713,448     $ 10,013,595     $ 1,699,853            17.0 %

Net revenue for the six-month period ended June 30, 2013 was $11.7 million compared to $10.0 million for the same period in 2012, an increase of $1.7 million, or 17.0%, compared to the same period in 2012, primarily as a result of the following factors:

· Net revenues for generic pharmaceutical products were $5.5 million during the six-month period ended June 30, 2013, an increase of 20.5% compared to $4.6 million for the same period in 2012. The primary reasons for the increase were market share gains on Opium Tincture and Fluvoxamine Maleate tablets. As described in Note 10 in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q quarterly report, the Company markets certain generic products, including Opium Tincture, without FDA-approved NDAs. The Company's combined net revenues for these products for the six-month periods ended June 30, 2013 and 2012 were $3.3 million and $2.7 million, respectively.

· Net revenues for branded pharmaceutical products were $2.0 million during the six-month period ended June 30, 2013, an increase of 128.1% compared to $868,000 for the same period in 2012. The primary reason for the increase was higher unit sales of Reglan® tablets. Higher unit sales of Cortenema® contributed to the increase to a lesser extent.

· Contract manufacturing revenues were $3.5 million during the six-month period ended June 30, 2013, a decrease of 14.8% compared to $4.2 million for the same period in 2012, due to decreased orders from contract manufacturing customers during the period. As described in Note 10 in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q quarterly report, the Company contract manufactures a group of products on behalf of a customer, which are marketed by that customer without an FDA-approved NDA. The Company's contract manufacturing revenue for the group of unapproved products for the six-month periods ended June 30, 2013 and 2012 was $1.2 million and $404,000, respectively.

· Contract services and other income were $692,000 during the six-month period ended June 30, 2013, an increase of 64.7% from $420,000 for the same period in 2012, due to increased fees charged to contract manufacturing customers. As described in Note 10 in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q quarterly report, the Company receives royalties on the net sales of a group of contract-manufactured products, which are marketed by the customer without an FDA-approved NDA. The Company's royalties on the net sales of these unapproved products for the six-month periods ended June 30, 2013 and 2012 were $185,000 and $131,000, respectively.

Cost of Sales (Exclusive of Depreciation and Amortization)

Six months ended
June 30,
2013 2012 Change % Change
Cost of sales (excl. depr. and amort.) $ 4,437,076 $ 3,970,604 $ 466,472 11.7 %

For the six-month period ended June 30, 2013, cost of sales increased by $466,000 or 11.7% from the same period in 2012. Cost of sales as a percentage of net revenues decreased to 37.9% during the six-month period ended June 30, 2013 from 39.7% during same period in 2012, primarily as a result of a favorable shift in product mix toward higher margin products, as well as decreases in the costs of raw materials for Opium Tincture, Fluvoxamine Maleate tablets, and Esterified Estrogen with Methyltestosterone tablets.

During the six-month period ended June 30, 2013, the Company purchased 35% of total costs of sales from three suppliers.

Other Operating Expenses



                                       Six months ended
                                           June 30,
                                     2013            2012           Change         % Change
Salaries and benefits            $  6,970,572     $ 2,224,760     $ 4,745,812          213.3 %
Freight                               142,773         162,192         (19,419 )        -12.0 %
Research and development              733,564         488,076         245,488           50.3 %
General and administrative          2,510,448       1,704,895         805,553           47.2 %
Depreciation and amortization         291,129         281,279           9,850            3.5 %
Total Other Operating Expenses   $ 10,648,486     $ 4,861,202     $ 5,787,284          119.1 %

For the six-month period ended June 30, 2013, other operating expenses increased to $10.6 million from $4.9 million for the same period in 2012, an increase of $5.8 million, or 119.1%, primarily as a result of the following factors, which are described in further detail in the Company's proxy statement/prospectus filed with the SEC on May 8, 2013 under "Management of the Combined Company following the Merger - Certain Relationships and Related Transactions" and "Executive Compensation - Transaction Bonus Agreements and Related Agreements":

· Salaries and benefits increased from $2.2 million to $7.0 million, primarily as a result of non-cash transaction bonuses paid to the Company's executives upon completion of the Merger. The compensation expense resulting from these bonuses totaled $4.5 million.

· Research and development expenses increased from $488,000 to $734,000, due to timing differences in product development schedules between the periods.

· Selling, general and administrative expenses increased from $1.7 million to $2.5 million primarily as a result of expenses incurred relating to the Merger.

Other Expenses



                           Six months ended
                               June 30,
                         2013           2012           Change        % Change
Interest expense       $ 466,902     $ 1,157,912     $ (691,010 )        -59.7 %
Other expense            483,956          99,400        384,556          386.9 %
Total Other Expenses   $ 950,858     $ 1,257,312     $ (306,454 )        -24.4 %

For the six-month period ended June 30, 2013, other expenses decreased to $951,000 from $1.3 million for the same period in 2012, a decrease of $306,000, or 24.4%, primarily as a result of the following factors, which are described in further detail in the Company's proxy statement/prospectus filed with the SEC on May 8, 2013 under "Management of the Combined Company following the Merger - Certain Relationships and Related Transactions" and "Executive Compensation - Transaction Bonus Agreements and Related Agreements":

· Interest expense decreased from $1.2 million to $467,000 as a result of the conversion in June 2012 of all of ANIP's subordinated debt to Series D convertible preferred stock. This reduction was partially offset by an early termination fee and accelerated amortization of deferred loan costs incurred upon repayment in June 2013 of the Company's revolving line of credit in connection with the Merger.

· Other expense increased from $99,000 to $484,000 as a result of payments totaling $390,000 to certain of the Company's investors for overall management, deal structuring, financial advisory and due diligence services in connection with the Merger.

Gain on Discontinued Operations



                                              Six months ended
                                                  June 30,
                                           2013              2012           Change        % Change
Gain on discontinued operations, net
of tax                                  $         -       $    61,257     $  (61,257 )        -100.0 %

Gain on discontinued operations consists of revenue and expenses associated with the Company's over-the-counter pharmaceutical products operation in Gulfport, Mississippi. This operation was sold in September 2010.

For the six-month period ended June 30, 2012, the gain on discontinued operations resulted primarily from settlements with suppliers.

LIQUIDITY AND CAPITAL RESOURCES

The following table highlights selected liquidity and working capital information from the Company's balance sheets:

                                                   June 30,        December 31,
                                                     2013              2012
Cash and cash equivalents                        $ 12,594,927     $       11,028
Restricted cash                                     2,260,100                  -
Accounts receivable, net                            6,427,506          5,432,401
Inventories                                         2,584,686          2,809,685
Prepaid expenses                                      251,765            313,193
Total Current Assets                             $ 24,118,984     $    8,566,307

Accounts payable                                 $  1,634,788     $    1,993,567
Accrued expenses                                    1,039,393            555,635
Returned goods reserve                                349,763            410,992
Deferred revenue                                       46,712            314,794
Borrowings under line of credit                             -          4,065,307
Accrued compensation                                2,726,167                 21
Current liabilities of discontinued operations        366,390            370,766
Total Current Liabilities                        $  6,163,213     $    7,711,082

At June 30, 2013, the Company had $12.6 million in unrestricted cash and cash equivalents. At December 31, 2012, the Company had $11,000 in unrestricted cash . . .

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